<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
REGISTRATION NO. 333-87693
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AIRNET COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3663 59-3218138
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
100 RIALTO PLACE
SUITE 300
MELBOURNE, FLORIDA 32901
(407) 953-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GERALD Y. HATTORI
AIRNET COMMUNICATIONS CORPORATION
100 RIALTO PLACE
SUITE 300
MELBOURNE, FLORIDA 32901
(407) 953-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN G. IGOE, ESQ. PHILIP J. BOECKMAN, ESQ.
EDWARDS & ANGELL, LLP CRAVATH, SWAINE & MOORE
250 ROYAL PALM WAY 825 EIGHTH AVENUE
PALM BEACH, FL 33480 NEW YORK, NY 10019
(561) 833-7700 (212) 474-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1999
PROSPECTUS
[AIRNET LOGO]
5,500,000 SHARES
AIRNET COMMUNICATIONS CORPORATION
COMMON STOCK
We are selling 5,500,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 825,000 additional shares of common stock
from us to cover over-allotments.
This is the initial public offering of our common stock. We currently
expect the initial public offering price to be between $11.00 and $13.00 per
share. We have applied to have our common stock listed on the Nasdaq National
Market under the symbol "ANCC".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any other securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to AirNet Communications Corporation (before
expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------
SALOMON SMITH BARNEY HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
, 1999
<PAGE> 3
[INSIDE FRONT COVER GRAPHIC:]
Begins with AirNet Communications Corporation header and logo.
The title line "AirNet Customers" is followed by a graphic map of the
continental United States and the territory of Guam with customers' company
names listed around and throughout the map showing "FCC Licensed Areas of AirNet
Customers." The Company's Internet address "WWW.AIRCOM.COM" is listed at the
bottom of the page.
<PAGE> 4
[INSIDE FRONT COVER GATEFOLD PAGE]
GRAPHIC:
Two-page design with "AirNet Base Station Subsystem" in medium lettering
across the top of both pages. The upper left corner of the graphic's left page
contains a company logo "AIRNET" with a lightning bolt between "AIR" and "NET".
From left-to-right these text blocks are:
- AirSite(R) Backhaul Free Base Station(TM)--No T-1 connection needed;
Compact, easy to deploy; 1 GSM carrier (7 voice channels)
- Wireless Backhaul Eliminates Most T-1 Facilities
- AdaptaCell(TM) Broadband, Software-Defined GSM Base Station--Supports
high speed data through changes in software, and few, if any, hardware
modifications; Up to 12 GSM Carriers (92 voice channels); One AdaptaCell
supports up to 12 AirSites
The Company's Internet address "WWW.AIRCOM.COM" is listed at the left-hand
bottom of the page.
On the right-hand page we show the following illustrations from left-to-right:
- Base Station Controller
- Operations and Maintenance Center (Radio)
- Transcoder Rate Adaptation Unit
- Industry Standard GSM "A" Interface
- Mobile Switching Center. Above this language is the phrase Third Party
Equipment
The page concludes with the following text in the lower right corner below a box
labeled "Mobile Switching Center":
AirNet's Base Station Subsystem is designed to connect to any vendor's
Mobile Switching Center.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Dilution.................................................... 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 27
Management.................................................. 39
Principal Stockholders...................................... 45
Certain Transactions........................................ 48
Description of Capital Stock................................ 52
Shares Eligible for Future Sale............................. 55
United States Tax Consequences to Non-U.S. Holders.......... 57
Underwriting................................................ 59
Legal Matters............................................... 61
Experts..................................................... 61
Change in Independent Accountants........................... 61
Additional Information...................................... 62
Index to Financial Statements............................... F-1
</TABLE>
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information you should consider before investing in our common stock. You should
read the entire prospectus carefully, especially the risks of investing in our
common stock discussed under "Risk Factors."
AIRNET COMMUNICATIONS CORPORATION
We provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM, or Global Standard for
Mobile Communications, system of mobile voice and data transmission. We market
our products to operators of wireless networks. A base station is a key
component of a wireless network and is used to receive and transmit voice and
data signals over radio frequencies. Our products include the AdaptaCell, a
software-defined base station, meaning it uses software to control the way it
encodes or decodes wireless signals, and the AirSite, a backhaul free base
station, meaning it carries voice and data signals back to the wireline network
without using a physical communications link.
Our AdaptaCell incorporates a proprietary radio architecture that is
designed to enable operators to upgrade their wireless networks to offer
high-speed data and Internet services by changing software rather than deploying
new base stations. Our AdaptaCell also incorporates a broadband architecture,
meaning that it uses only one radio to process a large number of radio channels.
Our AirSite uses an operator's existing radio frequencies as the medium to
provide the necessary connection to the wireline network. We believe our key
product attributes make our base stations easier to deploy and upgrade and
result in lower capital and operating costs than other existing base stations.
We received the 1998 GSM World Award for Best Technical Innovation from the GSM
Association, an international body with members from 133 countries, in
recognition of our innovative infrastructure.
In recent years, there has been substantial growth in the number of
wireless users around the world. According to International Data Corporation, or
IDC, there were over 303 million wireless subscribers worldwide in 1998 and
approximately 44% of these subscribers were using GSM. According to Allied
Business Intelligence, Inc., at the end of 1998, there were 3 million GSM
subscribers in the United States, representing 4.3% of all wireless subscribers
in the United States. IDC estimates that the number of wireless users worldwide
will reach approximately 1.1 billion in 2003, representing a 29% compound annual
growth rate, and GSM wireless users worldwide will reach 557 million by the end
of 2003, representing a 33% compound annual growth rate. We expect increasing
demand for high speed data and wireless Internet services to contribute to this
growth.
We expect this growth will require wireless service operators to deploy
infrastructure equipment capable of addressing existing wireless standards and a
new generation of wireless standards now under development. Existing GSM base
stations were not designed to be compatible with these developing standards. As
a result, we believe many wireless operators will replace their existing
hardware with more flexible, upgradeable base stations.
We believe our wireless infrastructure products position us to meet the
industry's challenge of transitioning from existing GSM networks to emerging
integrated voice and high-speed data networks. Due to the uncertainty of the
timing of this transition, our products have been designed to appeal to
operators who desire a wireless solution today with the ability to adapt to
tomorrow's new communications standards.
From our inception in January 1994 through May 1997, our operations
consisted principally of start-up activity associated with the design,
development, and marketing of our products. As a result, through September 30,
1999, we have generated only $19.7 million in net revenues and have an
accumulated deficit of $96.2 million. Through September 30, 1999, we have
shipped and billed for 240 base stations and have six commercially deployed
systems.
1
<PAGE> 7
The AdaptaCell and the AirSite Backhaul Free Base Station provide the
following key benefits:
Adaptable and Easy to Upgrade. We designed our software-defined
AdaptaCell base station to support new wireless standards through changes
in software, and few, if any, hardware modifications. By contrast, other
existing base stations must be extensively modified or even replaced if
operators want to offer high-speed data services to their customers.
Lower Operating Costs. Our AirSite does not require an expensive
physical communications link, usually through a digital T-1 phone line, to
the wireline network. Our AdaptaCell's simplified hardware design results
in a smaller base station that has fewer components and is easier to
install and maintain.
Flexible Deployment. Our system is scaleable and allows operators to
start small, establish a network, and incrementally expand coverage and
capacity as subscriber demand increases.
Our goal is to become a leading worldwide supplier of wireless base
stations. Our strategy for achieving this goal includes the following core
elements:
- leveraging our technology leadership;
- continuing to market our product advantages to domestic operators;
- expanding into international markets; and
- establishing a market leadership position in the emerging high-speed data
base station market.
We are incorporated in Delaware. Our executive offices are located at 100
Rialto Place, Suite 300, Melbourne, Florida 32901 and our telephone number is
(407) 953-6600.
AIRNET(R) and AIRSITE(R) are registered with the United States Patent and
Trademark Office. AdaptaCell(TM) and Backhaul Free Base Station(TM) are
trademarks of AirNet Communications Corporation. Names of other companies used
in this prospectus are trademarks of those companies. Information contained on
our web site does not constitute part of this prospectus.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
2
<PAGE> 8
THE OFFERING
Common stock offered(1).......... 5,500,000 shares
Common stock outstanding after
this offering(1)(2).............. 22,223,736 shares
Use of proceeds.................. We intend to use the net proceeds from this
offering primarily for general corporate
purposes, including working capital,
research and development, sales and
marketing and capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol........................... ANCC
- ---------------
(1) Excludes a 30-day option granted to the underwriters to purchase up to
825,000 additional shares of our common stock to cover over-allotments, if
any.
(2) Does not give effect to approximately 2,006,145 shares which may be issued
at a weighted average exercise price of $2.66 per share upon the exercise of
outstanding options. Also does not give effect to approximately 687,492
shares which may be issued at a weighted average exercise price of $3.32 per
share upon the exercise of outstanding warrants.
------------------------
Unless otherwise indicated, all information contained in this prospectus:
- assumes no exercise of the underwriters' option to purchase up to
825,000 additional shares of common stock to cover over-allotments;
- reflects the automatic conversion of all of our preferred shares into
16,256,089 shares of common stock upon the completion of this
offering;
- assumes an initial offering price of $12.00 per share, the midpoint of
the initial public offering price range; and
- reflects a one for 66.38 reverse stock split which will be effected
prior to this offering.
3
<PAGE> 9
SUMMARY FINANCIAL DATA
The following table summarizes the financial data for our business during
the periods indicated. The data set forth should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and attached notes included elsewhere
in this prospectus.
The information for the nine-month periods ended September 30, 1999 and
1998 and the year ended December 31, 1998 is presented as restated. See Note 12
to Notes to Financial Statements and Note 4 to Notes to Unaudited Financial
Statements.
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------------
1996 1997 1998 1998 1999
-------- -------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $ 1,077 $ 1,603 $ 4,462 $ 2,441 $ 11,077
Cost of revenues................ 665 971 2,867 1,763 7,084
-------- -------- ---------- -------- ----------
Gross profit.................... 412 632 1,595 678 3,993
-------- -------- ---------- -------- ----------
Operating expenses
Research and development...... 20,887 11,749 13,135 8,625 10,576
Sales and marketing........... 2,171 1,107 2,709 1,619 2,741
General and administrative.... 6,293 5,000 3,750 1,901 1,901
Amortization of deferred stock
compensation............... -- -- 859 851 211
Loss (gain) on disposal or
write down of property and
equipment.................. 1,053 4 (5) -- 2
-------- -------- ---------- -------- ----------
Total operating
expenses............ 30,404 17,860 20,448 12,996 15,431
-------- -------- ---------- -------- ----------
Loss from operations............ (29,992) (17,228) (18,853) (12,318) (11,438)
Other income (expense), net..... 818 (8) 77 (42) 105
-------- -------- ---------- -------- ----------
Net loss........................ $(29,174) $(17,236) $ (18,776) $(12,360) $ (11,333)
======== ======== ========== ======== ==========
Net loss per share attributable
to common stockholders, basic
and diluted................... $(157.63) $ (96.33) $ (81.88) $ (57.98) $ (70.95)
======== ======== ========== ======== ==========
Pro forma net loss per share
attributable to common
stockholders basic and
diluted(1).................... $ (1.44) $ (1.38)
========== ==========
Pro forma weighted average
shares used in calculating
basic and diluted net loss per
common share(1)............... 13,077,497 16,652,808
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $26,996 $ 87,134
Working capital............................................. 30,238 90,376
Total assets................................................ 47,689 107,827
Long-term debt.............................................. 230 230
Total stockholders' equity.................................. 33,449 93,587
</TABLE>
- ---------------
(1) Pro forma gives effect to the automatic conversion of all our outstanding
shares of preferred stock into 16,256,089 shares of our common stock and
cancellation of unpaid preferred dividends upon completion of this offering.
(2) Pro forma as adjusted gives effect to this offering and the automatic
conversion of all our outstanding shares of preferred stock into 16,256,089
shares of our common stock and cancellation of unpaid preferred dividends
upon completion of this offering.
4
<PAGE> 10
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in this
prospectus before you decide to purchase shares of our common stock.
WE HAVE INCURRED SIGNIFICANT LOSSES SINCE WE BEGAN DOING BUSINESS,
ANTICIPATE CONTINUING LOSSES, AND MAY NEVER ACHIEVE OR SUSTAIN
PROFITABILITY. We have accumulated losses of $96.2 million since we began doing
business in 1994 through September 30, 1999, and we may never achieve or sustain
profitability. We will need to generate significantly higher revenues to achieve
and sustain profitability. Since we began doing business in 1994, we have
generated only $19.7 million in net revenues through September 30, 1999. We have
been marketing our GSM base stations since 1996, and to date our only meaningful
sales have been to a small number of start-up domestic wireless operators. We
have never reported a profit. We will continue to incur significant research and
product development, sales and marketing, materials and general administrative
expenses, and we expect our expenses to increase as compared to prior periods.
We anticipate a net loss for the year 1999 and we may continue to incur losses
beyond 1999. We cannot be certain that we will realize sufficient revenues or
margins to sustain our business.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE YOUR INVESTMENT
DECISION AND WE CANNOT PREDICT FUTURE RESULTS. We have a limited operating
history and you should not rely on our recent results as an indication of our
future results in making your investment decision. There have been only five
commercial deployments of our systems to date. We had net sales of only $1.1
million, $1.6 million and $4.5 million in 1996, 1997 and 1998, respectively, and
$11.1 million for the nine months ended September 30, 1999. Unless we can
achieve significant increases in market acceptance of our products, we may never
advance beyond our start-up phase. Due to our limited operating history, it is
difficult or impossible for us to predict future results and you should not
expect future revenue growth based on our recent results. You should consider
our business and prospects in light of the risks and problems faced by
technology companies in the early stages of development.
OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT
IF AND WHEN A SALE WILL BE MADE AND COULD CAUSE US OPERATING DIFFICULTIES AND
CASH FLOW PROBLEMS. Our sales cycle, which is the period from the generation of
a sales lead until the recognition of revenue, can be long and is unpredictable,
making it difficult to forecast revenues and operating results. Our inability to
accurately predict the timing and magnitude of our sales could cause a number of
problems:
- we may have difficulty meeting our customers' delivery requirements in
the event many large orders are received in a short period of time
because we have limited production capacity and generally do not carry
materials in inventory;
- we may expend significant management efforts and incur substantial sales
and marketing expenses in a particular period that do not translate into
orders during that period or at all; and
- we may have difficulty meeting our cash flow requirements and obtaining
credit because of delays in receiving orders and because the terms of our
customer contracts defer certain billings until post-shipment contractual
milestones are met.
The problems resulting from our lengthy and variable sales cycle could
impede our growth, harm our stock price, and restrict our ability to take
advantage of new opportunities.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE. Our quarterly
revenues and operating results have varied and are likely to continue to vary
significantly due to the other risk factors described in this section and our
revenue recognition policy. While we may ship products on a regular basis as
they are manufactured for a customer, we presently record revenue only after
resolution of any uncertainties regarding satisfaction of all significant terms
and conditions of the customer contract. Given our limited operating history,
such uncertainties have been considered resolved to date when the customer has
placed the products in service or completed specified testing procedures. A
number of different factors outside our control can delay
5
<PAGE> 11
satisfaction of these conditions. Since our products are typically deployed as
part of a complete wireless system and we often fulfill orders through multiple
shipments, customers must have received the final shipment in order to either
place our products in service or complete the specified testing procedures. As
of September 24, 1999, the time period between shipment and revenue recognition
has averaged approximately 100 days, but has varied widely, and in one case was
as long as 225 days. In addition, because we do not maintain an inventory of
materials or finished goods and there is significant variation in the
manufacturing lead times for our components, shipment for our product typically
occurs 90 days after receipt of an order from a new customer. Our operating
results may be below the expectations of public market analysts and investors.
If this occurs, our stock's trading price could significantly decline. In
addition, we expect our results will fluctuate because of the seasonality of
sales and shipments in the telecommunications infrastructure industry, with less
activity in the beginning of each calendar year.
INTENSE COMPETITION IN THE MARKET FOR WIRELESS TELECOMMUNICATIONS EQUIPMENT
FROM MANY LARGER, MORE ESTABLISHED COMPANIES WITH GREATER RESOURCES COULD
PREVENT US FROM INCREASING OUR REVENUE AND ACHIEVING PROFITABILITY. The
wireless telecommunications infrastructure market is highly competitive. We
compete with large infrastructure manufacturers, systems integrators, and base
station subsystem suppliers, as well as new market entrants. Most of our current
and potential competitors have longer operating histories, larger installed
customer bases, substantially greater name recognition, and more financial,
technical, manufacturing, marketing, sales, distribution and other resources
than we do. We may not be able to compete successfully against current and
future competitors, including companies that develop and market new wireless
telecommunications products and services. These competitive pressures may result
in price reductions, reduced gross margins, longer sales cycles and loss of
customers.
OUR INABILITY TO PROVIDE FINANCING FOR OUR CUSTOMERS IS A COMPETITIVE
DISADVANTAGE AND COULD RESULT IN A LOSS OF SALES AND/OR CUSTOMERS TO COMPETITORS
WITH GREATER RESOURCES. Due to our size, we do not offer financing to our
customers which could cause us to lose business to our larger competitors. Many
of our customers and potential customers are start-up and small companies. These
operators usually require debt or equity financing to operate their businesses
and to purchase our products, and unlike some of our larger competitors, we are
not in a position to provide product purchase financing. Because we do not
provide this financing and have no plans to do so in the future, our success may
depend significantly upon our continuing ability to help arrange financing for
our customers. If we cannot assist in arranging financing for our customers, we
may lose sales and customers to competitors that directly provide financing.
IF WE PROVIDE CUSTOMER FINANCING IN THE FUTURE, CREDIT RISK PROBLEMS COULD
HURT OUR RESULTS AND REQUIRE US TO RAISE ADDITIONAL CAPITAL. In the future, we
may attempt to provide product purchase financing for our customers. If we
provide such financing, we will face credit risks, including slow payments or
non-payments from customers, and we may need to raise additional capital to
support financed sales and to deal with related credit risk problems.
A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR SUBSTANTIALLY ALL OF OUR REVENUES
AND THE LOSS OF ANY OF THESE CUSTOMERS COULD HURT OUR RESULTS AND CAUSE OUR
STOCK PRICE TO DECLINE. Our customer base has been and may continue to be
concentrated with a small number of customers. The loss of any of these
customers or the delay, reduction or cancellation of orders by or shipments to
any of these customers could hurt our results and cause a decline in our stock
price. In 1998, three customers accounted for 96% of our net revenues, with one
accounting for 42%. For the nine months ended September 30, 1999, two customers
accounted for 76% of our net revenues, with one accounting for 48%. The effect
of these risks on our operating results is compounded by our lengthy sales
cycle.
WE HAVE A CONCENTRATED CUSTOMER BASE AND THE FAILURE OF ANY OF OUR
CUSTOMERS TO PAY US OR TO PAY US ON TIME COULD CAUSE SIGNIFICANT CASH FLOW
PROBLEMS, HURT OUR RESULTS AND CAUSE OUR STOCK PRICE TO DECLINE. Our
concentrated customer base significantly increases the credit risks associated
with slow payments or non-payments by our customers. These risks are also higher
for us since many of our customers are start-up and small companies. Two
customers accounted for 82% of our outstanding accounts receivable as of
September 30, 1999, with one customer representing 61%. Two customers
represented 97% of our outstanding accounts receivable as of December 31, 1998,
with one customer representing 58%. In the past
6
<PAGE> 12
we have incurred bad debt charges and we may be required to do so in the future.
The failure of any of our customers to pay us, or to pay us on time, could cause
significant cash flow problems, hurt our results and cause our stock price to
decline.
WE HAVE DEVELOPED A SINGLE PRODUCT LINE BASED ON THE GSM STANDARD AND WE
MAY NOT SUCCEED IF GSM IS NOT WIDELY ACCEPTED IN THE U.S. We are concentrating
our efforts on the development and sale of a single product line of GSM base
station systems and related products. GSM, or the Global System for Mobile
Communication wireless standard, was first commercially deployed in the U.S.,
our current principal market, in late 1995. According to Allied Business
Intelligence, Inc., at the end of 1998 the U.S. had 3.0 million GSM subscribers,
compared to 13.9 million users of other digital standards, including CDMA, or
code division multiple access, and TDMA, or time division multiple access.
Additionally, there were 49.6 million analog subscribers in the U.S. at the end
of 1998. These other standards are more established in the U.S. and some in the
industry perceive CDMA to have several operational advantages over GSM,
including greater capacity. If GSM is not widely accepted by domestic wireless
subscribers and if we do not gain acceptance in our initial target market, our
plans to sell products abroad or in other targeted markets could be harmed. We
have no backup or alternative products in the event we are unsuccessful at
selling our currently planned GSM product line.
IF WE DO NOT SUCCEED IN THE DEVELOPMENT OF NEW PRODUCTS AND PRODUCT
FEATURES IN RESPONSE TO CHANGING TECHNOLOGY AND STANDARDS, CUSTOMERS WILL NOT
BUY OUR PRODUCTS. We need to develop new products and product features in
response to the evolving demands for better technology or our customers will not
buy our products. The market for our products is characterized by rapidly
changing technology, evolving industry standards, emerging wireless transmission
standards, and frequent new product introductions and enhancements. Our success
depends on our ability to adapt and upgrade our base stations to allow operators
to offer high-speed data and Internet services. If we fail to develop our
technology, we will lose significant potential market share to our competitors.
Also, because some operators do not have sufficient licensed spectrum, some of
our potential customers may not migrate to higher speed standards and those who
do may not purchase any of our products for use with new standards.
WE MAY NOT BE ABLE TO MODIFY OUR BASE STATIONS TO SUPPORT SOME OF THE
DEVELOPING WIRELESS STANDARDS AND THAT COULD SERIOUSLY HARM OUR BUSINESS. Our
base stations do not yet support emerging high speed data standards. We will
incur significant research and development costs to develop upgrade packages to
make our base stations compatible with them. We cannot predict with certainty
that we will be able to meet the technical demands of some of these new
standards nor can we predict with certainty that our base stations will have
substantially increased capacity, and if we are not successful, our business
could be seriously harmed. Even if we do develop our technology and products to
work with these new standards, consumer demand for advanced wireless services
may not be sufficient to justify network operators upgrading to them.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS WHICH WOULD
HURT OUR ABILITY TO COMPETE. Although we attempt to protect our intellectual
property rights through patents, trademarks, trade secrets, copyrights,
confidentiality and nondisclosure agreements and other measures, intellectual
property is difficult to evaluate and these measures may not provide adequate
protection for our proprietary rights and information. Patent filings by third
parties, whether made before or after the date of our filings, could render our
intellectual property less valuable. Competitors may misappropriate our
proprietary rights and information, disputes as to ownership of intellectual
property may arise, and our proprietary rights and information may otherwise
become known or independently developed by competitors. The failure to protect
our proprietary rights could seriously harm our business, operating results and
financial condition. We have not been granted any foreign patents and presently
have only a relatively low number of patent applications pending
internationally. If we do not obtain sufficient international protection for our
intellectual property, our competitiveness in international markets could be
significantly impaired, which would limit our growth and future revenues.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US THAT COULD BE
TIME-CONSUMING AND EXPENSIVE TO DEFEND. In the future, claims of infringement
of other parties' proprietary rights, invalidity claims or
7
<PAGE> 13
claims for indemnification resulting from infringement claims may be asserted or
prosecuted against us. Even if none of these claims were valid or successful, we
would be forced to incur significant costs and divert important resources to
defend against them. Any claim of infringement, whether or not successful, could
cause us considerable expense and place a significant burden on our management.
A SIGNIFICANT DECREASE IN THE COST OF DIGITAL T-1 PHONE LINES WILL DIMINISH
ONE OF OUR COMPETITIVE ADVANTAGES. Existing base stations require an expensive
physical communications link, usually through a digital T-1 phone line, to the
wireline network. Any significant decrease in the cost of digital T-1 phone
lines used to connect base stations to the wireline network, especially in less
populated areas, will diminish a cost advantage that we currently use to market
our products. The cost of T-1 facilities has recently declined significantly in
urban areas because of increased competition and increased market penetration of
DSL, or digital subscriber line, technologies.
IF WE FAIL TO EXPAND OUR CUSTOMER BASE BEYOND THE SMALLER OPERATORS WHO
RECENTLY ACQUIRED FCC LICENSES, WE MAY NOT BE ABLE TO SIGNIFICANTLY GROW OUR
REVENUES. We will only be able to significantly grow our revenues if we can
expand our customer base beyond the smaller operators who recently acquired
Federal Communications Commission, or FCC, licenses. There are a limited number
of such operators and most of them are smaller companies with limited resources.
These operators are less stable and more susceptible to delays in their
buildouts and deployments than more established operators. We plan on expanding
our sales to include the larger domestic operators and international operators.
However, as a result of the rapid consolidation of larger domestic GSM
operators, there are only a few larger domestic operators remaining. To date we
have not had any sales to the larger domestic or any international operators,
and we may not be successful in those markets in the future.
WE PLAN TO EXPAND INTO INTERNATIONAL MARKETS, WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS. Because the U.S. market for GSM products is
comparatively small, we have begun marketing our products internationally. A
portion of our international sales efforts will be targeted to service operators
who plan to deploy wireless communications networks in developing countries
where risks ordinarily associated with international operations are particularly
acute. International operations are subject to a number of risks and
uncertainties, including:
- difficulties and costs associated with obtaining foreign regulatory
approval for our products;
- unexpected changes in regulatory requirements;
- difficulties and costs associated with complying with a wide variety of
complex foreign laws and treaties;
- legal uncertainties regarding, and timing delays and expenses associated
with, tariffs, export licenses and other trade barriers;
- inadequate protection of intellectual property in foreign countries;
- increased difficulty in collecting delinquent or unpaid accounts;
- lack of suitable export financing;
- adverse tax consequences;
- dependence upon independent sales representatives and other indirect
resellers who may not be as effective and reliable as our employees;
- difficulties and costs associated with staffing and managing
international operations, overcoming cultural, linguistic and
nationalistic barriers and adapting to foreign business practices;
- political and economic instability; and
- currency fluctuations, including a decrease in the value of foreign
currencies relative to the U.S. dollar which could make our products less
competitive against those of foreign competitors.
8
<PAGE> 14
Any of these factors could impair our ability to expand into international
markets and could prevent us from increasing our revenues and achieving
profitability.
IF WE HAVE PROBLEMS CONNECTING TO OUR COMPETITORS' MOBILE TELEPHONE
SWITCHES, WE WILL INCUR ADDITIONAL EXPENSE AND DELAYS IN SELLING OUR PRODUCTS
AND MAY LOSE SALES. Our products must be compatible with our competitors'
mobile telephone switches. Although GSM is based on a number of well-defined
standard interfaces, a GSM switch can be manufactured according to different
variations within the standard interface. As a result, we may encounter
obstacles when we attempt to integrate our products with a particular switch,
since we have not yet tested our products for compatibility with all vendors'
switches. If we have problems connecting our products to a particular switch, we
will incur additional expense and delays in selling our products and may lose
sales.
OUR RELIANCE ON A LIMITED NUMBER OF SUPPLIERS COULD LEAD TO DELAYS,
ADDITIONAL COSTS, PROBLEMS WITH OUR CUSTOMERS AND POTENTIAL CUSTOMERS, AND LOSS
OF REVENUE. We plan to continue utilizing only one or a small number of
suppliers for each of the components of our base station systems. In particular,
there is currently only one supplier of high power amplifiers, a critical
component for a broadband base station, that can provide us with a product that
meets our quality standards. Furthermore, the majority of the switches used with
our systems have been manufactured by one of two small third party vendors. We
have no long-term contracts or arrangements with any of our suppliers that
guarantee product availability or the continuation of particular payment or
credit terms. If, for any reason, a supplier fails to meet our quality and
quantity requirements or stops selling products to us at commercially reasonable
prices, we could experience significant production delays and cost increases, as
well as higher warranty expenses and product image problems. Any of these
problems could damage relationships with current or prospective customers which
could seriously harm our operating results in a given period and impair our
ability to generate future sales. From time to time, we must replace some of the
components of our products when the supplier of that component is discontinuing
production. While we generally do not maintain an inventory of components,
sometimes we do purchase an inventory of these discontinued components so that
we can maintain production while finding new suppliers or developing substitute
components ourselves. We face the risk that we may deplete that inventory before
finding an adequate substitute, and that could cause the loss of significant
sales opportunities. Alternatively, we could purchase too many of the components
and may be left with excess inventory on our hands. We generally do not maintain
an inventory of finished goods and many components have long lead times, with
some taking 12 to 16 weeks from the time of entry of the order to delivery. We
cannot guarantee that alternative sources of supply can be arranged on short
notice or that components will be available from alternative sources on
satisfactory terms.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED
PERSONNEL, WE MAY NOT BE SUCCESSFUL. Our future success largely depends on our
ability to attract and retain highly-skilled hardware and software engineers,
particularly call processing engineers and digital signal processing engineers.
The market for these engineers is highly competitive and if we cannot continue
to attract and retain quality personnel, that failure would significantly limit
our ability to compete and to grow our business. Our success also depends upon
the continuing contributions of our key management, research, product
development, sales and marketing and manufacturing personnel, many of whom would
be difficult to replace, including R. Lee Hamilton, Jr., President and Chief
Executive Officer. Except for a severance and noncompetition agreement we have
with Dr. Hamilton, we do not have employment or noncompetition agreements with
any of our key officers. We also do not have key man life insurance policies
covering any of our employees.
IF WE FAIL TO MANAGE OUR GROWTH AND EXPANSION EFFECTIVELY, OUR BUSINESS AND
PROSPECTS COULD BE SERIOUSLY HARMED. The need to develop and offer our products
and implement our business plan in an evolving market will significantly
challenge our planning and management capabilities. At September 30, 1999, we
had a total of 153 employees. We plan to hire a significant number of new
employees as we expand our operations. We may not be able to implement
management information and control systems in an efficient and timely manner,
and our current or planned personnel, systems, procedures and controls may not
be adequate to support our future operations. If we are unable to manage our
growth effectively,
9
<PAGE> 15
our business and prospects could be seriously harmed. To manage our expected
growth of operations and personnel, we will need to:
- improve financial and operational controls, as well as our reporting
systems and procedures;
- install new management information systems; and
- hire, train, motivate and manage our sales and marketing, engineering,
technical, finance and customer support employees.
WE HAVE AN AGREEMENT WITH MOTOROLA, INC. TO GRANT THEM RIGHTS WHICH COULD
HARM OUR BUSINESS. When Motorola purchased $10.0 million of our Series B
Preferred Stock in 1995, we granted Motorola the right to acquire a worldwide,
nonexclusive, royalty-free license under any two of our patents. Motorola is a
large telecommunications and technology company with significant resources and
could exercise this right at any time and begin using these licenses to compete
against us. With respect to any possible infringement of our respective digital
base station patents, each of us also agreed not to enjoin the other and to
attempt dispute resolution, including negotiation of nonexclusive license
agreements in good faith, before resorting to litigation.
WE EXPECT THE PRICES OF OUR PRODUCTS TO DECLINE DUE TO COMPETITIVE
PRESSURES, AND THIS DECLINE COULD REDUCE OUR REVENUES AND GROSS MARGINS. We
anticipate that the prices of our products will decrease in the future due to
competitive pricing pressures, increased sales discounts, new product
introductions or other factors. If we are unable to offset these factors by
increasing our sales volumes, our revenues will decline. In addition, to
maintain our gross margins, we must develop and introduce new products and
product enhancements, and we must continue to reduce the manufacturing costs of
our products. We cannot guarantee that we will be able to do these things
successfully. Our failure to do so would cause our revenue and gross margins to
decline, which could seriously harm our operating results and cause the price of
our common stock to decline.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS, CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES AND SUBJECT US TO OTHER
RISKS. We expect to review opportunities to buy other businesses or
technologies that would complement our current products, expand the breadth of
our markets, enhance our technical capabilities, help secure critical sources of
supply and the availability of compatible switches or that may otherwise offer
growth opportunities. While we have no current agreements or negotiations
underway, we may buy businesses, products or technologies in the future. In the
event of any future purchases, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt; or
- assume liabilities.
These purchases also involve numerous risks, including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS ON
REASONABLE TERMS AND THIS COULD HURT OUR BUSINESS AND NEGATIVELY IMPACT OUR
STOCKHOLDERS. If adequate funds are not available or are not available on
reasonable terms, we may be unable to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures, which
could seriously harm our
10
<PAGE> 16
business. If our capital requirements vary from those currently planned, we may
require additional financing sooner than anticipated. If we raise additional
funds through the issuance of debt or equity securities, the percentage
ownership of our existing stockholders may be reduced, the securities issued may
have rights, preferences and privileges senior to those of holders of our common
stock, and the terms of the securities may impose restrictions on our
operations.
OUR INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION THAT COULD CAUSE
SIGNIFICANT DELAYS AND EXPENSE. Wireless telecommunications are subject to
extensive regulation by the U.S. and foreign governments. If we fail to conform
our products to regulatory requirements or experience any delays in obtaining
regulatory approvals, we could lose sales. Moreover, we only plan to qualify our
products in a foreign country once we have a purchase order from a customer
located there, and this practice may deter customers or contribute to delays in
receiving or filling orders. To date we have not qualified our products in any
foreign countries.
Continuing regulatory compliance could be expensive and may require
time-consuming and costly modifications of our products. Any failure of domestic
and international regulatory authorities to allocate suitable frequency spectrum
could limit our growth opportunities and our future revenues.
BECAUSE OUR PRODUCTS ARE HIGHLY COMPLEX AND ARE DEPLOYED IN COMPLEX
NETWORKS, THEY MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER DEPLOYMENT,
WHICH IF NOT REMEDIED COULD HARM OUR BUSINESS. Our products are highly complex,
are designed to be deployed in complex networks and may contain undetected
defects, errors or failures. Although our products are tested during
manufacturing and prior to deployment, they can only be fully tested when
deployed in commercial networks. Consequently, our customers may discover errors
after the products have been deployed. The occurrence of any defects, errors or
failures could result in installation delays, product returns, diversion of our
resources, increased service and warranty costs, legal actions by our customers,
increased insurance costs and other losses to us or to our customers or end
users. Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, which would harm our business and adversely
affect our operating results and financial condition. We will likely have
limited experience with any problems that may arise with new products that we
introduce.
IF WE OR OUR KEY SUPPLIERS OR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, WE
MAY INCUR SIGNIFICANT UNEXPECTED EXPENSES, EXPERIENCE BUSINESS INTERRUPTIONS AND
DELAYS, LOSE EXISTING OR POTENTIAL CUSTOMERS AND ORDERS AND EXPERIENCE OTHER
CONSEQUENCES THAT ARE HARMFUL TO OUR BUSINESS. If our systems or the systems of
our customers or suppliers do not correctly recognize date information when the
year changes to 2000, it could have an adverse effect on our business. The risk
exists primarily in six areas:
- warranty or other claims from our customers, which may result in
significant expense to us;
- failure of systems we use to run our business, which could interrupt our
business operations;
- failure of systems used by our suppliers or vendors, which could delay
manufacturing, affect the quality of our products or delay deployment of
our products;
- failure of our products due to year 2000 problems associated with
components supplied by others for use in our products, which may require
that we find replacement components or alternative sources and that we
potentially incur significant unexpected expenses;
- failure of systems our customers or potential customers use to run their
businesses, which could affect their ability to purchase products from
us; and
- failure of our customers' wireless networks which could affect their
business and buildout plans.
If our implementation of upgrades or replacement of noncompliant systems is
delayed, if we fail to identify a non-compliant product or system in a timely
fashion, or if we identify significant non-compliance issues, our business
operations could be interrupted, we could face significant unanticipated
expenses, our management's time and attention could be diverted and our sales
could decline materially. Customers may defer purchases of our products until
the general uncertainty associated with year 2000 has passed.
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<PAGE> 17
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY BE UNABLE TO RESELL YOUR
SHARES AT OR ABOVE THE OFFERING PRICE. There previously has been no public
market for our common stock. We cannot predict the extent to which investor
interest in us will lead to the development of a liquid trading market. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the trading market. The market price of our
common stock could be subject to wide fluctuations in response to many risk
factors listed in this section.
In recent years the stock market has experienced significant price and
volume fluctuations. Our common stock may also experience that volatility
unrelated to our own operating performance for reasons which include:
- performance of similar companies;
- news announcements and other developments with respect to our industry or
our competitors; and
- changes in general economic conditions.
A NUMBER OF SHARES ARE OR WILL BE ELIGIBLE FOR FUTURE SALE WHICH MAY
DEPRESS OUR STOCK PRICE. Sales of substantial amounts of our common stock in
the public market following this offering, or the perception that a large number
of shares are available for sale, could cause the market price of our common
stock to decline. After this offering, shares owned by our current stockholders
and holders of options and warrants to acquire our common stock, on a fully
diluted basis assuming exercise of all options and warrants, including our
executive officers and directors, are expected to constitute approximately
87.37% of the outstanding shares of our common stock, or 84.24% if the
underwriters' over-allotment option is exercised in full. Following the
expiration of a 180-day "lock-up" period to which substantially all of the
shares held by our current stockholders will be subject, the holders whose
shares are subject to that lock-up period will in general be entitled to dispose
of their shares. Moreover, Salomon Smith Barney Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to the lock-up agreements. In addition to the adverse effect a price
decline could have on holders of our common stock, that decline would likely
impede our ability to raise capital through the issuance of additional shares of
our common stock or other equity securities.
After this offering, the holders of approximately 17,123,441 shares of our
common stock (including shares issuable upon the exercise of outstanding
warrants) will have rights, subject to some conditions, to require us to file
registration statements covering their shares, or to include their shares in
registration statements that we may file for ourselves or other stockholders. By
exercising their registration rights and selling a large number of shares, these
holders could cause the price of our common stock to decline. Furthermore, if we
were to include in a company-initiated registration statement shares held by
those holders pursuant to the exercise of their registration rights, those sales
could impair our ability to raise needed capital by depressing the price at
which we could sell our common stock.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF THE BOOK VALUE OF OUR
COMMON STOCK THAT YOU PURCHASE IN THIS OFFERING. The initial public offering
price of our common stock is substantially more than the net tangible book value
per share of our common stock. As a result, holders who purchase our common
stock pursuant to this offering will experience immediate and substantial
dilution in the net tangible book value per share of our common stock from the
initial public offering price. The net tangible book value dilution to new
investors in this offering will be $7.79 per share at an assumed initial public
offering price of $12.00 per share. The exercise of outstanding options and
warrants is likely to result in further dilution to you.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AS WELL AS PROVISIONS OF
DELAWARE LAW, COULD DISCOURAGE POTENTIAL ACQUISITIONS OF OUR COMPANY THAT
STOCKHOLDERS MAY CONSIDER FAVORABLE. Some provisions of our certificate of
incorporation, our bylaws and Delaware law may discourage, delay or prevent a
merger or acquisition that stockholders may consider favorable. This may reduce
the market price of our common stock.
12
<PAGE> 18
CONTROL BY OUR EXISTING STOCKHOLDERS WILL LIMIT YOUR ABILITY TO INFLUENCE
THE OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE
POTENTIAL ACQUISITIONS OF OUR COMPANY BY THIRD PARTIES. We anticipate that our
executive officers, directors and entities affiliated with them, along with the
current holders of more than 5% of our equity, will, in the aggregate,
beneficially own approximately 56.6% of our outstanding common stock following
the completion of this offering. These stockholders, if acting together, would
be able to influence significantly all matters requiring approval by our
stockholders, including the election of our board of directors and the approval
of mergers or other business combination transactions. This concentration of
ownership could have the effect of delaying or preventing a change in our
control or otherwise discourage a potential acquirer from attempting to obtain
control of us, which in turn could have an adverse effect on the market price of
our common stock or prevent our stockholders from realizing a premium over the
market price for their shares of our common stock.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM ANTICIPATED FUTURE EVENTS OR OUR ANTICIPATED FUTURE
FINANCIAL PERFORMANCE. This prospectus contains forward-looking statements that
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "intends," "potential" or "continue" or the negative of such terms
or other comparable terminology. These statements are only predictions. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks outlined in this "Risk Factors" section and elsewhere in
this prospectus.
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<PAGE> 19
DILUTION
The pro forma net tangible book value per share of our common stock is the
difference between our tangible assets and our liabilities, divided by the
number of shares of our common stock outstanding after giving effect to the
automatic conversion of all outstanding shares of preferred stock into shares of
our common stock upon completion of this offering. For investors in our common
stock, dilution is the per share difference between the $12.00 per share assumed
initial offering price of our common stock in this offering and the pro forma
net tangible book value of our common stock immediately after completing this
offering. Dilution in this case results from the fact that the per share
offering price of our common stock is substantially in excess of the per share
price paid by some of our current stockholders for our presently outstanding
stock.
As of September 30, 1999, without taking into account any changes in our
net tangible book value subsequent to that date other than to give effect to the
sale of our common stock in this offering at the assumed offering price of
$12.00, less the estimated offering expenses including underwriting discounts
and commissions, the pro forma net tangible book value of each of the assumed
outstanding shares of common stock would have been $4.21 per share after this
offering ($93,587,899 pro forma net tangible book value divided by 22,223,736
shares of our common stock). Therefore, investors in our common stock would have
paid $12.00 for a share of common stock having a pro forma net tangible book
value of approximately $4.21 per share after this offering. That is, their
investment would have been diluted by approximately $7.79 per share. At the same
time, our current stockholders would have realized an increase in pro forma net
tangible book value of $2.21 per share after this offering without further cost
or risk to themselves. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share before this
offering.................................................... $ 2.00
Increase in pro forma net tangible book value per share
attributable to investors in this offering............. 2.21
------
Pro forma net tangible book value per share after this
offering.................................................. 4.21
------
Dilution per share to the new investors..................... $ 7.79
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1999, the number of shares of common stock purchased from AirNet, the total
consideration paid and the average price per share paid by existing and new
stockholders, before deducting underwriting discounts and commissions and
offering expenses payable by AirNet:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 16,723,736 75.2% $131,880,911 66.6% $ 7.89
New stockholders.................... 5,500,000 24.8 66,000,000 33.4 12.00
---------- ---- ------------ ----
Total..................... 22,223,736 100% $197,880,911 100%
========== ==== ============ ====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding. As of October 26, 1999, there were options outstanding
to purchase a total of approximately 2,006,145 shares of common stock with a
weighted average exercise price of $2.66 per share and warrants outstanding to
purchase a total of 687,492 shares of common stock with a weighted average
exercise price of $3.32 per share. To the extent that any of these options or
warrants are exercised, your investment will be further diluted. In addition,
more options may be granted in the future under our 1999 Equity Incentive Plan.
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<PAGE> 20
USE OF PROCEEDS
Our net proceeds from this offering, based on an assumed initial public
offering price of $12.00 per share, are estimated to be $60.1 million, or $69.3
million if the underwriters' over-allotment option is exercised in full, after
deducting the underwriting discount and estimated offering expenses.
We intend to use the net proceeds of this offering primarily for general
corporate purposes, including working capital, expansion of our engineering
organization, product development programs, sales and marketing capabilities,
and general and administrative functions and capital expenditures. We may also
use a portion of the net proceeds to invest in complementary products, to
license other technology or to make potential acquisitions. However, we have no
current understandings or agreements relating to potential acquisitions and are
not currently engaged in any negotiations with respect to any such transactions.
The use of proceeds has not been specifically identified due to the
flexible nature of our planning process. The amounts we actually expend for
general corporate purposes will vary significantly depending on a number of
factors, including revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
and use of the net proceeds of this offering. Pending the uses described above,
we intend to invest the net proceeds from this offering in short-term,
investment grade, interest bearing, securities.
DIVIDEND POLICY
We have never paid dividends on our common stock, and we do not expect to
pay any dividends on our common stock for the foreseeable future. Any future
determination to pay dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations,
capital requirements and other factors the board of directors deems relevant.
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<PAGE> 21
CAPITALIZATION
The following table shows our total capitalization at September 30, 1999:
- on an actual basis; and
- on a pro forma as adjusted basis to give effect to this offering and
the automatic conversion of all of our outstanding shares of preferred
stock into common stock.
You should read this table in conjunction with the financial statements and
related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------
PRO FORMA
ACTUAL(1) AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 26,996 $ 87,134
======== ========
Notes payable and other long-term debt obligations.......... $ 230 $ 230
Stockholders' equity:
Preferred stocks, $.01 par value, series A through G --
1,097,508,811 shares authorized, actual;
10,000,000 shares authorized, pro forma;
1,086,209,454 shares issued and outstanding, actual;
no shares issued and outstanding, pro forma............ 10,862 --
Common stock, $.001 par value --
20,528,917 shares authorized, actual;
50,000,000 shares authorized, pro forma;
467,647 shares issued and outstanding, actual;
22,223,736 shares issued and outstanding, pro forma.... -- 22
Additional paid-in capital................................ 120,373 191,351
Deferred stock compensation............................... (1,629) (1,629)
Accumulated deficit....................................... (96,157) (96,157)
-------- --------
Total stockholders' equity........................ 33,449 93,587
-------- --------
Total capitalization........................................ $ 33,679 $ 93,817
======== ========
</TABLE>
- ---------------
(1) As restated, see Note 4 to Notes to Unaudited Financial Statements.
16
<PAGE> 22
SELECTED FINANCIAL DATA
You should read the following selected financial information in conjunction
with our financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from inception to December 31, 1994, and for the years ended December 31,
1995 and 1996, and the balance sheet data as of December 31, 1994, 1995, and
1996, have been derived from our audited financial statements that are not
included in this prospectus. The statement of operations data for the years
ended December 31, 1996 and 1997, and the balance sheet data as of December 31,
1997 are derived from and are qualified in their entirety by reference to our
financial statements that have been audited by Ernst & Young LLP, independent
accountants, which are included elsewhere in this prospectus. The statement of
operations data for the year ended December 31, 1998 and the balance sheet data
as of December 31, 1998 are derived from and are qualified in their entirety by
reference to our financial statements that have been audited by Deloitte &
Touche LLP, independent auditors, which are included elsewhere in this
prospectus. The statement of operations data for the nine-month periods ended
September 30, 1998 and 1999 are unaudited. In the opinion of management, all
necessary adjustments (consisting only of normal recurring adjustments) have
been included to present fairly the unaudited results when read in conjunction
with the audited financial statements and the notes thereto appearing elsewhere
in this prospectus. The results presented below are not necessarily indicative
of the results to be expected for any future fiscal year or nine-month period.
The information for the nine-month periods ended September 30, 1999 and
1998 and the year ended December 31, 1998 is presented as restated. See Note 12
to Notes to Financial Statements and Note 4 to Notes to Unaudited Financial
Statements.
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT NINE-MONTHS ENDED
OF OPERATIONS YEARS ENDED DECEMBER 31, SEPTEMBER 30,
(JAN. 11, 1994) ------------------------------------------- ---------------------
TO DEC. 31, 1994 1995 1996 1997 1998 1998 1999
---------------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ -- $ 1,450 $ 1,077 $ 1,603 $ 4,462 $ 2,441 $ 11,077
Cost of revenues......................... -- 741 665 971 2,867 1,763 7,084
------- -------- -------- -------- ---------- -------- ----------
Gross profit............................. -- 709 412 632 1,595 678 3,993
------- -------- -------- -------- ---------- -------- ----------
Operating expenses
Research and development............... 2,622 12,360 20,887 11,749 13,135 8,625 10,576
Sales and marketing.................... 150 2,022 2,171 1,107 2,709 1,619 2,741
General and administrative............. 1,164 3,437 6,293 5,000 3,750 1,901 1,901
Amortization of deferred stock
compensation......................... -- -- -- -- 859 851 211
Loss (gain) on disposal or write-down
of equipment......................... -- -- 1,053 4 (5) -- 2
------- -------- -------- -------- ---------- -------- ----------
Total operating expenses......... 3,936 17,819 30,404 17,860 20,448 12,996 15,431
------- -------- -------- -------- ---------- -------- ----------
Loss from operations..................... (3,936) (17,110) (29,992) (17,228) (18,853) (12,318) (11,438)
Other income (expense), net.............. 83 1,326 818 (8) 77 (42) 105
------- -------- -------- -------- ---------- -------- ----------
Net loss................................. (3,853) (15,784) (29,174) (17,236) (18,776) (12,360) (11,333)
Preferred dividends...................... 266 2,548 3,456 4,095 5,616 4,305 5,097
Series G preferred deemed dividend....... -- -- -- -- -- -- 11,716
------- -------- -------- -------- ---------- -------- ----------
Net loss attributable to common
stockholders........................... $(4,119) $(18,332) $(32,630) $(21,331) $ (24,392) $(16,665) $ (28,146)
======= ======== ======== ======== ========== ======== ==========
Net loss per share attributable to common
stockholders........................... $(69.04) $ (98.24) $(157.63) $ (96.33) $ (81.88) $ (57.98) $ (70.95)
======= ======== ======== ======== ========== ======== ==========
Shares used in calculating basic and
diluted loss per common share.......... 59,665 186,599 207,005 221,451 297,895 287,448 396,719
======= ======== ======== ======== ========== ======== ==========
Pro forma net loss per common
share -- Basic and diluted(1).......... $ (1.44) $ (1.38)
========== ==========
Pro forma weighted average shares used in
calculating basic and diluted net loss
per common share(1).................... 13,077,497 16,652,808
========== ==========
</TABLE>
17
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------ ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $2,084 $31,490 $ 3,578 $11,348 $ 7,580 $26,996
Working capital................................. 1,605 31,691 2,419 12,127 11,239 30,238
Total assets.................................... 3,241 39,557 10,252 20,694 22,017 47,689
Long-term debt.................................. -- -- 571 4,143 159 230
Total stockholders' equity...................... 2,714 35,806 6,684 12,983 14,463 33,449
</TABLE>
- ---------------
(1) Pro forma gives effect to the automatic conversion of all our outstanding
shares of preferred stock into 16,256,089 shares of our common stock upon
completion of this offering.
18
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and our financial statements and notes included
elsewhere in this prospectus.
OVERVIEW
We provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM, or Global Standard for
Mobile Communications, system of mobile voice and data transmission. We market
our products to operators of wireless networks. A base station is a key
component of a wireless network and is used to receive and transmit voice and
data signals over radio frequencies. Our products include the AdaptaCell, a
software-defined base station, meaning it uses software to control the way it
encodes and decodes wireless signals, and the AirSite, a backhaul free base
station, meaning it carries voice and data signals back to the wireline network
without using a physical communications link.
We began marketing our GSM base stations in the beginning of 1996 and
shipped our first GSM base station in May 1997. Through September 30, 1999, we
have shipped and billed for 240 base stations and have six commercially deployed
systems. We currently sell and market our products in the U.S. through our
direct sales force. We are beginning to conduct our international sales and
marketing efforts through a network of agents, distributors and our direct sales
force.
From our inception in January 1994 through May 1997, our operations
consisted principally of start-up activity associated with the design,
development, and marketing of our products. As a result, we did not generate
significant revenues until 1998 and have generated only $19.7 million in net
revenues through September 30, 1999. We have incurred substantial losses since
commencing operations, and as of September 30, 1999, we had an accumulated
deficit of $96.2 million. We have not achieved profitability on a quarterly or
annual basis. Because we will need to continue to focus heavily on developing
our technology and products, organizing our sales and distribution systems and
assembling the personnel necessary to support our anticipated growth in the near
future, we expect to continue to incur net losses for at least the next several
quarters. We will need to generate significantly higher revenues in order to
support expected increases in research and development, sales and marketing and
general and administrative expenses, and to achieve and maintain profitability.
Our revenues are derived from sales of a single product line based on the
GSM system. We generate a substantial portion of our revenues from a limited
number of customers, with two customers accounting for 76% of our net revenues
during the nine months ended September 30, 1999. Most of our existing and
potential customers are start-up operators that have not yet commenced the
buildout of their networks, obtained necessary financing or acquired a high
degree of familiarity with our products.
We have and expect to continue to experience significant fluctuations in
our quarterly revenues as a result of our long and variable sales cycle.
Historically, our sales cycle, which is the period from the time a sales lead is
generated until the recognition of revenue, has ranged from 12 to 18 months. The
length and variability of our sales cycle is influenced by a number of factors
beyond our control, including: our customers' buildout and deployment schedules;
our customers' access to product purchase financing; our customers' degree of
familiarity with our products; the need for functional demonstrations and field
trials; the manufacturing lead time for our products; delays in final acceptance
of products following shipments; regulatory developments; and our revenue
recognition policies. The effect of our long sales cycle on our results is
compounded by our current dependency on a small number of customers.
Revenue from product sales is recognized after delivery and resolution of
any uncertainties regarding satisfaction of all significant terms and conditions
of the customer contract, which include completion of installation and customer
acceptance of product technical performance. Given our limited operating
history, such uncertainties have been considered resolved to date when the
customer has placed the products in service or completed specified testing
procedures. A number of different factors outside our control can delay
satisfaction of these conditions. Since our products are typically deployed as
part of a
19
<PAGE> 25
complete wireless system and we often fulfill orders through multiple shipments,
customers must have received the final shipment in order to either place our
products in service or complete the specified testing procedures. As of
September 24, 1999, the time period between shipment and revenue recognition has
averaged approximately 100 days, has varied widely, and in one case was as long
as 225 days.
In general, our gross margins will be affected by the following factors:
- demand for our products and services;
- new product introductions, both by us and our competitors;
- changes in our pricing policies and those of our competitors;
- the mix of base stations and other products sold;
- the mix of sales channels through which our products are sold;
- the mix of domestic and international sales; and
- the volume pricing we are able to attain from contract manufacturers and
third party vendors.
We currently obtain all of our primary components and subassemblies for our
products from a limited number of independent contract manufacturers and
purchase circuit boards, electronic and mechanical parts and other component
assemblies from a limited number of OEMs, or original equipment manufacturers,
and other selected vendors. Accordingly, a significant portion of our cost of
revenues consists of payments to these suppliers. The remainder of our cost of
revenues is related to our in-house manufacturing operations, which consist
primarily of quality control, final assembly, testing and product integration.
Research and development expenses consist primarily of expenses incurred in
the design, development and support of our proprietary technology. We expect
research and development expenses to increase as we continue to develop our
technology and future products. In particular, we may incur significant costs in
connection with our efforts to develop the software needed to upgrade our base
stations to support emerging wireless high-speed data transmission standards.
Sales and marketing expenses consist primarily of salaries, commissions,
consulting fees, tradeshow expenses, advertising, marketing expenses and
allocated overhead. We intend to increase expenditures for selling and marketing
as a result of expansion of distribution channels, strategic relationships,
sales and marketing personnel, and marketing programs. In particular, there may
be significant costs associated with our efforts to sell our products to larger
U.S. operators and to international operators.
General and administrative expenses consist primarily of expenses for
finance, office operations, administrative and general management activities,
including legal, accounting and other professional fees and bad debts. Increases
in general and administrative expenses are planned as we expand executive
management, finance and administration support, information systems and other
administrative functions required to support operations and the costs associated
with being a publicly-held company.
Subsequent to the issuance of our September 1999 financial statements, we
determined that we needed to restate our 1998 and 1999 financial statements to
record stock-based compensation and to record a deemed dividend of $11,715,761
to our Series G preferred stockholders in September 1999. In connection with the
grant of certain stock options to employees, we recorded stock compensation of
$0.9 million and $0.1 million during the year ended December 31, 1998 and the
nine months ended September 30, 1999, respectively, representing the difference
between the fair value of our common stock and the option exercise price of
these options at the date of grant. Deferred stock compensation is presented as
a reduction of stockholders' equity and amortized ratably over the vesting
period of the applicable options. We amortized $0.1 million and $1.6 million of
deferred compensation during the year ended December 31, 1998 and the nine
months ended September 30, 1999, respectively. We will expense the balance
ratably over the remainder of the vesting period of the options. See Note 12 to
the Notes to Financial Statements and Note 4 to the Notes to Unaudited Financial
Statements.
20
<PAGE> 26
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Net revenues: Net revenues increased $8.7 million or 354% from $2.4
million for the nine months ended September 30, 1998 to $11.1 million for the
nine months ended September 30, 1999. For the nine months ended September 30,
1999, two customers accounted for 77% of our net revenues. One was a new
customer making an initial deployment of infrastructure for its network.
Gross profit: Gross profit increased $3.3 million or 488% from $0.7
million for the nine months ended September 30, 1998 to $4.0 million for the
nine months ended September 30, 1999. This increase was due primarily to the
increase in revenues for the same period. The gross profit margin improved to
36% for the nine months ended September 30, 1999 from 28% for the nine months
ended September 30, 1998.
Research and development: Research and development expenses increased $2.0
million or 23% from $8.6 million for the nine months ended September 30, 1998 to
$10.6 million for the nine months ended September 30, 1999. This increase was
primarily due to new hires and additional purchases of engineering supplies in
support of our continued effort to enhance current products and develop new
products.
Sales and marketing: Sales and marketing expenses increased $1.1 million
or 69% from $1.6 million for the nine months ended September 30, 1998 to $2.7
million for the nine months ended September 30, 1999. This increase was
primarily attributable to additional sales and marketing personnel we hired to
expand our sales and distribution networks.
General and administrative: General and administrative expenses remained
the same for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net revenues: Net revenues increased $2.9 million or 178% from $1.6
million for the year ended December 31, 1997 to $4.5 million for the year ended
December 31, 1998. This increase resulted from a full year of shipments of our
GSM base station, which we first deployed in May 1997. Net revenues were
adversely affected in the second and third quarters of 1998 by proceedings of
the United States Federal Communications Commission, or FCC, related to the
final settlement of the auction process for a particular range of wireless
broadcast licenses, which occurred in mid-1998. Many of the start-up operators
who comprise our initial target market postponed their buildouts and new product
purchases during the pendency of these proceedings.
Gross profit: Gross profit increased $1.0 million or 152% from $0.6
million for the year ended December 31, 1997 to $1.6 million for the year ended
December 31, 1998. This increase was due primarily to the increase in net
revenues. The gross profit margin was 39% for the year ended December 31, 1997
and 36% for the year ended December 31, 1998. This decrease in gross profit
margin was attributable to unabsorbed overhead costs as we began to expand our
manufacturing capabilities in 1998.
Research and development: Research and development expenses increased $1.4
million or 12% from $11.7 million for the year ended December 31, 1997 to $13.1
million for the year ended December 31, 1998. This increase was associated with
new hires and purchases of certain engineering supplies.
Sales and marketing: Sales and marketing expenses increased $1.6 million
or 145% from $1.1 million for the year ended December 31, 1997 to $2.7 million
for the year ended December 31, 1998. Expenses increased for the recruitment and
support of additional sales staff to help establish our sales and distribution
activities. Additionally, expenses for travel, trade shows and outside services
contributed to the increase.
General and administrative: General and administrative expenses decreased
$1.2 million or 25% from $5.0 million for the year ended December 31, 1997 to
$3.8 million for the year ended December 31, 1998. This decrease was due to a
substantial reduction in all areas of general administrative expense as we sized
operations to more closely match net revenues. This decrease was partially
offset by a $1.5 million provision for bad debts related primarily to one
customer.
21
<PAGE> 27
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues: Net revenues increased $0.5 million or 49% from $1.1 million
for the year ended December 31, 1996 to $1.6 million for the year ended December
31, 1997. This increase was due to our first deployment of digital GSM base
stations in 1997.
Gross profit: Gross profit increased $0.2 million or 53% from $0.4 million
for the year ended December 31, 1996 to $0.6 million for the year ended December
31, 1997. This increase was due primarily to the increase in net revenues offset
by a writedown of $5.6 million for obsolete analog inventory. The gross profit
margin was 38% for the year ended December 31, 1996 and 39% for the year ended
December 31, 1997.
Research and development: Research and development expenses decreased $9.2
million or 44% from $20.9 million for the year ended December 31, 1996 to $11.7
million for the year ended December 31, 1997. This decrease resulted from the
completion in 1996 of the modification of our product platform to support
digital instead of analog wireless standards and for which we incurred a higher
level of expenditures in 1996.
Sales and marketing: Sales and marketing expenses decreased $1.1 million
or 49.0% from $2.2 million for the year ended December 31, 1996 to $1.1 million
for the year ended December 31, 1997. This decrease resulted primarily from
reduced publications and trade show and travel expenditures.
General and administrative: General and administrative expenses decreased
$1.3 million or 21% from $6.3 million for the year ended December 31, 1996 to
$5.0 million on for the year ended December 31, 1997. This decrease was the
result of reductions in headcount and recruitment expense, expensed equipment,
and consulting/legal fees.
Loss on disposal or write-down of equipment: As a result of discontinued
development efforts related to our analog base station, we incurred expenses of
$1.1 million for the year ended December 31, 1996 primarily for the loss on the
disposal or write-down of analog-based equipment.
Other income (expense), net: Other income of $0.8 million for the year
ended December 31, 1996, resulted from interest income generated from the
Company's cash balances during the year.
22
<PAGE> 28
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for the
four quarters in 1998 and three quarters in 1999, and such information expressed
as a percentage of our net revenues. This unaudited quarterly information has
been prepared on the same basis as the audited financial information presented
elsewhere herein and, in management's opinion, includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the information for the quarters presented.
The information for each quarter presented below (except for the quarter
ended June 30, 1998) is presented as restated. See Note 12 to Notes to Financial
Statements and Note 4 to Notes to Unaudited Financial Statements.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
----------- -------- ------------- ------------ ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............. $ 1,373 $ 939 $ 129 $ 2,021 $ 2,158 $ 2,215 $ 6,704
Cost of revenues......... 942 712 109 1,104 1,457 1,455 4,172
------- ------- -------- ------- ------- ------- -------
Gross profit............. 431 227 20 917 701 760 2,532
------- ------- -------- ------- ------- ------- -------
Operating expenses
Research and
development.......... 2,912 2,725 2,988 4,509 3,735 3,459 3,382
Sales and marketing.... 604 616 681 808 891 865 985
General and
administrative....... 503 569 547 2,127 561 580 761
Amortization of
deferred stock
compensation......... 848 -- 3 8 46 74 91
------- ------- -------- ------- ------- ------- -------
Total operating
expenses....... 4,867 3,910 4,219 7,452 5,233 4,978 5,219
------- ------- -------- ------- ------- ------- -------
Loss from operations..... (4,436) (3,683) (4,199) (6,535) (4,532) (4,218) (2,687)
------- ------- -------- ------- ------- ------- -------
Other income (expense),
net.................... 12 (58) 4 119 74 19 11
------- ------- -------- ------- ------- ------- -------
Net loss................. $(4,424) $(3,741) $ (4,195) $(6,416) $(4,458) $(4,199) $(2,676)
======= ======= ======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
(AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 68.6 75.8 84.5 54.6 67.5 65.7 62.2
------- ------- -------- ------ ------ ------ ------
Gross profit.................. 31.4 24.2 15.5 45.4 32.5 34.3 37.8
------- ------- -------- ------ ------ ------ ------
Operating expenses
Research and development.... 212.1 290.2 2,316.3 223.1 173.1 156.2 50.4
Sales and marketing......... 44.0 65.6 527.9 40.0 41.3 39.1 14.7
General and
administrative............ 36.7 60.6 424.1 105.2 26.0 26.2 11.3
Amortization of deferred
stock compensation........ 61.8 -- 2.3 0.4 2.1 3.3 1.4
------- ------- -------- ------ ------ ------ ------
Total operating
expenses............ 354.5 416.4 3,270.6 368.7 242.5 224.8 77.8
------- ------- -------- ------ ------ ------ ------
Loss from operations.......... (323.1) (392.2) (3,255.1) (323.3) (210.0) (190.5) (40.0)
------- ------- -------- ------ ------ ------ ------
Other income (expense), net... 0.9 (6.2) 3.1 5.9 3.5 0.9 0.0
------- ------- -------- ------ ------ ------ ------
Net loss...................... (322.2)% (398.4)% (3,252.0)% (317.4)% (206.5)% (189.6)% (40.0)%
======= ======= ======== ====== ====== ====== ======
</TABLE>
We have experienced and expect to continue to experience significant
fluctuations in quarterly operating results as a result of many factors. We
believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as any indication of future
performance. It is likely that future quarterly operating results from time to
time will not meet the expectations of market analysts or investors, which may
have an adverse effect on the price of our common stock.
23
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private sales of equity securities, which have provided aggregate net proceeds
of approximately $130 million through September 30, 1999, including the net
proceeds from our offering of Series G preferred stock. At September 30, 1999,
we had approximately $27.0 million in cash. We have no credit facilities.
Net cash used in operating activities was approximately $25.2 million in
1996, $17.9 million in 1997, $17.8 million in 1998 and $9.6 million in the nine
months ended September 30, 1999. The significant use of cash by operating
activities was the result of the net losses during all reported periods together
with cash used to finance our increase in accounts receivable and inventory
purchases. Customers are billed as contractual milestones are met. Deposits of
up to 50% of the contracted amount are received at the inception of the contract
and an additional amount which, together with the deposit, may range from 50% to
90% of the contracted amount, is billed upon shipment. However, while most of
the remaining unbilled amounts are invoiced after satisfaction of all
significant terms and conditions of the customer contract, collection of the
entire amounts due under our contracts to date have lagged behind shipment of
our products due to the substantial time period between shipment and customer
acknowledgement of the fulfillment of all of our applicable post-shipment
contractual obligations, the time at which we bill the remaining balance of the
contracted amount. This lag requires increasing investments in working capital
as our revenues increase. As of September 30, 1999, our receivables balance was
$6.8 million. This balance is primarily attributable to two customers, and
receivables from one of these customers accounted for approximately 61% of the
total amount outstanding.
We used net cash for capital expenditures of approximately $2.4 million,
$1.3 million, $0.9 million and $0.6 million for the periods ended December 31,
1996, December 31, 1997, December 31, 1998 and September 30, 1999, respectively.
These expenditures reflect our investments in computer equipment, software
development tools and test equipment, which was required to support our business
expansion.
We anticipate an increase in our capital expenditures for testing and
manufacturing equipment used during the final assembly of our product as our
revenues increase. Through December 31, 1999, we estimate that capital
expenditures will total approximately $1.5 million.
We lease our primary manufacturing and office facilities under long-term
non-cancelable operating leases. We also have operating leases for certain other
furniture, equipment and computers. We used net cash for operating leases of
approximately $1.5 million, $1.4 million, $1.1 million, and $0.7 million for the
periods ended December 31, 1996, December 31, 1997, December 31, 1998 and
September 30, 1999, respectively. Future minimum lease payments aggregated
through the year 2003 are approximately $1.5 million as of September 30, 1999.
We also lease certain computer and test equipment under capital lease
arrangements. We used net cash for capital leases of approximately $0.4 million,
$0.4 million, $0.6 million, and $0.6 million for the periods ended December 31,
1996, December 31, 1997, December 31, 1998 and September 30, 1999, respectively.
Future minimum lease payments aggregated through the year 2003 are approximately
$0.7 million as of September 30, 1999.
We believe that our available cash resources combined with the net proceeds
of this offering will be sufficient to fund operating losses and meet our
presently anticipated working capital and capital expenditure requirements for
the next twelve months. Thereafter, we may need to raise additional funds. We
may need to raise additional funds sooner to fund more rapid expansion, continue
development of new or enhanced products, respond to competitive pressures, fund
unexpected expenditures or operating losses or acquire businesses or
technologies. If additional funds are raised through the issuance of equity
securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to those of the holders of our
common stock. If we raise additional funds through the issuance of debt
securities, those securities would have rights, preferences and privileges
senior to those of holders of our common
24
<PAGE> 30
stock, and the terms of this debt could impose restrictions on our operations.
Additional financing may not be available when needed, on favorable terms or at
all.
YEAR 2000 COMPLIANCE
Many existing computer programs and systems use only two digits to identify
a year in the date field. For example, "99" would represent 1999. These programs
and systems were designed and developed without considering the impact of the
upcoming millennium. Consequently, date sensitive computer programs may
interpret the date "00" as 1900 rather than 2000. If not corrected, many
computer systems could fail or create erroneous results in 2000.
State of Readiness. We have completed an assessment of all of our internal
and external systems and our products with respect to the year 2000 issue. In
response to this assessment, we created a year 2000 committee to resolve any
non-compliant year 2000 systems and issues. We plan to complete testing all of
our internal and external systems, including the associated year 2000 fixes for
year 2000 compliance by December 15, 1999. As part of our process, we have
assessed the potential impact of year 2000 failures from vendors and other
companies upon our business and we are currently taking steps to minimize this
risk. We are in the final stages of assessing and verifying the year 2000
compliance of all of our suppliers and vendors. Verification will be
accomplished through the use of written inquiries to suppliers, certifications,
audits and information provided by suppliers on their websites. Some vendors
have not yet responded to our inquiries regarding year 2000 compliance. Based on
our current state of readiness, the actions we are currently taking and the
responses received from our suppliers and vendors to date, we do not believe
that the year 2000 problem will have a material adverse effect on our financial
position, liquidity, or operations.
Our Costs of Year 2000 Compliance. We estimate that our total costs of
year 2000 compliance will be less than $100,000. These costs include updating
our computer software and hardware, as well as contracting outside experts and
out-of-pocket expenses.
Risks of Year 2000 Issues. We procure crucial components used in our
manufacturing process from foreign vendors. As a result, we may be at risk from
foreign companies and countries that are not taking adequate measures to ensure
year 2000 compliance or that may not be at the same level of preparedness as
companies in the United States. For example, economic problems in Asia may
affect or divert resources with respect to the year 2000 issue. The failure of
those foreign countries and companies to be year 2000 compliant may cause
material shortages that could adversely impact our manufacturing operations. In
addition, some of our customers may experience catastrophic year 2000 failures,
including prolonged interruptions in their business, in which case they may have
a reduced demand for our products.
We may not be able to upgrade any or all of our major systems in accordance
with our plan to address the year 2000 issue. In addition, any such upgrades may
not effectively address the year 2000 issue. If required upgrades are not
completed or are unsuccessful, our operations may be materially adversely
affected. Furthermore, systems of other companies on which our own systems rely
may not be timely converted. A failure to convert by another company or a
conversion that is incompatible with our system could result in the:
- failure of our products due to year 2000 problems associated with
components supplied by others for use in our products, which may require
that we find replacement components or alternative sources and that we
potentially incur significant unexpected expenses;
- failure of systems our customers or potential customers use to run their
businesses, which could affect their ability to purchase products from
us; and
- failure of our customers' wireless networks which could affect their
business and buildout plans.
Any failures by our suppliers or vendors to ensure the year 2000 compliance
of their operations and the products and services they provide us could also
seriously harm our business. In addition, customers may defer purchases of our
products until the general uncertainty associated with year 2000 has passed.
25
<PAGE> 31
We cannot anticipate all customer situations and we may see an increase in
warranty and other claims as a result of the year 2000 transition.
Our Contingency Plans. We are developing contingency plans with respect to
significant year 2000 issues that are within our control. We intend to replace
any suppliers or vendors who are found not be 2000 compliant with vendors that
are 2000 compliant. However, we plan to continue utilizing only one or a small
number of suppliers for each of the components of our base station systems.
Therefore, replacing a supplier may be disruptive to our business and result in
the loss of sales. In addition, even if we believe a supplier or vendor to be
year 2000 compliant, that supplier or vendor may still have year 2000 problems.
We believe that, apart from the loss of important suppliers and vendors, the
worst case year 2000 scenario would involve disruption of our utilities and
banking facilities.
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BUSINESS
OVERVIEW
We provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM, or Global Standard for
Mobile Communications, system of mobile voice and data transmission. We market
our products to operators of wireless networks. A base station is a key
component of a wireless network that receives and transmits voice and data
signals over radio frequencies. We designed our base stations to be easier to
deploy and upgrade and to have lower capital and operating costs than other
existing base stations. Our system features two innovative base station
products:
The AdaptaCell is a software-defined base station, meaning it uses software
to control the way it encodes or decodes wireless signals. Our AdaptaCell
incorporates a proprietary radio architecture that is designed to enable
operators to upgrade their wireless networks to offer high-speed data and
Internet services by changing software rather than deploying new base stations.
Our AdaptaCell also incorporates a broadband architecture, meaning that it uses
only one radio to process a large number of radio channels.
The AirSite is a backhaul free base station, meaning it carries voice and
data signals back to the wireline network without using a physical
communications link. Our AirSite uses an operator's existing radio frequencies
as the medium to provide the necessary connection to the wireline network.
Unlike our competitors' base stations, our AirSite does not require an expensive
physical communications link, usually through a digital T-1 phone line, to the
wireline network. As a result, an operator's fixed network operating costs may
significantly decrease.
We were founded in 1994 and have raised approximately $130 million from
inception through September 30, 1999 to develop our technology and fund
operations. As of November 10, 1999, we had 33 domestic patents granted, 22
patent applications pending, and 2 provisional patent applications. We received
the 1998 GSM World Award for Best Technical Innovation from the GSM Association,
an international body with members from 133 countries, in recognition of our
innovative infrastructure.
INDUSTRY BACKGROUND
In recent years, there has been substantial growth in the number of
wireless users around the world, reaching 303 million subscribers in 1998
according to International Data Corporation, or IDC. IDC estimates that the
number of wireless users will reach approximately 1.1 billion in 2003,
representing a compound annual growth rate of 29%. We expect the following
factors to contribute to continued growth in wireless usage:
Improved Coverage. Due to the high start-up costs involved, initial
wireless deployments were limited to urban centers and major traffic
corridors. Existing operators have accelerated the buildout of their
networks to meet demands for improved service, including seamless roaming
across local, regional and even national markets. In addition, new
operators have sought to develop their own networks in locations where
service had previously been inadequate or too costly.
Lower Price. The price of wireless services has decreased
significantly in developed markets. With as many as six wireless service
operators in some U.S. markets, operators are seeking to enhance their
competitive position with more efficient and cost effective networks.
New Wireless Services. Wireless networks have traditionally been
designed to support voice traffic. With the advent of the Internet and
increased focus on the development of high capacity wireless networks, we
expect operators to make additional infrastructure investments in order to
offer high-speed data and Internet services while seeking to ensure
compatibility with their existing networks.
There has also been a substantial increase in wireless minutes of use.
According to Paul Kagan Associates, Inc., wireless minutes of use in the U.S.
are expected to increase from approximately 64 billion in 1997 to an estimated
150 billion in 1999. Subscribers are beginning to use wireless telephones as a
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substitute for wireline communications. Operators are striving to keep up with
the resulting demand by adding more base stations and increasing the capacity of
existing base stations to increase the number of channels in their networks.
Compounding the challenge, new service providers operating at higher frequencies
can require up to four times as many base stations as traditional wireless
networks in order to achieve the same coverage pattern. As a result, Allied
Business Intelligence, Inc. predicts there will be approximately 2.3 million
wireless base stations deployed by 2003 compared to approximately 823,000 in
1998, representing a 23% compound annual growth rate.
Various analog and digital standards for wireless voice and data
transmission are currently available to wireless service operators, including:
Global Systems for Mobile Communications, known as GSM; Code Division Multiple
Access, known as CDMA; and Time Division Multiple Access, known as TDMA. Unlike
CDMA and TDMA, GSM incorporates an open interface between the base station and
mobile switching center. This open interface makes it easier for wireless
service operators to purchase and integrate GSM system elements, including base
stations, from multiple vendors rather than relying on a single vendor. Although
GSM is based on a number of well-defined standard interfaces, a GSM mobile
telephone switch may be manufactured according to different variations within
the standard interface. As a result, we may encounter obstacles when we attempt
to integrate our products with a particular switch, since we have not yet tested
our products for compatibility with several vendors' switches. If our products
are not initially compatible with a particular mobile telephone switch, we can
make modifications to account for such variations in the standard interface. To
date, we have had little difficulty interfacing our system with multiple
vendors' switches.
GSM is the most widely used wireless standard worldwide, with systems
operating in approximately 120 countries and serving over 160 million
subscribers as of April 1999. This represents 45% of all wireless subscribers
and 65% of digital wireless subscribers worldwide. As of September 1999, the
number of subscribers using this standard increased to approximately 200
million.
In the U.S., TDMA and CDMA are currently the most widely used standards.
According to Allied Business Intelligence, Inc. in 1998, there were
approximately 8.1 million TDMA subscribers and approximately 5.8 million CDMA
subscribers. The primary users of these standards in the U.S. have been the
traditional large wireless operators. According to Allied Business Intelligence,
Inc. at the end of 1998 there were 3.0 million GSM subscribers in the United
States, representing 4.3% of wireless subscribers in the United States.
The growth in demand for wireless services caused a strain on the capacity
of existing wireless networks. Partially in response, the FCC allocated new
radio frequency spectrum for wireless services through a series of FCC auctions
and re-auctions commencing in late 1994 and ending in early 1999. Many of the
winners in this auction process were smaller, entrepreneurial wireless service
operators. These new operators are faced with the challenge of rapidly deploying
a wireless network infrastructure and establishing a competitive footprint, or
geographic coverage area, in order to interest potential subscribers and become
competitive with established operators. Because of these challenges, we believe
that these new operators are seeking to deploy an infrastructure with the lowest
capital and operating costs possible, while preserving their ability to support
additional subscribers and future high-speed data services. Due to its proven
technology and global roaming capability, many of these new operators have
selected GSM.
Government bodies in other countries are, like the FCC, auctioning off
radio frequency spectrum. We believe the same dynamics that led new domestic
operators to choose GSM will also lead many new international operators to
select GSM. In addition, the less-developed countries of Asia, Africa, Eastern
Europe, and South America have limited wireline infrastructure, creating new
opportunities for wireless operators. Therefore, we believe there will continue
to be a strong international demand for GSM and the associated infrastructure
equipment.
Existing GSM base stations were designed to support larger operators
providing voice service in heavily populated areas. As a result, they are not
cost-effective when used in low population density areas. In addition, these
base stations cannot be easily upgraded to support high-speed data and wireless
Internet services. A further problem with these base stations is the cost
associated with expensive physical
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communications links, usually through a digital T-1 phone line, to connect each
base station to the wireline network. This can result in significant recurring
expense for most operators.
The European Telecommunications Standards Institute, a leading worldwide
promoter of standards for the telecommunications industry, has proposed next
generation standards for GSM that will enable GSM to provide high-speed data and
wireless Internet services. We expect these standards to be introduced in
several phases starting with GPRS, then EDGE, and finally 3G. Industry leaders
have proposed a similar evolution path for TDMA, in which TDMA will converge
with GSM by adopting the EDGE standard for high-speed data and wireless Internet
services.
A key challenge for wireless service operators will be to incorporate new
high-speed data services into their networks while limiting the amount of new
infrastructure required. Operators may be required to install three different
sets of hardware: one to handle the current GSM standard, one for high-speed
data based on EDGE, and yet another for very high-speed data service based on
3G. In addition to the associated incremental costs, these service overlays
could be inefficient because it may not be possible to move system capacity from
one type of base station to another without adding additional hardware. Finally,
at present, our competitors' base stations cannot be easily modified to
substantially increase capacity to handle the expected increase in voice
traffic. We believe base stations with substantially increased higher capacity
will become crucial as high-speed data is increasingly accepted, occupying a
greater percentage of a wireless service operator's total system capacity and
leaving less capacity for conventional voice traffic.
THE AIRNET SOLUTION
We believe our software-defined solution positions us to meet the
industry's challenge of transitioning from today's existing GSM networks to
tomorrow's integrated voice and high-speed data networks. The timing of this
transition and the exact specifications of these new standards are uncertain. We
believe that our software-defined solution will be particularly valuable to
operators during this uncertain transition as it enables operators to purchase
infrastructure today which can be adapted to tomorrow's new standards.
We believe our solution reduces an operator's total cost of owning and
operating wireless networks. Our solution features two innovative base station
products, the AdaptaCell and the AirSite Backhaul Free Base Station, which
provide the following key benefits:
Adaptable and Easy to Upgrade. Our AdaptaCell base station
incorporates a broadband architecture and is software-defined, meaning it
uses only one radio or transceiver to process a large number of radio
channels and uses software to control the way it encodes and decodes
wireless signals. We expect this design will allow operators to support new
standards such as GPRS and EDGE through only changes in software. To
support 3G, a few, if any, hardware modifications may be required in
addition to a software upgrade. By contrast, other existing base stations
must be extensively modified or even replaced if operators want to offer
new high-speed data and wireless Internet services to their customers. As
wireless operators adopt new high-speed data standards like GPRS, EDGE and
3G, we believe the AdaptaCell's design will position our system as a
preferred solution. Also, since the AdaptaCell is designed to be configured
to support more than one standard at the same time, a single base station
could, for example, be configured to support voice, EDGE and 3G
simultaneously.
Lower Operating Costs. Our base stations are designed to result in
substantially lower operating costs per subscriber than our competitors'
base stations. Base stations usually require expensive physical
communications link, typically a digital T-1 phone line, to connect to the
wireline network. The AirSite features its own integral wireless backhaul,
meaning it carries voice and data signals back to the wireline network
without using a physical communications link. Our AirSite uses an
operator's existing radio frequencies as the medium to provide the
necessary connection to the wireline network. This eliminates the need for
a T-1 or any other physical connection from the AirSite back to the
AdaptaCell. In addition, eliminating coverage holes with other existing
base stations may not be cost-effective because an expensive T-1 or
physical link from each base station to the base station controller is
required. In contrast, our system only requires a T-1 line or other
physical backhaul
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connection between the base station controller and the AdaptaCell base
stations, each of which can service up to 12 separate AirSites. Finally,
our simplified hardware design results in a smaller base station that has
fewer components, is easier to install and maintain and uses less
electricity.
Flexible Deployment. As opposed to our competitors' systems, our
scaleable solution allows operators to start small, establish a network,
and incrementally expand coverage and capacity as subscriber demand
increases. In addition, because AirSites are backhaul free, operators are
able to deploy them in new and innovative ways. For example, some customers
have mounted AirSites on telephone poles and billboards, reducing the time
and cost associated with deploying a base station by simplifying zoning and
tower construction issues.
STRATEGY
Our goal is to become a leading worldwide supplier of wireless base
stations. Our strategy for achieving this goal includes the following core
elements:
Leverage Our Technology Leadership. Since our inception, we have raised
approximately $130 million to develop our technology and fund operations. As of
November 10, 1999, we had 33 domestic patents granted, 22 patent applications
pending, and 2 provisional patent applications. We believe that we currently
have the only commercially deployed broadband, software-defined base station.
The technological advances incorporated in our base stations provide our
customers with significant advantages. We intend to leverage our technology
leadership by continuing to invest in our substantial research and development
efforts in order to continue to provide our customers with cost-effective,
innovative solutions.
Continue to Market our Product Advantages to Domestic Operators. We will
continue to focus on providing infrastructure to domestic wireless service
operators deploying GSM systems in new markets, known as initial-coverage areas,
or filling gaps in existing deployments, known as coverage-limited areas. Many
of these operators are currently engaged in significant initial-coverage and
coverage-limited deployments. We also plan to target the larger domestic GSM
operators as they address buildouts in their own suburban and low-population
density areas. These larger operators are continually upgrading and expanding
coverage to maintain parity with their competitors. Our cost-effective,
scaleable infrastructure is designed to meet the needs of both new and existing
operators.
Expand Into International Markets. We believe success in domestic markets
will facilitate entry into international markets. The large infrastructure
vendors have targeted Europe and other high population density areas overseas
and have not focused as much on developing cost-effective products for use in
low population density areas. Using the same strategy we successfully
implemented in the U.S., we are focusing our international marketing efforts on
low population density markets such as Africa, Asia, Eastern Europe and South
America. We recently announced versions of our products modified for
international markets. To achieve an international market presence as quickly as
possible, we are establishing a network of agents, distributors, and OEMs.
Establish a Market Leadership Position in High-Speed Data Base Station
Markets. Our AdaptaCell positions us to establish a market leadership position
as wireless communications evolve from voice to high-speed Internet access. The
AdaptaCell is designed to support multiple wireless standards, enabling a single
base station to service voice and high-speed data subscribers simultaneously. We
have also designed the AdaptaCell to serve as the basis for a new generation of
base stations which will have substantially increased capacity.
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WIRELESS SYSTEM TECHNOLOGY
Figure 1 -- Mobile System Architecture
[BASE STATION SUBSYSTEM GRAPHIC]
Wireless telephone systems operate by dividing a geographic service
territory into a number of regions called cells. As Figure 1 shows, each cell
contains a base station that communicates with the wireless telephones located
in that cell. When a subscriber wishes to place a call, a signal is sent from
the subscriber's telephone to the base station in the cell in which the
subscriber is located. The base station completes the call via the base station
controller and mobile switching center, and then assigns one of several
available channels to be used by the subscriber's telephone while operating
within the cell's range. Since all telephone conversations are inherently
two-way, a similar reverse channel from the base station to the subscriber is
assigned at the same time.
In conventional analog phone systems, a channel occupies an entire radio
frequency carrier. In digital TDMA and GSM, a channel occupies only a small
fraction, or timeslot, within a particular radio frequency carrier. In these
systems, each wireless telephone waits for its assigned channel timeslot and
broadcasts the subscriber's digitized speech. Thus, multiple callers can make
use of the same radio frequency carrier at the same time. In digital CDMA, the
notion of a channel is more complex because all subscribers make use of the
entire available radio frequency spectrum simultaneously. In these systems, each
subscriber is assigned a unique identification code, which the telephone uses to
mathematically process the subscriber's voice and spread the signal across the
entire radio frequency spectrum. On the receiving end, the receiver uses the
same unique code to unscramble the signal. In analog and digital TDMA and GSM
wireless systems, each telephone is assigned a new channel when it enters a
cell. As a wireless telephone moves from cell to cell, it is transferred to an
adjacent base station and then reassigned a new channel. In digital CDMA
systems, no channel reassignments are necessary because the base station in the
new cell simply starts unscrambling the subscriber's signal and the old cell
stops.
Our competitors' base stations can only support a single specific standard
and require different hardware to support each standard. These are known as
hardware base stations. In a hardware base station, a discrete set of components
processes each radio frequency carrier. Adding voice channels requires
additional carriers, which typically means adding new hardware. As new
high-speed data standards, such as EDGE and 3G, are developed and deployed, an
operator may need to install new base stations to support these standards
because existing base stations are primarily designed to support only voice
services. An additional complication arises because not every subscriber can be
expected to migrate to the new service when it is first deployed. To accommodate
these late adopters, operators may need to support more than one standard
simultaneously. In these cases, an additional base station may be required.
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Our AdaptaCell receives wireless telephone signals from subscribers by
digitizing a full 5 MHz of the wireless service operator's radio frequency
spectrum and then processing the digitized spectrum using a series of digital
signal processors that run our proprietary software. An inverse process occurs
when transmitting to subscribers. When configured to support the GSM standard,
one of our broadband, software-defined radios can process up to 12 GSM radio
frequency carriers supporting 96 independent channels comprised of 92 voice
channels and 4 control channels using a single set of hardware. Base stations
utilizing narrowband radio technology use 12 duplicate sets of hardware in order
to accomplish the same task as one of our AdaptaCell base stations. This is
shown in Figure 2.
Figure 2 -- Narrowband Radio Technology Versus AirNet's Broadband,
Software-Defined Radio Technology
[RADIO TECHNOLOGY/AIRNET BROAD BAND GRAPHIC]
Our AdaptaCell is based on broadband, software-defined radio. We believe we
are the only base station manufacturer to have successfully deployed this
technology in commercial service. The term software-defined means that the way
the radio encodes and decodes signals is controlled by the installed software.
As new standards are developed and deployed, the same radio can be configured to
support multiple standards by loading new software into the radio. To accomplish
this, we believe our competitors' base stations will require significant
hardware changes which may be expensive. The term broadband means that the
AdaptaCell has one radio or transceiver that processes 5 MHz of radio frequency
spectrum on both transmission and reception. By contrast, base stations
utilizing narrowband radio technology use many independent narrowband radios
that individually process a much smaller amount of radio frequency spectrum,
1/25 as much in the case of GSM, which in effect limits them to one standard. As
such, the AdaptaCell has far fewer components than other existing base stations,
a design feature that increases reliability and lowers costs.
We have designed our broadband, software-defined base stations to support
more than one kind of wireless service on the same base station at the same
time. This is important because as new wireless services such as EDGE and 3G
high-speed data are deployed, many subscribers will still be using wireless
telephones that operate on older standards. These subscribers will expect their
telephones to continue to work as new standards are deployed. Operators using
our competitors' products will have to continually change hardware, or even
deploy multiple base stations that support old and new standards, to serve
different populations of subscribers using wireless telephones. After completion
of a software upgrade and perhaps a few hardware modifications, changing a
setting at a central control point is all that will be required to vary the
level of support given to each standard on an AdaptaCell.
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PRODUCTS
Our base station subsystem products currently support the GSM system for
wireless voice and data communications services. We chose to develop products
based on this standard because the interfaces, or connections, between the
various pieces that make up the GSM base station subsystem are well defined and
publicly documented. One of these interfaces, the connection between the mobile
switching center and the base station controller, and ultimately the base
stations that compose the base station subsystem, is referred to as the
A-interface. This A-interface allows wireless operators to attach our base
station subsystem equipment to an existing operator's mobile switching center.
It is this standard interface that makes any existing GSM operator a potential
customer for our base station subsystem equipment. We are currently marketing
the base station subsystem in three standard configurations, the GSM-900,
GSM-1800 and GSM-1900, operating at 900 MHz, 1800 MHz and 1900 MHz respectively.
As shown in Figure 3, our base station subsystem features two base
stations: the AdaptaCell broadband, software-defined GSM base station and the
AirSite Backhaul Free Base Station. We also offer custom-tailored ancillary
equipment that completes the base station subsystem. These include a base
station controller, a transcoder rate adaptation unit and an operations and
maintenance center (radio).
Figure 3 -- AirNet GSM Base Station Subsystem
[AIRNET BASE STATION SUBSYSTEM GRAPHIC]
AdaptaCell. The AdaptaCell wireless base station supports up to 12 GSM
radio frequency carriers (96 total channels including 92 voice/data channels and
four control channels). The AdaptaCell differs from our competitors' base
stations in that its operation is defined by software, not hardware. This means
that as subscribers demand new services from operators, specifically new
high-speed data and Internet services, it will be possible to upgrade the
AdaptaCell to support those services via a change of software and few, if any,
hardware modifications. Operators using our competitors' equipment will likely
have to install new equipment, and potentially a completely new base station,
for each new wireless standard they adopt. The AdaptaCell is available in two
basic configurations: omni-directional and sectorized. An omni-directional base
station serves a roughly circular geographic area while a sectorized base
station divides the area around it into independent sectors. Sectorized base
stations are useful in high-density applications because they allow a wireless
service operator to reuse frequencies in adjacent cells more readily than with
omni-directional base stations. Figure 3 shows an omni-directional
configuration.
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AirSite. The AirSite is a compact wireless base station that supports one
GSM radio frequency carrier (eight total channels including seven voice/data
channels and one control channel) and includes its own wireless backhaul system.
By contrast, other existing base stations must be connected to the rest of the
system using expensive physical communications links, usually digital T-1 lines.
The AirSite is a true GSM base station, meaning it has a unique site ID for
billing and "911" emergency identification purposes, offers the same geographic
coverage as other existing base stations, and has fault and error detection
functionality fully integrated into the operations and maintenance center
(radio). The AirSite operates by receiving a subscriber's wireless telephone
signal and transmitting it to the AdaptaCell. The AdaptaCell then sends the
signal over a T-1 line to the base station controller and on to the mobile
switching center. In reverse, digitized voice signals come from the mobile
switching center to the base station controller and then to the serving
AdaptaCell, which then transmits the signal to the AirSite. The AirSite then
transmits the signal to the subscriber. System capacity can be expanded by
deploying two AirSites in a tandem configuration at the same cell site, thus
supporting two GSM radio frequency carriers (16 total channels including 15
voice/data channels and one control channel).
Base Station Controller. Our base station controller coordinates the
activities of the AdaptaCells physically attached to it and all the AirSites
served by those AdaptaCells. A single base station controller can support up to
20 AdaptaCells and up to 240 AirSites. Among other things, the base station
controller monitors handset signal levels and the operational status of each of
its attached base stations, controls handset transmit power, and orchestrates
handoffs between base stations.
Transcoder Rate Adaptation Unit. In most telecommunications systems,
digitized voice requires 64 Kbps of bandwidth to accurately convey human speech.
Our transcoder rate adaptation unit compresses a standard 64 Kbps voice stream
to a GSM standardized 13 Kbps format more suitable for transmission within the
base station subsystem. This means that the digital T-1 line used to connect the
base station controller to the mobile switching center can carry four times as
many voice conversations as it normally would. This makes it less expensive to
attach a base station subsystem to its associated mobile switching center.
Operations and Maintenance Center (Radio). The operations and maintenance
center-radio provides the network management facility for one or more of our
base station subsystems. Our operations and maintenance center (radio) provides
a comprehensive graphical user interface for maintenance personnel. In its
maximum configuration, one operations and maintenance center (radio) can
simultaneously manage 10 base station controllers, 200 AdaptaCells, and 2,400
AirSites.
CUSTOMERS
Through September 30, 1999, we have shipped and billed for 240 base
stations to our customers.
The following table is a list of customers that have each ordered
approximately $1 million or more of our products from January 1997 through
September 30, 1999:
Carolina PCSI Limited Partnership
Coleman County Telephone Cooperative, Inc.
Comtel PCS Mainstreet Limited Partnership
Hafatel, LLC
High Plains/Midwest L.L.C.
MBO Wireless
Message Express Company*
NPI Wireless*
OnQue Communications, Inc.
Panhandle Telecommunications Systems, Inc.*
Pinpoint Communications
Third Kentucky Cellular Corporation
- ---------------
* Accounted for 10% or more of our revenues for the nine months ended September
30, 1999 or for the year ended December 31, 1998. Together, these customers
accounted for substantially all of our revenues for these periods.
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SALES AND MARKETING
We sell and market our products in the U.S. through our direct sales force.
Our international sales and marketing efforts are conducted through a network of
agents, distributors and our direct sales force. We have developed programs to
attract and retain high quality, motivated sales representatives that have the
technical skills and consultative sales experience necessary to sell our
infrastructure solutions.
We have established a marketing communications organization that is
responsible for the branding and marketing of our products and services and for
distinguishing the AirSite and AdaptaCell as branded product offerings. The
marketing organization is responsible for all new product launches to ensure
both internal execution and marketplace acceptance.
Direct Sales. Our direct sales force works as a team with our support
personnel. The direct sales account manager contacts a potential customer and
assists that customer in identifying its technology goals. A budgetary proposal
is then prepared for the customer containing a pro forma business analysis
comparing the customer's initial deployment costs and operating expenses using
traditional wireless infrastructure with those costs and expenses using our
products. The customer is then invited for an executive visit to review our
manufacturing and development facilities in Melbourne and tour one of our
deployed systems, and to discuss the customer's needs for financing, if any.
Final contract negotiations are scheduled shortly thereafter.
We have initiated direct sales efforts in the United States, Australia,
Africa, South America, and the Pacific Rim.
International Sales Agents, Distributors and OEMs. In order to further our
international sales objectives, we are establishing relationships with a number
of country/region specific sales agents, distributors, and OEMs. Our network
currently consists of sales agents working in Africa, Chile and Venezuela and a
distributor working in Australia. Since GSM has been widely adopted throughout
the world, other geographical areas have been targeted for penetration via
similar third party relationships; most notably, Eastern Europe and the Pacific
Rim.
CUSTOMER SERVICE AND SUPPORT
We provide a full range of customer support during all program
implementation phases. The following services are provided:
- rapid resolution of field problems through a 24-hour hot-line service;
- administration of service contracts and warranty policies; and
- software maintenance, support and improvements.
Our field service provides a host of program management services focusing
on equipment installation and system implementation. We install, commission, and
transfer operational control to the customer in a carefully planned program
designed to ensure success. Field service provides these services:
- radio frequency design, including preparation of coverage maps;
- installation;
- system drive testing; and
- maintenance.
We also provide certificate-based training programs to our customers in all
aspects of system installation, operation and maintenance.
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RESEARCH AND PRODUCT DEVELOPMENT
Our product strategy is to develop and offer a suite of software upgrade
packages designed to run on our AdaptaCell platform to support future high-speed
data standards while augmenting our line of backhaul free base stations with new
lower-cost designs.
We have invested heavily in the development of broadband, software-defined
base station technology. We began development in 1994 and shipped our first
prototype base stations in 1996.
In mid-1997, we deployed our first GSM base station subsystem. This system
was placed in commercial service in late 1997 and continues in service.
In 1998, we focused on adapting the base station subsystem for connection
to other vendor's switching equipment at the industry standard GSM A-interface.
During the year, we shipped products that were successfully integrated with
switches provided by two vendors, including Nortel Networks Corporation. We also
added additional features such as support for short message service and enhanced
full-rate vocoders.
In 1999, we shipped the AdaptaCell, which is the third generation of our
broadband, software-defined base station. This third generation base station may
be deployed in sectorized configurations. In addition, the AdaptaCell can also
be configured to operate on frequency bands used by GSM operators in
international markets.
Our current product development plans focus on the GPRS, EDGE and 3G
high-speed data standards. We first plan to develop a GPRS high-speed data
upgrade package. We also plan to take advantage of the evolution of digital
signal processors and other digital components to reduce the cost of our base
stations.
Subsequently, we expect to develop an EDGE high-speed data upgrade package.
Ultimately, we expect to develop one or more 3G software upgrade packages.
We may not be able to introduce these or any other products as scheduled. In
addition, market conditions may not ultimately dictate the necessity of
developing upgrade packages to support one or more of these emerging 3G high-
speed data standards. Also, while few modifications to the AdaptaCell hardware
platform are expected as the product evolves, some enhanced hardware, including
upgraded digital signal processors, will be required to support certain
features.
Our product development strategy has been to concentrate our engineering
resources on our core technology while making maximum use of third party vendors
and products for everything else. In practice, this means our engineering
resources are focused on broadband, software-defined base station technology,
backhaul free base stations, and the software upgrades necessary to support new
high-speed data standards.
As of September 30, 1999, 97 of our 153 employees were engaged in research
and product development, including hardware and software engineering.
MANUFACTURING
We currently use a limited number of third-party contractors to manufacture
all of our primary components and subassemblies for our products. As a result,
our in-house manufacturing operations consist primarily of quality control,
final assembly, testing and product integration. Circuit boards, electronic and
mechanical parts, and other component assemblies are purchased from OEM
manufacturers and other selected vendors. Quality control is maintained by an
in-house staff that sets standards and manages our manufacturing contractors.
There is currently only one supplier of high power amplifiers, a critical
component of our broadband base stations, that can provide us with a product
that meets our quality standards.
COMPETITION
The wireless telecommunications infrastructure market is highly
competitive. The market for our products is characterized by rapidly changing
technology, evolving industry wireless standards and frequent new product
introductions and enhancements. Failure to keep pace with these changes could
seriously
36
<PAGE> 42
harm our competitive position and prospects for growth. Our ability to compete
depends on many factors including product and standard flexibility, price and
reliability.
Current and potential competitors consist primarily of major domestic and
international companies, most of whom have longer operating histories; larger
installed customer bases; substantially greater name recognition; and greater
financial, technical, manufacturing, marketing, sales and distribution
resources. Competing base station vendors can be divided into two groups:
existing large equipment manufacturers who supply a complete range of wireless
base station systems to wireless service operators and smaller companies that
typically market components of wireless systems to system suppliers or directly
to operators. Our current competitors include Alcatel S.A., Hughes Network
Systems, LM Ericsson Telephone Company, Lucent Technologies Inc., Motorola,
Inc., NEC Corporation, Nokia Corporation, Nortel Networks Corporation and
Siemens AG. We face actual and potential competition not only from these
established companies but from start-up companies that develop and market new
wireless telecommunications products and services.
PROPRIETARY RIGHTS
We consider our technologies proprietary and seek to protect our
intellectual property rights. As of November 10, 1999, we had 33 domestic
patents granted, 22 patent applications pending, and 2 provisional patent
applications. In addition, we are seeking patent protection for our inventions
in foreign countries. One of the allowed domestic patents was based upon
proprietary rights originally obtained from Harris Corporation, one of our
stockholders, and is subject to a non-exclusive cross license to a third party.
We also obtained from Harris Corporation a royalty-free, worldwide,
non-exclusive right and license to use six other patents in the manufacture and
sale of products covered by these patents. Our patents cover the basic
architecture of the system, sub-components, and frequency reuse planning
schemes.
Simultaneously with Motorola's equity investment in January 1995, we signed
an agreement granting Motorola the right to obtain a non-exclusive, royalty-free
license under any two of our patents. In the event of a potential merger,
consolidation or sale of our company, we have the right to require Motorola to
either exercise its right or to cancel its right in exchange for a payment of $1
million per patent. With respect to possible infringement of our respective
digital base station patents, each of us agreed not to enjoin the other and to
attempt dispute resolution, including negotiation of nonexclusive license
agreements in good faith, before resorting to litigation.
While we believe that our patents will render it more difficult for
competitors to develop and market similar products, our patents may be
invalidated, circumvented, or challenged. Our patent rights may fail to provide
us with competitive advantages. Any pending or future patent applications,
whether or not being currently challenged by applicable governmental patent
examiners, may not be issued with the scope we seek.
We also rely upon copyright and trade secret laws. Source code for our own
proprietary software is protected as an unpublished copyrighted work and as a
trade secret. In addition, we generally enter into confidentiality or licensing
agreements with employees, consultants, vendors, customers, and licensees, and
generally limit access to the details of proprietary designs, software,
documentation, and other confidential information.
Notwithstanding our efforts to protect our rights, it may be possible for a
third party to copy or to obtain and use our intellectual property without our
authorization. We may have to pursue litigation in the future to enforce our
proprietary rights or to defend against claims of infringement and such
litigation could result in substantial costs and diversion of resources and
could seriously harm our business, operating results, and financial condition.
We are not engaged in any legal proceedings concerning matters of patent
infringement or enforcement; however, we are presently involved in a few minor
legal proceedings involving rights in our AirNet trademark. In addition, others
may develop technologies superior to our technology, duplicate our technology,
or design around our patents.
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<PAGE> 43
GOVERNMENT REGULATION
Our products must conform to a variety of requirements and protocols. In
order for our products to be used in certain jurisdictions, regulatory approval
may be necessary. The delays inherent in this regulatory approval process may
cause the rescheduling, postponement or cancellation of the installation of
telecommunications systems by our customers which, in turn, may significantly
reduce sales of products to such customers. The failure to comply with current
or future regulations or changes in the interpretation of existing regulations
in a particular country could result in the suspension or cessation of sales in
that country, restrictions on our development efforts and those of our
customers, render current products obsolete, or increase the opportunity for
additional competition. Such regulations or such changes in interpretation could
require us to modify our products and incur substantial costs to comply with
such regulations and changes. Products to support new services can be marketed
only if permitted by frequency allocations and regulations. We only plan to
qualify our products in a foreign country once we have a purchase order from a
customer located there, and this practice may deter customers or contribute to
delays in receiving or filling orders.
EMPLOYEES
As of September 30, 1999, we had 153 employees. Of these individuals, 97
are in research and product development, 18 are in manufacturing, 14 are in
sales and marketing, 14 are in customer and field services, and 10 are in
finance and administration. We also use contract personnel, primarily for
research and development.
None of our employees are represented by a labor union and we believe that
our relations with employees are good.
FACILITIES
Our headquarters consist of approximately 23,400 square feet of space
leased through December 31, 2001, located at 100 Rialto Place in Melbourne,
Florida. The primary manufacturing and product engineering operation is located
at 3950 Dow Road, Melbourne, Florida, consisting of approximately 26,580 square
feet, leased through December 31, 2001. We also maintain a manufacturing and
engineering facility in Westbury, New York, consisting of approximately 12,000
square feet, leased through December 31, 2001. We believe that these facilities
will be adequate to meet our requirements for the foreseeable future and that
suitable additional space will be available if needed.
LEGAL PROCEEDINGS
On January 21, 1997, we filed a complaint against Amplidyne, Inc. in
Brevard County, Florida, alleging breach of contract and non-performance in
connection with the delivery of certain high-power amplifier units used in our
base stations. We are seeking approximately $4.4 million in damages. Amplidyne
filed an answer alleging certain affirmative defenses and a counterclaim against
us for approximately $463,000. Amplidyne's motion for summary judgment was
denied in February 1999, and the litigation is currently still in a preliminary
stage with discovery not yet completed.
We are also involved in various claims and litigation matters arising in
the ordinary course of business. We believe that the ultimate outcome of these
matters will not have a material effect on our results of operations or
financial condition.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- -----------------------------------------------------
<S> <C> <C>
R. Lee Hamilton, Jr.(1)(3)... 40 President and Chief Executive Officer, Director
Gerald Y. Hattori............ 47 Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary
Glenn A. Ehley............... 37 Vice President of Sales and Marketing
Mark G. Demange.............. 39 Vice President of Engineering
William J. Lee............... 44 Vice President of Services
James W. Brown(1)(3)......... 48 Chairman
Joel P. Adams(1)(3).......... 42 Vice Chairman
J. Douglass Mullins(3)....... 50 Director
Robert M. Chefitz(2)......... 40 Director
Richard G. Coffey(1)(2)...... 39 Director
Bruce R. DeMaeyer(2)......... 61 Director
Milo D. Harrison(2).......... 60 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
On October 27, 1999 J. Douglass Mullins resigned as Chairman of the Board.
On that same date, James W. Brown was elected to succeed Mr. Mullins as Chairman
and Joel P. Adams was elected Vice Chairman. Mr. Mullins remains a Director of
the company.
R. Lee Hamilton, Jr. has served as President since April 1998 and as Chief
Executive Officer since January 1999. He joined us in July 1996 as Vice
President of Engineering and Operations. In April 1998 he was elected President
and Chief Operating Officer, a position he held until January 1999. Prior to
joining us, Dr. Hamilton held several executive positions at Motorola, Inc.,
from 1990 to 1996, most recently as General Manager for Systems Transmission
Products. Prior to joining Motorola, Dr. Hamilton was a Professor in the
Electrical Engineering Department at The Ohio State University, where he managed
a research program in wireless communications systems. He holds a Ph.D. in
Electrical Engineering from Purdue University, and a B.S. in Electrical
Engineering from Virginia Polytechnic Institute and State University.
Gerald Y. Hattori has served as Vice President of Finance and Chief
Financial Officer since March 1999 and as Treasurer and Secretary since
September 1999. Prior to joining us, Mr. Hattori was Vice President of Finance,
Chief Financial Officer and Treasurer of Nexar Technologies, Inc., a
manufacturer of personal computers, since October 1996. From September 1987 to
October 1996, Mr. Hattori served as Corporate Controller of Sipex Corporation, a
manufacturer of analog semiconductors. Mr. Hattori holds an M.B.A. from New
Hampshire College and a B.S. degree in Business Administration/Accounting from
Merrimack College.
Glenn A. Ehley has served as Vice President Sales and Marketing since
August 1997. Mr. Ehley joined us in July 1995 and served as Director of
Marketing. Prior to joining us, Mr. Ehley served in several positions at Siemens
Stromberg-Carlson, most recently as Senior Product Management Manager. Mr. Ehley
received an M.B.A. and M.S. in Computer Engineering from Florida Atlantic
University and received a B.S. in Computer Science from Illinois Benedictine
College.
Mark G. Demange has served as Vice President of Engineering since February
1999. Prior to joining us, Mr. Demange served in several positions at Zenith
Electronics Corp. from October 1996 to February
39
<PAGE> 45
1999, most recently as Vice President and General Manager of the Cable Modem
Business Unit. From June 1989 to October 1996, Mr. Demange held several
engineering management positions in Motorola's Wireless Data Group. Mr. Demange
holds an M.B.A. from Northern Illinois University, an M.S. in Electrical
Engineering from Midwest College of Engineering and a B.S. in Electrical
Engineering from Southern Illinois University.
William J. Lee has served as Vice President of Services since October 1999.
He joined us in June 1999 as Director of Services. From January 1985 to June
1999, Mr. Lee served in several capacities with Siemens Information and
Communications Networks, most recently as Director of Systems Integrations
Services. Prior to joining Siemens, Mr. Lee was an associate professor at the
Midwest College of Engineering in Northern Illinois and held various positions
with AT&T Network Systems. Mr. Lee holds a B.S. in Computer Science from
Northern Illinois University.
James W. Brown has served as a Director since November 1997 as the designee
of SCP Private Equity Partners, L.P., one of our stockholders, and as Chairman
since October 1999. Mr. Brown has been a Partner of SCP Private Equity
Management, L.P., which manages a private equity investment fund, since its
inception in 1996. Mr. Brown has also been a Managing Director of CIP Capital
Management, Inc. since 1994. From 1989 until 1994, Mr. Brown was Chief of Staff
to the Governor of Pennsylvania. Mr. Brown received a J.D. from the University
of Virginia and a B.A. from Villanova University's Honors Program.
Joel P. Adams has served as a Director since our inception in January 1994
and as Vice Chairman since October 1999. Mr. Adams has served since 1987 as Vice
President of Fostin Capital Corporation and since 1994 as President of Adams
Capital Management, L.P., a venture capital firm and one of our stockholders. In
addition, Mr. Adams serves as a Director of NetSolve, Inc., a public company,
and currently serves on several private company boards. Mr. Adams received an
M.S. in Industrial Administration from Carnegie Mellon University and a B.S. in
Nuclear Engineering from the State University of New York at Buffalo.
J. Douglass Mullins has served as a Director since our inception in January
1994. He served as Chairman of the Board from October 1996 until April 1998 and
he served as Chairman from March 1999 until October 1999. Mr. Mullins was acting
Chief Executive Officer between February 3, 1997 and March 10, 1997. Mr. Mullins
also served as Secretary and Treasurer during 1994. Since 1993, Mr. Mullins has
been President of Venture First Associates of Melbourne, Inc., a venture capital
firm, and General Partner of HVFM-I, L.P., one of our stockholders. Since 1984,
Mr. Mullins has served as a General Partner of various partnerships that manage
venture capital funds. Mr. Mullins received an M.B.A. from Harvard University
and a B.S. from Georgia Institute of Technology.
Robert M. Chefitz has served as a Director since January 1997. Mr. Chefitz
is a General Partner and Vice President of Patricof & Co. Ventures, Inc., an
affiliate of some of our stockholders. He joined the firm in 1987 and was
admitted as a General Partner in 1991. Previously, Mr. Chefitz was a Senior
Associate with Golder, Thomas & Cressey Co. of Chicago, a venture capital firm.
Mr. Chefitz received an M.B.A. from Columbia University and a B.A. from
Northwestern University.
Richard G. Coffey has served as a Director since August 1998. Since 1996,
he has been the Managing Director of Tandem Investments, Inc., a private equity
firm located in West Hartford, Connecticut, and a Managing Member of Tandem GSM
Capital, LLC, the Special Limited Partner of Tandem PCS Investments, L.P., one
of our stockholders. Prior to founding Tandem, Mr. Coffey was Director of
Private Investments for the Pennsylvania Public School Employees' Retirement
Systems from 1992 to 1996. Mr. Coffey received an M.B.A. from the Darden School
of the University of Virginia and an A.B. from Princeton University.
Bruce R. DeMaeyer has served to serve as a Director since January 1996.
Since 1992, Mr. DeMaeyer has been President of Great Western Teleconsulting,
focusing primarily on the domestic and international wireless telecommunications
marketplace. Prior to founding Great Western Teleconsulting, Mr. DeMaeyer
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<PAGE> 46
served as President of Ameritech Mobile Communications. Mr. DeMaeyer received a
B.S. in Electrical Engineering from Illinois Institute of Technology.
Milo D. Harrison has served as a Director since December 1997. Semi-retired
since 1989, Mr. Harrison served as an environmental consultant to major chemical
corporations after serving from 1981 to 1989 as President and Vice President of
Chemical Waste Management Company. Mr. Harrison received an M.B.A. from the
University of Buffalo and a B.S. from Ohio Northern University.
BOARD OF DIRECTORS COMMITTEES
The Audit Committee consists of Mr. Coffey, Chairman, Mr. Chefitz, Mr.
DeMaeyer and Mr. Harrison. The Audit Committee reviews our records and affairs
to determine our financial condition, oversees the adequacy of the systems of
internal control and monitors our adherence in accounting and financial
reporting to generally accepted accounting principles.
The Compensation Committee consists of Mr. Adams, Chairman, Mr. Brown, Mr.
Coffey and Dr. Hamilton. The Compensation Committee determines compensation for
our officers and administers our 1999 Equity Incentive Plan. However, the Board
of Directors must approve all awards granted under the Plan to directors and
employees who are subject to Section 16 of the Securities Exchange Act of 1934,
as amended. No officer serving on the board of directors or the Compensation
Committee has or will participate in decisions awarding compensation or granting
stock options to himself.
The Nominating Committee consists of Mr. Mullins, Chairman, Mr. Adams, Mr.
Brown and Dr. Hamilton. The Nominating Committee seeks candidates and recommends
nominations for election to the board of directors.
DIRECTOR COMPENSATION
Non-employee directors are entitled to receive option grants and other
awards under the 1999 Equity Incentive Plan. Non-employee directors are
currently entitled to receive an award of nonqualified stock options every three
years, the amount of which is determined by the board of directors in its sole
discretion. These director options will have an exercise price equal to the fair
market value of our common stock when granted and will vest in three annual
installments provided the director has attended at least 75% of board of
director meetings in the 12 months preceding each vesting date, with exception
for special circumstances. Unvested options for a particular year will vest on a
pro rata basis if a director leaves or is removed from office, provided he met
the attendance requirement for the portion of the year he served as a director.
All directors will be reimbursed for expenses incurred in attending meetings of
the board of directors and its committees. In September 1999, each non-employee
director received non-qualified stock options to purchase 7,533 shares of our
common stock at an exercise price of $8.63 per share. In September 1999, we also
issued to Mr. DeMaeyer 7,649 shares of our common stock in satisfaction of
$66,000 of accrued fees due to him for his services as a director under our
prior policy of cash compensation of $1,500 per meeting for independent
directors.
TERM OF EXECUTIVE OFFICERS AND DIRECTORS
Our directors currently serve terms until the next annual meeting of
stockholders and the election of their successors. At the next annual meeting of
stockholders, the board of directors will be divided into three classes, with
three directors in each class. The Class I directors will be nominated for
election for a term of three years, the Class II directors will be nominated for
election for a term of two years, and the Class III directors will be nominated
for election for a term of one year. Thereafter, each director will serve for a
term of three years. Directors will hold office until the annual meeting of
stockholders in the year in which the term of their class expires and until
their successors have been duly elected and qualified. Executive officers are
appointed by and serve at the discretion of the board.
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<PAGE> 47
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
compensation paid or to be paid during the fiscal year ended December 31, 1998
to the Chief Executive Officer and the other most highly compensated executive
officers whose compensation exceeded $100,000, based on salary and bonus earned
in fiscal 1998, who were executive officers on December 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL ----------------------------- UNDERLYING ALL OTHER
OCCUPATION YEAR SALARY BONUS OPTIONS COMPENSATION
------------------ ---- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jerrold D. Adams 1998 $250,000 -- 215,656 --
Chairman and
Chief Executive Officer
R. Lee Hamilton, Jr. 1998 178,154 -- 88,962 --
President and
Chief Operating Officer
Glenn A. Ehley 1998 117,231 -- 45,235 $27,978(1)
Vice President,
Sales & Marketing
</TABLE>
- ---------------
(1) Represents performance-based sales commissions.
BENEFIT PLANS
1999 Equity Incentive Plan. The 1999 Equity Incentive Plan, which amended
and restated our 1994 Stock Option Plan and Independent Director Stock Option
Plan, provides for the issuance of a maximum of 3,206,842 shares of common stock
pursuant to the grant of incentive stock options, non-qualified stock options,
restricted stock, stock appreciation rights, performance awards and other
stock-based awards to employees, directors and independent contractors. The 1999
Equity Incentive Plan is administered by the Compensation Committee which has
the authority to determine recipients of awards under the Plan. However, the
board of directors must approve all awards granted under the Plan to directors
and employees who are subject to Section 16 of the Securities Exchange Act of
1934, as amended. The exercise price of options and the vesting periods,
expiration dates and other terms of awards under the Plan are determined by the
Compensation Committee or the board of directors. Awards are not transferable
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order. Unless otherwise determined by the board of
directors, in the event of a change of control of our company, all unexercised
stock options granted pursuant to the Plan become fully vested and immediately
exercisable.
At September 30, 1999, we had granted options for the purchase of 2,190,624
shares of common stock, excluding options that expired upon the termination of
employment of certain employees (which shares are currently reserved for future
grant). Options for the purchase of 286,795 shares had been exercised, and
options for the purchase of 1,903,829 shares remained outstanding. At September
30, 1999, a total of 1,016,218 shares were reserved for grant of options.
401(k) Plan. In 1994, we adopted the AirNet Communications Corporation
401(k) Plan covering our full-time employees located in the United States. The
401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue
Code of 1986, as amended, so that contributions to the 401(k) plan by employees,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) plan. Pursuant to the 401(k) plan, employees may elect
to reduce their current compensation by up to the lesser of 15% of their annual
compensation or the statutorily prescribed annual limit ($10,000 in 1999) and to
have the amount of the reduction contributed to the 401(k) plan. Commencing
January 1, 2000, we will provide a matching contribution of fifty cents for each
dollar
42
<PAGE> 48
contributed by an employee under the 401(k) plan; provided, that the aggregate
of our matching contributions to any employee in any calendar year will not
exceed 3% of the employee's annual salary.
EMPLOYEE NONCOMPETE AND POST-TERMINATION BENEFITS AGREEMENT
In October 1999, we entered into an Employee Noncompete and
Post-Termination Benefits Agreement with Dr. Hamilton. Pursuant to this
Agreement, Dr. Hamilton has agreed that he will not compete with us for a period
of one year following any termination of his employment, and we agreed to
continue to provide him with his regular weekly salary and benefits during the
one year noncompetition period so long as his termination was not for cause.
Notwithstanding the foregoing, Dr. Hamilton may elect to terminate the
noncompetition period after nine months, in which case, his right to continue
receiving salary and benefits would also terminate. The Agreement also provides
for accelerated vesting and an extended exercise period with respect to stock
options held by Dr. Hamilton at the time of any termination of his employment.
Option Grants in Last Fiscal Year. The following table shows certain
information regarding stock options granted to the executive officers, during
the fiscal year ended December 31, 1998. All of these stock options were granted
under our stock option plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATE OF
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM $(1)
OPTIONS EMPLOYEES PER EXPIRATION ----------------------
NAME GRANTED DURING PERIOD SHARE DATE 5% 10%
---- ---------- ---------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jerrold D. Adams...... 215,656 25.7% $1.33 4/19/99 -- --
R. Lee Hamilton,
Jr.................... 88,962 10.6 1.33 2/19/08 $ 72,276 $188,230
Glenn A. Ehley........ 45,235 5.4 1.33 2/19/08 37,767 97,709
</TABLE>
- ---------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of our stock appreciates
from the date of grant to the expiration of the option at annualized rates
of 5% and 10%. These assumed rates of appreciation have been specified by
the SEC for illustrative purposes only and are not intended to forecast
future financial performance or possible future appreciation in the price of
our stock. The actual amount the executive officer may realize will depend
on the extent to which the stock price exceeds the exercise price of the
options on the date the option is exercised.
Option Exercises in Last Fiscal Year and Option Values at Fiscal Year
End. The following table sets forth certain information with respect to option
exercises during 1998 by the executive officers and the stock options held as of
December 31, 1998 by the executive officers.
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<PAGE> 49
OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AT FISCAL YEAR END
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998($)(2)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED $(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerrold D. Adams....... 40,054 $144,278 -- -- -- --
R. Lee Hamilton, Jr.... 2 -- 81,450 68,461 $221,655 $178,440
Glenn A. Ehley......... -- -- 21,874 53,784 59,706 142,120
</TABLE>
- ---------------
(1) Based on the fair market value of our stock on the date of exercise, as
determined by our board of directors, minus the exercise price, multiplied
by the number of shares issued upon exercise of the options.
(2) Based on a fair market value of $2.39 at December 31, 1998, as determined by
the board of directors.
Option Grants in 1999. The following table shows certain information
regarding stock options granted to executive officers in 1999 to date. All of
these stock options were granted under our stock option plan.
OPTION GRANTS IN CURRENT FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE POTENTIAL
OPTIONS EMPLOYEES PER EXPIRATION REALIZABLE
NAME GRANTED DURING PERIOD SHARE DATE VALUE(1)
---- ---------- ---------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
R. Lee Hamilton, Jr........... 316,361 30.1% $ 2.39 1/19/09 $3,796,332
30,130 2.9 8.63 9/01/09 361,560
Glenn A. Ehley................ 75,324 7.1 2.39 2/16/09 903,888
Gerald Y. Hattori............. 77,545 7.4 2.39 3/22/09 930,540
Mark G. Demange............... 77,545 7.4 2.39 3/08/09 930,540
William J. Lee................ 15,065 1.4 2.39 6/21/09 180,780
7,533 0.7 8.63 9/01/09 90,396
52,727 5.0 10.62 10/19/09 632,724
</TABLE>
--------------------
(1) Based on an assumed value of $12.00, the midpoint of the initial public
offering price range.
Option Exercises in Current Fiscal Year and Option Values at October 26,
1999. The following table sets forth certain information with respect to option
exercises during 1999 by the executive officers and the stock options held as of
October 26, 1999 by the executive officers.
OPTION EXERCISES IN CURRENT FISCAL YEAR AND OPTION VALUES AT OCTOBER 26, 1999
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SUBJECT TO UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT UPON COMPLETION OF
SHARES OCTOBER 26, 1999 OFFERING($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Lee Hamilton,
Jr. ................. -- -- 120,802 375,600 $1,335,474 $3,458,145
Glenn A. Ehley....... -- -- 40,936 110,046 452,334 1,105,101
Gerald Y. Hattori.... -- -- -- 77,545 -- 745,208
Mark G. Demange...... -- -- -- 77,545 -- 745,208
William J. Lee....... -- -- -- 75,325 -- 242,924
</TABLE>
--------------------
(1) Based on an assumed value of $12.00, the midpoint of the initial public
offering price range.
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<PAGE> 50
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 1999, certain
information with respect to our common stock owned beneficially by each
director, by the executive officers, by all executive officers and directors as
a group and by each beneficial owner of more than 5% of our outstanding common
stock. Executive officers who do not beneficially own any common stock have not
been listed. Except as noted in the footnotes, each of the persons listed has
sole investment and voting power with respect to the shares of common stock
included in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT OF OWNERSHIP
COMMON STOCK ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------ ------------------- --------------- --------------
<S> <C> <C> <C>
SCP Private Equity Partners, LP................ 3,811,931(1) 22.5% 17.0%
800 The Safeguard Building 435 Devon Park Drive
Wayne, PA 19087
Funds managed by:
Adams Capital Management, Inc. .............. 2,699,173(2) 16.1 12.1
518 Broad Street Sewickley, PA 15143
Harris Corporation............................. 2,353,673(3) 13.9 10.5
1025 West Nasa Boulevard Melbourne, FL 32919
Tandem PCS Investments, LP..................... 2,309,021(4) 13.7 10.3
c/o Live Cycles Holding Co. 1981 Avenue
McGill College Montreal, Quebec H3A 3C7,
Canada
Funds managed by:
Patricof & Co. Ventures, Inc................. 2,211,085(5) 13.2 9.9
445 Park Avenue New York, NY 10022
HVFM-I, LP..................................... 1,734,604(6) 10.3 7.8
c/o Venture First Associates of Melbourne,
Inc. 1901 S. Harbor City Boulevard, Suite 501
Melbourne, FL 32901
James W. Brown................................. 3,812,350(7) 22.5 17.0
Joel P. Adams.................................. 2,699,592(8) 16.1 12.1
Richard G. Coffey.............................. 2,309,440(9) 13.7 10.3
Robert M. Chefitz.............................. 2,211,504(10) 13.2 9.9
J. Douglass Mullins............................ 1,735,023(11) 10.3 7.8
R. Lee Hamilton, Jr............................ 120,795(12) * *
Glenn A. Ehley................................. 41,273(13) * *
Milo D. Harrison............................... 21,527(14) * *
Bruce R. DeMaeyer.............................. 13,040(15) * *
All executive officers and directors as a group
(12 persons)................................. 12,964,544 74.5 56.6
</TABLE>
- ---------------
* Less than 1% of the outstanding common stock.
45
<PAGE> 51
(1) Includes 3,437,688 shares held by SCP Private Equity Partners, L.P. and
204,443 shares issuable upon exercise of a warrant, and 169,800 shares held
by CIP Capital, L.P.
(2) Includes (a) 777,524 shares held by The P/A Fund, L.P. and 8,178 shares
issuable upon exercise of a warrant, (b) 271,595 shares held by Fostin
Capital Associates II, and (c) 1,592,809 shares held by Adams Capital
Management, L.P. and 49,067 shares issuable upon exercise of a warrant.
(3) Includes 2,184,500 shares held by Harris Corporation and 169,173 shares
issuable upon exercise of a warrant.
(4) Includes 2,145,466 shares held by Tandem PCS Investments, LP and 163,555
shares issuable upon exercise of a warrant.
(5) Includes (a) 982,977 shares held by APA Excelsior III, L.P. and 11,417
shares issuable upon exercise of a warrant (b) 374,608 shares held by
Coutts & Co. (Jersey), Ltd., Custodian for APA Excelsior III/Offshore, L.P.
and 4,351 shares issuable upon exercise of a warrant, (c) 51,441 shares
held by CIN Venture Nominees, Ltd. and 589 shares issuable upon exercise of
a warrant, and (d) 777,524 shares held by The P/A Fund, L.P., which is
co-managed by APA Pennsylvania Partners II and Fostin Capital Partners II
(see footnotes 2 and 8), and 8,178 shares issuable upon exercise of a
warrant.
(6) Includes 1,685,537 shares held by HVFM-I, L.P., and 49,067 shares issuable
upon exercise of a warrant.
(7) Includes 3,437,688 shares held by SCP Private Equity Partners, L.P. and
204,443 shares issuable upon exercise of a warrant, and 169,800 shares held
by CIP Capital, L.P. Also includes options which are exercisable within 60
days of September 30, 1999 for 419 shares. Mr. Brown is a Partner of SCP
Private Equity Partners, L.P. and Managing Director of CIP Capital, L.P.
Mr. Brown disclaims beneficial ownership of all such shares except to the
extent of his pecuniary interest therein.
(8) Includes (a) 777,524 shares held by The P/A Fund, L.P. and 8,178 shares
issuable upon exercise of a warrant, (b) 271,595 shares held by Fostin
Capital Associates II, and (c) 1,592,809 shares held by Adams Capital
Management, L.P. and 49,067 shares issuable upon exercise of a warrant.
Also includes options which are exercisable within 60 days of September 30,
1999 for 419 shares. Mr. Adams is the President of Adams Capital Management
which manages the assets of Fostin Capital Corp. which is a general partner
of Adams Capital Management, L.P. and of Fostin Capital Partners II, which
is a general partner of The P/A Fund, L.P. Mr. Adams is also Vice President
of Fostin Capital Corp. Mr. Adams disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein.
(9) Includes 2,145,466 shares held by Tandem PCS Investments, LP and 163,555
shares issuable upon exercise of a warrant. Also includes options which are
exercisable within 60 days of September 30, 1999 for 419 shares. Mr. Coffey
is a Managing Member of the Special Limited Partner of Tandem PCS
Investments, LP. Mr. Coffey disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(10) Includes (a) 982,977 shares held by APA Excelsior III, L.P. and 11,417
shares issuable upon exercise of a warrant, (b) 374,608 shares held by
Coutts & Co. (Jersey), Ltd., Custodian for APA Excelsior III/Offshore, L.P.
and 4,351 shares issuable upon exercise of a warrant, (c) 51,441 shares
held by CIN Venture Nominees, Ltd. and 589 shares issuable upon exercise of
a warrant, and (d) 777,524 shares held by The P/A Fund, L.P., which is
co-managed by APA Pennsylvania Partners II and Fostin Capital Partners II
(see footnotes 2 and 8), and 8,178 shares issuable upon exercise of a
warrant. Also includes options which are exercisable within 60 days of
September 30, 1999 for 419 shares. Mr. Chefitz is a Senior Vice President
of Patricof & Co. Venture, Inc., which acts as the investment manager for
CIN Venture Nominees, Ltd. Mr. Chefitz disclaims beneficial ownership of
all such shares except to the extent of his pecuniary interest therein.
(11) Includes 1,685,537 shares held by HVFM-I, L.P., and 49,067 shares issuable
upon exercise of a warrant. Also includes options which are exercisable
within 60 days of September 30, 1999 for
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<PAGE> 52
419 shares. Mr. Mullins is the President and one of two directors of
Venture First Associates of Melbourne, Inc. the general partner of HVFM-I,
L.P. Mr. Mullins disclaims beneficial ownership of all such shares except
to the extent of his pecuniary interest therein.
(12) Includes 2 shares held by Dr. Hamilton and options exercisable immediately
for 120,793 shares.
(13) Includes 206 shares held by Mr. Ehley, options exercisable immediately for
40,790 shares and options exercisable within 60 days of September 30, 1999
for 277 shares.
(14) Includes 19,658 shares held by Mr. Harrison, options exercisable
immediately for 565 shares, options exercisable within 60 days of September
30, 1999 for 419 shares and 885 shares issuable upon exercise of a warrant.
(15) Includes 7,649 shares held by Mr. DeMaeyer, options exercisable immediately
for 4,972 shares and options exercisable within 60 days of September 30,
1999 for 419 shares.
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<PAGE> 53
CERTAIN TRANSACTIONS
COMPANY FORMATION AND SERIES A FINANCING
Harris Corporation acquired an interest in the Company through HVFM-I, L.P.
in exchange for a contribution of capital and proprietary technology.
In 1994 and early 1995, we raised approximately $11.9 million in gross
proceeds from the sale of units of our stock to six investors: The P/A Fund,
L.P. f/k/a APA/Fostin Pennsylvania Venture Capital Fund II ($3,000,000), Fostin
Capital Associates II ($1,000,000), HVFM-I, L.P. ($4,440,301), APA Excelsior
III, L.P. ($2,093,808), Coutts & Co. (Jersey), Ltd., Custodian for APA Excelsior
III/Offshore, L.P. ($798,192), and CIN Venture Nominees, Ltd. (an affiliate and
nominee of Excelsior III, L.P.) ($108,000). These six investors paid $1.00 for
each unit, which consisted of one share of Non-Voting Redeemable Preferred
Stock, Series A and one share of common stock.
The following directors are affiliated with these investors:
- Joel P. Adams as President of Adams Capital Management manages the
investments in our company that were made by The P/A Fund, L.P. and
Fostin Capital Associates II and is a general partner of Fostin Capital
Partners II, a general partner of The P/A Fund, L.P.;
- Mr. Adams is also a stockholder and officer of Fostin Capital Corp., a
general partner of Fostin Capital Associates II;
- Mr. Mullins is a stockholder, director and President of Venture First
Associates of Melbourne, the general partner of HVFM-I, L.P.; and
- Robert M. Chefitz is a General Partner and Vice President of Patricof &
Co. Ventures, Inc., which manages investments of The P/A Fund, L.P., APA
Excelsior III, L.P., Coutts & Co. (Jersey), Ltd., Custodian for APA
Excelsior III/Offshore, L.P., and CIN Venture Nominees, Ltd.
On January 26, 1995, pursuant to a recapitalization, the six investors
listed above exchanged their shares of Non-Voting Redeemable Preferred Stock,
Series A on a one-for-one basis for shares of our Series A Preferred Stock.
SERIES B FINANCING
In early 1995, we raised approximately $15.8 million in gross proceeds from
the sale of our Series B Preferred Stock to 18 investors, at a purchase price of
$4.883818833 per share. In connection with Motorola Inc.'s purchase of shares of
Series B Preferred Stock, we entered into an OEM and Patent and License Option
Agreement under which we granted Motorola nonexclusive options to purchase 25
pre-commercial versions of our AdaptaCell base station and other products and
components designed or manufactured by us. Also, under the agreement:
- Motorola has the right to acquire a worldwide, nonexclusive, royalty-free
license under any two of our patents (for manufacture of designs by
Motorola, but not for access to or copying of our designs);
- in the event of a potential merger, consolidation or sale of our company,
we have the right to require Motorola to either exercise its right or to
cancel its right in exchange for a payment of $1 million per patent;
- with respect to possible infringement of our respective digital base
station patents, each of us agreed not to enjoin the other and to attempt
dispute resolution, including negotiation of nonexclusive license
agreements in good faith, before resorting to litigation; and
- Motorola may receive discounts on nonexclusive royalty-bearing licenses
from us.
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<PAGE> 54
SERIES C FINANCING
In July 1995, we raised an aggregate of approximately $30.0 million in
gross proceeds from the sale of shares of our Series C Preferred Stock to 102
investors, at a purchase price of $6.00 per share.
SERIES D FINANCING
In April 1997, we raised approximately $9.0 million in gross proceeds from
the sale of Series D Preferred Stock to 66 investors, at a purchase price of
$1.10 per share. Substantially all of these funds were invested by existing
Series A, Series B and Series C Preferred stockholders, including HVFM-I, L.P.
($3,500,000), The P/A Fund, L.P. ($1,000,000), Fostin Capital Associates II
($250,000), APA, Excelsior III, L.P. ($1,047,000), Coutts & Co. (Jersey) Ltd.,
Custodian for APA Excelsior III/Offshore, L.P. ($399,000), CIN Venture Nominees,
Ltd. ($54,000) and Milo D. Harrison ($14,740).
1997 BRIDGE FINANCING
On August 8, 1997, we closed on a 60 day $2 million secured bridge loan
from certain existing holders of our Series A Preferred Stock as follows: APA
Excelsior III, L.P. ($398,857); Coutts & Co. (Jersey) Ltd., Custodian for APA
Excelsior III/Offshore, L.P. ($152,000); CIN Venture Nominees, Ltd. ($20,572);
The P/A Fund, L.P. ($285,714); Fostin Capital Associates II, APA ($142,857); and
HVFM-I, L.P. ($1,000,000). The loans were evidenced by convertible promissory
notes that were secured by a first priority security interest in all our assets
and accrued interest at 16% per annum. The principal under these notes was
automatically converted into $2 million of shares of Series E Preferred Stock
upon the initial closing of the offering of Series E Preferred Stock described
below and the security interests were terminated.
SERIES E FINANCING
In the second half of 1997, we raised approximately $15.4 million in gross
proceeds from the sale of shares of Series E Preferred Stock to 49 investors, at
a per share purchase price of $.035619838954. A significant portion of the
funding was provided by existing holders of Series A, B, C and D Preferred
Stock, including HVFM-I, L.P. ($2,500,000), The P/A Fund, L.P. ($1,000,000),
Fostin Capital Associates II ($500,000), APA Excelsior III, L.P. ($1,396,000),
Coutts & Co. (Jersey) Ltd., Custodian for APA Excelsior III/Offshore, L.P.
($532,000), CIN Venture Nominees, Ltd. ($72,000) and Milo D. Harrison ($41,183).
In addition to the investments by then-existing stockholders, SCP Private Equity
Partners, L.P. ($5,000,000) and CIP Capital, L.P. ($250,000) invested in Series
E Preferred Stock. James Brown, one of our directors, is a Partner of SCP and
Managing Director of CIP.
The initial closing of the Series E Offering (including the sale of $6
million of Series E Preferred Stock and the sale of the note and warrant to
Harris Corporation, as described below) was consummated on September 15, 1997.
At this initial closing we sold to Harris Corporation a $4 million Senior
Secured Convertible Promissory Note which was convertible into 112,296,970
shares of Series E Preferred Stock. This note accrued interest at 8% and was
secured by a first priority security interest in all of our assets. On August
28, 1998, Harris Corporation elected to convert this note into 112,296,970
shares of Series E Preferred Stock and the security interests were terminated.
We also issued Harris Corporation a warrant to purchase an additional 169,173
shares of Series E Preferred Stock. Following this offering, the warrant by its
terms becomes exercisable for the same number of our common shares.
Harris Corporation is the principal investor and limited partner of HVFM-I,
L.P., a holder of shares of Series A, D, E, F and G Preferred Stock, common
stock, and one of the June 1999 convertible promissory notes described below.
Harris Corporation has represented in writing to us that it does not control or
manage HVFM-I, L.P. Nevertheless, Mr. Mullins, a director of our company and a
director and President of Venture First, the general partner of HVFM-I, L.P.,
abstained from the board of director votes approving our transactions with
Harris Corporation.
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<PAGE> 55
SERIES F FINANCING
In late 1998, we raised approximately $15.7 million in gross proceeds from
the sale of Series F Preferred Stock to 31 investors, at a per share purchase
price of $0.05526523774. The lead investor in the Series F Offering was Tandem
PCS Investments, L.P. ($7,000,000) with the remainder of the funding being
provided by existing stockholders, including HVFM-I, L.P. ($500,000), The P/A
Fund, L.P. ($999,999), Fostin Capital Associates II ($139,000), APA Excelsior
III, L.P. ($1,182,240), Coutts & Co. (Jersey) Ltd., Custodian for APA Excelsior
III/Offshore, L.P. ($450,540) and CIN Venture Nominees, Ltd. ($63,690). Richard
G. Coffey, one of our directors, is a Managing Member of the Special Limited
Partner of Tandem PCS Investments, L.P.
1999 BRIDGE FINANCING
In early June 1999, we closed on loans in an aggregate amount of $800,000
from certain existing stockholders or related affiliates as follows: The P/A
Fund, L.P., APA Excelsior III, L.P., Coutts & Co. (Jersey) Ltd., Custodian for
APA Excelsior III/Offshore, L.P. and CIN Venture Nominees, Ltd. ($200,000);
HVFM-I, L.P. ($200,000); Adams Capital Management, L.P. ($200,000); and SCP
Private Equity Partners ($200,000). The loans were evidenced by demand
promissory notes and accrued interest at the prime rate plus 2% per annum. The
demand notes were canceled and exchanged for convertible promissory notes as
part of the initial closing of our convertible promissory notes and warrant
offering.
In mid-June 1999, we closed on $6.0 million of convertible promissory notes
along with warrants to purchase approximately 490,663 shares of our common
stock. In July and August 1999, we closed on an additional $338,187 of
convertible promissory notes along with warrants to purchase approximately
27,656 shares of our common stock. All of the warrants have an exercise price of
$3.67 per share. The purchasers of the convertible promissory notes and
warrants, all of whom are existing stockholders, invested in this offering as
follows: SCP Private Equity Partners ($2,500,000); Adams Capital Management,
Inc. ($600,000); The P/A Fund, L.P., APA Excelsior III, L.P., Coutts & Co.
(Jersey) Ltd., Custodian for APA Excelsior III/Offshore, L.P. and CIN Venture
Nominees, Ltd. ($300,000); HVFM-I, L.P. ($600,000); Tandem PCS Investments, L.P.
($2,000,000); Milo D. Harrison ($10,817); and other existing investors
($338,187). The convertible promissory notes were secured by a security interest
in all of our assets.
The principal and accrued interest under the outstanding convertible
promissory notes was automatically converted into shares of Series G Preferred
Stock upon the closing of the Series G financing.
SERIES G FINANCING
In September 1999, we raised $30.0 million in gross proceeds from the sale
of Series G Preferred Stock to 45 investors, at a per share purchase price of
$0.13, including conversion of principal and accrued interest under $6.3 million
of the convertible promissory notes issued in the 1999 bridge financing. The
lead outside investors in the Series G offering were Mellon Ventures, Inc.
($5,000,000), Peak Telecommunications Investments, LLC ($3,987,157) and Peak
Telecommunications Investments II, LLC ($2,199,907) and Damac Investors Inc.
($1,000,000) and Damac Investors (III) Inc. ($1,000,000) Milo D. Harrison
($107), and a substantial portion of the funding was provided by existing
stockholders, including Tandem PCS Investments, L.P. ($48,027), HVFM-I, L.P.
($2,442,308), Adams Capital Management, L.P. ($490,045), SCP Private Equity
Partners ($1,860,034.25), The P/A Fund, L.P. ($2,401), APA Excelsior III, L.P.
($142,953), Coutts & Co. (Jersey) Ltd., Custodian for APA Excelsior
III/Offshore, L.P. ($1,228), CIN Venture Nominees, Ltd. ($173) and Harris
Corporation ($4,252,313).
AGGREGATE VALUE OF INVESTMENTS BY PRINCIPAL STOCKHOLDERS
The following table sets forth, for each director, each executive officer
and each beneficial owner of more than 5% of our outstanding common stock, the
aggregate amount invested in our securities in connection with the financings
described above under "Certain Transactions" and the aggregate value of
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<PAGE> 56
these securities, or the shares of common stock issuable upon the exercise or
conversion of these securities, upon completion of this offering.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE VALUE OF
AMOUNT INVESTMENT UPON
INVESTED(1) COMPLETION OF OFFERING(2)
----------- -------------------------
<S> <C> <C>
Funds managed by Patricof & Co. Ventures, Inc.(3).......... $14,539,196 $26,533,020
HVFM-I, LP(4).............................................. 14,162,609 20,720,328
Funds Managed by Adams Capital Management, Inc.(5)......... 13,292,444 32,390,076
SCP Private Equity Partners, LP(6)......................... 13,710,034 45,743,172
Harris Corporation......................................... 8,652,313 28,244,076
Tandem PCS Investments, LP(7).............................. 9,648,027 27,708,252
Milo D. Harrison(8)........................................ 316,847 235,896
</TABLE>
- ---------------
(1) Assumes the exercise by Harris Corporation of its warrant to purchase
169,173 shares of common stock at an exercise price of $2.36 per share and
the exercise by the principal stockholders of all warrants issued in the
1999 Bridge Financing at an exercise price of $3.67 per share.
(2) Based on an assumed value of $12.00, the midpoint of the initial public
offering price range.
(3) Includes APA Excelsior III, LP, Coutts & Co (Jersey) Ltd., Custodian for APA
Excelsior III/ Offshore LP, CIN Venture Nominees, Ltd. and the P/A Fund, LP,
which is co-managed by APA Pennsylvania Partners II and Fostin Capital
Partners II. Mr. Chefitz, a director of the company, is a Senior Vice
President of Patricof & Co. Venture, Inc., which acts as the investment
manager for CIN Ventures Nominees, Ltd. Mr. Chefitz disclaims beneficial
ownership of these securities except to the extent of his pecuniary interest
therein, which, based on an assumed value of $12.00 per share, will be
approximately $150,000 upon completion of this offering.
(4) Mr. Mullins, a director of the company, is the President and one of two
directors of Venture First Associates of Melbourne, Inc., the general
partner of HVFM-I, LP. Mr. Mullins disclaims beneficial ownership of these
securities except to the extent of his pecuniary interest therein, which,
based on an assumed value of $12.00 per share, will be approximately
$530,462 upon completion of this offering which includes an interest valued
at $159,138 held in an irrevocable trust for the benefit of his children.
(5) Includes Adams Capital Management, L.P., Fostin Capital Associates II, and
The P/A Fund, L.P., which is co-managed by APA Pennsylvania Partners II and
Fostin Capital Partners II. Mr. Adams, a director of the company, is the
President of Adams Capital Management, L.P. and of Fostin Capital Partners
II, which is a general partner of The P/A Fund, L.P. Mr. Adams is also Vice
President of Fostin Capital Corp. Mr. Adams disclaims beneficial ownership
of these securities except to the extent of his pecuniary interest therein,
which, based on an assumed value of $12.00 per share, will be approximately
$1,625,000 upon completion of this offering.
(6) Includes CIP Capital LP. Mr. Brown, a director of the company, is a Partner
of SCP Private Equity Partners, L.P. and Managing Director of CIP Capital,
L.P. Mr. Brown disclaims beneficial ownership of these securities except to
the extent of his pecuniary interest therein, which, based on an assumed
value of $12.00 per share, will be approximately $604,401 upon completion of
this offering.
(7) Mr. Coffey, a director of the company, is a Managing Member of the Special
Limited Partner of Tandem PCS Investments, LP. Mr. Coffey disclaims
beneficial ownership of these securities except to the extent of his
pecuniary interest therein, which, based on an assumed value of $12.00 per
share, will be approximately $596,839 upon completion of this offering.
(8) Mr. Harrison is a director of the company.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will, upon the closing of this offering,
consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred
stock. No other class of capital stock will be authorized. The following
information relates only to our Sixth Amended and Restated Certificate of
Incorporation, which will be adopted prior to the closing of this offering.
COMMON STOCK
Upon the closing of this offering, we expect to have 16,723,736 shares of
common stock issued and outstanding, excluding the shares sold in the offering.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. As of the date of this prospectus, there are 181 holders of record of
our common stock. Our common stock does not have cumulative voting rights, which
means that the holders of a majority of the outstanding common stock voting for
the election of directors can elect all directors then being elected. The
holders of common stock are entitled to receive dividends when, as, and if
declared by the board of directors out of legally available funds. Upon
liquidation or dissolution, the holders of common stock will be entitled to
share ratably in the assets legally available for the distribution to
stockholders after payment of liabilities and subject to the prior rights of any
holders of preferred stock then outstanding. The holders of common stock have no
conversion, sinking fund, redemption, preemptive or subscription rights. The
rights, preferences and privileges of holders of common stock are subject to the
rights of the holders of shares of any series of preferred stock which we may
issue in the future.
PREFERRED STOCK
We have 10,000,000 shares of undesignated preferred stock authorized for
issuance. Upon the closing of the offering, no shares of preferred stock will be
issued and outstanding.
Our board of directors may, without further action by our stockholders,
from time to time direct the issuance of preferred stock in one or more series,
and may, at the time of issuance, fix the dividend rights, dividend rates, any
conversion rights or right of exchange, any voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
the liquidation preferences, and any other rights, preferences, privileges, and
restrictions of any series of preferred stock and the number of shares
constituting such series and the designation thereof. We have no present plans
to issue any shares of preferred stock.
WARRANTS
Warrants issued to Harris Corporation on September 12, 1997 entitle Harris
Corporation to purchase 169,173 shares of our common stock for $2.36 per share.
Such warrants are currently exercisable and expire on September 12, 2002.
In June and August 1999, we issued warrants to purchase up to 518,319
shares of common stock in connection with our sale of $6.3 million of our
convertible promissory notes and warrants. The exercise price for the warrants
is $3.67 per share. The warrants are currently exercisable and expire on June
10, 2009.
REGISTRATION RIGHTS
After the 180 day period following the closing of this offering, the
holders of approximately 16,435,949 shares of common stock and holders of
warrants to purchase approximately 687,492 shares of common stock have rights to
require us to register their shares for sale under the Securities Act. Under two
separate agreements with these stockholders, if we propose to register any of
our securities for sale, either for our own account or for the account of
another holder exercising registration rights, these stockholders are entitled
to include their shares in our registration. These stockholders have the right
to demand that we register their shares on two occasions (under each agreement)
on a form other than
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<PAGE> 58
Form S-3 and on an unlimited number of additional occasions using Form S-3, if
we are eligible to use Form S-3.
All of the registration rights are subject to conditions and limitations,
including the right of underwriters to limit the number of shares included in a
registration and to exclude holders' shares from a registration initiated by us
for our account. We have agreed to pay the expenses of those registrations in
most cases. We are not required to honor demands for registration within 6
months after the effective date of any registration statement. On one occasion
during any one year period in the case of the former holders of Series E, F and
G preferred stock or any one year period in the case of any former holder of
Series A, B, C or D preferred stock, we can defer demand registration requests
for up to 120 days if our board of directors determines in good faith that a
registration would be materially detrimental to us.
ANTITAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Prior to the consummation of this offering, we will amend and restate our
certificate of incorporation by filing our Sixth Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware. Some provisions of our amended and restated certificate of
incorporation, our bylaws and Delaware law could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, even if doing so would be beneficial to our stockholders.
Classified Board of Directors. Our amended and restated certificate of
incorporation will provide for the board of directors to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
Holders of a majority of the outstanding shares of capital stock entitled to
vote with respect to an election of directors will be able to remove directors
only for cause. Vacancies on the board of directors may be filled by the
remaining directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of our board of directors or one
of its committees, of candidates for election as director as well as for other
stockholder proposals to be considered at stockholders' meetings. Notice of
stockholder proposals and director nominations must be timely given in writing
to our secretary prior to the meeting at which the matters are to be acted upon
or the directors are to be elected, and must contain certain information
specified in the bylaws. For notice to be timely, we must receive it at our
principal executive offices not less than 120 days prior to the anniversary date
of the release of our proxy statement in connection with our immediately
preceding annual meeting of stockholders. However, in the event no annual
meeting was held in the previous year or the annual meeting is called for a date
that is not within 60 days before or after such anniversary date, notice by the
stockholder in order to be timely must be received within a reasonable time
before the solicitation is made.
Blank Check Preferred. Our board of directors will have the authority to
issue up to 10,000,000 shares of preferred stock and to determine the
preferences, rights and privileges of those shares without any further vote or
action by our stockholders. The rights of the holders and the market value of
our common stock may be adversely affected by the rights of the holders of any
series of preferred stock that may be issued in the future. Furthermore, our
board could, without stockholder approval, use our preferred stock to adopt a
"poison pill" takeover defense mechanism.
Delaware Anti-Takeover Statute. Upon the listing of our common stock on
the Nasdaq National Market, we will be subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover statute. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed matter.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested
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<PAGE> 59
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision could have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including
discouraging takeover attempts that might result in you receiving a premium over
the market price for your shares of common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company. Their telephone number is 212-509-4000.
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 22,223,736
shares of common stock, or 23,048,736 shares if the underwriters' over-allotment
option is exercised in full, in each case excluding 687,492 shares underlying
warrants and 2,006,145 shares underlying outstanding options. Of these shares,
all of the shares sold in this offering (5,500,000 shares or 6,325,000 shares if
the underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act
except for any shares purchased by an "affiliate", which will be subject to the
limitations of Rule 144 under the Securities Act. As defined in Rule 144 under
the Securities Act, an "affiliate" of an issuer is a person that directly, or
indirectly through the use of one or more intermediaries, controls, is
controlled by or is under common control with such issuer. The remaining
outstanding shares of common stock will be "restricted securities" as defined in
Rule 144 under the Securities Act and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including exemptions provided by Rule 144 under the Securities
Act. In addition, we and our executive officers and directors, and other holders
of substantially all of our existing outstanding shares, have agreed not to
offer, sell, contract to sell or otherwise dispose of any common stock or any
securities convertible into or exchangeable for common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Salomon Smith Barney. Immediately following this offering, the existing
stockholders will own 16,723,736 restricted shares, representing approximately
75.25%, 72.56% if the underwriters' over-allotment option is exercised in full,
of the then outstanding shares of common stock. Our executive officers and
directors will own 13,701,460 shares.
Prior to this offering, there has been no established market for our common
stock and we can make no predictions about the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of our common stock prevailing from time to time. Nevertheless, sales of
substantial amounts of our common stock in the public market, or the perception
that such sales may occur, may cause the market price for our common stock to
decline.
RULE 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares must be aggregated, who has beneficially owned restricted shares
for at least one year, including persons who are affiliates, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of:
- one percent of the then outstanding shares of our common stock,
approximately 222,237 shares immediately after this offering; or
- the reported average weekly trading volume of our common stock during the
four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements, and the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person, or persons whose shares must be aggregated,
who has held restricted shares for a minimum of two years and who is not, and
for three months prior to the sale of such shares has not been one of our
affiliates is free to sell such shares immediately following this offering
without regard to the volume, manner-of-sale, and certain other limitations
contained in Rule 144. However, our transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of the shares. Upon completion of
this offering holders of 15,814,195 shares are eligible to freely sell such
shares under Rule 144(k).
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<PAGE> 61
REGISTRATION RIGHTS
After the 180 day period following the closing of this offering, the
holders of 16,435,949 shares of common stock, including 13,685,693 shares held
by affiliates, and holders of warrants to purchase 687,492 shares of common
stock, including 660,725 shares held by affiliates, have rights to require us to
register their shares for sale under the Securities Act. See "Description of
Capital Stock -- Registration Rights."
OPTIONS
Options to acquire 2,006,145 shares of our common stock are outstanding. We
intend to file a registration statement on Form S-8 under the Securities Act to
register all of the shares of our common stock which are issuable upon exercise
of stock options granted or to be granted under the 1999 Equity Incentive Plan.
The filing of this registration statement will allow these shares, other than
those held by members of management who are deemed to be affiliates, to be
eligible for resale without restriction, subject to the lock-up period related
to this offering, or further registration upon issuance to participants. After
the effective date of the registration statement on Form S-8 and, if applicable,
the expiration of the lock-up period related to this offering, shares purchased
upon exercise of options granted pursuant to the 1999 Equity Incentive Plan
generally will be available for resale in the public market by non-affiliates
without restriction. Sales by our affiliates of shares registered on this
registration statement are subject to all of the Rule 144 restrictions except
for the one-year holding period requirement.
In addition to possibly being able to sell option shares without
restriction under a Form S-8 registration statement when effective, persons
other than our affiliates are allowed under Rule 701 under the Securities Act to
sell shares of our common stock issued upon exercise of stock options beginning
90 days after the date of this prospectus, subject only to the manner of sale
provisions of Rule 144 and to the lock-up period related to this offering. Our
affiliates may also begin selling option shares beginning 90 days after the date
of this prospectus but are subject to all of the Rule 144 restrictions except
for the one-year holding period requirement and for the 180 day lock-up period
related to this offering.
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<PAGE> 62
UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
tax consequences of the purchase, ownership and disposition of our common stock
to a non-U.S. Holder. For the purpose of this discussion, a non-U.S. Holder is
any holder that for U.S. federal income tax purposes is not a U.S. person. For
purposes of this discussion, the term U.S. person means:
- a citizen or resident of the U.S.;
- a corporation or other entity taxable as a corporation and created or
organized in the U.S. or under the laws of the U.S. or any political
subdivision thereof;
- an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant in light of a non-U.S. Holder's particular facts
and circumstances, such as being a U.S. expatriate, and does not address any tax
consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, the Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof, and all of which
are subject to change, possibly with retroactive effect. ACCORDINGLY, EACH
NON-U.S. HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE,
LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND
DISPOSING OF SHARES OF OUR COMMON STOCK.
DIVIDENDS
We have never paid dividends on our common stock and do not expect to pay
any cash dividends on our common stock for the foreseeable future. In the event,
however, that we do pay dividends on our common stock, any dividend paid to a
non-U.S. Holder of common stock generally will be subject to U.S. withholding
tax either at a rate of 30% of the gross amount of the dividend or such lower
rate as may be specified by an applicable tax treaty. Dividends received by a
non-U.S. Holder that are effectively connected with a U.S. trade or business
conducted by the non-U.S. Holder are exempt from such withholding tax. However,
those effectively connected dividends, net of certain deductions and credits,
are taxed at the same graduated rates applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate non-U.S. Holder that are effectively connected with a U.S. trade or
business of the corporate non-U.S. Holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.
A non-U.S. Holder of common stock that is eligible for a reduced rate of
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. Holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of our common stock
unless:
- the gain is effectively connected with a U.S. trade or business of the
non-U.S. Holder (which gain, in the case of a corporate non-U.S. Holder,
must also be taken into account for branch profits tax purposes);
- the non-U.S. Holder is an individual who holds his or her common stock as
a capital asset (generally, an asset held for investment purposes) and
who is present in the U.S. for a period or
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<PAGE> 63
periods aggregating 183 days or more during the calendar year in which
the sale or disposition occurs and certain other conditions are met; or
- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the holder's holding
period for our common stock. We have determined that we are not and do
not believe that we will become a "United States real property holding
corporation" for U.S. federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-U.S. Holder at an address within the U.S. may be
subject to backup withholding at a rate of 31% if the non-U.S. Holder fails to
establish that it is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payer. Backup withholding
generally will not apply to dividends paid to non-U.S. Holders at an address
outside the U.S. on or prior to December 31, 2000 unless the payer has knowledge
that the payee is a U.S. person. Under recently finalized Treasury Regulations
regarding withholding and information reporting, payment of dividends to
non-U.S. Holders at an address outside the U.S. after December 31, 2000 may be
subject to backup withholding at a rate of 31% unless such non-U.S. Holder
satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a non-U.S. Holder of common stock outside the U.S. to or through
a foreign office of a broker will not be subject to backup withholding but will
be subject to information reporting requirements if the broker is:
- a U.S. person;
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holder's non-U.S.
status and certain other conditions are met, or the holder otherwise establishes
an exemption. Neither backup withholding nor information reporting generally
will apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-U.S. Holders should consult their tax advisors
regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
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<PAGE> 64
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of that underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Salomon Smith Barney Inc. ................................
Hambrecht & Quist LLC.....................................
Volpe Brown Whelan & Company, LLC.........................
---------
Total..................................................... 5,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of particular legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the shares, other than those covered
by their over-allotment option described below, if they purchase any of the
shares.
The underwriters, for whom Salomon Smith Barney Inc., Hambrecht & Quist LLC
and Volpe Brown Whelan & Company, LLC are acting as representatives, propose to
offer some of the shares directly to the public at the public offering price set
forth on the cover page of this prospectus and some of the shares to certain
dealers at the public offering price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share on sales to certain other dealers. If all the
shares are not sold at the initial offering price, the underwriters may change
the public offering price and other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 825,000 additional shares of our
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to some
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
At our request, the underwriters will reserve up to 350,000 shares of our
common stock to be sold, at the initial public offering price, to our directors,
officers and employees, as well as to some of our customers and suppliers. This
directed share program will be administered by Salomon Smith Barney Inc. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered by this
prospectus. We have agreed to indemnify the underwriters against certain
liabilities and expenses, including liabilities under the Securities Act of 1933
in connection with sales of the directed shares.
We, our officers and directors and holders of substantially all of our
existing outstanding shares have agreed that, for a period of 180 days from the
date of this prospectus, we will not, without the prior written consent of
Salomon Smith Barney Inc., dispose of or hedge, any shares of our common stock
or any securities convertible into, or exercisable or exchangeable for, our
common stock. Salomon Smith Barney Inc., in its sole discretion, may release any
of the securities subject to these lock-up agreements at any time without
notice.
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<PAGE> 65
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the shares was determined by
negotiation among us and the representatives. Among the factors considered in
determining the initial public offering price were:
- our record of operation;
- our current financial condition;
- our future prospects;
- our markets;
- the economic conditions in and future prospects for the industry in which
we compete;
- our management; and
- currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies
considered comparable to us.
The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may not
develop and continue after this offering.
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "ANCC".
The following table shows the underwriting discount that we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
-------------- --------------
<S> <C> <C>
Per share.................................... $ $
Total........................................ $ $
</TABLE>
In connection with this offering Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of shares in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids for or
purchases of shares made to prevent or retard a decline in the market price of
the shares while this offering is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the shares to be higher than
it would otherwise be in the open market in the absence of such transactions.
Salomon Smith Barney Inc. may effect these transactions on the Nasdaq National
Market or in the over-the-counter market, or otherwise and may discontinue them
at any time.
We estimate that our total expenses for this offering, excluding the
underwriting discount, will be $1.24 million.
The representatives or their respective affiliates may in the future
perform various investment banking and advisory services for us from time to
time, for which they will receive customary fees. The representatives may, from
time to time, engage in transactions with and perform services for us in the
ordinary course of business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
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<PAGE> 66
LEGAL MATTERS
The validity of our common stock and certain other legal matters related to
this offering will be passed upon for us by Edwards & Angell, LLP (a limited
liability partnership including professional corporations), Palm Beach, Florida.
Certain legal matters will be passed upon for the underwriters by Cravath,
Swaine & Moore, New York, New York.
EXPERTS
The financial statements of AirNet Communications Corporation as of June
30, 1999 and December 31, 1998 and for the six-month period ended June 30, 1999
and the year ended December 31, 1998 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report expresses an unqualified opinion and
includes an explanatory paragraph referring to the restatement of the 1998 and
1999 financial statements), and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of AirNet Communications Corporation at December
31, 1997 and for each of the two years in the period ended December 31, 1997
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon the authority of
such firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
On August 6, 1999, we engaged Deloitte & Touche LLP as our independent
accountants for the fiscal year ended December 31, 1998 to replace Ernst & Young
LLP, who we dismissed as our independent accountants effective August 5, 1999.
The decision to change accountants was approved by our board of directors upon
the recommendation of the audit committee.
The reports of Ernst & Young on our financial statements for 1996 and 1997
did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of our financial statements for the fiscal years
ended December 31, 1996 and 1997, and in the subsequent interim period preceding
the dismissal of Ernst & Young, except as disclosed in the following paragraph,
there were no disagreements with Ernst & Young on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Ernst & Young would have
caused Ernst & Young to make a reference to the matter in their report. During
the two most recent fiscal years and subsequent interim period preceding the
dismissal of Ernst & Young, we have not been advised of any matters described in
Regulation S-K, Item 304(a)(1)(v) of the Securities Act.
During 1999, we asked Ernst & Young for advice about the possibility of
changing our revenue recognition policies for the year ending December 31, 1999
and thereafter. We expressed our opinion that revenue should be recognized upon
shipment of our products. Ernst & Young informed us that we could not recognize
revenue until all uncertainties about customer acceptance had been resolved
pursuant to the requirements of AICPA SOP 97-2.
Although the audit committee of our board of directors had preliminary
discussions with Ernst & Young regarding our revenue recognition policies in a
February 1999 meeting, neither the audit committee nor our board of directors
had any subsequent discussions with Ernst & Young.
We have not changed our revenue recognition policies.
We authorized Ernst & Young to respond fully to the inquiries of Deloitte &
Touche regarding our revenue recognition policies. We requested that Ernst &
Young furnish us with a letter addressed to the
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<PAGE> 67
Securities and Exchange Commission stating whether or not they agree with the
above statements. A copy of such letter is filed as an exhibit to the
registration statement which includes this prospectus.
Prior to engaging Deloitte & Touche as our new independent accountants:
- we requested advice from Deloitte & Touche concerning the revenue
recognition issues referenced above. Deloitte & Touche did not provide us
with advice.
- we did not consult with Deloitte & Touche regarding the type of audit
opinion that might be rendered by them or items that were or should have
been subject to the AICPA's Statement on Auditing Standards No. 50,
"Reports on the Application of Accounting Principles."
We have requested that Deloitte & Touche review the above disclosures
regarding our change in accountants and have given them the opportunity to
furnish us with a letter addressed to the Securities and Exchange Commission in
which Deloitte & Touche may include new information, clarify our statements on
the change in accountants or disclose the respects in which they disagree with
the statements made by us in this prospectus regarding our change in
accountants. If Deloitte & Touche elects to submit such a letter to the
Securities and Exchange Commission, we will file the letter as an exhibit to the
registration statement when received.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares offered
in this offering. This prospectus, which constitutes a part of the registration
statement, does not contain all the information set forth in the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Commission. Statements contained in this prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. For further information pertaining to us and our common stock, we
refer you to our registration statement and the exhibits and schedules thereto,
copies of which may be inspected without charge at the public reference section
of the Commission at 450 Fifth Street, NW, Washington, DC 20549 and at the
regional offices of the commission located at 75 Park Place, New York, New York
10007, and Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of all or any portion of the registration
statement may be obtained from the Commission at prescribed rates. In addition,
the Commission maintains a web site that contains reports and other information
that is filed through the Commission's EDGAR System. The web site can be
accessed at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
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<PAGE> 68
AIRNET COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on the Financial Statements as
of June 30, 1999 and December 31, 1998 and for the
Six-Month Period Ended June 30, 1999 and the Year Ended
December 31, 1998......................................... F-2
Report of Independent Auditors on the Financial Statements
as of December 31, 1997 and for the Years Ended December 31,
1997 and 1996............................................... F-3
Balance Sheets at June 30, 1999, (As Restated) December 31,
1998 (As Restated) and 1997............................... F-4
Statements of Operations for the Six-Month Periods Ended
June 30, 1999 (As Restated) and June 30, 1998 (As
Restated) (Unaudited), and the Years Ended December 31,
1998, (As Restated) 1997, and 1996........................ F-5
Statements of Stockholders' Equity for the Six-Month Period
Ended June 30, 1999 (As Restated) and Years Ended December
31, 1998, (As Restated) 1997 and 1996..................... F-6
Statements of Cash Flows for the Six-Month Periods Ended
June 30, 1999 (As Restated) and June 30, 1998 (As
Restated) (Unaudited) and the Years Ended December 31,
1998, (As Restated) 1997, and 1996........................ F-7
Notes to Financial Statements............................... F-8
Balance Sheet (Unaudited) at September 30, 1999 (As
Restated)................................................. F-23
Statements of Operations (Unaudited) for the Nine-Month
Periods Ended September 30, 1999 (As Restated) and 1998
(As Restated)............................................. F-24
Statement of Stockholders' Equity (Unaudited)
for the Nine-Month Period ended September 30, 1999
(As Restated)............................................... F-25
Statements of Cash Flows (Unaudited) for the Nine-Month
Periods Ended September 30, 1999 (As Restated) and 1998
(As Restated)............................................. F-26
Notes to Unaudited Financial Statements..................... F-27
</TABLE>
F-1
<PAGE> 69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
AirNet Communications Corporation:
We have audited the accompanying balance sheets of AirNet Communications
Corporation (the Company) as of June 30, 1999 and December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows for the
six-month period ended June 30, 1999 and the year ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at June 30, 1999
and December 31, 1998, and the results of its operations and its cash flows for
the six-month period ended June 30, 1999 and the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company's 1999 and 1998
financial statements have been restated.
Deloitte & Touche LLP
Certified Public Accountants
Orlando, Florida
September 22, 1999
(October 27, 1999 as to
the last paragraph of Note 11 and November 11, 1999 as to Note 12)
F-2
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
Board of Directors
AirNet Communications Corporation
We have audited the accompanying balance sheet of AirNet Communications
Corporation as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AirNet Communications
Corporation at December 31, 1997, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Orlando, Florida
March 6, 1998
F-3
<PAGE> 71
AIRNET COMMUNICATIONS CORPORATION
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1999 1998 1997
-------------- -------------- -----------
(AS RESTATED, (AS RESTATED,
SEE NOTE 12) SEE NOTE 12)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 9,731,725 $ 7,580,482 $11,347,796
Accounts receivable -- net of allowance for
doubtful accounts of $1,515,100, $1,505,000
and $14,500 in 1999, 1998, and 1997,
respectively................................. 3,609,614 3,010,106 1,588,196
Inventories..................................... 7,970,018 7,806,876 2,535,797
Other........................................... 171,770 235,722 222,455
------------ ----------- -----------
21,483,127 18,633,186 15,694,244
------------ ----------- -----------
PROPERTY AND EQUIPMENT:
Test equipment and other........................ 4,212,451 3,521,955 2,639,149
Computer equipment.............................. 3,234,780 3,145,589 3,005,011
Software........................................ 1,917,969 1,850,625 1,665,231
Office equipment, furniture, and fixtures....... 490,230 451,480 441,384
Leasehold improvements.......................... 450,548 450,548 447,732
------------ ----------- -----------
10,305,978 9,420,197 8,198,507
Accumulated depreciation........................ (7,018,882) (6,161,388) (4,336,857)
------------ ----------- -----------
3,287,096 3,258,809 3,861,650
------------ ----------- -----------
OTHER LONG-TERM ASSETS............................ 147,562 124,592 1,137,954
------------ ----------- -----------
$ 24,917,785 $22,016,587 $20,693,848
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 2,310,250 $ 2,174,379 $1,311,671
Accrued compensation and related withholdings... 984,254 547,322 378,254
Other accrued expenses.......................... 145,270 261,095 67,462
Current portion of long-term debt obligations... 473,452 358,637 524,582
Customer deposits............................... 5,017,132 1,154,604 --
Deferred revenues............................... 3,817,246 2,898,122 1,285,733
------------ ----------- -----------
Total current liabilities............... 12,747,604 7,394,159 3,567,702
------------ ----------- -----------
NOTES PAYABLE AND OTHER LONG-TERM DEBT
OBLIGATIONS..................................... 5,986,754 159,415 4,142,950
------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stocks (aggregate liquidation values
of $120,753,169 at June 30, 1999)............ 8,554,402 8,554,402 4,596,720
Common stock, $.001 par value, 20,528,917 shares
authorized, 423,998 shares issued and
outstanding at June 30, 1999; 19,897,454
shares authorized, 365,678 shares issued and
outstanding at December 31, 1998; 12,929,154
shares authorized, 260,399 shares issued and
outstanding at December 31, 1997............. 423 365 260
Additional paid-in capital...................... 92,186,906 90,875,715 74,433,994
Deferred stock compensation..................... (1,076,486) (143,443) --
Accumulated deficit............................. (93,481,818) (84,824,026) (66,047,778)
------------ ----------- -----------
Total stockholders' equity.............. 6,183,427 14,463,013 12,983,196
------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 24,917,785 $22,016,587 $20,693,848
============ =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 72
AIRNET COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998 (UNAUDITED),
AND YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------------- -------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------ ------------
(AS RESTATED, (UNAUDITED) (AS RESTATED,
SEE NOTE 12) (AS RESTATED, SEE NOTE 12)
SEE NOTE 12)
<S> <C> <C> <C> <C> <C>
NET REVENUES....................... $ 4,373,227 $ 2,311,916 $ 4,462,001 $ 1,602,994 $ 1,077,017
COST OF REVENUES................... 2,912,271 1,653,745 2,867,076 970,786 664,908
------------ ------------ ------------ ------------ ------------
Gross profit............. 1,460,956 658,171 1,594,925 632,208 412,109
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development......... 7,194,371 5,637,156 13,134,459 11,748,770 20,887,554
Sales and marketing.............. 1,755,875 1,220,012 2,709,453 1,107,410 2,170,996
General and administrative....... 1,139,016 1,071,791 3,749,773 5,000,168 6,293,253
Amortization of deferred stock
compensation.................. 120,322 847,841 859,293 -- --
Loss (gain) on disposal or
write-down of property and
equipment..................... 2,242 -- (4,986) 3,722 1,052,572
------------ ------------ ------------ ------------ ------------
Total costs and
expenses............... 10,211,826 8,776,800 20,447,992 17,860,070 30,404,375
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS............... (8,750,870) (8,118,629) (18,853,067) (17,227,862) (29,992,266)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................. 137,836 210,752 430,191 229,793 872,459
Interest expense................. (32,577) (262,614) (373,242) (233,495) (13,864)
Other -- net..................... (12,181) 5,870 19,870 (4,918) (40,585)
------------ ------------ ------------ ------------ ------------
93,078 (45,992) 76,819 (8,620) 818,010
------------ ------------ ------------ ------------ ------------
NET LOSS........................... (8,657,792) (8,164,621) (18,776,248) (17,236,482) (29,174,256)
PREFERRED DIVIDENDS................ 3,398,059 2,611,415 5,616,152 4,095,453 3,455,838
------------ ------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS..................... $(12,055,851) $(10,776,036) $(24,392,400) $(21,331,935) $(32,630,094)
============ ============ ============ ============ ============
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS, BASIC AND
DILUTED.......................... $ (31.97) $ (40.46) $ (81.88) $ (96.33) $ (157.63)
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES USED IN
CALCULATING BASIC AND DILUTED
LOSS PER COMMON SHARE............ 377,072 266,326 297,895 221,451 207,005
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 73
AIRNET COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX-MONTH PERIOD ENDED JUNE 30, 1999
AND YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCKS COMMON STOCK ADDITIONAL DEFERRED
------------------------ ------------------- PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ---------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................. 20,170,642 $ 201,706 198,357 $ 1,984 $55,239,034 --
Exercise of common stock options............ -- -- 13,434 134 52,600 --
Net loss.................................... -- -- -- -- -- --
----------- ---------- ------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1996................. 20,170,642 201,706 211,791 2,118 55,291,634 --
Issuance of Series D preferred stock........ 8,174,049 81,740 -- -- 8,294,302 --
Issuance of Series E preferred stock........ 431,327,408 4,313,274 -- -- 10,703,294 --
Exercise of common stock options............ -- -- 48,608 197 30,412 --
Change of par value to $.001 per share...... -- -- -- (2,055) 2,055 --
Issuance of warrants........................ -- -- -- -- 112,297 --
Net loss.................................... -- -- -- -- -- --
----------- ---------- ------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1997................. 459,672,099 4,596,720 260,399 260 74,433,994 --
Issuance of Series F preferred stock........ 283,471,155 2,834,712 -- -- 12,567,498 --
Stock compensation (As restated, See Note
12)....................................... -- -- -- -- 1,002,736 1,002,736
Exercise of common stock options............ -- -- 105,279 105 28,770 --
Amortization of deferred stock
compensation.............................. 859,293
Conversion of note to Series E preferred
stock..................................... 112,296,970 1,122,970 -- -- 2,842,717 --
Net loss (As restated, See Note 12)......... -- -- -- -- -- --
----------- ---------- ------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 (As restated,
See Note 12)................................ 855,440,224 8,554,402 365,678 365 90,875,715 (143,443)
Stock compensation (As restated, See Note
12)....................................... -- -- -- -- 1,053,365 (1,053,365)
Exercise of common stock options............ -- -- 58,320 58 14,527 --
Amortization of deferred stock compensation
(As restated, See Note 12)................ -- -- -- -- -- 120,322
Issuance of warrants........................ -- -- -- -- 243,299 --
Net loss (As restated, See Note 12)......... -- -- -- -- -- --
----------- ---------- ------- ------- ----------- -----------
BALANCE AT JUNE 30, 1999 (As restated, See
Note 12).................................... 855,440,224 $8,554,402 423,998 $ 423 $92,186,906 $(1,076,486)
=========== ========== ======= ======= =========== ===========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995................. $(19,637,040) $ 35,805,684
Exercise of common stock options............ -- 52,734
Net loss.................................... (29,174,256) (29,174,256)
------------ ------------
BALANCE AT DECEMBER 31, 1996................. (48,811,296) 6,684,162
Issuance of Series D preferred stock........ -- 8,376,042
Issuance of Series E preferred stock........ -- 15,016,568
Exercise of common stock options............ -- 30,609
Change of par value to $.001 per share...... -- --
Issuance of warrants........................ -- 112,297
Net loss.................................... (17,236,482) (17,236,482)
------------ ------------
BALANCE AT DECEMBER 31, 1997................. (66,047,778) 12,983,196
Issuance of Series F preferred stock........ -- 15,402,210
Stock compensation (As restated, See Note
12)....................................... -- --
Exercise of common stock options............ -- 28,875
Amortization of deferred stock
compensation.............................. 859,293
Conversion of note to Series E preferred
stock..................................... -- 3,965,687
Net loss (As restated, See Note 12)......... (18,776,248) (18,776,248)
------------ ------------
BALANCE AT DECEMBER 31, 1998 (As restated,
See Note 12)................................ (84,824,026) 14,463,013
Stock compensation (As restated, See Note
12)....................................... -- --
Exercise of common stock options............ -- 14,585
Amortization of deferred stock compensation
(As restated, See Note 12)................ -- 120,322
Issuance of warrants........................ -- 243,299
Net loss (As restated, See Note 12)......... (8,657,792) (8,657,792)
------------ ------------
BALANCE AT JUNE 30, 1999 (As restated, See
Note 12).................................... $(93,481,818) $ 6,183,427
============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 74
AIRNET COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998 (UNAUDITED),
AND YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------------- -------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------ ------------
(AS RESTATED, (UNAUDITED) (AS RESTATED,
SEE NOTE 12) (AS RESTATED, SEE NOTE 12)
SEE NOTE 12)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(8,657,792) $(8,164,621) $(18,776,248) $(17,236,482) $(29,174,256)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 865,509 874,655 1,919,061 1,959,758 2,087,694
Provision for losses on accounts receivable... 10,100 -- 1,490,500 -- --
Write down for inventory obsolescence......... 24,235 14,096 187,802 569,414 5,646,823
Loss (gain) on disposal and write-down of
fixed assets................................ 2,242 -- (4,986) 3,722 1,052,572
Amortization of deferred stock compensation... 120,322 847,841 859,293 -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (609,609) (419,892) (2,027,282) (1,386,742) 456,273
Inventory................................... (187,377) (228,157) (5,458,881) (1,650,453) (4,043,284)
Other current assets........................ 63,952 (15,975) (101,324) (41,088) 54,580
Other long-term assets...................... (22,970) 62,467 128,234 (712,085) 112,492
Accounts payable............................ 135,871 (124,756) 862,708 (598,641) 853,587
Accrued expenses............................ 321,107 329,338 362,701 (116,789) (2,069,541)
Customer deposits........................... 3,862,529 105,195 1,154,604 -- (132,238)
Deferred revenue............................ 919,124 (1,117,497) 1,612,389 1,285,733 --
----------- ----------- ------------ ------------ ------------
Net cash used in operating activities.... (3,152,757) (7,837,306) (17,791,429) (17,923,653) (25,155,298)
----------- ----------- ------------ ------------ ------------
INVESTING ACTIVITIES -- Cash paid for property and
equipment....................................... (351,310) (170,134) (855,175) (1,324,427) (2,366,828)
----------- ----------- ------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term
borrowings.................................... 6,000,000 -- -- 3,909,539 --
Net proceeds from issuance of preferred and
common stocks and warrants.................... 14,585 4,779 15,431,085 23,535,516 52,734
Principal payments on capital lease
obligations................................... (359,275) (245,097) (551,795) (427,009) (443,058)
----------- ----------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. 5,655,310 (240,318) 14,879,290 27,018,046 (390,324)
----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH................... 2,151,243 (8,247,758) (3,767,314) 7,769,966 (27,912,450)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.......................................... 7,580,482 11,347,796 11,347,796 3,577,830 31,490,280
----------- ----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 9,731,725 $ 3,100,038 $ 7,580,482 $ 11,347,796 $ 3,577,830
=========== =========== ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........ $ 32,577 $ 262,614 $ 373,242 $ 233,495 $ 13,864
=========== =========== ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital
lease obligations............................. $ 544,728 $ 23,959 $ 368,002 $ -- $ 1,435,228
=========== =========== ============ ============ ============
Capital stock issued in exchange for conversion
of Harris warrants............................ $ -- $ -- $ 3,965,687 $ -- $ --
=========== =========== ============ ============ ============
Issuance of warrants in connection with bridge
financing..................................... $ 243,299 $ -- $ -- $ -- $ --
=========== =========== ============ ============ ============
</TABLE>
See notes to financial statements.
F-7
<PAGE> 75
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- AirNet Communications Corporation (the Company or
AirNet) is engaged in the design, development, manufacture, and installation of
broadband, software-defined base stations, base station controllers, and related
wireless infrastructure components for wireless telecommunications in the Global
Systems for Mobile Communications (GSM) market. This product and service line
represents the Company's one reportable segment as defined by Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company was founded in 1994 and is
incorporated in the state of Delaware.
Unaudited Interim Financial Statements -- The accompanying unaudited
interim financial statements for the six-month period ended June 30, 1998 have
been prepared in accordance with generally accepted accounting principles
(GAAP), and the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted as permitted by such rules and
regulations. In the opinion of management, all material adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included in the accompanying unaudited financial statements.
Development Stage Enterprise -- Prior to January 1, 1998, the Company was
considered a development stage company under Statement of Financial Accounting
Standards No. 7, Accounting and Reporting by Development-Stage Enterprises,
issued by the Financial Accounting Standards Board (FASB), as the Company's
operations principally involved research, development and refinement of the
product and production process, and other business planning activities from
which it was not deriving significant revenues. The total deficit accumulated
during the development stage was $66,047,778.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Vulnerability Due to Certain Concentrations and Other Risks -- The Company
performs ongoing credit evaluations of its customers' financial conditions and
generally does not require collateral on accounts receivable; hence, the
accounts receivable are unsecured and the Company is at risk to the extent such
amounts become uncollectible. Customers are billed as contractual milestones are
met, including deposits of up to 50% of the contracted amount at the inception
of the contract. However, collection of the entire amounts due under the
Company's contracts to date have lagged behind shipment of products due to the
substantial time period between shipment and the fulfillment of post-shipment
contractual obligations. As of June 30, 1999 and December 31, 1998 and 1997, two
customers represented 91 percent, 97 percent, and 100 percent, respectively, of
accounts receivable, with one customer representing 69 percent, 58 percent, and
56 percent, respectively, of accounts receivable.
The Company's customers are comprised primarily of cellular service
providers. To date, all of the Company's sales have been to customers in the
United States, wherein communications are subject to the regulations imposed by
the U.S. Federal Communications Commission.
The Company's future results of operations involve a number of significant
risks and uncertainties. Factors that could affect the Company's future
operating results and cause actual results to vary materially from expectations
include, but are not limited to, dependence on key personnel, dependence on a
limited number of customers, ability to design new products, product
obsolescence, ability to generate consistent sales, ability to finance research
and development, government regulation, technological innovations and
acceptance, competition, reliance on certain vendors, credit and risks
associated with the Year 2000.
F-8
<PAGE> 76
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets -- At January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of (Statement 121),
which requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity should be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. To the extent the estimated future cash flows (undiscounted and
without interest) attributable to the assets, less estimated future cash
outflows, are less than the carrying amount, an impairment loss is recognized.
The amount of the loss is measured by the difference between the asset carrying
value and its fair value less costs to sell. As a result of the adoption of
Statement 121, the Company recorded an impairment loss on analog-based equipment
in the amount of approximately $812,000 in 1996. No impairment losses were
recorded in 1997, 1998, or the six-month period ended June 30, 1999.
Comprehensive Income -- In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
(Statement 130), effective for fiscal years beginning after December 15, 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Company
adopted Statement 130 in 1998; however, there were no changes in equity during
1998 and for the six-month period ended June 30, 1999 exclusive of investments
by owners and losses from operations. As such, the comprehensive loss for all
periods presented is equal to the amount shown on the statement of operations as
net loss.
Stock-Based Compensation -- In October 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(Statement 123), effective for fiscal years beginning after December 15, 1995.
Statement 123 requires expanded disclosures of stock-based compensation
arrangements and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB 25 to its employee stock-based
compensation awards. (See Note 6 for the effect on net loss if the Company had
applied the fair value method as prescribed by Statement 123.)
Financial Instruments -- The carrying amounts reported in the balance sheet
under cash and cash equivalents, accounts receivable, accounts payable and notes
payable approximate fair value due to the immediate or short-term maturity of
these financial instruments.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties and matters of judgement and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Cash Equivalents -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
As of June 30, 1999, the Company had cash and cash equivalent balances totaling
$9,431,725 in financial institutions, which were in excess of federally insured
amounts. The Company's policy is to invest excess funds in only well capitalized
financial institutions.
Inventory -- Inventory is valued at the lower of cost (determined by the
first-in, first-out basis) or market. Inventories are reviewed periodically and
items considered to be slow moving or obsolete are
F-9
<PAGE> 77
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
written down to their estimated net realizable value. During 1996, the Company
recorded a write down of approximately $5,459,000 on analog-based equipment as a
result of discontinued development efforts related to the Company's analog base
station. Finished goods delivered to customers are recorded in inventory until
the related revenue is recognized.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the related assets, which ranges from two to five years. Assets held
under capital leases and leasehold improvements are amortized over the life of
the related leases and the amounts are included in depreciation.
Intangible Assets -- On January 18, 1994, the Company capitalized $440,289
of patent costs transferred by an initial investor to the Company in exchange
for 6,633 shares of the Company's Series A nonvoting convertible cumulative
preferred stock and 6,615 shares of common stock. Recoverability of the
intangible asset was assessed using estimated undiscounted cash flows of related
operations. The intangible asset was amortized over five years using the
straight-line method, and as such, was fully amortized in 1998. The unamortized
balance of the intangible asset prior to 1998 is included in Other Long-Term
Assets on the accompanying balance sheet as of December 31, 1997.
Revenue Recognition -- Revenue from product sales is recognized after
delivery and resolution of any uncertainties regarding satisfaction of all
significant terms and conditions of the customer contract, which include
completion of installation and customer acceptance of product technical
performance. Given the Company's limited operating history, such uncertainties
have been considered resolved to date when the customer has either placed the
products in service or completed specified testing procedures. Resolution of
such uncertainties is partly dependent on factors outside of the Company's
control. Revenues on products shipped, which have not met the foregoing
conditions, are deferred until such time that the conditions are satisfied.
Historically, the time period over which satisfaction of such conditions has
occurred has varied widely and has been substantial. Sales of the Company's
products are not subject to right of return. Sales of services are recognized at
the time of performance.
Warranty and Customer Support -- The Company typically warrants its
products against defects in materials and workmanship for a period of one year
from the date of revenue recognition. A provision for estimated future warranty
and customer support is recorded when revenue is recognized. To date, warranty
and customer support costs have not been material.
Research and Development Expenses -- Expenditures relating to the
development of new products and processes, including significant improvements to
existing products, are expensed as incurred. These expenses include continued
product development and engineering support costs for test development and
technical services.
Income Taxes -- The Company accounts for income taxes under the asset and
liability method. Under this method, deferred income taxes are recognized for
the tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that the change in the rate is enacted.
F-10
<PAGE> 78
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Loss per Share -- Basic loss per share is computed by dividing the net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. The Company has incurred losses since inception. Net loss
attributable to common stockholders is computed by adding dividends accrued but
unpaid on cumulative preferred stocks to the net loss reported. Diluted net loss
per share equals basic net loss per share for all periods reported since
potential common shares are anti-dilutive. A reconciliation of the components
used in computing basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss........................ $ 8,657,792 $ 8,164,621 $18,776,248 $17,236,482 $29,174,256
----------- ----------- ----------- ----------- -----------
Plus preferred dividends:
Series A...................... 354,627 354,627 709,254 709,254 709,254
Series B...................... 473,292 473,292 946,584 946,584 946,584
Series C...................... 900,000 900,000 1,800,000 1,800,000 1,800,000
Series D...................... 269,744 269,744 539,487 404,615 --
Series E...................... 773,752 613,752 1,307,505 235,000 --
Series F...................... 626,644 -- 313,322 -- --
----------- ----------- ----------- ----------- -----------
3,398,059 2,611,415 5,616,152 4,095,453 3,455,838
----------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders.................. $12,055,851 $10,776,036 $24,392,400 $21,331,935 $32,630,094
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding................... 377,072 266,326 297,895 221,451 207,005
=========== =========== =========== =========== ===========
Net loss per share attributable
to common stockholders, basic
and diluted................... $ (31.97) $ (40.46) $ (81.88) $ (96.33) $ (157.63)
=========== =========== =========== =========== ===========
</TABLE>
For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute earnings per share in the future but were excluded
from the computation of diluted net loss per share in the periods presented
since their effect would have been anti-dilutive. The potential number of common
shares into which these outstanding securities are convertible are as follows:
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- --------------------------------
1999 1998 1998 1997 1996
----------- ----------- ---------- --------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible preferred stocks............. 12,779,601 6,817,442 12,779,601 6,817,442 196,450
Outstanding options...................... 841,850 190,368 273,599 106,218 --
---------- --------- ---------- --------- -------
Total.................................... 13,621,451 7,007,810 13,053,200 6,923,660 196,450
========== ========= ========== ========= =======
Weighted average exercise price of
options................................ $ 1.99 $ 1.33 $ 1.33 $ 0.66 $ --
========== ========= ========== ========= =======
</TABLE>
Reclassifications -- Certain 1997 and 1996 balances have been reclassified
in order to conform to the 1998 and 1999 financial statement presentation.
F-11
<PAGE> 79
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials.................................. $4,051,815 $4,589,729 $1,516,017
Work in process................................ 975,225 987,515 191,745
Finished goods delivered to customers.......... 2,942,978 2,229,632 828,035
---------- ---------- ----------
$7,970,018 $7,806,876 $2,535,797
========== ========== ==========
</TABLE>
3. SENIOR SECURED CONVERTIBLE PROMISSORY NOTE PAYABLE
On September 12, 1997, the Company entered into a Convertible Note and
Warrant purchase agreement with Harris Corporation (Harris), pursuant to which
Harris purchased a secured convertible promissory note and a warrant for
$4,000,000. The Harris note was secured by all assets of the Company and bears
interest at an annual rate of 8 percent. The Harris note was convertible into
112,296,970 shares of the Company's Series E voting cumulative preferred stock,
and the Harris warrant was exercisable for the purchase of an additional
11,229,697 shares of Series E voting cumulative preferred stock at a warrant
exercise price of $0.356 per share. The warrant expires on September 12, 2002.
The fair value of the Harris warrant was calculated at $112,297 at the date of
grant using the minimum valuation model. This fair value was accounted for as a
discount on the note, and was being amortized over the life of the note.
Harris exercised its right of conversion of the note in September 1998 and
received 112,296,970 shares of the Company's Series E voting convertible
preferred stock and the note was canceled. The warrant remained outstanding at
June 30, 1999.
4. BRIDGE FINANCING
Through a private placement in June 1999, the Company issued $6,000,000 of
securities comprised of convertible promissory notes (Bridge Notes) with
attached warrants (the Bridge Warrants). The investors are also preferred
stockholders. The Bridge Notes, which mature on December 11, 2000, bear interest
at a rate of prime plus 2 percent (9.75 percent at June 30, 1999), payable upon
maturity. The Bridge Notes are collateralized by a security interest in all
assets of the Company, subordinated to a first lien for any debt incurred to
finance receivables and inventory. The conversion feature of the Bridge Notes is
automatically initiated in the event that the Company closes on a private
financing of at least $10 million or closes on an initial public offering (IPO)
of the Company's common stock. In the event of the private financing, the
amounts outstanding will be converted into the security issued in such
financing. As of September 16, 1999, the principal and accrued interest on this
financing was converted into Series G senior voting convertible preferred stock
(see Note 11).
The Bridge Warrants vest immediately, have a ten-year term, and contain a
cashless exercise option. Warrants to purchase 490,663 shares of common stock at
$3.67 per share were issued. The Bridge Warrants expire on June 11, 2009. The
fair value of the Bridge Warrants was calculated at $243,299 at the date of
grant using the Black-Scholes model based upon the following assumptions:
<TABLE>
<S> <C>
Volatility.................................................. 40.7%
Expected life............................................... 10 years
Fair value of stock......................................... $3.67
Dividend rate............................................... 0%
Risk-free interest rate..................................... 6.11%
</TABLE>
This fair value was accounted for as a discount on the Bridge Notes, and is
being amortized over the life of the Bridge Notes.
F-12
<PAGE> 80
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PREFERRED STOCKS
The Company has the following preferred stocks outstanding (liquidation
values are as of June 30, 1999):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Series A voting convertible cumulative
preferred stock, $.01 par value, 12,000,000
shares authorized, 11,940,301 shares issued
and outstanding (liquidation value,
$15,262,351)................................. $ 119,403 $ 119,403 $ 119,403
Series B voting convertible cumulative
preferred stock, $.01 par value, 3,300,000
shares authorized, 3,230,341 shares issued and
outstanding (liquidation value, $19,799,382)... 32,303 32,303 32,303
Series C voting convertible cumulative
preferred stock, $.01 par value, 5,000,000
shares authorized, issued, and outstanding
(liquidation value, $37,200,000)............. 50,000 50,000 50,000
Series D voting convertible cumulative
preferred stock, $.01 par value, 13,727,364
shares authorized, 8,174,049 shares issued
and outstanding (liquidation value,
$10,205,300)................................. 81,740 81,740 81,740
Series E voting convertible cumulative
preferred stock, $.01 par value, 568,855,000
shares authorized, 543,624,378 shares issued
and outstanding at June 30, 1999 and December
31, 1998 and 713,086,000 shares authorized
and 431,327,408 issued and outstanding at
December 31, 1997 (liquidation value,
$21,680,069)................................. 5,436,244 5,436,244 4,313,274
Series F voting convertible cumulative
preferred stock, $.01 par value, 361,891,142
shares authorized, 283,471,155 shares issued
and outstanding (liquidation value,
$16,606,067)................................. 2,834,712 2,834,712 --
---------- ---------- ----------
$8,554,402 $8,554,402 $4,596,720
========== ========== ==========
</TABLE>
Dividends -- The preferred stockholders are entitled to receive, when
declared, cumulative cash dividends at the following rates per share per year:
<TABLE>
<S> <C>
Series A.................................................... $0.059
Series B.................................................... $0.293
Series C.................................................... $0.360
Series D.................................................... $0.066
Series E.................................................... $0.003
Series F.................................................... $0.004
</TABLE>
Dividends contractually accrue quarterly whether or not declared by the
Board of Directors and regardless of profits, surplus or other funds legally
available for payment. All unpaid cash dividends will be cancelled in the event
of an underwritten public offering of the Company's common stock of at least $20
million. Holders of Series F and E preferred stocks are entitled to receive cash
dividends in preference to any dividends payable on common stock or Series A
through D preferred stocks. Holders of Series D preferred stock are entitled to
receive cash dividends in preference to any dividends payable on common
F-13
<PAGE> 81
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock or Series A through C preferred stocks. No dividends can be paid on Series
C preferred stock until all dividends that accrued on Series A and B preferred
stocks prior to the sale of Series C preferred stock have been paid. Thereafter
Series A through C rank equally with regard to the payment of dividends.
The payment of dividends on all shares of preferred stocks outstanding can
be waived in writing by the holders of 60 percent of the voting power of each
series of stock (66.67 percent for Series F).
At June 30, 1999, the cumulative unpaid dividends on preferred stocks are
as follows:
<TABLE>
<S> <C>
Series A................................................ $ 3,441,453
Series B................................................ 4,022,982
Series C................................................ 7,200,000
Series D................................................ 1,213,846
Series E................................................ 2,316,257
Series F................................................ 939,966
-----------
$19,134,504
===========
</TABLE>
No dividends have been declared on any series of preferred stock and,
accordingly, a liability has not been recorded for the unpaid cumulative
dividends.
Conversion -- Preferred stocks are convertible, at the option of the
holder, at any time, into the following number of common shares:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Series A................................................. 44,745
Series B................................................. 59,121
Series C................................................. 92,584
Series D................................................. 123,140
Series E................................................. 8,189,581
Series F................................................. 4,270,430
----------
Total.................................................... 12,779,601
==========
</TABLE>
Upon the closing of the sale of shares of common stock in a fully underwritten
public offering of at least $20 million, all preferred stocks will automatically
convert into shares of common stock and all the rights of the preferred
shareholders will be terminated.
Liquidation -- In the event of any liquidation, dissolution, or winding up
of the Company, the holders of preferred stocks (Series A through D) shall be
entitled to receive in cash out of the assets of the Company, before any
distribution to any junior stock, the following amounts per share:
<TABLE>
<S> <C>
Series A.................................................... $ 0.990
Series B.................................................... $ 4.884
Series C.................................................... $ 6.000
Series D.................................................... $ 1.100
</TABLE>
Series D preferred stockholders are entitled to receive a liquidation
distribution prior to any distribution to Series A through C preferred stocks.
Series E and F preferred stockholders have liquidation preferences and rank
ahead of Series A through D preferred stockholders. The amount of preference is
the greater of (a) the aggregate stated value of all Series E and Series F
preferred stocks ($0.036 and $0.055, respectively) plus accrued and unpaid
dividends or (b) the amount that would be distributable to the holders of the
Series E and F
F-14
<PAGE> 82
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
preferred stocks if the entire remaining assets and funds of the Company legally
available for distribution, if any, were distributed among the holders of Series
E and F preferred stocks in proportion to the number of shares of common stock
of the Company into which their respective shares of Series E and F preferred
stocks are convertible as of the date of liquidation.
Voting -- Holders of preferred stocks have the right to one vote for each
share of common stock issuable upon conversion. So long as any shares of Series
E or F preferred stocks remain outstanding, the Company shall not, without the
vote or written consent of at least a majority of the voting power of those
stockholders (voting together as a single class), approve certain transactions,
including any creation or issuance of additional common stock, merger, sale of
substantially all the assets of the Company, liquidation of the Company,
acquisition transaction, payment of dividends or repurchase of preferred stocks.
The written consent of the holders of at least 60 percent of the
outstanding shares of preferred stocks (Series A through D) is required to amend
the rights and privileges of the Series A through D preferred stocks, increase
the number of authorized shares, create another class of capital stock, or merge
with another corporation.
The written consent of the holders of 60 percent of the voting power of
Series E preferred stock and 66.67 percent of Series F preferred stock is
required to approve any change in the rights and privileges of the holders of
the Series E or F preferred stocks, to authorize issuance of any parity
securities, make any dividends or other distributions, or issue common stock or
preferred stocks.
Preemptive Rights -- Holders of preferred stocks have the preemptive rights
to purchase, on a pro rata basis, any new securities, except common stock in an
underwritten public offering and shares reserved for issuance on grant of stock
options under the option plans noted in Note 6, which the Company may issue.
6. STOCK COMPENSATION PLANS
Officers and employees of the Company are awarded options periodically for
the purchase of common stock of the Company under the Company's 1994 Stock
Option Plan, as amended. The options, which expire five to ten years from the
date of grant, are exercisable equally over a vesting period up to four years.
Effective April 1998, under the Company's 1996 Independent Director Stock
Option Plan, as amended, each independent director of the Company is eligible to
receive a grant of options. During 1998, 10,696 shares were issued under this
plan at exercise prices ranging from $1.33 to $2.39 per share.
F-15
<PAGE> 83
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity for the period from December
31, 1995 through June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- ---------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1995.................. 45,539 $0.664 - $66.380 $12.61
Granted........................................... 19,055 $3.319 - $66.380 $27.22
Terminated...................................... (11,543) $0.664 - $66.380 $23.90
Exercised....................................... (13,434) $0.664 - $66.380 $ 3.98
--------- ---------------- ------
Outstanding at December 31, 1996.................. 39,617 $0.664 - $66.380 $19.21
Granted......................................... 665,875 $0.066 - $ 3.319 $ 0.66
Terminated...................................... (19,579) $0.066 - $66.380 $ 3.98
Exercised....................................... (48,608) $0.066 - $ 3.983 $ 0.66
--------- ---------------- ------
Outstanding at December 31, 1997.................. 637,305 $0.066 - $ 3.319 $ 0.66
Granted......................................... 1,004,500 $1.328 - $ 3.319 $ 1.99
Terminated...................................... (168,536) $0.664 - $66.380 $ 1.33
Exercised....................................... (105,275) $0.066 - $ 3.319 $ 2.66
--------- ---------------- ------
Outstanding at December 31, 1998.................. 1,367,994 $0.066 - $ 3.319 $ 1.33
Granted......................................... 836,003 $2.390 - $ 2.390 $ 2.66
Terminated...................................... (404,127) $0.066 - $ 3.319 $ 1.33
Exercised....................................... (58,314) $0.066 - $ 3.319 $ 2.66
--------- ---------------- ------
Outstanding at June 30, 1999...................... 1,741,556 $0.066 - $ 3.319 $ 1.99
========= ================ ======
</TABLE>
For options outstanding and exercisable at June 30, 1999, the exercise
price ranges and weighted average exercise prices and remaining lives are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
- ----------- --------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.066 263,444 2.3 years $ 0.066 157,583 $ 0.066
$0.66 - $1.32 467,335 2.9 years $ 1.32 286,480 $ 1.32
$2.39 - $3.32 1,010,777 9.1 years $ 2.43 32,362 $ 3.07
</TABLE>
The outstanding options expire at various dates through December 2009. At
June 30, 1999, a total of 476,425 shares were exercisable, with a weighted
average exercise price of $1.33 per share. The weighted average remaining
contractual life of options at June 30, 1999 with exercise prices ranging from
$0.066 to $3.32 is 6.1 years. The weighted average fair value of the options
issued during the six-month periods ended June 30, 1999 and (unaudited) 1998 was
$3.65 and $3.44, respectively, and for the year ended December 31, 1998 was
$3.29.
The weighted average exercise prices and fair values of options whose
exercise price equals, or is less than the market price on the grant date is as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998 DECEMBER 31, 1998
----------------- ----------------- -----------------
EXERCISE FAIR EXERCISE FAIR EXERCISE FAIR
OPTIONS ISSUED: PRICE VALUE PRICE VALUE PRICE VALUE
- --------------- -------- ----- -------- ----- -------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Equals market price.................... -- -- $2.36 $2.36 $2.36 $2.36
Less than market price................. $2.39 $3.65 1.33 2.36 2.08 3.28
</TABLE>
All 1996 and 1997 options were issued at market price.
F-16
<PAGE> 84
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1999, a total of 386,056 shares of the Company's common stock
were available for future grants of stock warrants and options.
Total compensation expense for options issued at an exercise price below
fair value at the date of grant was $120,322 and $847,841 for the six-month
periods ended June 30, 1999 and (unaudited) 1998 and $859,293 for the year ended
December 31, 1998. Stock compensation expense is recognized on a straight-line
method over the vesting period of the options.
Pro forma information regarding net loss is required by Statement 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1999 1998 1997 1996
-------- ----- ----- -----
<S> <C> <C> <C> <C>
Risk-free interest rate.......................... 6.11% 5.15% 6.0% 6.0%
Expected life.................................... 4 yrs 4 yrs 4 yrs 4 yrs
Dividend yield................................... 0.0% 0.0% 0.0% 0.0%
Volatility....................................... 40.7% 40.7% 0.0% 0.0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying Statement 123's fair value method to the Company's stock options
granted in 1998 and the six-month periods ended June 30, 1999 and 1998
(unaudited) results in the following pro forma amounts:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1999 1998 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss attributable to common
shareholders........................... $(12,433,647) $(10,889,386) $(24,904,109)
Net loss per share attributable to common
shareholders -- basic and diluted........ $ (32.97) $ (40.89) $ (83.60)
</TABLE>
The effect of applying Statement 123's fair value method to the Company's
stock options granted in 1996 and 1997 results in a net loss that was not
materially different from the amount presented.
7. EMPLOYEE RETIREMENT PLAN
The Company sponsors a retirement plan for all employees through a salary
deduction 401(k) savings plan. Employees are permitted to contribute to the plan
up to 15 percent of eligible wages, not to exceed the maximum amount allowable
by law. The Company has not historically matched employee contributions.
Employees are 100 percent vested upon entering the plan.
8. INCOME TAXES
At June 30, 1999, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $80,615,000 expiring
at various dates through 2019. In addition, the Company has available
approximately $1,255,000 of research and development tax credit carryforwards,
expiring at various dates through 2018, which may be used to offset future
regular tax liabilities. The benefit of the net operating loss carryforwards has
been fully offset by a valuation allowance. U.S. tax rules impose limitations on
the use of net operating losses and tax credits following certain defined
changes in ownership. The Company has not completed the complex analysis
required by the Internal Revenue Code to determine if an ownership change has
occurred. If such a change were deemed to have occurred, the limitation could
reduce or eliminate the amount of these benefits that would be available to
offset future taxable income each year, starting with the year of ownership
change.
F-17
<PAGE> 85
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of statutory income tax rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED JUNE 30,
--------------------------------------------
1999 % 1998 %
----------- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax benefit at federal income tax rate........... $(2,943,649) (34.0) $(2,775,971) (34.0)
State income taxes -- net of federal benefit..... (308,867) (3.6) (341,443) (4.1)
Research and development credits................. (279,736) (3.2) (66,185) (0.9)
Other............................................ 50,664 0.6 288,887 3.6
Valuation allowance.............................. 3,481,588 40.2 2,888,612 35.4
----------- ----- ----------- -----
Effective tax rate............................... $ -- -- $ -- --
=========== ===== =========== =====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 % 1997 % 1996 %
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Tax benefit at federal income
tax rate..................... $(6,383,894) (34.0) $(5,860,404) (34.0) $(9,919,247) (34.0)
State income taxes-net of
federal benefit................ (649,239) (3.5) (630,212) (4.0) (1,061,726) (4.0)
Research and development
credits...................... (397,393) (2.1) (282,236) (2.0) (55,235) --
Other.......................... 303,190 1.6 10,904 -- 27,407 --
Valuation allowance............ 7,127,336 38.0 6,761,948 40.0 11,008,801 38.0
----------- ----- ----------- ----- ----------- -----
Effective tax rate............. $ -- -- $ -- -- $ -- --
=========== ===== =========== ===== =========== =====
</TABLE>
Significant components of the net deferred tax balances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Intangible assets............................... $ -- $ -- $ (33,136)
Accruals...................................... (11,367) (25,925) (24,167)
------------ ------------- ------------
Total deferred tax liabilities.................. (11,367) (25,925) (57,303)
------------ ------------- ------------
Deferred tax assets:
Net operating loss carryforwards.............. 30,335,434 26,908,081 19,010,415
Inventory..................................... 3,094,723 3,185,285 4,614,927
Fixed assets.................................. 36,488 105,071 214,244
Start-up costs................................ 325,295 455,413 715,650
Research and development credits.............. 1,255,856 976,120 578,727
Bad debts..................................... 570,132 566,332 --
Other......................................... 196,053 150,649 117,066
------------ ------------- ------------
Total deferred tax assets....................... 35,813,981 32,346,951 25,251,029
------------ ------------- ------------
Net deferred tax assets......................... 35,802,614 32,321,026 25,193,726
Valuation allowance for net deferred tax
assets........................................ (35,802,614) (32,321,026) (25,193,726)
------------ ------------- ------------
$ -- $ -- $ --
============ ============= ============
No amounts were paid for income taxes during any of the periods presented.
</TABLE>
F-18
<PAGE> 86
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its primary manufacturing and office
facilities under long-term noncancelable operating leases. The Company also has
operating leases for certain other furniture, equipment and computers. Future
minimum lease payments for long-term noncancelable operating leases for the
twelve-month periods ending June 30 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 612,667
2001........................................................ 630,597
2002........................................................ 320,578
2003........................................................ --
----------
$1,563,842
==========
</TABLE>
Rental expense charged to operations was $489,615 and $640,003 for the
six-month periods ended June 30, 1999 and 1998 (unaudited), respectively, and
$1,127,798, $1,411,896, and $1,535,372 for the years ended December 31, 1998,
1997, and 1996, respectively.
Capital Lease Obligations -- The Company also leases certain computer and
test equipment under capital lease agreements. Summary information is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Cost......................................... $ 2,308,830 $ 1,819,065 $1,521,340
Accumulated depreciation..................... (1,335,313) (1,063,810) (886,609)
----------- ----------- ----------
$ 973,517 $ 755,255 $ 634,731
=========== =========== ==========
</TABLE>
A schedule of future minimum lease payments under the capital leases for
the Company and the related present value of the net minimum lease payments as
of June 30, 1999 follows:
<TABLE>
<S> <C>
2000........................................................ $ 492,288
2001........................................................ 223,728
2002........................................................ 35,103
2003........................................................ 1,614
---------
Total minimum lease payments................................ 752,733
Less amount representing interest........................... (49,228)
---------
Present value of lease payments............................. 703,505
Less capital lease obligations -- current portion........... (473,452)
---------
Capital lease obligations, less current portion............. $ 230,053
=========
</TABLE>
Agreements -- Simultaneously with its equity investment in January 1995,
Motorola, Inc. (Motorola) entered into an agreement with the Company whereby
Motorola was granted the right to obtain non-exclusive, royalty-free licenses
under any two of AirNet's patents of Motorola's choice. In return, the Company
and Motorola have agreed not to enjoin the other and to negotiate license
agreements in good faith with respect to possible patent infringement. In the
event of a merger, consolidation or sale of AirNet, the Company has the option
to require Motorola to either exercise its right to obtain such licenses or to
cancel such right in exchange for a payment by AirNet of $1 million per patent.
The Company has entered into Change of Control Severance and Bonus
Agreements (the Agreements) with four key employees. Under the Agreements, the
Company is obligated to pay the key employees twelve months salary upon a
Termination Event (as defined in the Agreements). A Bonus
F-19
<PAGE> 87
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Payment (as defined) equal to the greater of .05 percent to 2 percent of all
consideration in excess of $50 million or 15 percent of the employee's annual
salary shall be paid in the event of a change in control. Also, if the Company
is acquired during 1999 or 2000 for a price of greater than $25 million, then
all employees of the Company (excluding the key employees aforementioned) would
receive a bonus of 15 percent of their annual salary, pro rated if an employee
has been employed with the Company for less than one year. The Agreements
terminate upon the issuance of any underwritten public offering of the Company's
common stock.
In April 1998, the Company entered into a Special Outside Director
Acquisition Bonus Pool (the Director Bonus Pool) with three directors. In the
event the Company is acquired, the Director Bonus Pool is determined by the sale
price in excess of $50 million. For every $1 million in excess of $50 million,
the Director Bonus Pool increases by $3,000. The total amount is divided between
these three directors according to a formula approved by the board of directors.
The Director Bonus Pool terminates on the earlier of December 31, 1999 or the
closing of an underwritten public offering.
Litigation -- In January 1997, the Company filed a complaint seeking
$4,400,000 in damages against a vendor alleging breach of contract and
nonperformance in connection with the delivery of certain high-power amplifier
units used in the Company's base stations. The defendant vendor has filed an
answer alleging certain affirmative defenses and a counterclaim against the
Company in the amount of approximately $463,000. The defendant's motion for
summary judgment was denied in February 1999, and the litigation is currently
still in a preliminary stage with discovery not yet completed.
The Company is also involved from time to time in various claims and
litigation matters arising in the ordinary course of business. Management
believes that the ultimate outcome of these matters will not have a material
effect on the Company's results of operations or financial condition.
10. MAJOR CUSTOMERS
Revenue generated from major customers representing more than 10 percent of
net revenues is summarized below:
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------ ----------------------------------
1999 1998 1998 1997 1996
---------- ----------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A........................ $ -- $1,397,880 $1,496,894 $ 372,504 $ --
Customer B........................ $ -- $ -- $ -- $1,230,490 $ --
Customer C........................ $2,742,188 $ -- $1,872,126 $ -- $ --
Customer D........................ $ -- $ -- $ 894,949 $ -- $ --
Customer E........................ $1,093,118 $ -- $ -- $ -- $ --
Customer F........................ $ -- $ -- $ -- $ -- $639,985
Customer G........................ $ -- $ -- $ -- $ -- $376,336
</TABLE>
11. SUBSEQUENT EVENTS
Authorized Capital Stock -- On August 2, 1999, the Company's Board of
Directors approved and adopted an amended and restated certificate of
incorporation, which increased the number of authorized capital shares from
2,327,483,032 to 2,843,875,792 primarily to accommodate the issuance of Series G
preferred stock.
Stock Options -- Effective September 1, 1999, the Company adopted the 1999
Equity Incentive Plan (1999 Plan), which amended and restated the 1994 Stock
Option and the 1996 Independent Director Stock Option Plan. The 1999 Plan
provides for the issuance of a maximum of 3,206,841 shares of common
F-20
<PAGE> 88
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock pursuant to the grant of incentive stock options, non-qualified stock
options, restricted stock, stock appreciation rights, performance awards and
other stock-based awards to employees, directors and independent contractors.
In July, August and September 1999, the Company's Board of Directors
approved and issued options to employees, directors and officers for the
purchase of 19,066, 20,262 and 169,102 shares, respectively, of the Company's
common stock at exercise prices between $2.39 and $8.63 per share.
Additional Bridge Financing -- In July and August 1999, the Company issued
additional Bridge Notes and 27,656 additional Bridge Warrants for proceeds of
$338,187. These additional securities were issued on the same terms as those
described in Note 4.
Series G Senior Voting Convertible Preferred Stock -- In September 1999,
the Company issued 230,769,231 shares at $0.13 per share of its Series G senior
voting convertible preferred stock, par value $0.01 per share. Of this total,
49,892,191 shares were converted from the holders of the Bridge Notes, including
accrued interest, and the cash proceeds from the offering, exclusive of the
Bridge Notes conversion, were approximately $23,700,000.
The Series G preferred stockholders are entitled to receive, when declared,
cumulative cash dividends at the rate of $0.0104 per share per year. Each share
of Series G preferred stock is convertible into one share of common stock at the
option of the holder at any time. The Series G preferred stock will
automatically convert into 3,476,487 shares of common stock, and any unpaid cash
dividends will be cancelled upon a underwritten public offering of at least $20
million. The Company has recorded a deemed dividend of $11,715,761 for the
difference on the date of issuance between the issuance price of the preferred
stock and the fair value of the common stock into which the preferred stock is
convertible.
The liquidation rights of Series G preferred stockholders are identical to
those of Series E and Series F preferred stockholders (see Note 5). The voting
rights of Series G preferred stockholders are the same as the Series E preferred
stockholders.
October Events -- In October 1999, the Board of Directors approved a
reverse stock split of common stock of 1 share for 66.38 shares. All common
stock and per share information has been restated to reflect this reverse split
for all periods presented. Also the Board of Directors approved and granted to
employees and officers options to purchase 11,749 shares of common stock at an
exercise price of $10.62 per share.
12. RESTATEMENT
Subsequent to the issuance of the Company's June 1999 financial statements,
the Company's management determined that the estimated fair value of the
Company's common stock used to measure compensation expense related to stock
options granted to employees during the six month periods ended June 30, 1999
and 1998 and the year ended December 31, 1998 should have been consistent with
its recent preferred stock issuances, including consideration of the issuance
prices of such preferred stock and the applicable conversion rates.
F-21
<PAGE> 89
AIRNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As a result, the accompanying 1999 and 1998 financial statements have been
restated from amounts previously reported to include additional compensation
expense and deferred compensation expense relating to the aggregate intrinsic
value of stock options granted to the Company's employees. The effects of the
restatement included in the accompanying financial statements are as follows:
<TABLE>
<CAPTION>
FOR THE SIX-MONTH FOR THE YEAR ENDED
PERIOD ENDED JUNE 30, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEETS DATA
Additional paid-in capital............ $ 90,130,805 $ 92,186,906 $ 89,872,979 $ 90,875,715
Deferred stock compensation........... -- (1,076,486) -- (143,443)
Accumulated deficit................... (92,502,203) (93,481,818) (83,964,733) (84,824,026)
STATEMENTS OF OPERATIONS DATA
Amortization of deferred stock
compensation........................ $ -- $ 120,322 $ -- $ 859,293
Loss from operations.................. (8,630,548) (8,750,870) (17,993,774) (18,853,067)
Net loss.............................. (8,537,470) (8,657,792) (17,916,955) (18,776,248)
Net loss attributable to common
stockholders........................ (11,935,529) (12,055,851) (23,533,107) (24,392,400)
Net loss per share attributable to
common shareholders, basic and
diluted............................. $ (31.65) $ (31.97) $ (79.00) $ (81.88)
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX-MONTH
PERIOD ENDED JUNE 30, 1998
--------------------------
AS
PREVIOUSLY AS
REPORTED RESTATED
----------- ------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Amortization of deferred stock compensation................. $ -- $ 847,841
Loss from operations........................................ (7,270,788) (8,118,629)
Net loss.................................................... (7,316,780) (8,164,621)
Net loss attributable to common stockholders................ (9,928,195) (10,776,036)
Net loss per share attributable to common shareholders,
basic and diluted......................................... $ (37.28) $ (40.46)
</TABLE>
* * *
F-22
<PAGE> 90
AIRNET COMMUNICATIONS CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
(AS RESTATED,
SEE NOTE 4)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 26,995,929
Accounts receivable -- net of allowance for doubtful
accounts of $1,515,100................................. 6,762,994
Inventories............................................... 9,863,461
Other..................................................... 624,635
------------
44,247,019
------------
PROPERTY AND EQUIPMENT:
Test equipment and other.................................. 4,484,889
Computer equipment........................................ 3,239,708
Software.................................................. 1,949,340
Office equipment, furniture, and fixtures................. 497,429
Leasehold improvements.................................... 454,724
------------
10,626,090
Accumulated depreciation.................................. (7,406,364)
------------
3,219,726
------------
OTHER LONG-TERM ASSETS...................................... 222,381
------------
$ 47,689,126
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,457,693
Accrued compensation and related withholdings............. 665,583
Other accrued expenses.................................... 89,590
Current portion of long-term debt obligations............. 379,238
Customer deposits......................................... 3,642,444
Deferred revenues......................................... 4,774,665
------------
Total current liabilities......................... 14,009,213
------------
NOTES PAYABLE AND OTHER LONG-TERM DEBT OBLIGATIONS.......... 230,054
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stocks (aggregate liquidation values of
$150,753,169 at September 30, 1999).................... 10,862,095
Common stock, $.001 par value, 20,528,917 shares
authorized, 467,647 shares issued and outstanding at
September 30, 1999..................................... 468
Additional paid-in capital................................ 120,373,428
Deferred stock compensation............................... (1,629,413)
Accumulated deficit....................................... (96,156,719)
------------
Total stockholders' equity........................ 33,449,859
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 47,689,126
============
</TABLE>
See notes to unaudited financial statements.
F-23
<PAGE> 91
AIRNET COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------- -------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 4) SEE NOTE 4)
<S> <C> <C>
NET REVENUES................................................ $ 11,076,852 $ 2,441,352
COST OF REVENUES............................................ 7,084,222 1,762,875
------------ ------------
Gross profit...................................... 3,992,630 678,477
------------ ------------
OPERATING EXPENSES:
Research and development.................................. 10,575,925 8,625,358
Sales and marketing....................................... 2,741,043 1,618,769
General and administrative................................ 1,900,430 1,901,307
Amortization of deferred stock compensation............... 210,821 850,794
Loss on disposal or write-down of property and
equipment.............................................. 2,242 --
------------ ------------
Total costs and expenses.......................... 15,430,461 12,996,228
------------ ------------
LOSS FROM OPERATIONS........................................ (11,437,831) (12,317,751)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income........................................... 302,937 306,290
Interest expense.......................................... (193,668) (357,242)
Other -- net.............................................. (4,131) 8,556
------------ ------------
105,138 (42,396)
------------ ------------
NET LOSS.................................................... (11,332,693) (12,360,147)
PREFERRED DIVIDENDS......................................... 5,097,089 4,304,928
SERIES G PREFERRED DEEMED DIVIDEND.......................... 11,715,761 --
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ $(28,145,543) $(16,665,075)
============ ============
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS,
BASIC AND DILUTED......................................... $ (70.95) $ (57.98)
============ ============
SHARES USED IN CALCULATING BASIC AND DILUTED LOSS PER COMMON
SHARE..................................................... 396,719 287,448
============ ============
</TABLE>
See notes to unaudited financial statements.
F-24
<PAGE> 92
AIRNET COMMUNICATIONS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------------- ---------------- PAID-IN STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
------------- ----------- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998
(As restated, see Note 4)... 855,440,224 $ 8,554,402 365,678 $365 $ 90,875,715 $ (143,443) $(84,824,026)
Issuance of Series G
preferred stock......... 230,769,231 2,307,693 -- -- 26,660,127
Stock compensation (As
restated, see Note 4)... -- -- -- -- 1,696,791 (1,696,791)
Exercise of common stock
options................. -- -- 101,969 103 108,615
Amortization of deferred
stock compensation (As
restated, see Note 4)... -- -- -- -- -- 210,821
Issuance of warrants...... -- -- -- -- 1,032,180
Net loss (As restated, see
Note 4)................. -- -- (11,332,693)
------------- ----------- ------- ---- ------------ ----------- ------------
1,086,209,455 $10,862,095 467,647 $468 $120,373,428 $(1,629,413) $(96,156,719)
============= =========== ======= ==== ============ =========== ============
<CAPTION>
TOTAL
------------
<S> <C>
BALANCE AT DECEMBER 31, 1998
(As restated, see Note 4)... $ 14,463,013
Issuance of Series G
preferred stock......... 28,967,820
Stock compensation (As
restated, see Note 4)...
Exercise of common stock
options................. 108,718
Amortization of deferred
stock compensation (As
restated, see Note 4)... 210,821
Issuance of warrants...... 1,032,180
Net loss (As restated, see
Note 4)................. (11,332,693)
------------
$ 33,449,859
============
</TABLE>
See notes to unaudited financial statements
F-25
<PAGE> 93
AIRNET COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
(AS (AS
RESTATED, RESTATED,
SEE NOTE 4) SEE NOTE 4)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(11,332,693) $(12,360,147)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,252,992 1,307,513
Provision for losses on accounts receivable............. 10,100 --
Write down for inventory obsolescence................... 25,178 14,096
Loss on disposal and write-down of fixed assets......... 2,242 --
Amortization of deferred stock compensation............. 210,821 850,794
Changes in operating assets and liabilities:
Accounts receivable.................................. (3,762,988) 35,455
Inventory............................................ (2,081,763) (1,628,031)
Other current assets................................. (388,913) (110,460)
Other long-term assets............................... (97,789) 46,924
Accounts payable..................................... 2,283,314 597,149
Accrued expenses..................................... (53,244) 272,583
Customer deposits.................................... 2,487,840 2,447,975
Deferred revenue..................................... 1,876,543 (1,117,497)
------------ ------------
Net cash used in operating activities.............. (9,568,360) (9,643,646)
------------ ------------
INVESTING ACTIVITIES -- Cash paid for property and
equipment................................................. (565,875) (306,659)
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term borrowings........ 6,332,935 --
Net proceeds from issuance of preferred and common stocks
and warrants............................................ 23,771,769 15,276,319
Principal payments on capital lease obligations........... (555,022) (388,887)
------------ ------------
Net cash provided by financing activities.......... 29,549,682 14,887,432
------------ ------------
NET INCREASE IN CASH........................................ 19,415,447 4,937,127
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 7,580,482 11,347,796
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 26,995,929 $ 16,284,923
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 193,668 $ 357,242
============ ============
No amounts were paid for income taxes during any of the periods presented.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Property and equipment acquired under capital lease
obligations............................................. $ 650,276 $ 23,959
============ ============
Capital stock issued in exchange for conversion of the
Bridge Financing........................................ $ 5,306,007 $ --
============ ============
Issuance of warrants in connection with bridge
financing............................................... $ 298,334 $ --
============ ============
Series G preferred deemed dividend........................ $ 11,715,761 $ --
============ ============
</TABLE>
See notes to unaudited financial statements.
F-26
<PAGE> 94
AIRNET COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited financial statements and related notes should be
read in conjunction with the financial statements and related notes included
elsewhere in the Prospectus.
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP), and the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted as permitted by such rules and regulations. In the
opinion of management, all material adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included in
the accompanying unaudited financial statements. Operating results for the
nine-month period ended September 30, 1999, are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
NOTE 2 -- STOCKHOLDERS' EQUITY
The following significant transactions occurred in the three-month period
ended September 30, 1999:
- The number of authorized capital shares was increased
- An equity incentive plan was adopted
- Options were issued to employees, directors and officers
- Additional bridge notes and warrants were issued
- Series G preferred stock was issued and bridge notes were converted to
Series G preferred stock
NOTE 3 -- SUBSEQUENT EVENT
On October 27, 1999, the Board of Directors approved a reverse stock split
of common stock of 1 share for 66.38 shares. All common stock and per share
information in the accompanying unaudited financial statements has been restated
to reflect this reverse split.
NOTE 4 -- RESTATEMENT
Subsequent to the issuance of the Company's September 1999 financial
statements, the Company's management determined that the estimated fair value of
the Company's common stock used to measure compensation expense related to stock
options granted to employees during the nine-month periods ended September 30,
1999 and 1998 should have been consistent with its recent preferred stock
issuances, including consideration of the issuance prices of such preferred
stock, the applicable conversion rate and the mid-point of the proposed initial
public offering price range.
Additionally, the Company determined that the application of Topic D-60 of
the Emerging Issues Task Force required the recognition of a beneficial
conversion feature of the Company's Series G convertible preferred stock. The
beneficial conversion feature should have been recognized as a deemed dividend
for the difference between the amount received per share of common stock,
assuming conversion of the Series G convertible preferred stock, and the
mid-point of the proposed initial public offering price range of the Company's
common stock.
F-27
<PAGE> 95
AIRNET COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
As a result, the accompanying 1999 and 1998 financial statements have been
restated from amounts previously reported to record additional compensation
expense and deferred compensation expense relating to the aggregate intrinsic
value of stock options granted to the Company's employees, and the 1999
financial statements have also been restated to record an $11,715,761 beneficial
conversion feature (an increase in loss attributable to common stockholders of
$29.53 per share) of the Series G preferred stock.
The effects of the restatements included in the accompanying unaudited
interim financial statements are as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE-MONTH AS OF AND FOR THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1998 PERIOD ENDED SEPTEMBER 30, 1999
------------------------------- -------------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Additional paid-in capital... $ -- $ -- $117,673,902 $120,373,428
Deferred stock
compensation............... -- -- -- (1,629,413)
Accumulated deficit.......... -- -- (95,086,606) (96,156,719)
STATEMENTS OF OPERATIONS DATA
Amortization of deferred
stock compensation......... -- 850,794 -- 210,821
Loss from operations......... (11,466,957) (12,317,751) (11,227,010) (11,437,831)
Net loss..................... (11,509,353) (12,360,147) (11,121,872) (11,332,693)
Series G preferred deemed
dividend................... -- -- -- 11,715,761
Net loss attributable to
common stockholders........ (15,814,281) (16,665,075) (16,218,961) (28,145,543)
Net loss per share
attributable to common
stockholders, basic and
diluted.................... $ (55.02) $ (57.98) $ (40.88) $ (70.95)
STATEMENT OF CASH FLOWS DATA
Supplemental schedule of
noncash investing and
financing activities:
Series G preferred deemed
dividend................... $ -- $ -- $ -- $ 11,715,761
</TABLE>
F-28
<PAGE> 96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,500,000 SHARES
AIRNET COMMUNICATIONS CORPORATION
COMMON STOCK
[AIRNET LOGO]
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of our common stock registered hereby:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 22,859
NASD fee.................................................... 8,725
Printing and engraving expenses............................. 150,000
Accounting fees and expenses................................ 400,000
Legal fees and expenses..................................... 400,000
Blue Sky fees and expenses.................................. --
Nasdaq/NMS application fee.................................. 95,000
Transfer agent fees and expenses............................ 25,000
Miscellaneous............................................... 140,376
----------
Total............................................. $1,241,960
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our officers and directors are covered by provisions of the Delaware
General Corporation Law and our certificate of incorporation and bylaws, which
serve to limit, and, in some instances, to indemnify them against, liabilities
which they may incur in their respective capacities. Our certificate of
incorporation limits the liability of our directors to the fullest extent
permitted by Delaware law. Specifically, the directors of the Company will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or unlawful stock repurchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit.
Our bylaws provide for the indemnification of our directors and officers
(as well as certain other persons) if the person acted in good faith and in a
manner reasonably believed to be in or not opposed to our best interests, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. In an action by or in the right of the
Company, no indemnification may be made if the person shall have been adjudged
to be liable to the Company unless the court in which the action was brought
determines upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for the expenses which the court deems proper. Our bylaws
also provide that any indemnification (unless ordered by a court) may be made by
the Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the person has met the
applicable standard of conduct. This determination must be made (i) by the board
of directors by a majority vote of a quorum consisting of directors who were not
parties to the action, (ii) if a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the shareholders of the Company. If an
indemnified person has been successful on the merits or otherwise in defense of
any action described above, or in the defense of any matter in the action, the
person will be indemnified against expenses (including attorneys' fees) incurred
in connection with the action, without the necessity of authorization in the
specific case. Expenses incurred in defending or investigating a threatened or
pending action may be paid by us in advance of the final disposition of the
action upon receipt of an undertaking by the person to repay the amount if it is
ultimately determined that indemnification is not proper. The indemnification
and advancement of expenses provided by or granted
II-1
<PAGE> 98
under our bylaws are not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, contract, vote of shareholders or disinterested directors or
otherwise, it being our policy that indemnification of the persons specified in
the bylaws shall be made to the fullest extent permitted by law. The
indemnification and advancement of expenses provided by our bylaws, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director or officer and inure to the benefit of the heirs,
executors and administrators of that person.
We carry directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, we have issued unregistered securities to a
limited number of persons as described below:
In April 1997, we raised approximately $9.0 million from the sale of
an aggregate of 8,093,022 shares of Series D Preferred Stock to 66
investors in an offering at $1.10 per share. We paid Robertson, Stephens &
Company LLC $145,096.98 and issued an additional 81,027 shares of Series D
Preferred Stock to Robertson, Stephens & Company LLC as consideration for
its services as a placement agent in connection with the Series D offering.
In the second half of 1997, we raised approximately $15.4 million from
the sale of an aggregate of 431,327,408 shares of Series E Preferred Stock
to 49 investors in an offering at $.035619838954 per share. We paid
BankAmerica Robertson Stephens a placement agent fee in the amount of
$32,040 as consideration for its services as a placement agent in
connection with the Series E offering.
In late 1998, we raised approximately $15.7 million from the sale of
an aggregate of 283,471,155 shares of Series F Preferred Stock to 31
investors in an offering at $0.05526523774 per share.
On June 11, 1999 and August 2, 1999, we raised approximately $6.0
million and $338,187, respectively, from the sale of convertible promissory
notes along with warrants to purchase shares of our common stock to certain
of our existing stockholders. These loans were evidenced by convertible
promissory notes and $6.3 million of the notes automatically converted into
shares of Series G Preferred Stock upon the closing of the offering of
Series G Preferred Stock.
In September 1999, we raised $30 million from the sale of an aggregate
of 230,769,231 shares of Series G Preferred Stock to 45 investors in an
offering at $0.13 per share.
From January 1, 1996 through October 26, 1999, (the most recent
practicable date), we granted stock options to purchase an aggregate of
148,517,725 shares of our common stock at prices ranging from $.066 to
$10.62 per share to employees, consultants and directors (net of options
forfeited for failure to exercise prior to expiration date).
From January 1, 1996 through October 26, 1999, (the most recent
practicable date), we issued and sold an aggregate of 18,499,659 shares of
our common stock to employees, consultants and directors for aggregate
consideration of $225,012 pursuant to exercise of stock options and grant
of stock awards.
For additional information concerning these sales of unregistered
securities, see "Certain Transactions" in the form of prospectus included in
this registration statement.
Except where otherwise provided above, none of these unregistered sales
transactions involved any underwriters, underwriting discounts or commissions,
or any public offering. We believe that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2) of the
Securities Act, Regulation D promulgated under Section 4(2) or Rule 701 pursuant
to compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients in these transactions represented their intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution of the securities, and appropriate legends
II-2
<PAGE> 99
were affixed to the share certificates and instruments issued in the
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Sixth Amended and Restated Certificate of Incorporation.
*3.2 Second Amended and Restated Bylaws.
*4.1 Specimen Certificate evidencing shares of Common Stock.
*4.2 Second Amended and Restated Shareholders' and Registration
Rights Agreement dated as of April 16, 1997.
*4.3 First Amendment to Second Amended and Restated Shareholders'
and Registration Rights Agreement dated as of September 20,
1999.
*4.4 Second Amended and Restated Agreement Among Series E, Series
F and Series G Second Amended and Restated Preferred
Stockholders and Senior Registration Rights Agreement dated
as of September 7, 1999.
*4.5 First Amendment to Second Amended and Restated Agreement
Among Series E, Series F and Series G Preferred Stockholders
and Senior Registration Rights Agreement dated as of
September 20, 1999.
*5.1 Opinion of Edwards & Angell, LLP regarding legality of the
Common Stock.
*10.1 AirNet Communications Corporation 1999 Equity Incentive
Plan.
*10.2 OEM and Patent License Option Agreement dated January 27,
1995 between Motorola, Inc. and AirNet Communications
Corporation.
*10.3 Employee Noncompete and Post-Termination Benefits Agreement
dated October 26, 1999 between AirNet Communications
Corporation and R. Lee Hamilton, Jr.
*11.1 Statement regarding computation of per share earnings.
*16.1 Letter from Ernst & Young regarding Change in Independent
Accountants.
*23.1 Consent of Edwards & Angell, LLP (included in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
*24.1 Power of Attorney (included on signature page).
*27.1 Financial Data Schedule, June 30, 1999.
*27.2 Financial Data Schedule, December 31, 1998.
*27.3 Financial Data Schedule, September 30, 1999.
</TABLE>
- ---------------
* Previously filed
b. Financial Statement Schedules:
Financial Statement Schedules have been omitted because of the absence of
conditions under which they would be required or because the required
information has been included in the financial statements.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question
II-3
<PAGE> 100
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Form S-1 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Melbourne, State of Florida, on November 12, 1999.
AIRNET COMMUNICATIONS CORPORATION
By: *
------------------------------------
Name: R. Lee Hamilton, Jr.
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 12, 1999.
<TABLE>
<C> <S>
* Director, President and Chief Executive Officer
- ---------------------------------------------
R. Lee Hamilton, Jr.
/s/ GERALD Y. HATTORI Vice President of Finance, Chief Financial Officer,
- --------------------------------------------- Treasurer and Secretary
Gerald Y. Hattori
* Director
- ---------------------------------------------
Joel P. Adams
* Director
- ---------------------------------------------
James W. Brown
* Director
- ---------------------------------------------
Robert M. Chefitz
* Director
- ---------------------------------------------
Richard G. Coffey
Director
- ---------------------------------------------
Bruce R. DeMaeyer
* Director
- ---------------------------------------------
Milo D. Harrison
* Director
- ---------------------------------------------
J. Douglass Mullins
Gerald Y. Hattori, Attorney-in-Fact
*By: /s/ GERALD Y. HATTORI
--------------------------------------
</TABLE>
II-5
<PAGE> 102
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Sixth Amended and Restated Certificate of Incorporation.
*3.2 Second Amended and Restated Bylaws.
*4.1 Specimen Certificate evidencing shares of Common Stock.
*4.2 Second Amended and Restated Shareholders' and Registration
Rights Agreement dated as of April 16, 1997.
*4.3 First Amendment to Second Amended and Restated Shareholders'
and Registration Rights Agreement dated as of September 20,
1999.
*4.4 Second Amended and Restated Agreement Among Series E, Series
F and Series G Second Amended and Restated Preferred
Stockholders and Senior Registration Rights Agreement dated
as of September 7, 1999.
*4.5 First Amendment to Second Amended and Restated Preferred
Stockholders and Senior Registration Rights Agreement dated
as of September 20, 1999.
*5.1 Opinion of Edwards & Angell, LLP regarding legality of the
Common Stock.
*10.1 AirNet Communications Corporation 1999 Equity Incentive
Plan.
*10.2 OEM and Patent License Option Agreement dated January 27,
1995 between Motorola, Inc. and AirNet Communications
Corporation.
*10.3 Employee Noncompete and Post-Termination Benefits Agreement
dated October 26, 1999 between AirNet Communications
Corporation and R. Lee Hamilton, Jr.
*11.1 Statement regarding computation of per share earnings.
*16.1 Letter from Ernst & Young regarding Change in Independent
Accountants.
*23.1 Consent of Edwards & Angell, LLP (included in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
*24.1 Power of Attorney (included on signature page).
*27.1 Financial Data Schedule, June 30, 1999.
*27.2 Financial Data Schedule, December 31, 1998.
*27.3 Financial Data Schedule, September 30, 1999.
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
AirNet Communications Corporation
Shares 1/
Common Stock
($ .01 par value)
Underwriting Agreement
New York, New York
, 1999
Salomon Smith Barney Inc.
Hambrecht & Quist
Volpe Brown Whelan & Company
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
AirNet Communications Corporation, a corporation organized
under the laws of Delaware (the "Company"), proposes to sell to the several
underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the
"Representatives") are acting as representatives, shares of Common
Stock, $ par value ("Common Stock") of the Company (said shares to be issued
and sold by the Company being hereinafter called the "Underwritten Securities").
The Company also proposes to grant to the Underwriters an option to purchase up
to additional shares of Common Stock to cover over-allotments (the
"Option Securities"; the Option Securities, together with the Underwritten
Securities, being hereinafter called the "Securities"). To the extent there are
no additional Underwriters listed on Schedule I other than you, the term
Representatives as used herein shall mean you, as Underwriters, and the terms
Representatives and Underwriters shall mean either the singular or plural as the
context requires. Certain terms used herein are defined in Section 17 hereof.
As part of the offering contemplated by this Agreement,
Salomon Smith Barney Inc. has agreed to reserve out of the Securities set forth
opposite its name on the Schedule II to this Agreement, up to shares,
for sale to the Company's employees, officers, and directors and customers and
vendors of the Company (collectively, "Participants"), as set forth in the
Prospectus under the heading "Underwriting" (the "Directed Share Program"). The
Securities to be sold by Salomon Smith Barney Inc. pursuant to the Directed
Share Program (the "Directed Shares") will be sold by Salomon Smith Barney Inc.
pursuant to this Agreement at the public offering price. Any Directed Shares not
orally confirmed for purchase by any Participants by the end of the business day
- --------
1/ Plus an option to purchase from the Company, up to additional
Securities to cover over-allotments.
<PAGE> 2
2
on which this Agreement is executed will be offered to the public by Salomon
Smith Barney Inc. as set forth in the Prospectus.
1. Representations and Warranties. The Company represents and
warrants to, and agrees with, each Underwriter as set forth below in this
Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-87693) on Form S-1, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus,
each of which has previously been furnished to you. The Company will
next file with the Commission either (1) prior to the Effective Date of
such registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b). In the case of clause (2), the
Company has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules thereunder to be included in such
registration statement and the Prospectus. As filed, such amendment and
form of final prospectus, or such final prospectus, shall contain all
Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date and at the Execution Time, the Registration Statement
did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date, the Prospectus, if not filed pursuant to Rule
424(b), will not, and on the date of any filing pursuant to Rule 424(b)
and on the Closing Date and any settlement date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration Statement
or the Prospectus (or any supplement thereto) in reliance upon and in
conformity with information furnished in writing to the Company by or
on behalf of any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectus (or any
supplement thereto).
<PAGE> 3
3
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized with full corporate
power and authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the Prospectus.
The Company is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction which
requires such qualification, except where the failure to be so
qualified would not, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company.
(d) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriters pursuant to this
Agreement, will be fully paid and nonassessable; the Securities are
duly listed, and admitted and authorized for trading, subject to
official notice of issuance and evidence of satisfactory distribution,
on the Nasdaq National Market; the certificates for the Securities are
in valid and sufficient form; the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or other
rights to subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of capital
stock of or ownership interests in the Company are outstanding;
(e) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus
under the headings "Business--Government Regulation," "Risk
Factors--Our industry is subject to extensive government regulation
that could cause significant delays and expense," "Description of
Capital Stock--Antitakeover Effects of Provisions of Delaware Law and
Our Certificate Of Incorporation and Bylaws," "Shares Eligible for
Future Sale" and "United States Tax Consequences to Non-U.S.
Holders" fairly summarize the matters therein described.
(f) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms.
(g) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(h) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein and in the Prospectus.
<PAGE> 4
4
(i) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to (i) the charter
or by-laws of the Company, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company is a party or bound or to which its property is subject, or
(iii) any statute, law, rule, regulation, judgment, order or decree
applicable to the Company of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties.
(j) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement.
(k) The historical financial statements and schedules of the
Company included in the Prospectus and the Registration Statement
present fairly in all material respects the financial condition,
results of operations and cash flows of the Company as of the dates and
for the periods indicated, comply as to form with the applicable
accounting requirements of the Act and have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as otherwise noted
therein). The selected financial data set forth under the caption
"Selected Financial Data" in the Prospectus and Registration Statement
fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein. The pro forma
financial information included in the Prospectus and the Registration
Statement is based on assumptions that provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions and events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma adjustments reflect the proper application of those adjustments
to the historical financial statement amounts included in the
Prospectus and the Registration Statement.
(l) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or its property is pending or, to the best knowledge of the
Company, threatened that (i) could reasonably be expected to have a
material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii)
could reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated
in the Prospectus (exclusive of any supplement thereto).
(m) The Company owns or leases all such properties as are
necessary to the conduct of its operations as presently conducted.
(n) The Company is not in violation or default of (i) any
provision of its charter or bylaws, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is
<PAGE> 5
5
subject, which violation or default would, individually or in the
aggregate, have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto), or (iii) any statute,
law, rule, regulation, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body, arbitrator
or other authority having jurisdiction over the Company or any of its
properties, as applicable.
(o) Ernst & Young LLP and Deloitte & Touche LLP, who have
certified certain financial statements of the Company and delivered
their reports with respect to the audited financial statements and
schedules included in the Prospectus, are each independent public
accountants with respect to the Company within the meaning of the Act
and the applicable published rules and regulations thereunder.
(p) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(q) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto)) and has paid all taxes required
to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable,
except for any such assessment, fine or penalty that is currently being
contested in good faith or as would not have a material adverse effect
on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
(r) No labor problem or dispute with the employees of the
Company exists or, to the Company's best knowledge, is threatened or
imminent, and the Company, without independent investigation, is not
aware of any existing or imminent labor disturbance by the employees of
any of its principal suppliers, contractors or customers, that could
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(s) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged; all
policies of insurance and fidelity or surety bonds insuring the Company
or its businesses, assets, employees, officers and directors are in
full force and effect; the Company is in compliance with the terms of
such policies and instruments in all material respects; and there are
no claims by the Company under any such policy or instrument as to
which any insurance
<PAGE> 6
6
company is denying liability or defending under a reservation of rights
clause; the Company has not been refused any insurance coverage sought
or applied for; and the Company has no reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have
a material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company, whether or
not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(t) The Company possesses all licenses, certificates, permits
and other authorizations issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct its businesses, and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
(u) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(v) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(w) The Company is (i) in compliance with any and all
applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) has received and is in compliance with all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct its businesses and (iii) has not received
notice of any actual or potential liability for the investigation or
remediation of any disposal or release of hazardous or toxic substances
or wastes, pollutants or contaminants, except where such non-compliance
with Environmental Laws, failure to receive required permits, licenses
or other approvals, or liability would not, individually or in the
aggregate, have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto). Except as set forth
in the Prospectus, the Company has not been named as a "potentially
<PAGE> 7
7
responsible party" under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
(x) The Company has reasonably concluded that the associated
costs and liabilities of compliance with, or the effect of,
Environmental Laws on the business, operations and properties of the
Company would not, singly or in the aggregate, have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
(y) The Company has no plans (as defined in Section 3(3) of
the United States Employee Retirement Income Security Act of 1974
("ERISA")) subject to the minimum funding standards of ERISA and the
regulations and published interpretations thereunder.
(z) The Company owns, possesses, licenses or has other rights
to use, on reasonable terms, all patents, patent applications, trade
and service marks, trade and service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, technology, know-how
and other intellectual property (collectively, the "Intellectual
Property") necessary for the conduct of the Company's business as now
conducted or as proposed in the Prospectus to be conducted. Except as
set forth in the Prospectus under the caption "Business--Proprietary
Rights," (a) to the best knowledge of the Company, there are no rights
of third parties to any such Intellectual Property; (b) to the best
knowledge of the Company, there is no material infringement by third
parties of any such Intellectual Property; (c) there is no pending or,
to the best knowledge of the Company, threatened action, suit,
proceeding or claim by others challenging the Company's rights in or to
any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (d) there is no
pending or, to the best knowledge of the Company, threatened action,
suit, proceeding or claim by others challenging the validity or scope
of any such Intellectual Property, and the Company is unaware of any
facts which would form a reasonable basis for any such claim; (e) there
is no pending or, to the best knowledge of the Company, threatened
action, suit, proceeding or claim by others that the Company infringes
or otherwise violates any patent, trademark, copyright, trade secret or
other proprietary rights of others, and the Company is unaware of any
other fact which would form a reasonable basis for any such claim; (f)
to the Company's knowledge, there is no U.S. patent or published U.S.
patent application which contains claims that dominate or may dominate
any Intellectual Property described in the Prospectus as being owned by
or licensed to the Company or that interferes with the issued or
pending claims of any such Intellectual Property; and (g) there is no
prior art of which the Company is aware that may render any U.S. patent
held by the Company invalid or any U.S. patent application held by the
Company unpatentable which has not been disclosed to the U.S. Patent
and Trademark Office.
(aa) The statements contained in the Prospectus under the
captions "Risk Factors--We may not be able to adequately protect our
proprietary rights which would hurt our ability to compete" and
"Business--Proprietary Rights," insofar as such statements summarize
legal matters, agreements, documents, or proceedings, including the
status of patent applications, whether pending, granted or allowed,
<PAGE> 8
8
discussed therein, are accurate and fair summaries of such legal
matters, agreements, documents or proceedings.
(bb) Except as disclosed in the Registration Statement and the
Prospectus, the Company (i) does not have any material lending or other
relationship with any bank or lending affiliate of Salomon Smith Barney
Holdings Inc. and (ii) does not intend to use any of the proceeds from
the sale of the Securities hereunder to repay any outstanding debt owed
to any affiliate of Salomon Smith Barney Holding Inc.
(cc) The Company has implemented a comprehensive, detailed
program to analyze and address the risk that the computer hardware and
software used by them may be unable to recognize and properly execute
date-sensitive functions involving certain dates prior to and any dates
after December 31, 1999 (the "Year 2000 Problem"), and has, except as
set forth in the Prospectus, reasonably determined that such risk will
be remedied on a timely basis without material expense and will not
have a material adverse effect upon the financial condition and results
of operations of the Company; and the Company reasonably believes,
after due inquiry, that each supplier, vendor, customer or financial
service organization used or serviced by the Company has remedied or
will remedy on a timely basis the Year 2000 Problem, except as set
forth in the Prospectus and except to the extent that a failure to
remedy by any such supplier, vendor, customer or financial service
organization would not have a material adverse effect on the Company.
The Company is in compliance with the Commission's Release No. 33-7558
related to Year 2000 compliance, as amended to date.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.
Furthermore, the Company represents and warrants to Salomon
Smith Barney Inc. that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the securities
laws and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
2. Purchase and Sale. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, the
Company agrees to sell to each Underwriter, and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$ per share, the amount of the Underwritten Securities set forth opposite
such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to Option Securities at the same purchase price per share as the
Underwriters shall pay for the
<PAGE> 9
9
Underwritten Securities. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Securities by the Underwriters.
Said option may be exercised in whole or in part at any time (but not more than
once) on or before the 30th day after the date of the Prospectus upon written or
telegraphic notice by the Representatives to the Company setting forth the
number of shares of the Option Securities as to which the several Underwriters
are exercising the option and the settlement date. The number of Option
Securities to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Securities to be purchased by the
several Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as you in your absolute discretion shall
make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
, 1999, or at such time on such later date not more than three
Business Days after the foregoing date as the Representatives shall designate,
which date and time may be postponed by agreement among the Representatives and
the Company or as provided in Section 9 hereof (such date and time of delivery
and payment for the Securities being herein called the "Closing Date"). Delivery
of the Securities shall be made to the Representatives for the respective
accounts of the several Underwriters against payment by the several Underwriters
through the Representatives of the purchase price thereof to or upon the order
of the Company by wire transfer payable in same-day funds to an account
specified by the Company. Delivery of the Underwritten Securities and the Option
Securities shall be made through the facilities of The Depository Trust Company
unless the Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities (at the expense of the Company) to the Representatives, at
388 Greenwich Street, New York, New York on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
<PAGE> 10
10
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request by the
Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any
supplement to the Prospectus or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the rules thereunder, the Company
promptly will (1) notify the Representatives of any such event; (2)
prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance; and (3)
supply any supplemented Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
required by the Act, as many copies of each Preliminary Prospectus and
the Prospectus and any supplement thereto as the Representatives may
reasonably request; provided that the printing and delivery costs for
any copies of the Preliminary Prospectus and the Prospectus and any
supplements thereto requested by the
<PAGE> 11
11
Representatives on any date after the date which is nine (9) month
after the Closing Date shall by borne by the Underwriters.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to service
of process in suits, other than those arising out of the offering or
sale of the Securities, in any jurisdiction where it is not now so
subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common
Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction for a period of 180 days
following the Execution Time, provided, however, that the Company may
issue and sell Common Stock pursuant to any employee stock option plan,
stock ownership plan or dividend reinvestment plan of the Company in
effect at the Execution Time and the Company may issue Common Stock
issuable upon the conversion of securities or the exercise of warrants
outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of
them; (ii) subject to the proviso in Section 5(d) hereof, the printing
(or reproduction) and delivery (including postage, air freight charges
and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus,
and all amendments or supplements to any of them, as may, in each case,
be reasonably requested for use in connection with the offering and
sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the printing (or
reproduction) and delivery of this Agreement, any blue sky memorandum
and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Securities; (v) the
registration of the
<PAGE> 12
12
Securities under the Exchange Act and the listing of the Securities on
the Nasdaq National Market; (vi) any registration or qualification of
the Securities for offer and sale under the securities or blue sky laws
of the several states (including filing fees and the reasonable fees
and expenses of counsel for the Underwriters relating to such
registration and qualification); (vii) any filings required to be made
with the National Association of Securities Dealers, Inc. (including
filing fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such filings); (viii) the transportation and
other expenses incurred by or on behalf of Company representatives in
connection with presentations to prospective purchasers of the
Securities; (ix) the fees and expenses of the Company's accountants and
the fees and expenses of counsel (including local and special counsel)
for the Company; and (x) all other costs and expenses incident to the
performance by the Company of its obligations hereunder.
(i) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Salomon Smith Barney Inc.
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the removal of such transfer
restrictions upon the expiration of such period of time.
(j) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program.
Furthermore, the Company covenants with Salomon Smith Barney
Inc. that the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the
<PAGE> 13
13
manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Edwards &
Angell, LLP, counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own or
lease, as the case may be, and to operate its properties and
conduct its business as described in the Prospectus, and is
duly qualified to do business as a foreign corporation and is
in good standing under the laws of each jurisdiction which
requires such qualification;
(ii) the Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
Common Stock have been duly and validly authorized and issued
and are fully paid and nonassessable; the Securities have been
duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement,
will be fully paid and nonassessable; the Securities are duly
listed, and admitted and authorized for trading, subject to
official notice of issuance and evidence of satisfactory
distribution, on the Nasdaq National Market; the certificates
for the Securities are in valid and sufficient form; the
holders of outstanding shares of capital stock of the Company
are not entitled to preemptive or other rights to subscribe
for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert
any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are
outstanding;
(iii) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or its property of a
character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectus,
and there is no franchise, contract or other document of a
character required to be described in the Registration
Statement or Prospectus, or to be filed as an exhibit thereto,
which is not described or filed as required; and the
statements included in the Prospectus under the headings
"Business--Government Regulation," "Risk Factors--Our industry
is subject to extensive government regulation that could cause
significant delays and expense," "Description of Capital
Stock--Antitakeover Effects of Provisions of Delaware Law and
Our Certificate Of Incorporation and Bylaws," "Shares Eligible
for Future Sale" and "United States Tax Consequences to
Non-U.S. Holders" fairly summarize the matters therein
described;
<PAGE> 14
14
(iv) the Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued,
no proceedings for that purpose have been instituted or
threatened and the Registration Statement and the Prospectus
(other than the financial statements and other financial
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder; and such counsel has no reason to believe that on
the Effective Date or the date the Registration Statement was
last amended after the Effective Date the Registration
Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading or that the Prospectus as of its date and on the
Closing Date included or includes any untrue statement of a
material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (in
each case, other than the financial statements and other
financial information contained therein, as to which such
counsel need express no opinion);
(v) this Agreement has been duly authorized, executed
and delivered by the Company;
(vi) the Company is not and, after giving effect to
the offering and sale of the Securities and the application of
the proceeds thereof as described in the Prospectus, will not
be, an "investment company" as defined in the Investment
Company Act of 1940, as amended;
(vii) no consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such
other approvals (specified in such opinion) as have been
obtained;
(viii) neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter
or by-laws of the Company, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant
or instrument to which the Company is a party or bound or to
which its or their property is subject, or (iii) any statute,
law, rule, regulation, judgment, order or decree applicable to
the Company of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or its properties, which
<PAGE> 15
15
violation or default would, in the case of clauses (ii) and
(iii) above, either individually or in the aggregate, have a
material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company, whether or not arising from transactions in the
ordinary course of business; and
(ix) no holders of securities of the Company have
rights to the registration of such securities under the
Registration Statement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
States of Delaware, New York and Florida or the Federal laws of the
United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the
Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
public officials. References to the Prospectus in this paragraph (b)
include any supplements thereto at the Closing Date.
(c) The Company shall have requested and caused Gardner,
Carton & Douglas, special regulatory counsel to the Company, to furnish
to the Representatives their opinion, dated the Closing Date and
addressed to the Representatives, substantially in the form of Exhibit
B hereto.
(d) The Company shall have requested and caused Quarles &
Brady LLP, special counsel to the Company for intellectual property
matters, to furnish to the Representatives their opinion, dated the
Closing Date and addressed to the Representatives, substantially in the
form of Exhibit C hereto.
(e) The Representatives shall have received from Cravath,
Swaine & Moore, counsel for the Underwriters, such opinion or opinions,
dated the Closing Date and addressed to the Representatives, with
respect to the issuance and sale of the Securities, the Registration
Statement, the Prospectus (together with any supplement thereto) and
other related matters as the Representatives may reasonably require,
and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such
matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
<PAGE> 16
16
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect
on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(g) The Company shall have requested and caused Ernst & Young
LLP to have furnished to the Representatives, at the Execution Time, a
letter, dated as of the Execution Time, in form and substance
reasonably satisfactory to the Representatives, confirming that they
are independent accountants within the meaning of the Act and the
respective applicable rules and regulations adopted by the Commission
thereunder and Rule 101 of the Code of Professional Conduct of the
American Institute of Certified Public Accountants and stating in
effect that:
(i) in their opinion the audited financial statements
and financial statement schedules for the fiscal years ended
December 31, 1995, 1996 and 1997, included or incorporated by
reference in the Registration Statement and the Prospectus and
reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related rules and regulations adopted by the Commission; and
(ii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Registration
Statement and the Prospectus, including the information set
forth under the captions "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Selected
Financial Data", "Prospectus Summary--Summary Financial Data",
and "Certain Transactions" in the Prospectus, agrees with the
accounting records of the Company, excluding any questions of
legal interpretation.
References to the Prospectus in this paragraph (g) include any
supplement thereto at the date of the letter.
(h) The Company shall have requested and caused Deloitte &
Touche LLP to have furnished to the Representatives, at the Execution
Time and at the Closing Date, letters, dated respectively as of the
Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the
applicable rules and regulations adopted by the Commission thereunder
and that they have performed a review of the unaudited interim
financial information of the Company for the three-
<PAGE> 17
17
month period ended September 30, 1999, and as at September 30, 1999, in
accordance with Statement on Auditing Standards No. 71, and stating in
effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the related rules and
regulations adopted by the Commission;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company;
their limited review, in accordance with standards established
under Statement on Auditing Standards No. 71, of the unaudited
interim financial information for the three-month period ended
September 30, 1999, and as at September 30, 1999; carrying out
certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with
respect to the comments set forth in such letter; a reading of
the minutes of the meetings of the stockholders, directors and
the executive, finance, compensation and audit committees of
the Company; and inquiries of certain officials of the Company
who have responsibility for financial and accounting matters
of the Company as to transactions and events subsequent to
June 30, 1999, nothing came to their attention which caused
them to believe that:
(1) any unaudited financial statements
included in the Registration Statement and the
Prospectus do not comply as to form in all material
respects with applicable accounting requirements of
the Act and with the related rules and regulations
adopted by the Commission with respect to
registration statements on Form S-1; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles
applied on a basis substantially consistent with that
of the audited financial statements included in the
Registration Statement and the Prospectus;
(2) with respect to the period subsequent to
September 30, 1999, there were any changes, at a
specified date not more than three days prior to the
date of the letter, in the long-term debt of the
Company or capital stock of the Company or decreases
in the stockholders' equity of the Company as
compared with the amounts shown on the September 30,
1999 consolidated balance sheet included in the
Registration Statement and the Prospectus, or for the
period from October 1, 1999, to such specified date
there were any decreases, as compared with the
corresponding period in the preceding year and the
preceding quarter in net revenues or income before
income taxes or in total or per share amount of net
income of the Company, except in all instances for
changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance
thereof unless said explanation is not deemed
necessary by the Representatives;
<PAGE> 18
18
(3) the information included in the
Registration Statement and Prospectus in response to
Regulation S-K, Item 301 (Selected Financial Data),
Item 302 (Supplementary Financial Information), and
Item 402 (Executive Compensation) is not in
conformity with the applicable disclosure
requirements of Regulation S-K; and
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company) set forth in the Registration Statement and the
Prospectus, including the information set forth under the
captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Selected Financial
Data", "Prospectus Summary--Summary Historical Financial and
Operating Data", "Capitalization", "Dilution", "Business" and
"Risk Factors" in the Prospectus, agrees with the accounting
records of the Company, excluding any questions of legal
interpretation.
References to the Prospectus in this paragraph (h) include any
supplement thereto at the date of the letter.
The Company shall have received from Deloitte & Touche LLP (and
furnished to the Representatives) a report with respect to a review of unaudited
interim financial information of the Company for the seven quarters ending
September 30, 1999, in accordance with Statement on Auditing Standards No. 71.
(i) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (h) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of the Company,
whether or not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto) the effect of which, in any case referred to in clause (i)
or (ii) above, is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of any
supplement thereto).
(j) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market, and satisfactory evidence
of such actions shall have been provided to the Representatives.
(k) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A hereto from
each officer and director of the Company and from such other stockholders of the
Company as the Representatives may request addressed to the Representatives.
<PAGE> 19
19
(l) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates and
documents as the Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancelation shall be given to the Company in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Cravath, Swaine & Moore, counsel for the
Underwriters, at Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019,
on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney on demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein; provided further, that with respect to any
untrue statement or omission of material fact made in any Preliminary
Prospectus, the indemnity agreement contained in this Section 8(a) shall not
inure to the benefit of any Underwriter from whom the person asserting any such
loss, claim, damage or liability purchased the Securities concerned, to the
extent that any such loss,
<PAGE> 20
20
claim, damage or liability of such Underwriter occurs under the circumstance
where it shall have been determined by a court of competent jurisdiction by
final and nonappealable judgment that (w) the Company had previously furnished
copies of the Prospectus to the Representatives, (x) delivery of the Prospectus
was required by the Act to be made to such person, (y) the untrue statement or
omission of a material fact contained in the Preliminary Prospectus was
corrected in the Prospectus and (z) there was not sent or given to such person,
at or prior to the written confirmation of the sale of such securities to such
person, a copy of the Prospectus. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
The Company agrees to indemnify and hold harmless Salomon
Smith Barney Inc., the directors, officers, employees and agents of Salomon
Smith Barney Inc. and each person who controls Salomon Smith Barney Inc. within
the meaning of either the Act or the Exchange Act ("Salomon Smith Barney Inc.
Entities"), from and against any and all losses, claims, damages and liabilities
to which they may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim), insofar
as such losses, claims damages or liabilities (or actions in respect thereof)
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable preliminary prospectus, not
misleading; (ii) caused by the failure of any Participant to pay for and accept
delivery of the securities which immediately following the Effective Date of the
Registration Statement were subject to a properly confirmed agreement to
purchase; or (iii) related to, arising out of, or in connection with the
Directed Share Program, provided that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of Salomon
Smith Barney Inc. specifically for inclusion therein.
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
with reference to written information relating to such Underwriter furnished to
the Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company acknowledges that (i) the
statements set forth in the last paragraph of the cover page regarding delivery
of the Securities, and (ii) under the heading "Underwriting", (A) the list of
underwriters and their respective participation in the sale of the Securities,
(B) the sentences related to concessions and reallowances and (C) the paragraph
related to stabilization, syndicate covering transactions and penalty bids in
any Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus.
<PAGE> 21
21
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to the second paragraph of 8(a) hereof in
respect of such action or proceeding, then in addition to such separate firm for
the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in addition to
any local counsel) for Salomon Smith Barney Inc., the directors, officers,
employees and agents of Salomon Smith Barney Inc., and all persons, if any, who
control Salomon Smith Barney Inc. within the meaning of either the Act or the
Exchange Act for the defense of any losses, claims, damages and liabilities
arising out of the Directed Share Program. Notwithstanding the indemnifying
party's election to appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the reasonable
fees, costs and expenses of such separate counsel, if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party would
present such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, (iii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or (iv)
the indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters severally
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company
and one or more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and by the Underwriters on the other from the offering of the Securities;
provided, however, that in no
<PAGE> 22
22
case shall any Underwriter (except as may be provided in any agreement among
underwriters relating to the offering of the Securities) be responsible for any
amount in excess of the underwriting discount or commission applicable to the
Securities purchased by such Underwriter hereunder. If the allocation provided
by the immediately preceding sentence is unavailable for any reason, the Company
and the Underwriters severally shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company shall be deemed to be equal to the total net proceeds from the offering
(before deducting expenses) received by it, and benefits received by the
Underwriters shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the Prospectus.
Relative fault shall be determined by reference to, among other things, whether
any untrue or any alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information provided by the
Company on the one hand or the Underwriters on the other, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation which does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act or the Exchange Act
and each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Company within the meaning of either the Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (d).
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Under writers) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter
<PAGE> 23
23
of its liability, if any, to the Company and any nondefaulting Underwriter for
damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in the Company's Common Stock shall have
been suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on either of such Exchanges, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Prospectus
(exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancelation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel
(fax no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith
Barney Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
General Counsel; or, if sent to the Company, will be mailed, delivered or
telefaxed to (407) 676-9914 and confirmed to it at 100 Rialto Place, Suite 300,
Melbourne, Florida 32901, attention of the Chief Financial Officer.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
<PAGE> 24
24
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto or any Rule
462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
<PAGE> 25
25
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
AirNet Communications Corporation
By: ........................................
Name:
Title:
<PAGE> 26
26
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.
Hambrecht & Quist
Volpe Brown Whelan & Company
By: Salomon Smith Barney Inc.
By:
................................................
Name:
Title:
For themselves and the other several Underwriters named in Schedule I to the
foregoing Agreement.
<PAGE> 27
SCHEDULE I
NUMBER OF UNDERWRITTEN
SECURITIES TO BE
UNDERWRITERS PURCHASED
Salomon Smith Barney Inc. . . .
Hambrecht & Quist. . . . . . . .
Volpe Brown Whelan & Company. .
------------
Total . . . .
============
<PAGE> 28
[FORM OF LOCK-UP AGREEMENT] EXHIBIT A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR SHAREHOLDER OF
CORPORATION]
AirNet Communications Corporation
Public Offering of Common Stock
September , 1999
Salomon Smith Barney Inc.
Hambrecht & Quist
Volpe Brown Whelan & Company
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement") between AirNet
Communications Corporation, a Delaware corporation (the "Company"), and each of
you as representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, $ par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell,
pledge or otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing) of a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of the Underwriting Agreement, other than shares of Common Stock disposed
of as bona fide gifts approved by Salomon Smith Barney Inc.
<PAGE> 29
2
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
[SIGNATURE OF OFFICER, DIRECTOR OR MAJOR
STOCKHOLDER]
[NAME AND ADDRESS OF OFFICER, DIRECTOR OR
MAJOR STOCKHOLDER]
<PAGE> 1
EXHIBIT 3.1
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AIRNET COMMUNICATIONS CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I.............................................................................................1
ARTICLE II............................................................................................1
ARTICLE III...........................................................................................1
ARTICLE IV............................................................................................1
A. CLASSES OF STOCK...................................................................................1
B. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES A PREFERRED STOCK,
SERIES B PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D PREFERRED STOCK AND
COMMON STOCK..........................................................................................3
1. Dividends......................................................................................3
(a) Holders of Series A, Series B, Series C and Series D Preferred Stock......................3
(b) Holders of Common Stock...................................................................5
2. Liquidation....................................................................................5
(a) Preference................................................................................5
(b) Consolidation, Merger, etc................................................................6
(c) Distributions to Holders of Common Stock..................................................8
(d) Waiver of Liquidation Preference..........................................................8
3. Conversion.....................................................................................8
(a) Right to Convert..........................................................................8
(i) Series A Preferred Stock..............................................................8
(ii) Series B Preferred Stock.............................................................8
(iii) Series C Preferred Stock............................................................9
(iv) Series D Preferred Stock.............................................................9
(b) Mechanics of Conversion..................................................................10
(c) Adjustment for Stock Splits and Combinations.............................................11
(d) Adjustment for Certain Dividends and Distributions.......................................11
(e) Adjustments for Other Dividends and Distributions........................................12
(f) Adjustment for Reclassification, Exchange or Substitution................................12
(g) Adjustment for Merger or Reorganization, etc.............................................13
(h) No Impairment............................................................................13
(i) Certificate as to Adjustments............................................................13
(j) Notice of Record Date....................................................................14
(k) Notices..................................................................................14
(l) Mandatory Conversion.....................................................................15
(i) Mandatory Conversion Event...........................................................15
(ii) Procedure for Mandatory Conversion..................................................15
(m) Retirement and Cancellation of Shares....................................................16
4. Voting Rights.................................................................................16
(a) Holders of Series A Preferred Stock......................................................16
(b) Holders of Series B Preferred Stock......................................................16
(c) Holders of Series C Preferred Stock......................................................16
(d) Holders of Series D Preferred Stock......................................................16
(e) Protective Provisions....................................................................17
(f) Protective Provisions for Series A Preferred Stock.......................................17
(g) Protective Provisions for Series B Preferred Stock.......................................17
(h) Protective Provisions for Series C Preferred Stock.......................................18
(i) Protective Provisions for Series D Preferred Stock.......................................18
(j) Election of Directors....................................................................18
(k) Holders of Common Stock..................................................................19
(l) Change in Authorized Shares of Common Stock..............................................20
5. Pre-emptive Rights............................................................................20
(a) Right to Purchase........................................................................20
(b) "New Securities..........................................................................21
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(c) Procedure................................................................................21
(d) Right of Corporation.....................................................................21
(e) "Holder..................................................................................22
(f) WAIVER...........................................................................................22
(g) Expiration...............................................................................22
C. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES E PREFERRED STOCK,
SERIES F PREFERRED STOCK, AND SERIES G PREFERRED STOCK...............................................22
1. Designation...................................................................................22
2. Rank..........................................................................................23
3. Dividends.....................................................................................23
4. Liquidation Preference........................................................................28
5. Redemption....................................................................................31
6. Conversion....................................................................................31
(a) Right to Convert.........................................................................31
(b) Mechanics of Conversion..................................................................32
(c) Dividends Payable........................................................................33
(d) Adjustments to Conversion Price..........................................................33
(i) Stock Dividends, Splits and Reclassifications........................................33
(ii) Rights, Options, and Convertible and Exchangeable Securities........................34
(iii) Dividends in Kind..................................................................34
(iv) Issuances Below Conversion Price....................................................35
(v) Current Market Price.................................................................37
(vi) Adjustment for Merger or Reorganization, etc........................................37
(vii) References to Common Stock.........................................................38
(viii) Deferral of Issuance of Common Stock..............................................38
(e) Issue and Transfer Taxes.................................................................38
(f) No Impairment............................................................................38
(g) Certificate as to Adjustments............................................................39
(h) Notice of Record Date....................................................................39
(i) Notices..................................................................................40
(j) Mandatory Conversion.....................................................................40
(i) Mandatory Conversion Event...........................................................40
(ii) Procedure for Mandatory Conversion..................................................41
(k) Retirement and Cancellation of Shares....................................................41
7. Voting Rights.................................................................................41
8. Board of Directors; Right of Series E Preferred Stock and Series F Preferred Stock to
Elect Directors......................................................................................44
9. Pre-emptive Rights............................................................................46
(a) Right to Purchase........................................................................46
(b) Waiver...................................................................................46
(c) Expiration...............................................................................46
10. No Reissuance of Senior Preferred Stock......................................................46
D. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF COMMON STOCK FOLLOWING A
QUALIFIED PUBLIC OFFERING............................................................................46
1. Dividends.....................................................................................47
2. Stock Split, Reclassification, etc............................................................47
3. Liquidation...................................................................................47
4. Voting........................................................................................48
5. No Pre-emptive or Subscription Rights.........................................................48
E. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF POST-IPO PREFERRED SHARES.....................48
ARTICLE V............................................................................................49
ARTICLE VI...........................................................................................49
ARTICLE VII..........................................................................................50
ARTICLE VIII.........................................................................................50
</TABLE>
- (ii) -
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE IX...........................................................................................50
ARTICLE X............................................................................................50
</TABLE>
- (iii) -
<PAGE> 5
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AIRNET COMMUNICATIONS CORPORATION
Pursuant to the provisions of Sections 242, 245 and 228 of the General
Corporation Law of Delaware, the undersigned Corporation adopts the following
Sixth Amended and Restated Certificate of Incorporation:
FIRST: The name of the Corporation is AirNet Communications
Corporation (the "Corporation").
SECOND: The following Sixth Amended and Restated Certificate of
Incorporation was adopted by the stockholders of the Corporation by written
consent in accordance with Sections 228, 242 and 245 of the General Corporation
Law of Delaware, and written notice has been given to those stockholders who
have not consented in writing.
The Restated Certificate of Incorporation of the Corporation (originally filed
under the name of Overture Systems, Inc. incorporated on January 11, 1994), as
previously amended, is hereby deleted in its entirety and is amended and
restated as follows:
ARTICLE I
The name of the Corporation is AirNet Communications Corporation.
ARTICLE II
The registered office of the Corporation in the State of Delaware is
located at The Prentice-Hall Corporation System, Inc., 1013 Centre Road, in the
City of Wilmington, County of New Castle. The name of the registered agent at
such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
A. CLASSES OF STOCK. (i) At all times prior to the closing of the
sale of shares of Common Stock in a fully underwritten public offering (with
underwriters approved by the holders of a majority of the voting power of the
then outstanding Senior Preferred Stock (as defined in Article IV.C.1.))
pursuant to an effective registration statement under the Securities Act of
1933, as amended, where (x) the aggregate sales price of such securities (before
deduction of underwriting discounts, commissions and expenses of sale) is not
less than $20,000,000 and
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(y) the product of the price per share paid by the public for the Common Stock
sold in such offering, multiplied by the number of shares of Common Stock
outstanding immediately after such offering, is not less than $220,000,000
("Qualified Public Offering"), the aggregate number of shares of capital stock
which the Corporation shall have authority to issue shall be 1,147,508,811
shares, of which 11,940,301 shares shall be Series A Voting Convertible
Preferred Stock, par value $.01 per share ("Series A Preferred Stock"),
3,300,000 shares shall be Series B Voting Convertible Preferred Stock, par value
$.01 per share ("Series B Preferred Stock"), 5,000,000 shares shall be Series C
Voting Convertible Preferred Stock, par value $.01 per share ("Series C
Preferred Stock"), 8,174,049 shares shall be Series D Voting Convertible
Preferred Stock, par value $.01 per share ("Series D Preferred Stock"),
554,854,075 shares shall be Series E Senior Voting Convertible Preferred Stock,
par value $.01 per share ("Series E Preferred Stock"), 283,471,155 shares shall
be Series F Senior Voting Convertible Preferred Stock, par value $.01 per share
("Series F Preferred Stock"), 230,769,231 shares shall be Series G Senior Voting
Convertible Preferred Stock, par value $.01 per share (the "Series G Preferred
Stock"), and 50,000,000 shares shall be Common Stock, par value $.001 per
share ("Common Stock"). The Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series G Preferred Stock referred to above shall
hereinafter be referred to from time to time as the "Company Preferred Stock."
(ii) When this Sixth Amended and Restated Certificate of Incorporation
of the Corporation is filed and becomes effective in accordance with the General
Corporation Law of the State of Delaware (the "Effective Time"), each 66.38
shares of Common Stock issued and outstanding immediately prior to the Effective
Time (hereinafter referred to in this subparagraph A.(ii) as "Old Common Stock")
shall be automatically reclassified as and converted into one (1) share of
Common Stock (hereinafter referred to in this subparagraph A.(ii) as "New Common
Stock"). Notwithstanding the immediately preceding sentence, no fractional
shares of New Common Stock shall be issued to the holders of record of Old
Common Stock in connection with the foregoing reclassification of shares of Old
Common Stock. In lieu thereof, the Corporation shall deliver to any stockholder
that would otherwise receive a fractional share one additional share. Each stock
certificate that, immediately prior to the Effective Time, represented shares of
Old Common Stock shall, from and after the Effective Time, automatically and
without the necessity of presenting the same for exchange, represent that number
of whole shares of New Common Stock into which the shares of Old Common Stock
represented by such certificate shall have been reclassified, provided, however,
that each holder of record of a certificate that represented shares of Old
Common Stock shall receive, upon surrender of such certificate, a new
certificate representing the number of whole shares of New Common Stock into
which the Shares of Old Common Stock represented by such certificate shall have
been reclassified.
(iii) Upon the closing of a Qualified Public Offering and the conversion
of the Company Preferred Stock into Common Stock in accordance with Article
IV.B.3(l) and Article IV.C.6(j), the rights, preferences, privileges and
restrictions granted to and imposed upon the Company Preferred Stock in Article
IV.B. and Article IV.C. shall expire (except for the rights of the holders
thereof, upon surrender of their certificate or certificates therefor, to
receive certificates for the number of shares of Common Stock into which such
Company Preferred Stock has been converted) the Company shall no longer have the
authority to issue shares of Company Preferred Stock and the aggregate number of
shares of capital stock which the Corporation shall thereafter have authority to
issue is
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60,000,000 shares, consisting of two classes of capital stock:
(a) 50,000,000 shares of Common Stock, par value $.001 per
share (the "Common Stock");
(b) 10,000,000 shares of Preferred Stock, par value $.01 per
share (the "Post-IPO Preferred Shares").
For purposes of this Sixth Amended and Restated Certificate of
Incorporation, "Post-IPO Preferred Shares" refers to the shares of preferred
stock, par value $.01 per share, which the Company has authority to issue, as
well as such shares which are from time to time issued and outstanding,
following the Qualified Public Offering and (ii) "Company Preferred Stock"
refers to the shares of preferred stock, par value $.01 per share, which the
Company has authority to issue, as well as such shares which are from time to
time issued and outstanding, prior to the Qualified Public Offering.
Accordingly, "Company Preferred Stock" is not part of and is distinct from the
"Post-IPO Preferred Shares."
B. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES A
PREFERRED STOCK, SERIES B PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D
PREFERRED STOCK AND COMMON STOCK. The rights, preferences, privileges and
restrictions granted to and imposed upon the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Common
Stock are set forth in this Division B and are subject to the provisions of
Article IV. C and, with respect to Common Stock, the provisions of Article IV.
D.
1. DIVIDENDS.
(a) Holders of Series A, Series B, Series C and Series D Preferred
Stock. The holders of shares of Series A Preferred Stock shall be entitled to
receive cumulative cash dividends at the rate of $.0594 per share per annum, out
of the Corporation's surplus or, in case there shall be no surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, or assets legally available for the payment thereof. The
holders of shares of Series B Preferred Stock shall be entitled to receive
cumulative cash dividends, at the rate of $0.2930291 per share per annum, out of
the Corporation's surplus or, in case there shall be no surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, or assets legally available for the payment thereof. The
holders of shares of Series C Preferred Stock shall be entitled to receive
cumulative cash dividends at the rate of $.36 per share per annum, out of the
Corporation's surplus or, in case there shall be no surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, or assets legally available for the payment thereof. The
holders of shares of Series D Preferred Stock shall be entitled to receive
cumulative cash dividends at the rate of $.0666 per share per annum, out of the
Corporation's surplus or, in case there shall be no surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, or assets legally available for the payment thereof. Such
dividends shall be payable quarterly on the fifteenth (15th) day of December,
March, July and September in each year, to such stockholders of record on the
fortieth (40th) day preceding each such dividend payment date. Dividends on the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
and Series D Preferred Stock shall accrue, from the date of initial issuance
until paid, and be deemed to accrue from day to day whether or not earned or
declared and shall be cumulative. The holders of sixty percent (60%) of the
aggregate Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock (the "Collective A, B and C Preferred Stock") then outstanding,
voting
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separately as a single class on the basis of one vote for each share of
Collective A, B and C Preferred Stock outstanding, may waive in writing the
payment of dividends on all shares of Collective A, B and C Preferred Stock then
outstanding at any time or times so long as any of the Collective A, B and C
Preferred Stock remains outstanding. Arrearages in the payment of dividends
shall not bear interest. The holders of sixty percent (60%) of the aggregate
Series D Preferred Stock then outstanding may waive in writing the payment of
dividends on all shares of Series D Preferred Stock then outstanding at any time
or times so long as any of the Series D Preferred Stock remains outstanding.
So long as any shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock (the "Collective Preferred
Stock") remain outstanding, no dividend whatsoever shall be paid or declared on
any Common Stock or any junior stock (which term as used herein shall mean the
Common Stock and any other class of stock of the Corporation hereafter
authorized ranking junior to the Collective Preferred Stock as to dividends),
nor shall any distribution be made on any junior stock, other than a dividend
payable in junior stock, nor shall any shares of any junior stock be acquired
for consideration by the Corporation (other than purchases or redemptions
pursuant to or in accordance with employee stock control, subscription or option
agreements entered into between the Corporation and its or its subsidiaries'
directors, officers and employees prior to the date on which a share of Series F
Preferred Stock is first issued (the "Original Series F Issue Date") and other
than the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any of the Junior
Securities or Parity Securities) unless all dividends accrued, whether or not
declared, on the Collective Preferred Stock for all past quarter-yearly dividend
periods and then in arrears shall have been paid and the full dividends due
thereon for the then current quarter-yearly dividend period shall have been paid
or shall have been declared and a sum sufficient for the payment thereof set
apart.
No dividend shall be declared or paid on any Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, or on the Corporation's Series A
Non-Voting Redeemable Preferred Stock, previously authorized and outstanding and
exchanged for Series A Preferred Stock, unless simultaneously with such payment
there is paid to holders of Series D Preferred Stock all of the cumulative
dividends accrued, whether or not declared, and then in arrears on the
Corporation's Series D Preferred Stock; and provided that no dividend shall be
declared or paid for any quarter-yearly period on any share of Series B
Preferred Stock or Series C Preferred Stock unless simultaneously with such
payment there is paid to holders of Series A Preferred Stock all of the
cumulative dividends accrued, whether or not declared, and then in arrears on
the Corporation's Series A Non-Voting Redeemable Preferred Stock, previously
authorized and outstanding and exchanged for shares of Series A Preferred Stock,
as well as all of the cumulative dividends accrued, whether or not declared, on
the Series A Preferred Stock prior to the issuance of the share of Series B
Preferred Stock or Series C Preferred Stock with respect to which the dividend
is proposed to be declared or paid and then in arrears; and provided further
that, no dividend shall be declared or paid for any quarter-yearly period on any
share of Series C Preferred Stock unless simultaneously with such payment there
is paid to the holders of Series B Preferred Stock all of the cumulative
dividends accrued, whether or not declared, on the Series B Preferred Stock
prior to the issuance of the share of Series C Preferred Stock with respect to
which the dividend is
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proposed to be declared or paid and then in arrears.
Except as otherwise specified in this Article IV.B.1(a), the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock rank on a parity with each other with respect to dividend rights.
No dividend shall be declared or paid for any quarter-yearly period on any stock
of the Corporation ranking equally with the Collective Preferred Stock as to
dividends unless simultaneously with such payment there is paid (i) all of the
cumulative dividends accrued, whether or not declared, on the Collective
Preferred Stock and then in arrears, and (ii) a percentage of the quarter-yearly
dividend payable on the Collective Preferred Stock for such quarter-yearly
period equal to the percentage of the quarter-yearly dividend on such other
stock which is then to be paid.
Subject to the foregoing provisions, and not otherwise, such dividends (payable
in cash, stock or otherwise) as may be determined by the Board of Directors of
the Corporation (the "Board of Directors") may be declared and paid on any
junior stock from time to time out of the remaining funds of the Corporation
legally available for the payment of dividends, and the Collective Preferred
Stock shall not be entitled to participate in any such dividends, whether
payable in cash, stock or otherwise.
(b) Holders of Common Stock. Subject to the provisions of Article
IV.B.1(a) hereof, the holders of shares of Common Stock shall be entitled to
receive, when and as declared by the Board of Directors, such dividends out of
the Corporation's surplus or, in case there shall be no surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year, or assets legally available for the payment thereof, as
may be declared from time to time by the Board of Directors.
2. LIQUIDATION.
(a) Preference. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the Collective Preferred Stock shall be entitled to receive in cash out of the
assets of the Corporation, before any distribution or payment shall be made to
the holders of any junior stock, as follows:
(i) an amount per share equal to $1.10 for each outstanding
share of Series D Preferred Stock, plus any accrued but unpaid dividends,
whether or not declared, on such share to holders of Series D Preferred Stock;
(ii) an amount per share equal to $.99 for each outstanding
share of Series A Preferred Stock, plus any accrued but unpaid dividends,
whether or not declared, on such share to holders of Series A Preferred Stock;
(iii) an amount per share equal to $4.883818833 for each
outstanding share of Series B Preferred Stock, plus any accrued but unpaid
dividends, whether or not declared, on
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such share to holders of Series B Preferred Stock; and
(iv) an amount per share equal to $6.00 for each outstanding
share of Series C Preferred Stock, plus any accrued but unpaid dividends,
whether or not declared, on such share to holders of Series C Preferred Stock.
If upon the occurrence of such event, the assets and funds of the Corporation
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed among the
holders of the Collective Preferred Stock in respect of accrued but unpaid
dividends in accordance with the priorities established in the third paragraph
of Article IV.B.1(a) hereof and any remaining assets and funds legally available
for distribution shall be distributed first to the holders of the Series D
Preferred Stock in an amount equal to $1.10 for each outstanding share of Series
D Preferred Stock (pro rated among them on the basis of outstanding shares of
Series D Preferred Stock) and any excess among the holders of the Collective A,
B and C Preferred Stock as follows:
(i) an amount per share equal to $.99 multiplied by the
"Distribution Fraction" (as defined below) for each outstanding share of Series
A Preferred Stock to holders of Series A Preferred Stock;
(ii) an amount per share equal to $4.883818833 multiplied by the
"Distribution Fraction" for each outstanding share of Series B Preferred Stock;
and
(iii) an amount per share equal to $6.00 multiplied by the
"Distribution Fraction" for each outstanding share of Series C Preferred Stock.
For purposes of the foregoing calculations, "Distribution Fraction" shall
be a fraction determined by dividing (A) the amount of such remaining assets and
funds legally available for distribution by (B) the sum of (I) $.99 multiplied
by the number of shares of Series A Preferred Stock then outstanding, plus (II)
$4.883818833 multiplied by the number of shares of Series B Preferred Stock then
outstanding, plus (III) $6.00 multiplied by the number of shares of Series C
Preferred Stock then outstanding.
(b) Consolidation, Merger, etc.
(i) For purposes of this Section 2, a Change of Control (as
defined in Article IV.B.2(b)(ii) below) shall, at the option of each holder of
Collective Preferred Stock, upon written notice to the Corporation prior to the
closing of the transaction that constitutes a Change of Control, be treated as a
liquidation, dissolution or winding up of the Corporation with respect to such
holder and shall entitle the electing holders of Collective Preferred Stock to
receive, at the closing of the transaction that constitutes a Change of Control,
in cash, securities or other property (valued as provided in Article
IV.B.2(b)(iii) below), amounts as specified in Article IV.B.2(a) above;
provided, however, that when such payments are made as a result of a Change of
Control that is treated as a liquidation, dissolution, or winding up of the
Corporation, the
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payment to be made pursuant to this Article IV.B.2(b) shall be made only upon
surrender of the certificate or certificates for the shares of Collective
Preferred Stock with respect to which such payment is to be made, and, from and
after the date that the certificate or certificates for such shares are required
to be surrendered (whether or not such certificate or certificates are
surrendered on such date), all rights (other than the right to receive payment
as provided in this Article IV.B.2(b) upon surrender of such certificate or
certificates) with respect to such shares shall terminate, and such shares be
deemed to be canceled and retired. Notwithstanding the foregoing, a Change of
Control shall not be treated as a liquidation, dissolution or winding up of the
Corporation with respect to any holder of the Collective Preferred Stock if (x)
both (i) the holders of sixty percent (60%) of the Series D Preferred Stock then
outstanding, and (ii) the holders of sixty percent (60%) of the Collective A, B
and C Preferred Stock then outstanding, each voting separately as a single class
on the basis of one vote for each share of Series D Preferred Stock then
outstanding or Collective A, B and C Preferred Stock then outstanding, as
applicable, waive in writing the provisions of the preceding sentence prior to
definitive authorization by the Corporation's Board of Directors of such
consolidation, merger or sale of assets or prior to the order of such court or
administrative body requiring such reorganization or (y) such Change of Control
has not been treated as a liquidation, dissolution or winding up of the
Corporation with respect to any holder of Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock.
(ii) "Change of Control" means (x) the sale, lease,
conveyance or other disposition of all or substantially all of the Corporation's
assets as an entirety or substantially as an entirety to any person or "group"
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) in one or a series of transactions, provided
that a transaction where the holders of all classes of voting stock of the
Corporation immediately prior to such transaction own, directly or indirectly,
more than 50% of the aggregate voting power of all classes of voting stock of
such person or group immediately after such transaction shall not be a Change of
Control; or (y) any transaction or series of transactions (as a result of a
tender offer, merger, consolidation or otherwise, but not as a result of the
issuance of Series E Preferred Stock or of a Qualified Public Offering, as
defined in Article IV.B.3(l)(i)) that results in, or that is in connection with,
any person, including a "group" (within the meaning of Section 13(d)(3) of the
Exchange Act) that includes such person, acquiring "beneficial ownership" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% or
more of the aggregate voting power of all classes of voting stock of the
Corporation or any person that possesses "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% or more of
the aggregate voting power of all classes of voting stock of the Corporation.
(iii) Whenever the distribution provided for in this
Article IV.B.2 shall be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of such securities or
other property as determined in good faith by the Board of Directors of the
Corporation.
(c) Distributions to Holders of Common Stock. After the payment of all
preferential amounts required to be paid to the holders of shares of Collective
Preferred Stock and the
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"Senior Preferred Stock" (as defined in Article IV.C.1 hereto) upon the
liquidation, dissolution or winding up of the Corporation, the holders of shares
of Common Stock then outstanding shall be entitled to receive the remaining
assets and funds of the Corporation available for distribution to its
stockholders, pro rata based upon the number of shares of Common Stock held by
each such holder.
(d) Waiver of Liquidation Preference. The holders of sixty percent
(60%) of the Series D Preferred Stock then outstanding may waive in writing the
liquidation preference set forth in Article IV.B.2(a) as to the Series D
Preferred Stock. The holders of sixty percent (60%) of the Collective A, B and C
Preferred Stock then outstanding, voting separately as a single class on the
basis of one vote for each share of Collective A, B and C Preferred Stock
outstanding, may waive in writing the liquidation preference set forth in
Article IV.B.2(a) as to the Collective A, B and C Preferred Stock.
3. CONVERSION. The holders of any of the shares of Collective
Preferred Stock shall have conversion rights respectively as follows (the
"Conversion Rights"):
(a) Right to Convert.
(i) Series A Preferred Stock. Each share of Series A Preferred
Stock shall be convertible, at the option of the holder thereof, at any time and
from time to time, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $1.00 by the Series A Conversion Price
(as defined below) in effect at the time of conversion. The conversion price at
which shares of Common Stock shall be deliverable upon conversion of Series A
Preferred Stock without the payment of additional consideration by the holder
thereof (the "Series A Conversion Price") shall be $4.020052210 per share. Such
Series A Conversion Price, and the rate at which shares of Series A Preferred
Stock may be converted into shares of Common Stock, shall be subject to
adjustment as provided below.
(ii) Series B Preferred Stock. Each share of Series B Preferred
Stock shall be convertible, at the option of the holder thereof, at any time and
from time to time, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $4.883818833 by the Series B
Conversion Price (as defined below) in effect at the time of conversion. The
conversion price at which shares of Common Stock shall be deliverable upon
conversion of Series B Preferred Stock without the payment of additional
consideration by the holder thereof (the "Series B Conversion Price") shall be
$4.020052210 per share. Such Series B Conversion Price, and the rate at which
shares of Series B Preferred Stock may be converted into shares of Common Stock,
shall be subject to adjustment as provided below.
(iii) Series C Preferred Stock. Each share of Series C Preferred
Stock shall be convertible, at the option of the holder thereof, at any time and
from time to time, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $6.00 by the Series C Conversion Price
(as defined below) in effect at the time of conversion. The conversion price at
which shares of Common Stock shall be deliverable upon conversion of Series C
Preferred Stock without the payment of additional consideration by the holder
thereof
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(the "Series C Conversion Price") shall be $4.881432585 per share. Such Series C
Conversion Price, and the rate at which shares of Series C Preferred Stock may
be converted into shares of Common Stock, shall be subject to adjustment as
provided below.
(iv) Series D Preferred Stock. Each share of Series D Preferred
Stock shall be convertible, at the option of the holder thereof, at any time and
from time to time, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing $1.10 by the Series D Conversion Price
(as defined below) in effect at the time of conversion. The conversion price at
which shares of Common Stock shall be deliverable upon conversion of Series D
Preferred Stock without the payment of additional consideration by the holder
thereof (the "Series D Conversion Price") shall be $1.10 per share. Such Series
D Conversion Price, and the rate at which shares of Series D Preferred Stock may
be converted into shares of Common Stock, shall be subject to adjustment as
provided below.
Each of the "Series A Conversion Price," the "Series B Conversion Price," the
"Series C Conversion Price" and the "Series D Conversion Price" may be referred
to herein as the "Conversion Price," but the Conversion Price applicable to
Series A Preferred Stock shall only be the "Series A Conversion Price," the
Conversion Price applicable to Series B Preferred Stock shall only be the
"Series B Conversion Price", the Conversion Price applicable to Series C
Preferred Stock shall only be the "Series C Conversion Price," and the
Conversion Price applicable to Series D Preferred Stock shall only be the
"Series D Conversion Price."
Subject to Article IV.B.3 (l)(i), in the event that at the time of the
conversion of a holder's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or Series D Preferred Stock there are accrued but
unpaid cash dividends, whether or not declared, on such Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred
Stock and provided no shares of Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock are or remain outstanding, such cash dividend
payable to a holder of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or Series D Preferred Stock pursuant to Article
IV.B.1(a) hereof shall be paid and distributed to such holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock immediately prior to the conversion of such holder's Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock; provided that if a holder intends to convert only a portion of
its Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, or Series D Preferred Stock, the cash dividend payable to such holder
immediately prior to such conversion shall be that dollar amount which is
proportionate to the number of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock which
such holder intends to convert.
If pursuant to and in accordance with Article IV.B.1(a) and this Article
IV.B.3(a)(iv), the Corporation cannot distribute all or a portion of such cash
dividend ("Dividend Payment Obligation") immediately prior to such conversion
then the Corporation shall distribute the balance of such Dividend Payment
Obligation as soon as assets or funds are available for such distribution under
and in accordance with Article IV.B.1(a); provided that, notwithstanding
anything contained herein to the contrary, no Dividend Payment Obligation may be
paid by the
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Corporation so long as shares of Series E Preferred Stock, Series F Preferred
Stock, or Series G Preferred Stock are or remain outstanding.
(b) Mechanics of Conversion.
(i) In order for a holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock to
convert shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, or Series D Preferred Stock into shares of Common Stock, such
holder shall surrender the certificate or certificates for such shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series
D Preferred Stock at the office of the transfer agent for the Collective
Preferred Stock (or at the principal office of the Corporation if the
Corporation serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of the shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock represented by such certificate or certificates. Such notice
shall state such holder's name or the names of the nominees in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
If required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by a written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
his, her or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D
Preferred Stock, or to his, her or its nominees, a certificate or certificates
for the number of shares of Common Stock to which such holder shall be entitled.
No fractional shares shall be issued upon conversion of the Collective Preferred
Stock, and the number of shares of Common Stock to be issued shall be rounded up
to the nearest whole share. In determining the number of shares of Common Stock
issuable upon conversion, each holder's Collective Preferred Stock and Senior
Preferred Stock being converted on the same day shall be aggregated.
(ii) The Corporation shall at all times when the Collective
Preferred Stock shall be outstanding, reserve and keep available out of its
authorized but unissued stock, for the purpose of effecting the conversion of
the Collective Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Collective Preferred Stock. Before taking any
action which would cause an adjustment reducing the Conversion Price below the
then par value of the shares of Common Stock issuable upon conversion of the
Collective Preferred Stock, the Corporation will take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Corporation
may validly and legally issue fully paid and nonassessable shares of Common
Stock at such adjusted Conversion Price.
(iii) On the Conversion Date, all shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred
Stock which shall have been surrendered for conversion as herein provided shall
no longer be deemed to be outstanding and
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all rights with respect to such shares, including the rights, if any, to receive
notices and to vote such Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or Series D Preferred Stock shall immediately cease
and terminate on the Conversion Date, except only the right of the holders
thereof to receive shares of Common Stock in exchange therefor.
(iv) If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities Act of 1933, as
amended, which is not a Qualified Public Offering as defined in Article
IV.B.3(l)(i) hereof, the conversion may, at the option of any holder tendering
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or
Series D Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock issuable upon such
conversion of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, or Series D Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, or Series D Preferred Stock until immediately prior to the
closing of the sale of securities.
(c) Adjustment for Stock Splits and Combinations. If the Corporation
shall at any time or from time to time effect a subdivision of the outstanding
Common Stock, each Conversion Price then in effect immediately before that
subdivision shall be proportionately decreased. If the Corporation shall at any
time or from time to time combine the outstanding shares of Common Stock, each
Conversion Price then in effect immediately before the combination shall be
proportionately increased. Any adjustment under this subsection shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
(d) Adjustment for Certain Dividends and Distributions. In the event
the Corporation at any time, or from time to time shall make or issue, or fix a
record date for the determination of holders of any Common Stock entitled to
receive a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event each Conversion Price then in effect shall be
decreased as of the time of such distribution or, in the event such a record
date shall have been fixed, as of the close of business on such record date, by
multiplying the Conversion Price then in effect by a fraction:
(x) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and
(y) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the
time such dividend or other distribution is made or issued or the close
of business on such record date, as applicable, plus the number of shares
of Common Stock issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price shall be
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recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price shall be adjusted pursuant to this subsection as
of the time of actual payment of such dividends or distributions.
(e) Adjustments for Other Dividends and Distributions. In the event
the Corporation at any time or from time to time shall make or issue, or fix a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock, then and in each such event
provision shall be made so that the holders of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall
receive upon conversion thereof in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Corporation that
they would have received had their Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, or Series D Preferred Stock been converted into
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the Conversion Date, retained such
securities receivable by them as aforesaid during such period giving application
to all adjustments called for during such period, under this paragraph (e) with
respect to the rights of the holders of Collective Preferred Stock.
(f) Adjustment for Reclassification, Exchange or Substitution. If the
Common Stock issuable upon the conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, or Series D Preferred Stock shall have the right thereafter to convert
such share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other change,
by holders of the number of shares of Common Stock into which such shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or
Series D Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or other change, all subject to further
adjustment as provided herein.
(g) Adjustment for Merger or Reorganization, etc. In case of any
consolidation or merger of the Corporation with or into another corporation
(other than a Change of Control (as defined in Article IV.B.2(b)(ii) above)
which is treated as a liquidation pursuant to Article IV.B.2(b) by the holders
of a majority of the Collective Preferred Stock then outstanding), the
authorized capital of the surviving or resulting corporation (referred to herein
as the "surviving corporation") shall include provision for a class or classes
of senior preferred stock having rights, preferences and limitations
substantially economically equivalent to the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock with respect to the capital structure of the Corporation
immediately prior to such consolidation or merger, including provision for each
holder of each share of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or Series D Preferred Stock to receive
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<PAGE> 17
the preferred stock of the surviving corporation which corresponds to such
series on a substantially economically equivalent basis and which shall
thereafter be convertible into the kind and amount of shares of stock or other
securities of the surviving corporation or other property to which a holder of
the number of shares of Common Stock of the Corporation deliverable upon
conversion of such Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, or Series D Preferred Stock as the case may be, would have been
entitled upon such consolidation or merger; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Directors) shall be made
in the application of the provisions set forth in this Article IV.B.3 with
respect to the rights and interest thereafter of the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock to the end that the provisions set forth in this Article IV.B.3
(including provisions with respect to changes in and other adjustments of the
Conversion Price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other securities of the surviving
corporation or other property thereafter deliverable upon the conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock.
(h) No Impairment. Except as permitted by applicable law and this
Certificate of Incorporation, including this Article IV.B, the Corporation will
not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Article IV.B.3 and in the taking of
all such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Collective Preferred Stock against
impairment.
(i) Certificate as to Adjustments. Upon the occurrence of each
adjustment of the Conversion Price pursuant to this Article IV.B.3, the
Corporation at its expense shall promptly compute such adjustment in accordance
with the terms hereof and furnish to each holder of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock,
as applicable, a certificate setting forth such adjustment and showing in detail
the facts upon which such adjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock furnish
or cause to be furnished to such holder a similar certificate setting forth (i)
such adjustments, (ii) the Conversion Price then in effect, and (iii) the number
of shares of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock.
(j) Notice of Record Date. In the event:
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or other securities of
the Corporation;
(ii) that the Corporation subdivides or combines its outstanding
shares of
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<PAGE> 18
Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another corporation, or
of the sale of all or substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Collective Preferred Stock, and shall cause
to be mailed to the holders of Collective Preferred Stock at their last
addresses as shown on the records of the Corporation or such transfer agent, at
least ten (10) days prior to the record date specified in (A) below or twenty
(20) days before the date specified in (B) below, a notice stating:
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up is expected
to become effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up.
(k) Notices. Any notice required by the provisions of this Article
IV.B.3 to be given to the holders of shares of Collective Preferred Stock shall
be deemed given if deposited in the United States mail, first class, postage
prepaid, and addressed to each holder of record at its address appearing on the
books of the Corporation.
(l) Mandatory Conversion
(i) Mandatory Conversion Event. All holders of shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock then outstanding shall convert their shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock into shares of Common Stock, at the then effective Conversion
Price pursuant to this Article IV.B.3, upon the closing of a Qualified Public
Offering.
Notwithstanding any provision to the contrary contained herein, (x) in the event
that there are accrued but unpaid cash dividends or Dividend Payment Obligations
at the date of the closing of a Qualified Public Offering, all such accrued but
unpaid cash dividends and Dividend Payment
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<PAGE> 19
Obligations payable to the holders of Collective Preferred Stock shall be
canceled, and no holder or former holder of Collective Preferred Stock shall
have any further right or interest therein or (y) in the event of voluntary
conversion by a holder of any Collective Preferred Stock at a time when the
Corporation is contemplating an initial public offering, the Corporation may, at
its option, defer payment of any dividends otherwise payable upon such
conversion for up to 180 days and if a Qualified Public Offering is closed
within such 180 day period, all of such accrued but unpaid cash dividends
payable to such holders of Collective Preferred Stock shall be canceled and no
such holder of Collective Preferred Stock shall have any further right or
interest therein.
(ii) Procedure for Mandatory Conversion. Upon a mandatory
conversion pursuant to Article IV.B.3(l)(i), the outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series
D Preferred Stock will be automatically converted into shares of Common Stock
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered for conversion to the
Corporation or the transfer agent for the Collective Preferred Stock. On the
date of mandatory conversion, all rights with respect to the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred
Stock so converted, including the rights, if any, to receive notices and vote,
will terminate, except for the rights of the holders thereof, upon surrender of
their certificate or certificates therefor, to receive certificates for the
number of shares of Common Stock into which such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock
has been converted (as rounded with respect to any fraction of a share as
provided in Article IV.B.3(b)). If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly authorized in writing. As soon as practicable after the date of such
mandatory conversion and the surrender of the certificate or certificates of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or
Series D Preferred Stock, the Corporation shall cause to be issued and delivered
to such holder, or on his or its written order, a certificate or certificates
for the number of full shares of Common Stock issuable on such conversion in
accordance with the provisions hereof as rounded as provided in Section 3(b) in
respect of any fraction of a share of Common Stock otherwise issuable upon such
conversion.
(m) Retirement and Cancellation of Shares. All certificates evidencing
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, or Series D Preferred Stock which are required to be surrendered for
conversion in accordance with the provisions hereof shall, from and after the
date such certificates are so required to be surrendered, be deemed to have been
retired and canceled and the shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date.
4. VOTING RIGHTS.
(a) Holders of Series A Preferred Stock. The holders of shares of
Series A Preferred
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<PAGE> 20
Stock shall have the right to one vote for each share of Common Stock issuable
upon conversion of such shares of Series A Preferred Stock and shall vote with
the holders of Common Stock and the other series of Collective Preferred Stock,
as a single class, and shall be entitled to notice of any stockholders meeting
in accordance with the bylaws of the Corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by Delaware law. The
voting rights of the holders of Series A Preferred Stock are further subject to
and qualified by the provisions of Article IV.B.4(e), (f), (g), (h), (i), and
(j).
(b) Holders of Series B Preferred Stock. The holders of shares of
Series B Preferred Stock shall have the right to one vote for each share of
Common Stock issuable upon conversion of such shares of Series B Preferred Stock
and shall vote with the holders of Common Stock and the other series of
Collective Preferred Stock, as a single class, and shall be entitled to notice
of any stockholders meeting in accordance with the bylaws of the Corporation,
and shall be entitled to vote upon such matters and in such manner as may be
provided by Delaware law. The voting rights of the holders of Series B Preferred
Stock are further subject to and qualified by the provisions of Article IV.
B.4(e), (f), (g), (h), (i), and (j).
(c) Holders of Series C Preferred Stock. The holders of shares of
Series C Preferred Stock shall have the right to one vote for each share of
Common Stock issuable upon conversion of such shares of Series C Preferred Stock
and shall vote with the holders of Common Stock and the other series of
Collective Preferred Stock, as a single class, and shall be entitled to notice
of any stockholders meeting in accordance with the bylaws of the Corporation,
and shall be entitled to vote upon such matters and in such manner as may be
provided by Delaware law. The voting rights of the holders of Series C Preferred
Stock are further subject to and qualified by the provisions of Article IV.B.4
(e), (f), (g), (h), (i), and (j).
(d) Holders of Series D Preferred Stock. The holders of shares of
Series D Preferred Stock shall have the right to one vote for each share of
Common Stock issuable upon conversion of such shares of Series D Preferred Stock
and shall vote with the holders of Common Stock and the other series of
Collective Preferred Stock, as a single class, and shall be entitled to notice
of any stockholders meeting in accordance with the bylaws of the Corporation,
and shall be entitled to vote upon such matters and in such manner as may be
provided by Delaware law. The voting rights of the holders of Series D Preferred
Stock are further subject to and qualified by the provisions of Article
IV.B.4(e), (f), (g), (h), (i), and (j).
(e) Protective Provisions. So long as any shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock are outstanding, the Corporation shall not, without the prior written
consent or affirmative vote of the holders of at least sixty percent (60%) of
the outstanding shares of Collective Preferred Stock, given in writing or by
vote at a meeting, consenting or voting, as the case may be, separately as a
single class on the basis of one vote for each share of Collective Preferred
Stock outstanding:
(i) amend, alter, change or repeal the rights, preferences or
privileges of the Collective Preferred Stock;
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<PAGE> 21
(ii) increase the authorized number of shares of any of the four
series of Collective Preferred Stock;
(iii) authorize, create or issue any other class or series of
capital stock, or rights, options or warrants to purchase any capital stock, or
any securities of any type whatsoever which are convertible into capital stock,
having a preference over, or being on parity with, any of the Collective
Preferred Stock with respect to dividends, liquidation or redemption; or
(iv) merge with or into, or consolidate with any other
corporation, or sell, lease or otherwise dispose of all or substantially all of
its properties or assets.
(f) Protective Provisions for Series A Preferred Stock. So long as any
shares of Series A Preferred Stock are outstanding, the Corporation shall not,
without the prior written consent or affirmative vote of the holders of at least
fifty-one percent (51%) of the outstanding shares of Series A Preferred Stock,
given in writing or by vote at a meeting, consenting or voting, as the case may
be, separately as a single class on the basis of one vote for each share of
Series A Preferred Stock outstanding:
(i) make any material adverse change in the rights,
preferences, or privileges of the Series A Preferred Stock other than a material
adverse change that affects all series of Collective Preferred Stock in a
substantially equivalent manner; or
(ii) create a new class of shares having rights or preferences
senior to or on a parity with the Series A Preferred Stock, except for rights or
preferences similarly senior to or on a parity with the Collective Preferred
Stock.
(g) Protective Provisions for Series B Preferred Stock. So long as any
shares of Series B Preferred Stock are outstanding, the Corporation shall not,
without the prior written consent or affirmative vote of the holders of at least
fifty-one percent (51%) of the outstanding shares of Series B Preferred Stock,
given in writing or by vote at a meeting, consenting or voting, as the case may
be, separately as a single class on the basis of one vote for each share of
Series B Preferred Stock outstanding:
(i) make any material adverse change in the rights,
preferences, or privileges of the Series B Preferred Stock other than a material
adverse change that affects all series of Collective Preferred Stock in a
substantially equivalent manner; or
(ii) create a new class of shares having rights or preferences
senior to or on a parity with the Series B Preferred Stock, except for rights or
preferences similarly senior to or on a parity with the Collective Preferred
Stock.
(h) Protective Provisions for Series C Preferred Stock. So long as any
shares of Series C Preferred Stock are outstanding, the Corporation shall not,
without the prior written consent or affirmative vote of the holders of at least
fifty-one percent (51%) of the outstanding shares of Series C Preferred Stock,
given in writing or by vote at a meeting, consenting or voting,
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<PAGE> 22
as the case may be, separately as a single class on the basis of one vote for
each share of Series C Preferred Stock outstanding:
(i) make any material adverse change in the rights,
preferences, or privileges of the Series C Preferred Stock other than a material
adverse change that affects all series of Collective Preferred Stock in a
substantially equivalent manner; or
(ii) create a new class of shares having rights or preferences
senior to or on a parity with the Series C Preferred Stock, except for rights or
preferences similarly senior to or on a parity with the Collective Preferred
Stock.
(i) Protective Provisions for Series D Preferred Stock. So long as any
shares of Series D Preferred Stock are outstanding, the Corporation shall not,
without the prior written consent or affirmative vote of the holders of at least
sixty percent (60%) of the outstanding shares of Series D Preferred Stock, given
in writing or by vote at a meeting, consenting or voting, as the case may be,
separately as a single class on the basis of one vote for each share of Series D
Preferred Stock outstanding:
(i) make any material adverse change in the rights,
preferences, or privileges of the Series D Preferred Stock other than a material
adverse change that affects all series of Collective Preferred Stock in a
substantially equivalent manner; or
(ii) create a new class of shares having rights or preferences
senior to or on a parity with the dividend, liquidation or redemption rights of
the Series D Preferred Stock.
(j) Election of Directors. So long as any shares of Collective
Preferred Stock remain outstanding (i) the holders of a majority of the
outstanding shares of Series A Preferred Stock, Series B Preferred Stock and
Common Stock, voting together as a separate single class, on the basis of one
vote for each share of Common Stock then outstanding and on the basis of one
vote for each share of Common Stock issuable upon conversion of each share of
Series A Preferred Stock and Series B Preferred Stock then outstanding, shall
have the right to elect one director of the Corporation, (ii) the holders of a
majority of the outstanding shares of Series C Preferred Stock, voting as a
separate single class, on the basis of one vote for each share of Series C
Preferred Stock then outstanding, shall have the right to elect one director of
the Corporation and (iii) the holders of a majority of the outstanding shares of
Series D Preferred Stock, voting as a separate single class, on the basis of one
vote for each share of Series D Preferred Stock then outstanding, shall have the
right to elect one director of the Corporation. In the case of any vacancy in
the office of the director elected by the holders of the Common Stock, the
Series A Preferred Stock and the Series B Preferred Stock, the holders of a
majority of the outstanding shares of the Common Stock, the Series A Preferred
Stock and the Series B Preferred Stock, voting as a separate single class, on
the basis of one vote for each share of Common Stock then outstanding and on the
basis of one vote for each share of Common Stock issuable upon conversion of
each share of Series A Preferred Stock and Series B Preferred Stock then
outstanding shall have the right to elect a successor to hold the office for the
unexpired term of the director whose place shall be vacant. Any director who
shall have been elected by the
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<PAGE> 23
holders of the Common Stock, the Series A Preferred Stock and the Series B
Preferred Stock or any director so elected as provided in the preceding sentence
hereof, may be removed during the aforesaid term of office, whether with or
without cause, only by the affirmative vote of the holders of a majority of the
outstanding shares of the Common Stock, the Series A Preferred Stock and the
Series B Preferred Stock, voting as a separate single class, on the basis of one
vote for each share of Common Stock then outstanding and on the basis of one
vote for each share of Common Stock issuable upon conversion of each share of
Series A Preferred Stock and Series B Preferred Stock then outstanding. In the
case of any vacancy in the office of the director elected by the holders of the
Series C Preferred Stock, the holders of a majority of the outstanding shares of
Series C Preferred Stock, voting as a separate single class, on the basis of one
vote for each share of Series C Preferred Stock then outstanding shall have the
right to elect a successor to hold the office for the unexpired term of the
director whose place shall be vacant. Any director who shall have been elected
by the holders of Series C Preferred Stock or any director so elected as
provided in the preceding sentence hereof, may be removed during the aforesaid
term of office, whether with or without cause, only by the affirmative vote of
the holders of a majority of the Series C Preferred Stock, voting as a separate
single class, on the basis of one vote for each share of Series C Preferred
Stock then outstanding. In the case of any vacancy in the office of the director
elected by the holders of the Series D Preferred Stock, the holders of a
majority of the outstanding shares of Series D Preferred Stock, voting as a
separate single class, on the basis of one vote for each share of Series D
Preferred Stock then outstanding shall have the right to elect a successor to
hold the office for the unexpired term of the director whose place shall be
vacant. Any director who shall have been elected by the holders of Series D
Preferred Stock or any director so elected as provided in the preceding sentence
hereof, may be removed during the aforesaid term of office, whether with or
without cause, only by the affirmative vote of the holders of a majority of the
Series D Preferred Stock, voting as a separate single class, on the basis of one
vote for each share of Series D Preferred Stock then outstanding.
(k) Holders of Common Stock. The holders of outstanding shares of
Common Stock shall have the right to one vote for each share of Common Stock
held, shall vote with the holders of the Company Preferred Stock, as a single
class on the basis of one vote for each share of Common Stock held and one vote
for each share of Common Stock issuable upon conversion of shares of the Company
Preferred Stock, and shall be entitled to notice of any stockholders meeting in
accordance with the bylaws of the Corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by Delaware law. The
voting rights of the holders of Common Stock are further subject to and
qualified by the provisions of Article IV.B.4(e), (f), (g), (h), (i), (j), and
(l) hereof.
(l) Change in Authorized Shares of Common Stock. The number of
authorized shares of Common Stock may be increased or decreased (but not below
the number of shares of Common Stock outstanding) by the affirmative vote of the
holders of a majority of the outstanding shares of all classes of stock of the
Corporation entitled to vote, voting together as a single class on the basis of
one vote for each share of Common Stock held and one vote for each share of
Common Stock issuable upon conversion of shares of the Company Preferred Stock
held.
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5. PRE-EMPTIVE RIGHTS.
(a) Right to Purchase. The holders of any Collective Preferred Stock
(hereinafter referred to in this Article IV.B.5 collectively as the "Holders"
and individually as a "Holder") shall have the pre-emptive right to purchase, on
a pro rata basis, all or any part of New Securities (as hereinafter defined)
which the Corporation may, from time to time, propose to issue and sell, subject
to the terms and conditions set forth below. The pro rata share of each Holder
of Series A Preferred Stock, for purposes of this pre-emptive right to purchase,
shall be determined by dividing (x) the total number of shares of Common Stock
which are owned by such Holder plus the total number of shares of Common Stock
issuable upon conversion of Series A Preferred Stock owned by such Holder of
Series A Preferred Stock, by (y) the total number of shares of Common Stock then
outstanding plus the total number of shares of Common Stock issuable upon
conversion of all then outstanding Company Preferred Stock. The pro rata share
of each Holder of Series B Preferred Stock, for purposes of this pre-emptive
right to purchase, shall be determined by dividing (x) the total number of
shares of Common Stock which are owned by such Holder plus, the total number of
shares of Common Stock issuable upon conversion of Series B Preferred Stock
owned by such Holder of Series B Preferred Stock, by (y) the total number of
shares of Common Stock then outstanding plus the total number of shares of
Common Stock issuable upon conversion of all then outstanding Company Preferred
Stock. The pro rata share of each Holder of Series C Preferred Stock, for
purposes of this pre-emptive right to purchase, shall be determined by dividing
(x) the total number of shares of Common Stock which are owned by such Holder
plus the total number of shares of Common Stock issuable upon conversion of
Series C Preferred Stock owned by such Holder of Series C Preferred Stock, by
(y) the total number of shares of Common Stock then outstanding plus the total
number of shares of Common Stock issuable upon conversion of all then
outstanding Company Preferred Stock. The pro rata share of each Holder of Series
D Preferred Stock, for purposes of this pre-emptive right to purchase, shall be
determined by dividing (x) the total number of shares of Common Stock which are
owned by such Holder plus the total number of shares of Common Stock issuable
upon conversion of Series D Preferred Stock owned by such Holder of Series D
Preferred Stock, by (y) the total number of shares of Common Stock then
outstanding plus the total number of shares of Common Stock issuable upon
conversion of all then outstanding Company Preferred Stock. All of the foregoing
notwithstanding, in the event a Holder owns shares of more than one series of
Collective Preferred Stock, the Common Stock which is owned by such Holder shall
only be counted one time in connection with any calculation of such Holder's pro
rata share.
(b) "New Securities". The term "New Securities" as used herein shall
mean any capital stock of the Corporation whether now or hereafter authorized,
and rights, options or warrants to purchase capital stock, and securities of any
type whatsoever which are, or may become, convertible into capital stock;
provided, however, that the term "New Securities" shall not include (i) shares
of Common Stock issuable upon conversion of any of the Preferred Stock (as
defined in Article IV.C.2 herein), (ii) shares of Series E Preferred Stock
issuable upon the exercise of the Series E Preferred Stock Warrant issued on the
Original Issue Date (as defined in Article IV.C.6(d)(iv), (iii) securities
offered to the public pursuant to a registration statement approved by the Board
of Directors and filed with the Securities and Exchange Commission for a
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<PAGE> 25
public offering and sale of securities of the Corporation, (iv) securities
issued in connection with the acquisition of another corporation by the
Corporation by merger, purchase of all or substantially all of the assets of
another corporation or other reorganization, (v) shares of Common Stock and
options therefor issued or issuable pursuant to any stock option plan or plans
or stock purchase plan or plans approved by the Board of Directors, or (vi)
securities issued as a result of any stock split, combination, reverse stock
split, stock dividend or recapitalization of the Corporation.
(c) Procedure. In the event the Corporation intends to issue New
Securities, it shall give each Holder written notice of such intention,
describing the type of New Securities to be issued, the price thereof and the
general terms upon which the Corporation proposes to effect such issuance. Each
such Holder shall have twenty (20) business days from the date of any such
notice to agree to purchase all or part of its pro rata share of such New
Securities, for the purchase price and upon the general terms and conditions
specified in the Corporation's notice, by giving written notice to the
Corporation stating the quantity of New Securities to be so purchased. Each
Holder shall have a right of over-allotment such that if any Holder fails to
exercise its right hereunder to purchase its total pro rata portion of New
Securities, the other Holders may purchase such portion on a pro rata basis, by
giving written notice to the Corporation within ten (10) business days from the
date that the Corporation provides written notice to the other Holders of the
amount of New Securities with respect to which such nonpurchasing Holder has
failed to exercise its rights hereunder.
(d) Right of Corporation. In the event any Holder or Holders fail to
exercise the foregoing pre-emptive right to purchase with respect to any New
Securities within such twenty (20) business day period (or the additional 10
business day period provided for overallotment), the Corporation may within
ninety (90) business days thereafter sell any or all of such New Securities not
agreed to be purchased by the Holders, at a price and upon general terms no more
favorable to the purchasers thereof than specified in the notice given to each
Holder pursuant to Article IV.B.5(c). In the event the Corporation has not sold
such New Securities within such ninety (90) business day period, the Corporation
shall not thereafter issue or sell any New Securities without first offering
such New Securities to the Holders in the manner provided above.
(e) "Holder". For purposes of this Article IV.B.5, the term "Holder"
shall include the partners, stockholders or other affiliates of a Holder, and a
Holder may apportion its pro rata share among itself and such partners,
stockholders and other affiliates in such proportion as it deems appropriate.
(f) Waiver. The Holders of sixty percent (60%) of the Collective
Preferred Stock then outstanding, voting separately as a single class on the
basis of one vote for each share of Collective Preferred Stock outstanding, may
waive in writing the pre-emptive right to purchase set forth in Article
IV.B.5(a) at any time or times so long as any of the Collective Preferred Stock
remains outstanding.
(g) Expiration. The pre-emptive rights described in this Article
IV.B.5 shall expire
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<PAGE> 26
upon the closing of a Qualified Public Offering.
C. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES E
PREFERRED STOCK, SERIES F PREFERRED STOCK, AND SERIES G PREFERRED STOCK. The
rights, preferences, privileges and restrictions granted to and imposed upon the
Series E Preferred Stock, Series F Preferred Stock, and Series G Preferred Stock
are set forth in this Article IV.C.
1. Designation. The Preferred Stock created and authorized hereby
shall be designated as (i) the Series E Senior Voting Convertible Preferred
Stock, par value $0.01 per share ("Series E Preferred Stock"), consisting of
554,854,075 shares, (ii) the Series F Senior Voting Convertible Preferred Stock,
par value $0.01 per share ("Series F Preferred Stock"), consisting of
283,471,155 shares, and (iii) the Series G Senior Voting Convertible Preferred
Stock, par value $0.01 per share (the "Series G Preferred Stock"), consisting of
230,769,231 shares. The Series E Preferred Stock, Series F Preferred Stock, and
Series G Preferred Stock are sometimes referred to collectively as the "Senior
Preferred Stock". The stated value ("Stated Value") (i) of the Series E
Preferred Stock shall be $0.035619838954 per share, (ii) of the Series F
Preferred Stock shall be $0.05526523774 per share, and (iii) of the Series G
Preferred Stock shall be $0.13 per share, which values do not represent a
determination by the Board of Directors of fair market value or otherwise.
2. Rank. The Senior Preferred Stock shall, with respect to dividend
rights (including dividends accrued on the Series E Preferred Stock and the
Series F Preferred Stock prior to the date on which shares of Series G Preferred
Stock are issued) and rights on liquidation, winding up and dissolution, rank
pari passu with each other and prior to the Common Stock and the Collective
Preferred Stock. (All equity securities of the Corporation to which the Senior
Preferred Stock ranks prior, including the Common Stock and the Collective
Preferred Stock, are collectively referred to herein as the "Junior Securities";
all equity securities of the Corporation with which the Senior Preferred Stock
ranks on a parity are collectively referred to herein as the "Parity
Securities"; all preferred stock of the Corporation, including Collective
Preferred Stock, Parity Securities and Senior Preferred Stock and any other
preferred stock of the Corporation, are collectively referred to herein as
"Preferred Stock.") The Senior Preferred Stock shall be subject to the creation
of Junior Securities and Parity Securities in accordance with the terms hereof,
but not to the creation of equity securities of the Corporation (other than
convertible debt securities) to which the Senior Preferred Stock ranks junior,
whether with respect to dividends or upon liquidation, dissolution, winding up
or otherwise.
3. Dividends.
(a) (i) The holders of the shares of Series E Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors, out
of funds legally available for the payment of dividends, cumulative dividends at
the rate of $0.002849587 per share per annum. The holders of the shares of
Series F Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors, out of funds legally available for the payment of
dividends, cumulative dividends at the rate of $0.004421219 per share per annum.
The holders of the shares
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<PAGE> 27
of Series G Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available for the
payment of dividends, cumulative dividends at the rate of $0.0104 per share per
annum. Such dividends shall be payable in quarterly payments on the fifteenth
(15th) day of December, March, July and September of each year (each of such
dates being a "dividend payment date"), in preference to dividends on the Junior
Securities, provided that no dividends shall be declared or paid on the Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock, as
individual classes, unless dividends shall be declared or paid on all the Senior
Preferred Stock. Such dividends shall be paid to the holders of record at the
close of business on a record date to be set by the Board of Directors or a
committee thereof (each of such dates being a "dividend payment record date").
Each of such quarterly dividends shall be fully cumulative and shall accrue
(whether or not declared), without interest, from the previous dividend payment
date, except that with respect to the first dividend, such dividend shall accrue
from the date of initial issuance. Dividends payable for the first dividend
period and any partial dividend period shall be calculated on the basis of a
360-day year and the actual number of days elapsed in the period for which
payable.
(ii) In addition to the dividends payable pursuant to Article
IV.C.3(a)(i), no Excess Dividend (as defined below) shall be paid on or declared
and set apart for the shares of any series of Junior Securities or Parity
Securities, if any, unless at the same time a like dividend for the same
dividend period shall be paid on or declared and set apart with respect to all
outstanding shares of the Senior Preferred Stock in a proportionate amount for
each such share of Senior Preferred Stock, as though the holders of the Senior
Preferred Stock, Junior Securities and Parity Securities, if any, as to which
such dividend is paid or declared and set apart were the holders of the number
of shares of Common Stock represented by, or into which their respective shares
of Senior Preferred Stock, Junior Securities and Parity Securities, if any, are
convertible, as of the record date for the determination of the holders of
securities of the Corporation entitled to receive a proportionate amount of such
Excess Dividend. As used herein, "Excess Dividend" means a dollar amount of
dividends paid on or declared and set apart for the shares of any Junior
Securities or Parity Securities with respect to a dividend period to the extent
that the aggregate dollar amount of such dividends, as a percentage of all
dividends paid on or declared and set apart with respect to Senior Preferred
Stock, Junior Securities and Parity Securities, if any, with respect to such
dividend period exceeds the ratio of (x) the number of shares of Common Stock of
the Corporation represented by, and into which, the shares of Junior Securities
and Parity Securities, if any, as to which such dividends were paid or declared
and set aside are convertible to (y) the number of shares of Common Stock
represented by, and into which, shares of Senior Preferred Stock, Junior
Securities and Parity Securities, if any, are convertible, in each case as of
the first day of such dividend period.
(b) In the event the Corporation shall declare a distribution (other
than any distribution pursuant to Article IV.C.3(a)) payable in shares of
capital stock of the Corporation (other than Common Stock) or evidences of its
indebtedness or assets (excluding ordinary cash dividends, which may be an
initial cash dividend, payable out of consolidated earnings or earned surplus
(both of which to be calculated for these purposes excluding charges for
amortization of goodwill and other intangibles) and dividends or distributions
referred to in Article IV.C.6(d)(i) and (ii)), securities of other persons,
evidences of indebtedness issued by other persons, or rights
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<PAGE> 28
or warrants to subscribe for or purchase any of such securities, assets or
evidences of indebtedness (excluding those rights with respect to the
Corporation's securities referred to in Article IV.C.6(d)(ii)) (any of the
foregoing being hereinafter called "Securities or Assets"), then, in each such
case the holders of the Senior Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the Senior
Preferred Stock, Junior Securities and Parity Securities, if any, as to which
such distribution is declared were the holders of the number of shares of Common
Stock represented by, and into which their respective shares of Senior Preferred
Stock, Junior Securities and Parity Securities, if any, are convertible, as of
the record date for the determination of the holders of securities of the
Corporation entitled to receive such distribution.
(c) All dividends paid with respect to shares of Senior Preferred
Stock pursuant to Article IV.C.3(a)(i) shall be paid as follows:
(i) if the funds legally available for the payment of dividends
are sufficient to pay in full the accrued dividends payable to the holders of
the outstanding shares of Senior Preferred Stock, the accrued dividends on each
share of Senior Preferred Stock shall be paid to the holders; or
(ii) if the funds legally available for the payment of dividends
are not sufficient to pay in full the accrued dividends payable to the holders
of the outstanding shares of all Senior Preferred Stock, then the aggregate
amount of funds legally available for the payment shall be distributed as
follows:
(A) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Series E Preferred Stock multiplied by the
"Dividend Distribution Fraction" (as defined below) will be paid to the holders
of Series E Preferred Stock (the "Series E Aggregate Distribution"). The Series
E Aggregate Distribution will be paid to the holders of Series E Preferred Stock
on a proportional basis as to each holder of Series E Preferred Stock as
determined by multiplying the Series E Aggregate Distribution by a fraction
determined by dividing (x) the accrued but unpaid dividends payable to each such
holder of Series E Preferred Stock outstanding by (y) the aggregate amount of
accrued but unpaid dividends payable to the holders of all shares of Series E
Preferred Stock outstanding on the record date for the determination of the
holders of Senior Preferred Stock entitled to receive such dividends;
(B) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Series F Preferred Stock multiplied by the
Dividend Distribution Fraction will be paid to the holders of Series F Preferred
Stock (the "Series F Aggregate Distribution"). The Series F Aggregate
Distribution will be paid to the holders of Series F Preferred Stock on a
proportional basis as to each holder of Series F Preferred Stock as determined
by multiplying the Series F Aggregate Distribution by a fraction determined by
dividing (x) the accrued but unpaid dividends payable to each such holder of
Series F Preferred Stock outstanding by (y) the aggregate amount of accrued but
unpaid dividends payable to the holders of all shares of Series F Preferred
Stock outstanding on the record date for the determination of the holders of
Senior Preferred Stock entitled to receive such dividends; and
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<PAGE> 29
(C) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Series G Preferred Stock multiplied by the
Dividend Distribution Fraction will be paid to the holders of Series G Preferred
Stock (the "Series G Aggregate Distribution"). The Series G Aggregate
Distribution will be paid to the holders of Series G Preferred Stock on a
proportional basis as to each holder of Series G Preferred Stock as determined
by multiplying the Series G Aggregate Distribution by a fraction determined by
dividing (x) the accrued but unpaid dividends payable to each such holder of
Series G Preferred Stock outstanding by (y) the aggregate amount of accrued but
unpaid dividends payable to the holders of all shares of Series G Preferred
Stock outstanding on the record date for the determination of the holders of
Senior Preferred Stock entitled to receive such dividends.
For purposes of the foregoing calculations, the "Dividend Distribution Fraction"
shall be a fraction determined by dividing (x) the aggregate amount of funds
legally available for the payment of dividends declared with respect to shares
of Senior Preferred Stock, by (y) the aggregate amount of accrued but unpaid
dividends on the shares of Senior Preferred Stock outstanding on the record date
for the determination of the holders of Senior Preferred Stock entitled to
receive such dividends.
(d) No full dividends shall be declared by the Board of Directors or
paid or set apart for payment by the Corporation on any Parity Securities for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum set apart sufficient for such payment on
the Senior Preferred Stock for all dividend payment periods terminating on or
prior to the date of payment, or setting apart for payment, of such full
dividends on such Parity Securities. If any dividends are not paid in full, as
aforesaid, upon the shares of the Senior Preferred Stock and any other Parity
Securities, all dividends declared upon shares of the Senior Preferred Stock and
any other Parity Securities shall be distributed as follows:
(i) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Series E Preferred Stock multiplied by the
"Parity Dividend Distribution Fraction" (as defined below) will be paid to the
holders of Series E Preferred Stock (the "Series E Aggregate Parity
Distribution"). The Series E Aggregate Parity Distribution will be paid to the
holders of Series E Preferred Stock on a proportional basis as to each holder of
Series E Preferred Stock as determined by the multiplying the Series E Aggregate
Parity Distribution by a fraction determined by dividing (x) the accrued but
unpaid dividends payable to each such holder of Series E Preferred Stock
outstanding by (y) the aggregate amount of accrued but unpaid dividends payable
to the holders of all shares of Series E Preferred Stock outstanding on the
record date for the determination of the holders of Senior Preferred Stock and
Parity Securities entitled to receive such dividends;
(ii) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Series F Preferred Stock multiplied by the
Parity Dividend Distribution Fraction will be paid to the holders of Series F
Preferred Stock (the "Series F Aggregate Parity Distribution"). The Series F
Aggregate Parity Distribution will be paid to the holders of Series F
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<PAGE> 30
Preferred Stock on a proportional basis as to each holder of Series F Preferred
Stock as determined by multiplying the Series F Aggregate Parity Distribution by
a fraction determined by dividing (x) the accrued but unpaid dividends payable
to each such holder of Series F Preferred Stock outstanding by (y) the aggregate
amount of accrued but unpaid dividends payable to the holders of all shares of
Series F Preferred Stock outstanding on the record date for the determination of
the holders of Senior Preferred Stock and Parity Securities entitled to receive
such dividends;
(iii) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Series G Preferred Stock multiplied by the
Parity Dividend Distribution Fraction will be paid to the holders of Series G
Preferred Stock (the "Series G Aggregate Parity Distribution"). The Series G
Aggregate Parity Distribution will be paid to the holders of Series G Preferred
Stock on a proportional basis as to each holder of Series G Preferred Stock as
determined by multiplying the Series G Aggregate Parity Distribution by a
fraction determined by dividing (x) the accrued but unpaid dividends payable to
each such holder of Series G Preferred Stock outstanding by (y) the aggregate
amount of accrued but unpaid dividends payable to the holders of all shares of
Series G Preferred Stock outstanding on the record date for the determination of
the holders of Senior Preferred Stock and Parity Securities entitled to receive
such dividends; and
(iv) an amount equal to the aggregate accrued but unpaid
dividends on outstanding shares of Parity Securities multiplied by the Parity
Dividend Distribution Fraction will be paid to the holders of Parity Securities
(the "Parity Securities Aggregate Parity Distribution"). The Parity Securities
Aggregate Parity Distribution will be paid to the holders of Parity Securities
on a proportional basis as to each holder of Parity Securities as determined by
multiplying the Parity Securities Aggregate Parity Distribution by a fraction
determined by dividing (x) the accrued but unpaid dividends payable to each such
holder of Parity Securities outstanding by (y) the aggregate amount of accrued
but unpaid dividends payable to the holders of all shares of Parity Securities
outstanding on the record date for the determination of the holders of Senior
Preferred Stock and Parity Securities entitled to receive such dividends.
For purposes of the foregoing calculations, the "Parity Dividend Distribution
Fraction" shall be a fraction determined by dividing (x) the aggregate amount of
funds legally available for the payment of dividends declared with respect to
shares of Senior Preferred Stock and Parity Securities, by (y) the aggregate
amount of accrued but unpaid dividends on the shares of Senior Preferred Stock
and Parity Securities outstanding on the record date for the determination of
the holders of Senior Preferred Stock and Parity Securities entitled to receive
such dividends.
No interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on any Senior Preferred Stock or any other
Parity Securities which may be in arrears. Any dividends not paid pursuant to
Article IV.C.3(a)(i) or this Article IV.C.3(d) shall be fully cumulative and
shall accrue (whether or not declared), without interest, as set forth in
Article IV.C.3(a)(i).
(e) (i) Holders of shares of the Senior Preferred Stock shall be
entitled to receive,
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<PAGE> 31
on a pari passu basis, the dividends provided for in Article IV.C. 3(a)(i) in
preference to and in priority over any dividends upon any of the Junior
Securities.
(ii) So long as any shares of Senior Preferred Stock are or
remain outstanding, the Board of Directors shall not declare, and the
Corporation shall not pay or set apart for payment any dividend on any of the
Junior Securities or take any payment on account of, or set apart for payment
money for a sinking or other similar fund for, the repurchase, redemption or
other retirement of, any of the Junior Securities or Parity Securities or any
warrants, rights or options exercisable for or convertible into any of the
Junior Securities or Parity Securities (other than purchases or redemptions
pursuant to or in accordance with employee stock control, subscription or
option agreements entered into between the Corporation and its or its
subsidiaries' directors, officers and employees prior to the Original Series F
Issue Date and other than the repurchase, redemption or other retirement of
debentures or other debt securities that are convertible or exchangeable into
any of the Junior Securities or Parity Securities), or make any distribution in
respect of the Junior Securities, either directly or indirectly, whether in
cash, obligations or shares of the Corporation or other property (other than
distributions or dividends in Junior Securities to the holders of Junior
Securities), and shall not permit any corporation or other entity directly or
indirectly controlled by the Corporation to purchase or redeem any of the
Junior Securities or Parity Securities or any warrants, rights, calls or
options exercisable for or convertible into any of the Junior Securities or
Parity Securities (other than purchases or redemptions pursuant to or in
accordance with employee agreements entered into between the Corporation and
certain of its or its subsidiaries' directors, officers and employees prior to
the Original Series F Issue Date and other than the repurchase, redemption or
other retirement of debentures or other debt securities that are convertible or
exchangeable into any of the Junior Securities or Parity Securities) unless
prior to or concurrently with such declaration, payment, setting apart for
payment, repurchase, redemption or other retirement or distribution, as the
case may be, all accrued and unpaid dividends on shares of the Senior Preferred
Stock not paid on the dates provided for in Article IV.C.3(a)(i) (including
accrued dividends not paid by reason of the terms and conditions of Article
IV.C.3(a)(i) or Article IV.C.3(d)) shall have been or are paid.
(f) Subject to the foregoing provisions of this Article IV.C.3, the
Board of Directors may declare, and the Corporation may pay or set apart for
payment, dividends and other distributions on any of the Junior Securities or
Parity Securities, and may repurchase, redeem or otherwise retire any of the
Junior Securities or Parity Securities or any warrants, rights or options
exercisable for or convertible into any of the Junior Securities or Parity
Securities, and the holders of shares of Senior Preferred Stock shall not be
entitled to share therein.
(g) The payment of dividends on all shares of Senior Preferred Stock
outstanding at any time or times may be waived in writing by the holders of (i)
sixty percent (60%) of the voting power of the then outstanding Series E
Preferred Stock and Series G Preferred Stock, voting together as a separate
single class on the basis of one vote for each share of Series E Preferred Stock
and Series G Preferred Stock then outstanding; and (ii) sixty-six and two thirds
percent (66-2/3%) of the voting power of the then outstanding Series F Preferred
Stock, voting as a separate single class on the basis of one vote for each share
of Series F Preferred Stock then outstanding.
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<PAGE> 32
4. Liquidation Preference. (a) In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the holders of shares of Senior Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders an amount ("Aggregate Liquidation Amount") in
cash equal to the greater of:
(i) the Stated Value of each share of Senior Preferred Stock
outstanding plus all accrued but unpaid dividends thereon to the date of
liquidation, dissolution or winding up; or
(ii) the amount that would be distributable to the holders of
the Senior Preferred Stock if the entire remaining assets and funds of the
Corporation legally available for distribution, if any, were to be distributed
among the holders of the Senior Preferred Stock, Junior Securities and Parity
Securities, if any, in proportion to the number of shares of Common Stock
represented by, and into which their respective shares of Senior Preferred
Stock, Junior Securities and Parity Securities, if any, are convertible, as of
the date of liquidation, dissolution or winding up, before any payment shall be
made or any assets distributed to the holders of any of the Junior Securities.
(b) If the Aggregate Liquidation Amount is the amount set forth in
Article IV.C.4(a)(i), then the amount available for distribution shall be
distributed as follows:
(i) an amount equal to the aggregate Stated Value of each share
of Series E Preferred Stock outstanding, plus accrued but unpaid dividends
thereon, multiplied by the "Liquidation Preference Distribution Fraction" (as
defined below), will be paid to the holders of Series E Preferred Stock (the
"Series E Liquidation Distribution"). The Series E Liquidation Distribution will
be paid to the holders of Series E Preferred Stock on a proportional basis as to
each holder of Series E Preferred Stock as determined by multiplying the Series
E Liquidation Distribution by a fraction determined by dividing (x) the
aggregate Stated Value of Series E Preferred Stock held by each such holder of
Series E Preferred Stock outstanding as of the date of liquidation, dissolution
or winding up, plus the accrued but unpaid dividends payable thereon by (y) the
aggregate Stated Value of all shares of Series E Preferred Stock outstanding as
of the date of liquidation, dissolution or winding up, plus the aggregate amount
of accrued but unpaid dividends payable thereon;
(ii) an amount equal to the aggregate Stated Value of each share
of Series F Preferred Stock outstanding, plus accrued but unpaid dividends
thereon, multiplied by the Liquidation Preference Distribution Fraction, will be
paid to the holders of Series F Preferred Stock (the "Series F Liquidation
Distribution"). The Series F Liquidation Distribution will be paid to the
holders of Series F Preferred Stock on a proportional basis as to each holder of
Series F Preferred Stock as determined by multiplying the Series F Liquidation
Distribution by a fraction determined by dividing (x) the aggregate Stated Value
of Series F Preferred Stock held by each such holder of Series F Preferred Stock
as of the date of liquidation, dissolution or winding up, plus the accrued but
unpaid dividends payable thereon by (y) the aggregate Stated Value of all shares
of Series F Preferred Stock outstanding as of the date of liquidation,
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<PAGE> 33
dissolution or winding up plus the aggregate amount of accrued but unpaid
dividends payable thereon; and
(iii) an amount equal to the aggregate Stated Value of each share
of Series G Preferred Stock outstanding, plus accrued but unpaid dividends
thereon, multiplied by the Liquidation Preference Distribution Fraction, will be
paid to the holders of Series G Preferred Stock (the "Series G Liquidation
Distribution"). The Series G Liquidation Distribution will be paid to the
holders of Series G Preferred Stock on a proportional basis as to each holder of
Series G Preferred Stock as determined by multiplying the Series G Liquidation
Distribution by a fraction determined by dividing (x) the aggregate Stated Value
of Series G Preferred Stock held by each such holder of Series G Preferred Stock
as of the date of liquidation, dissolution or winding up, plus the accrued but
unpaid dividends payable thereon by (y) the aggregate Stated Value of all shares
of Series G Preferred Stock outstanding as of the date of liquidation,
dissolution or winding up plus the aggregate amount of accrued but unpaid
dividends payable thereon.
For purposes of the foregoing calculations, "Liquidation Preference Distribution
Fraction" shall be a fraction determined by dividing (x) the aggregate amount of
assets and funds available for payment of the Aggregate Liquidation Amount by
(y) the aggregate Stated Value of each share of Senior Preferred Stock
outstanding plus all accrued but unpaid dividends thereon to the date of
liquidation, dissolution or winding up.
(c) If the Aggregate Liquidation Preference is the amount set forth in
Article IV.C.4(a)(ii), then the amount available for distribution shall be
distributed as follows:
(i) (A) an amount equal to the Stated Value of each share of
Series E Preferred Stock outstanding shall be paid to each holder of
Series E Preferred Stock;
(B) an amount equal to the Stated Value of each share of
Series F Preferred Stock outstanding shall be paid to each holder of
Series F Preferred Stock; and
(C) an amount equal to the Stated Value of each share of
Series G Preferred Stock outstanding shall be paid to each holder of
Series G Preferred Stock; and
(ii) the balance of the Aggregate Liquidation Preference shall
be paid to the holders of Senior Preferred Stock outstanding as of the date of
liquidation, dissolution or winding up on a pro rata basis in proportion to the
number of shares of Common Stock into which such shares of Senior Preferred
Stock are then convertible.
(d) After payment to the holders of the Senior Preferred Stock of the
amounts set forth in Article IV.C.4(a), the remaining assets and funds of the
Corporation legally available for distribution, if any, shall be distributed
among the holders of the Collective Preferred Stock and Common Stock as provided
in Article IV.B.2.
(e) (i) For purposes of this Article IV.C.4, a Change of Control
(as defined
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<PAGE> 34
below) shall, at the option of each holder of Senior Preferred Stock with an
aggregate Stated Value of not less than $1,000,000, upon written notice to the
Corporation prior to the closing of the transaction that constitutes a Change of
Control, be treated as a liquidation, dissolution or winding up of the
Corporation with respect to such holder and shall entitle the electing holders
of Senior Preferred Stock to receive, at the closing of the transaction that
constitutes a Change of Control, in cash, securities or other property (valued
as provided in Article IV.C.4(f) below), amounts as specified in Article
IV.C.4(a), (b) and (c) above; provided, however, that when such payments are
made as a result of a Change of Control that is treated as a liquidation,
dissolution, or winding up of the Corporation, the payment to be made pursuant
to this Article IV.C.4(e) shall be made only upon surrender of the certificate
or certificates for the shares of Senior Preferred Stock with respect to which
such payment is to be made, and, from and after the date that the certificate or
certificates for such shares are required to be surrendered (whether or not such
certificate or certificates are surrendered on such date), all rights (other
than the right to receive payment as provided in this Article IV.C.4(e) upon
surrender of such certificate or certificates) with respect to such shares shall
terminate, and such shares be deemed to be canceled and retired. Notwithstanding
the foregoing, a Change of Control shall not be treated as a liquidation,
dissolution or winding up of the Corporation with respect to any holder of the
Senior Preferred Stock if the holders of (i) sixty percent (60%) of the voting
power of the then outstanding Series E Preferred Stock, voting as a separate
single class on the basis of one vote for each share of Series E Preferred Stock
then outstanding, (ii) sixty-six and two thirds percent (66-2/3%) of the voting
power of the then outstanding Series F Preferred Stock, voting as a separate
single class on the basis of one vote for each share of Series F Preferred Stock
then outstanding, and (iii) sixty percent (60%) of the voting power of the then
outstanding Series G Preferred Stock, voting as a separate single class on the
basis of one vote for each share of Series G Preferred Stock then outstanding,
waive in writing the provisions of this Article IV.C.4(e), as applicable, prior
to definitive authorization by the Board of Directors of such transaction or
prior to the order of such court or administrative body requiring such
reorganization.
(ii) "Change of Control" means (x) the sale, lease, conveyance
or other disposition of all or substantially all of the Corporation's assets as
an entirety or substantially as an entirety to any person or "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) in one or a series of
transactions, provided that a transaction where the holders of all classes of
voting stock of the Corporation immediately prior to such transaction own,
directly or indirectly, more than 50% of the aggregate voting power of all
classes of voting stock of such person or group immediately after such
transaction shall not be a Change of Control; or (y) any transaction or series
of transactions (as a result of a tender offer, merger, consolidation or
otherwise, but not as a result of the issuance of Senior Preferred Stock or of a
Qualified Public Offering as defined in Article IV.C.6(j)(i) hereof) that
results in, or that is in connection with, any person, including a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) that includes such
person, acquiring "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 50% or more of the aggregate voting
power of all classes of voting stock of the Corporation or any person that
possesses "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% or more of the aggregate voting power of
all classes of voting stock of the Corporation.
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(f) Whenever the distribution provided for in this Article IV.C.4
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors of the Corporation.
5. Redemption. The Corporation shall not have the right to call or
redeem any shares of Senior Preferred Stock.
6. Conversion.
(a) Right to Convert. Upon the terms and in the manner set forth in
this Article IV.C.6 and subject to the provisions for adjustment contained in
Article IV.C.6(d), each share of Senior Preferred Stock shall be convertible, at
the option of the holder thereof at any time, upon surrender to the Corporation
of the certificates for the shares to be converted, into a number of fully paid
and nonassessable shares of Common Stock as is determined by dividing the
applicable Stated Value of such Senior Preferred Stock by the applicable
Conversion Price (as defined below) in effect at the time of conversion. The
conversion price for the Series E Preferred Stock shall be $0.035619838954 per
share, subject to adjustment as provided below (the "Series E Conversion
Price"). The conversion price for the Series F Preferred Stock shall be
$0.05526523774 per share, subject to adjustment as provided below (the "Series F
Conversion Price"). The conversion price for the Series G Preferred Stock shall
be $0.13 per share, subject to adjustment as provided below (the "Series G
Conversion Price").
Each of the "Series E Conversion Price," the "Series F Conversion Price," and
the "Series G Conversion Price" may be referred to herein as the "Conversion
Price," but the Conversion Price applicable to Series E Preferred Stock shall
only be the "Series E Conversion Price," the Conversion Price applicable to
Series F Preferred Stock shall only be the "Series F Conversion Price" and the
Conversion Price applicable to the Series G Preferred Stock shall only be the
"Series G Conversion Price".
Subject to Article IV.C.6(j)(i), in the event that at the time of the conversion
of a holder's Series E Preferred Stock, Series F Preferred Stock, or Series G
Preferred Stock there are accrued but unpaid cash dividends, whether or not
declared, on such Series E Preferred Stock, Series F Preferred Stock, or Series
G Preferred Stock such cash dividend payable to a holder of Series E Preferred
Stock, Series F Preferred Stock, or Series G Preferred Stock pursuant to Article
IV.C.3(a) shall be paid and distributed to such holder of Series E Preferred
Stock, Series F Preferred Stock, or Series G Preferred Stock immediately prior
to the conversion of such holder's Series E Preferred Stock, Series F Preferred
Stock, or Series G Preferred Stock; provided that if a holder intends to convert
only a portion of its Series E Preferred Stock, Series F Preferred Stock, or
Series G Preferred Stock the cash dividend payable to such holder immediately
prior to such conversion shall be that dollar amount which is proportionate to
the number of shares of Series E Preferred Stock, Series F Preferred Stock, or
Series G Preferred Stock which such holder intends to convert. If pursuant to
and in accordance with Article IV.C.3(a) the Corporation cannot distribute all
or a portion of such cash dividend immediately prior to such conversion, then
the Corporation shall distribute the balance of such cash dividend as soon as
assets or funds are
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available for such distribution under and in accordance with Article IV.C.3(a).
(b) Mechanics of Conversion.
(i) In order for a holder of Series E Preferred Stock, Series F
Preferred Stock, or Series G Preferred Stock to convert shares of Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock into
shares of Common Stock, such holder shall surrender the certificate or
certificates for such shares of Series E Preferred Stock, Series F Preferred
Stock, or Series G Preferred Stock at the office of the transfer agent for the
Senior Preferred Stock (or at the principal office of the Corporation if the
Corporation serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of shares of the Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock
represented by such certificate of certificates. Such notice shall state such
holder's name or the names of the nominees in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. If required
by the Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his,
her or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock or to
his, her or its nominees, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled. No fractional shares
shall be issued upon conversion of the Series E Preferred Stock, Series F
Preferred Stock, or Series G Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded up to the nearest whole share. In
determining the number of shares of Common Stock issuable upon conversion, each
holder's Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock and Collective Preferred Stock being converted on the same day shall be
aggregated.
(ii) The Corporation shall at all times when any Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock shall be
outstanding, reserve and keep available out of its authorized but unissued
stock, for the purpose of effecting the conversion of the Series E Preferred
Stock, Series F Preferred Stock, or Series G Preferred Stock, such number of its
duly authorized shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Series E Preferred Stock,
Series F Preferred Stock, and Series G Preferred Stock. Before taking any action
which would cause an adjustment reducing the Conversion Price below the then par
value of the shares of Common Stock issuable upon conversion of the Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock, the
Corporation will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at such adjusted
Conversion Price.
(iii) On the Conversion Date, all shares of Series E Preferred
Stock, Series F Preferred Stock, and Series G Preferred Stock which shall have
been surrendered for conversion
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as herein provided shall no longer be deemed to be outstanding and all rights
with respect to such shares, including the rights, if any, to receive notices
and to vote such Series E Preferred Stock, Series F Preferred Stock, and Series
G Preferred Stock shall immediately cease and terminate on the Conversion Date,
except only the right of the holders thereof to receive shares of Common Stock
in exchange therefor.
(iv) If the conversion is in connection with an underwritten
offering of securities registered pursuant to the Securities Act of 1933, as
amended, which is not a Qualified Public Offering as defined in Article
IV.C.6(j)(i), the conversion may, at the option of any holder tendering Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock for
conversion, be conditioned upon the closing with the underwriter of the sale of
securities pursuant to such offering, in which event the person(s) entitled to
receive the Common Stock issuable upon such conversion of Series E Preferred
Stock, Series F Preferred Stock, or Series G Preferred Stock shall not be deemed
to have converted such Series E Preferred Stock, Series F Preferred Stock, or
Series G Preferred Stock until immediately prior to the closing of the sale of
securities.
(c) Dividends Payable. The holders of shares of Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock at the close of
business on a dividend payment record date shall be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof or the Corporation's default in payment
of the dividend due on such dividend payment date.
(d) Adjustments to Conversion Price. The applicable Conversion Price
shall be subject to adjustment as described below as a result of events taking
place at any time or from time to time after the Original Issue Date as to
Series E Preferred Stock, the Original Series F Issue Date with respect to
Series F Preferred Stock and the Original Series G Issue Date (as hereinafter
defined) with respect to the Series G Preferred Stock.
For purposes of this Certificate of Incorporation the date on which a share of
Series G Preferred Stock was first issued is defined as the "Original Series G
Issue Date".
(i) Stock Dividends, Splits and Reclassifications. If the
Corporation shall (w) declare or pay a dividend on its outstanding Common Stock
in shares of Common Stock or make a distribution to all holders of its Common
Stock in shares of Common Stock, (x) subdivide its outstanding shares of Common
Stock into a greater number of shares of Common Stock, (y) combine its
outstanding shares of Common Stock into a smaller number of shares of Common
Stock or (z) issue by reclassification of its shares of Common Stock other
securities of the Corporation, then the Series E Conversion Price, Series F
Conversion Price, and the Series G Conversion Price in effect immediately prior
thereto shall be adjusted so that the holder of any shares of Series E Preferred
Stock, Series F Preferred Stock, or Series G Preferred Stock thereafter
converted shall be entitled to receive the number and kind of shares of Common
Stock of other securities that the holder would have owned or have been entitled
to receive after the happening of any of the events described above had such
shares of Series E Preferred Stock, Series F Preferred Stock, or Series G
Preferred Stock been converted immediately prior to the
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<PAGE> 38
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this Article IV.C.6(d)(i) shall become effective on the date of
the dividend payment, subdivision, combination or issuance retroactive to the
record date with respect thereto, if any, for such event. Such adjustments shall
be made successively.
(ii) Rights, Options, and Convertible and Exchangeable
Securities. If the Corporation shall issue, without charge to holders of its
Common Stock or Preferred Stock, rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock (excluding "Excluded Securities" as defined in Article
IV.C.6(d)(iv) below) at a price per share (the "Rights Price") that is lower
than the then current Series E Conversion Price, Series F Conversion Price or
Series G Conversion Price at the record date mentioned below, the Series E
Conversion Price, the Series F Conversion Price and/or the Series G Conversion
Price, as the case may be, shall be adjusted to be equal to the Rights Price.
The adjustment shall be made successively whenever any such rights, options,
warrants or convertible or exchangeable securities are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive the rights, options, warrants or convertible or
exchangeable securities. If all such rights, options, warrants or convertible or
exchangeable securities expire or terminate without having been converted,
exchanged or exercised, as the case may be, then, subject to the other
provisions of this Article IV.C.6 and successive applications of this Article
IV.C.6(d)(ii), the Conversion Price shall be recalculated and adjusted to the
amount such Conversion Price would have been assuming (but taking into account
all subsequent issuances of securities by the Company) that such expired or
terminated rights, options, warrants or convertible or exchangeable securities
had never been issued by the Corporation.
(iii) Dividends in Kind. In case the Corporation shall distribute
to all holders of its outstanding Common Stock any Securities or Assets (as
defined in Article IV.C.3(b)) that, for any reason, are not distributed to
holders of the Series E Preferred Stock, Series F Preferred Stock, or Series G
Preferred Stock pursuant to Article IV.C.3(b), then in each such case, unless
the Corporation elects to reserve shares or other units of such Securities or
Assets for distribution to the holders of the Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock upon the conversion of the shares
of Series E Preferred Stock, Series F Preferred Stock, and Series G Preferred
Stock so that any such holder converting shares of Series E Preferred Stock,
Series F Preferred Stock, or Series G Preferred Stock, as the case may be, will
receive upon such conversion, in addition to the shares of Common Stock to which
such holder is entitled, the amount and kind of such Securities or Assets which
such holder would have received if such holder had, immediately prior to the
record date for the distribution of the Securities or Assets, converted its
shares of Series E Preferred Stock, Series F Preferred Stock, or Series G
Preferred Stock into Common Stock, the Series E Conversion Price, the Series F
Conversion Price, and the Series G Conversion Price shall be adjusted so that
the same shall equal the price determined by multiplying the applicable
Conversion Price in effect immediately prior to the date of such distribution by
a fraction of which the numerator shall be the current market price per share
(as determined in accordance with Article IV.C.6(d)(v)) of the Common Stock on
the record date mentioned below less the then fair market value (as determined
by the Board of Directors, whose determination shall, if made in good faith, be
conclusive) of the
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<PAGE> 39
portion of the capital stock or assets or evidences of indebtedness so
distributed or of such rights or warrants applicable to one share of Common
Stock, and of which the denominator shall be the current market price per share
of the Common Stock on such record date. Such adjustment shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such distribution, except as provided in Article IV.C.6(d)(i) above.
(iv) Issuances Below Conversion Price. If the Corporation shall
issue without charge or sell and issue any shares of Common Stock, rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase shares of Common Stock (excluding the "Excluded
Securities" as defined below in this Article IV.C.6(d)(iv)) at a price per share
(determined, in the case of rights, options, warrants or convertible or
exchangeable securities, by dividing (x) the total amount received or receivable
by the Corporation in consideration of the sale and issuance of such rights,
options, warrants or convertible or exchangeable securities, plus the total
consideration payable to the Corporation upon exercise or conversion or exchange
thereof, by (y) the total number of shares of Common Stock covered by such
rights, options, warrants or convertible or exchangeable securities) (the
"Issuance Price") that is lower than the then current Series E Conversion Price,
the Series F Conversion Price or the Series G Conversion Price immediately prior
to such sale and issuance, then in each case the Series E Conversion Price, the
Series F Conversion Price and/or the Series G Conversion Price, as the case may
be, shall be adjusted to be equal to the Issuance Price. For the purposes of
such adjustment, the consideration received or receivable by the Corporation
therefor shall be deemed to be the consideration received or receivable by the
Corporation (plus any discounts or commissions in connection therewith) for such
rights, options, warrants or convertible or exchangeable securities, plus the
consideration or premiums stated in such rights, options, warrants or
convertible or exchangeable securities to be paid for the shares of Common Stock
purchasable thereby. In case the Corporation shall (x) sell and issue shares of
Common Stock for a consideration consisting, in whole or in part, of property
other than cash or its equivalent or (y) sell and issue shares of Common Stock
together with one or more other securities as part of a unit at a price per
unit, then in determining the "price per share" and the "consideration received
or receivable by the Corporation" for purposes of the first sentence and the
immediately preceding sentence of this Article IV.C.6(d)(iv), the Board of
Directors shall determine, in its discretion, the fair value of said property or
the shares of Common Stock then being sold as part of such unit, as the case may
be, and such determination, if made in good faith, shall be binding. If all such
rights, options, warrants or convertible or exchangeable securities expire or
terminate without having been converted, exchanged or exercised, as the case may
be, then, subject to the other provisions of this Article IV.C.6 and successive
applications of this Article IV.C.6(d)(iv), the Conversion Price shall be
recalculated and adjusted to the amount such Conversion Price would have been
assuming (but taking into account all subsequent issuances of securities by the
Company) that such expired or terminated rights, options, warrants or
convertible or exchangeable securities had never been issued by the Corporation.
The adjustments required by this Article IV.C.6(d)(iv) shall be made
successively whenever any such shares of Common Stock, rights, options, warrants
or convertible or exchangeable securities containing the right to subscribe for
or purchase shares of Common Stock are issued for less then the current Series E
Conversion Price, the Series F Conversion Price and/or the Series G Conversion
Price, as the case may be, subject to the exceptions noted above with respect to
the
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Excluded Securities, and shall become effective immediately after the issue
date.
As used in this Article IV.C.6(d)(iv) and Article IV.C.6(d)(ii) above,
"Excluded Securities" means and includes the following:
(A) shares of Common Stock, rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock issued in any of the transactions described in
paragraphs (i), (ii) and (iii) above;
(B) any shares of Common Stock, options or warrants to
purchase shares of Common Stock issued or granted on or before August 31, 1999
and the shares of Common Stock issuable upon the exercise of such options or
warrants;
(C) any shares of Preferred Stock or warrants to
purchase shares of Preferred Stock issued on or before August 31, 1999, the
shares of Preferred Stock issuable upon the exercise of such warrants and the
shares of Common Stock issuable upon conversion of such shares of Preferred
Stock; and
(D) shares of Common Stock issued to or issuable upon
the exercise of stock options or other rights to be granted to existing or
future officers, employees, directors or contractors of the Corporation or its
subsidiaries with an exercise price between $0.035619838954 per share and
$0.05526523774 per share (the "Excluded Options"), provided that upon the grant
of any Excluded Options (with the date of each such grant being referred to
herein as an "Excluded Option Grant Date"), the number of shares of Common Stock
underlying the Excluded Options being granted on any particular Excluded Option
Grant Date, and the number of shares of Common Stock underlying all options
granted to past and existing employees, directors, or contractors under the
Company's stock option plans shall not at any time exceed the aggregate of
212,870,132 (including 54,854,298 "Additional Excluded Options" as defined
below) shares of Common Stock.
(E) shares of Common Stock issued to or issuable upon
the exercise of stock options or other rights to be granted to existing or
future officers, employees, directors or contractors of the Corporation or its
subsidiaries with an exercise price between $0.05526523774 per share and $0.13
per share (the "Additional Excluded Options"), provided that upon the grant of
any Additional Excluded Options (with the date of each such grant being referred
to herein as an "Additional Excluded Option Grant Date"), the number of shares
of Common Stock underlying the Additional Excluded Options being granted on any
particular Additional Excluded Option Grant Date, and the number of shares of
Common Stock underlying the Additional Excluded Options shall not at any time
exceed the aggregate of 54,854,298 shares of Common Stock.
For purposes of this Certificate of Incorporation the date on which a
share of Series E Preferred Stock was first issued is defined as the "Original
Issue Date."
(v) Current Market Price. For the purposes of any computation of
current
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<PAGE> 41
market price per share under Section (6)(d)(iii), the current market price per
share of Common Stock at any date shall be deemed to be the average of the daily
closing prices for the 20 consecutive trading days commencing on the 30th
trading day prior to the date in question. The closing price for each day shall
be (v) the average of the highest and lowest trading price of a share of Common
Stock of the Corporation on the principal national securities exchange on which
such stock is then listed or admitted to trading on such date, or, if no trade
occurs on such date, the average of the reported closing bid and asked prices on
such date on such exchange, or (w) if such stock is not then listed or admitted
to trading on any national securities exchange but is designated as a National
Market System Security by the National Association of Securities Dealers, the
last reported trading price of such stock on such National Market System on such
date, or (x) if there shall have been no trading on such National Market System
on such date or if such stock is not so designated, the average of the reported
closing bid and asked prices of such stock on such date as shown by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), or (y)
if such stock is not quoted on NASDAQ, the average of the firm bid and offer
prices for such stock as reported on the NASDAQ OTC Bulletin Board Display
Service on such date or the average of the then most recently reported such
prices, or (z) if such stock is not quoted on the NASDAQ OTC Bulletin Board
Display Service, the average of the bid and asked prices for such stock on such
date as reported in the "pink sheets" published by the National Quotation Bureau
or as quoted by any member firm of the New York Stock Exchange selected by the
Board. In the event such closing prices are unavailable, the current market
price shall be deemed to be the fair market value as determined in good faith by
the Board of Directors, on the basis of such relevant factors as it in good
faith considers, in the reasonable judgment of the Board of Directors,
appropriate.
(vi) Adjustment for Merger or Reorganization, etc. In case of any
consolidation or merger of the Corporation with or into another corporation
(other than a Change of Control which is treated as a liquidation pursuant to
Article IV.C.4(e) by the holders of a majority of the Senior Preferred Stock
then outstanding), the authorized capital of the surviving or resulting
corporation (referred to herein as the "surviving corporation") shall include
provision for a class or classes of senior preferred stock having rights,
preferences and limitations substantially economically equivalent to the Senior
Preferred Stock with respect to the capital structure of the Corporation
immediately prior to such consolidation or merger, including provision for each
holder of each share of Senior Preferred Stock, as the case may be, to receive
the preferred stock of the surviving corporation which corresponds to such
series on a substantially economically equivalent basis and which shall
thereafter be convertible into the kind and amount of shares of stock or other
securities of the surviving corporation or other property to which a holder of
the number of shares of Common Stock of the Corporation deliverable upon
conversion of such Senior Preferred Stock would have been entitled upon such
consolidation or merger; and, in such case, appropriate adjustment (as
determined in good faith by the Board of Directors) shall be made in the
application of the provisions set forth in this Article IV.C.6 with respect to
the rights and interest thereafter of the holders of Senior Preferred Stock to
the end that the provisions set forth in this Article IV.C.6 (including
provisions with respect to changes in and other adjustments of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other securities of the surviving corporation
or other property thereafter deliverable upon the conversion of the
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Senior Preferred Stock.
(vii) References to Common Stock. For the purposes of this
Article IV.C.6(d) and Article IV.C.(g) below, the term "shares of Common Stock"
shall mean (x) the class of stock designated as the Common Stock of the
Corporation at the date hereof or (y) any other class of stock resulting from
successive changes or reclassifications of such shares consisting solely of
changes in par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to Article IV.C.6(d)(i),
(iii) or (vi), the holders of Senior Preferred Stock shall become entitled to
receive any securities other than shares of Common Stock, thereafter the number
of such other securities so issuable upon conversion of the shares of Series E
Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the shares of Series
E Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock, as the
case may be, contained in this Article IV.C.6(d).
(viii) Deferral of Issuance of Common Stock. Notwithstanding the
foregoing, in any case in which this Article IV.C.6(d) provides that an
adjustment shall become effective immediately after a record date for an event,
the Corporation may defer until the occurrence of such event issuing to the
holder of any share of Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock converted after such record date and before the
occurrence of such event the additional shares of Common Stock issuable upon
such conversion before giving effect to such adjustment.
(e) Issue and Transfer Taxes. The Corporation will pay any and all
documentary, stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on the conversion of shares of
Senior Preferred Stock pursuant to this Article IV.C.6; provided, however, that
the Corporation shall not be required to pay any tax which may be payable in
respect of any registration of transfer involved in the issue or delivery of
shares of Common Stock in a name other than that of the registered holder of
Senior Preferred Stock converted or to be converted, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(f) No Impairment. Except as permitted by applicable law and the
Certificate of Incorporation, including this Article IV.C., the Corporation will
not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Article IV.C.6 and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of Senior Preferred Stock against impairment.
(g) Certificate as to Adjustments. Upon the occurrence of each
adjustment of the Conversion Price pursuant to this Article IV.C.6, the
Corporation at its expense shall promptly
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compute such adjustment in accordance with the terms hereof and furnish to each
holder of Senior Preferred Stock a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based. The Corporation
shall, upon the written request at any time of any holder of Senior Preferred
Stock, furnish or cause to be furnished to such holder a similar certificate
setting forth (i) such adjustments, (ii) the Conversion Price then in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which then would be received upon the conversion of Series E Preferred
Stock, Series F Preferred Stock or Series G Preferred Stock, as the case may be.
(h) Notice of Record Date. In the event:
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or other securities of
the Corporation;
(ii) that the Corporation subdivides or combines its outstanding
shares of Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another corporation, or
of the sale of all or substantially all of the assets of the Corporation or of
any other Change of Control; or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Senior Preferred Stock, and shall cause to
be mailed to the holders of Senior Preferred Stock at their last addresses as
shown on the records of the Corporation or such transfer agent, at least ten
(10) days prior to the record date specified in (A) below or twenty (20) days
before the date specified in (B) below, a notice stating:
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, Change of Control, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up.
(i) Notices. Any notice required by the provisions of this
Article IV.C.6 to be given to the holders of shares of Senior Preferred Stock
shall be deemed given if deposited in the
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United States mail, first class, postage prepaid, and addressed to each holder
of record at its address appearing on the books of the Corporation.
(j) Mandatory Conversion
(i) Mandatory Conversion Event. All holders of shares of Senior
Preferred Stock then outstanding shall convert their shares of Senior Preferred
Stock into shares of Common Stock, at the then effective Conversion Price
pursuant to this Article IV.C.6, upon the closing of a Qualified Public
Offering. Notwithstanding any provision to the contrary contained herein, (x) in
the event that there are accrued but unpaid cash dividends with respect to any
Senior Preferred Stock at the date of the closing of a Qualified Public
Offering, all such accrued but unpaid cash dividends payable to the holders of
Senior Preferred Stock shall be canceled, and no holder or former holder of
Senior Preferred Stock shall have any further right or interest to such
dividends, or (y) in the event of voluntary conversion by a holder of any Senior
Preferred Stock at a time when the Corporation is contemplating an initial
public offering, the Corporation may, at its option, defer payment of any
dividends otherwise payable upon such conversion for up to 180 days and if a
Qualified Public Offering is closed within such 180 day period, all of such
accrued but unpaid cash dividends payable to such holders of Senior Preferred
Stock shall be canceled and no such holder of Senior Preferred Stock shall have
any further right or interest therein.
(ii) Procedure for Mandatory Conversion. Upon a mandatory
conversion pursuant to Article IV.C.6(j)(i), the outstanding shares of Senior
Preferred Stock will be automatically converted into shares of Common Stock
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered for conversion to the
Corporation or the transfer agent for the Senior Preferred Stock. On the date of
mandatory conversion, all rights with respect to the Senior Preferred Stock so
converted, including the rights, if any, to receive notices and vote, will
terminate, except for the rights of the holders thereof, upon surrender of their
certificate or certificates therefor, to receive certificates for the number of
shares of Common Stock into which such Senior Preferred Stock has been converted
(as rounded with respect to any fraction of a share as provided in Article
IV.C.6(b)(i)). If so required by the Corporation, certificates surrendered for
conversion shall be endorsed or accompanied by written instrument or instruments
of transfer, in form satisfactory to the Corporation, duly authorized in
writing. As soon as practicable after the date of such mandatory conversion and
the surrender of the certificate or certificates of Senior Preferred Stock, the
Corporation shall cause to be issued and delivered to such holder, or on his,
her or its written order, a certificate or certificates for the number of full
shares of Common Stock issuable on such conversion in accordance with the
provisions hereof as rounded as provided in Article IV.C.6(b)(i) in respect of
any fraction of a share of Common Stock otherwise issuable upon such conversion.
(k) Retirement and Cancellation of Shares. All certificates evidencing
shares of Senior Preferred Stock which are required to be surrendered for
conversion in accordance with the provisions hereof shall, from and after the
date such certificates are so required to be surrendered, be deemed to have been
retired and canceled and the shares of Senior Preferred
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<PAGE> 45
Stock represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date.
7. Voting Rights. (a) Each holder of shares of Senior Preferred Stock
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which such shares of Senior Preferred Stock could be converted and
shall have voting rights and powers equal to the voting rights and powers of the
Common Stock (except as otherwise expressly provided herein or as required by
law, voting together with the Common Stock and other series of Preferred Stock
as a single class) and shall be entitled to notice of any stockholders' meeting
in accordance with applicable law and the Bylaws of the Corporation.
(b) So long as any shares of Senior Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least a majority of the voting power of the then outstanding
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock,
voting together as a separate single class on the basis of one vote for each
share of Series E Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock then outstanding, approve:
(i) Any amendment to the Corporation's Certificate of
Incorporation or Bylaws, other than amendments relating solely to the
authorization, creation or issuance of additional Common Stock;
(ii) Any merger or consolidation of the Corporation or any
subsidiary of the Corporation, other than a merger pursuant to Section 253 of
the Delaware General Corporation Law;
(iii) The sale, lease or exchange of all or substantially all of
the assets of the Corporation;
(iv) Any reorganization or liquidation (not including a Change
of Control which is treated as a liquidation pursuant to Article IV.C.4(e)) or
winding up of the Corporation;
(v) Any transaction pursuant to which the Corporation or any of
its subsidiaries: (w) acquires the capital stock of any entity other than the
Corporation, or any entity which is not then a subsidiary of the Corporation,
pursuant to a solicitation of tenders therefor, or in one or more negotiated
block, market or other transactions not involving a tender offer, or a
combination of any of the foregoing; (x) makes any entity a subsidiary of the
Corporation; (y) causes any entity to be merged into the Corporation or any of
its subsidiaries, in any case, pursuant to a merger, purchase of assets or any
reorganization providing for the delivery or issuance to the holders of such
entity's then outstanding securities, in exchange for such securities, cash or
securities of the Corporation or any of its affiliates, or a combination
thereof; or (z) purchases all or substantially all of the business or assets of
any entity; or
(vi) The repurchase, redemption or other acquisition of any
shares of Preferred Stock or Common Stock other than (x) repurchases of shares
of capital stock pursuant to
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<PAGE> 46
employee buy-sell arrangements in effect on or before the Original Series F
Issue Date and (y) by conversion of Preferred Stock in accordance with the terms
thereof.
(c) So long as any shares of Senior Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of (i) at least sixty percent (60%) of the voting power of the then
outstanding Series E Preferred Stock, voting as a separate single class on the
basis of one vote for each share of Series E Preferred Stock then outstanding,
and the vote, (ii) at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of the then outstanding Series F Preferred Stock, voting as a
separate single class on the basis of one vote for each share of Series F
Preferred Stock then outstanding, and (iii) at least sixty percent (60%) of the
voting power of the then outstanding Series G Preferred Stock, voting as a
separate single class on the basis of one vote for each share of Series G
Preferred Stock then outstanding, approve any amendment to the Corporation's
Certificate of Incorporation or Bylaws if such amendment would adversely affect,
in a substantially equivalent manner, any of the rights, preferences, privileges
or voting rights provided for herein for the benefit of the Senior Preferred
Stock, including, without limitation, any amendment that would:
(i) Change the relative seniority rights of the holders of the
Senior Preferred Stock as to the payment of dividends in relation to the holders
of any other capital stock of the Corporation;
(ii) Reduce the amount payable to the holders of the Senior
Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of the Senior Preferred Stock to the
rights upon liquidation of the holders of any other capital stock of the
Corporation;
(iii) Make the Senior Preferred Stock redeemable at the option of
the Corporation or otherwise;
(iv) Cancel or modify the conversion rights of the Senior
Preferred Stock; or
(v) Authorize the issuance of any Parity Securities.
(d) So long as any shares of Series E Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least sixty percent (60%) of the voting power of the then
outstanding Series E Preferred Stock, voting as a separate single class on the
basis of one vote for each share of Series E Preferred Stock outstanding,
approve any amendment to the Corporation's Certificate of Incorporation or
Bylaws if such amendment would adversely affect any of the rights, preferences,
privileges or voting rights provided for herein for the benefit of Series E
Preferred Stock, (other than an amendment which also adversely affects any of
the rights, preferences, privileges or voting rights provided for herein for the
benefit of Series F Preferred Stock and Series G Preferred Stock in a
substantially equivalent manner) including, without limitation, any amendment
that would:
(i) Change the relative seniority rights of the holders of the
Series E Preferred
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Stock as to the payment of dividends in relation to the holders of any other
capital stock of the Corporation;
(ii) Reduce the amount payable to the holders of the Series E
Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of the Series E Preferred Stock to the
rights upon liquidation of the holders of any other capital stock of the
Corporation;
(iii) Make the Series E Preferred Stock redeemable at the option
of the Corporation or otherwise;
(iv) Cancel or modify the conversion rights of the Series E
Preferred Stock; or
(v) Authorize the issuance of any Parity Securities.
(e) So long as any shares of Series F Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of the then outstanding Series F Preferred Stock, voting as a separate
single class on the basis of one vote for each share of Series F Preferred Stock
then outstanding, approve any amendment to the Corporation's Certificate of
Incorporation or Bylaws if such amendment would adversely affect any of the
rights, preferences, privileges or voting rights provided for herein for the
benefit of Series F Preferred Stock, (other than an amendment which also
adversely affects any of the rights, preferences, privileges or voting rights
provided for herein for the benefit of Series E Preferred Stock and Series G
Preferred Stock in a substantially equivalent manner) including, without
limitation, any amendment that would:
(i) Change the relative seniority rights of the holders of the
Series F Preferred Stock as to the payment of dividends in relation to the
holders of any other capital stock of the Corporation;
(ii) Reduce the amount payable to the holders of the Series F
Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of the Series F Preferred Stock to the
rights upon liquidation of the holders of any other capital stock of the
Corporation;
(iii) Make the Series F Preferred Stock redeemable at the option
of the Corporation or otherwise;
(iv) Cancel or modify the conversion rights of the Series F
Preferred Stock; or
(v) Authorize the issuance of any Parity Securities.
(f) So long as any shares of Series G Preferred Stock remain
outstanding, the
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<PAGE> 48
Corporation shall not, without the vote or written consent by the holders of at
least sixty percent (60%) of the voting power of the then outstanding Series G
Preferred Stock, voting as a separate single class on the basis of one vote for
each share of Series G Preferred Stock outstanding, approve any amendment to the
Corporation's Certificate of Incorporation or Bylaws if such amendment would
adversely affect any of the rights, preferences, privileges or voting rights
provided for herein for the benefit of Series G Preferred Stock, (other than an
amendment which also adversely affects any of the rights, preferences,
privileges or voting rights provided for herein for the benefit of Series E
Preferred Stock and Series F Preferred Stock in a substantially equivalent
manner) including, without limitation, any amendment that would:
(i) Change the relative seniority rights of the holders of the
Series G Preferred Stock as to the payment of dividends in relation to the
holders of any other capital stock of the Corporation;
(ii) Reduce the amount payable to the holders of the Series G
Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, or change the relative seniority of the
liquidation preferences of the holders of the Series G Preferred Stock to the
rights upon liquidation of the holders of any other capital stock of the
Corporation;
(iii) Make the Series G Preferred Stock redeemable at the option
of the Corporation or otherwise;
(iv) Cancel or modify the conversion rights of the Series G
Preferred Stock; or
(v) Authorize the issuance of any Parity Securities.
(g) So long as any shares of Senior Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of (i) at least sixty percent (60%) of the voting power of the then
outstanding Series E Preferred Stock, voting as a separate single class on the
basis of one vote for each share of Series E Preferred Stock then outstanding,
and the vote, (ii) at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of the then outstanding Series F Preferred Stock, voting as a
separate single class on the basis of one vote for each share of Series F
Preferred Stock then outstanding, and (iii) at least sixty percent (60%) of the
voting power of the then outstanding Series G Preferred Stock, voting as a
separate single class on the basis of one vote for each share of Series G
Preferred Stock then outstanding, declare or pay any dividends or make any other
distributions on the Common Stock or any series of Preferred Stock.
8. Board of Directors; Right of Series E Preferred Stock and Series F
Preferred Stock to Elect Directors. So long as any shares of Series E Preferred
Stock or Series F Preferred Stock are outstanding:
(a) The number of members of the Corporation's Board of Directors
shall be nine (9); and
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<PAGE> 49
(b) The holders of a majority of the outstanding shares of Series E
Preferred Stock and Series F Preferred Stock, voting as a separate single class,
on the basis of one vote for each share of Series E Preferred Stock and Series F
Preferred Stock then outstanding, shall have the right to elect six of the nine
directors;
provided, however, if the Corporation has not consummated a Qualified Public
Offering on or before September 7, 2000, then:
(x) The number of members of the Corporation's Board of
Directors shall be eleven (11); and
(y) The holders of a majority of (i) the outstanding shares of
Series E Preferred Stock and Series F Preferred Stock, voting as a
separate single class, on the basis of one vote for each share of Series
E Preferred Stock and Series F Preferred Stock then outstanding, shall
have the right to elect six of the eleven directors, and (ii) the
outstanding shares of Series G Preferred Stock, voting as a separate
single class, on the basis of one vote for each share of Series G
Preferred Stock then outstanding, shall have the right to elect one of
the eleven directors.
In the case of any vacancy in the office of a director elected by the
holders of the Series E Preferred Stock and Series F Preferred Stock, the
holders of a majority of the outstanding shares of Series E Preferred Stock and
Series F Preferred Stock, voting as a separate single class, on the basis of one
vote for each share of Series E Preferred Stock and Series F Preferred Stock
then outstanding shall have the right to elect a successor to hold the office
for the unexpired term of the director whose place shall be vacant. Any director
who shall have been elected by the holders of Series E Preferred Stock and
Series F Preferred Sock or any director so elected as provided in the preceding
sentence hereof, may be removed during the aforesaid term of office, whether
with or without cause, only by the affirmative vote of the holders of a majority
of the Series E Preferred Stock and Series F Preferred Stock, voting as a
separate single class, on the basis of one vote for each share of Series E
Preferred Stock and Series F Preferred Stock then outstanding. In the case of
any vacancy in the office of a director elected by the holders of the Series G
Preferred Stock, the holders of a majority of the outstanding shares of Series G
Preferred Stock, voting as a separate single class, on the basis of one vote for
each share of Series G Preferred Stock then outstanding shall have the right to
elect a successor to hold the office for the unexpired term of the director
whose place shall be vacant. Any director who shall have been elected by the
holders of Series G Preferred Sock or any director so elected as provided in the
preceding sentence hereof, may be removed during the aforesaid term of office,
whether with or without cause, only by the affirmative vote of the holders of a
majority of the Series G Preferred Stock, voting as a separate single class, on
the basis of one vote for each share of Series G Preferred Stock then
outstanding.
9. Pre-emptive Rights.
(a) Right to Purchase. The holders of Series E Preferred Stock, Series
F Preferred
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Stock (including for this purpose Series E Preferred Stock issuable upon the
exercise of the Series E Preferred Stock Purchase Warrant issued on the Original
Issue Date) and the Series G Preferred Stock shall have the pre-emptive right to
purchase, on a pro rata basis, all or any part of New Securities (as defined in
Article IV.B.5) which the Corporation may, from time to time, propose to issue
and sell, as and to the same extent as holders of the Collective Preferred Stock
under Article IV.B.5; except that holders of Series G Preferred Stock shall not
have pre-emptive rights to purchase up to 230,769,231 shares of Series G
Preferred Stock issued by the Corporation on or after the date on which the
Fifth Amended and Restated Certificate of Incorporation is filed. The pro rata
share of each holder of such Series E Preferred Stock, Series F Preferred Stock
or Series G Preferred Stock, for purposes of this pre-emptive right to purchase,
shall be determined by dividing (x) the total number of shares of Common Stock
which are owned by such holder plus the total number of shares of Common Stock
issuable upon conversion of such Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock owned by such holder of such Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock, by (y)
the total number of shares of Common Stock then outstanding plus the total
number of shares of Common Stock issuable upon conversion of all then
outstanding Company Preferred Stock. All of the foregoing notwithstanding, in
the event any holder of Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock also owns Common Stock and any Collective Preferred
Stock, the Common Stock which is owned by such holder shall not be counted for
purposes of clause (x) of the immediately preceding sentence.
(b) Waiver. The pre-emptive right to purchase set forth in Article
IV.C.9(a) may be waived in writing by the holders of (i) sixty percent (60%) of
the voting power of the then outstanding Series E Preferred Stock and Series G
Preferred Stock, voting together as a separate single class on the basis of one
vote for each share of Series E Preferred Stock then outstanding, and (ii)
sixty-six and two thirds percent (66-2/3%) of the voting power of the then
outstanding Series F Preferred Stock, voting as a separate single class on the
basis of one vote for each share of Series F Preferred Stock then outstanding.
(c) Expiration. The pre-emptive rights described in this Article
IV.C.9 shall expire upon the closing of a Qualified Public Offering.
10. No Reissuance of Senior Preferred Stock. No share or shares of
Senior Preferred Stock acquired by the Corporation by reason of purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares that the Corporation shall be
authorized to issue.
D. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF COMMON STOCK
FOLLOWING A QUALIFIED PUBLIC OFFERING. Notwithstanding any provision to the
contrary contained herein, the rights, preferences, privileges and restrictions
granted to and imposed upon Common Stock following a Qualified Public Offering
are set forth in this ARTICLE IV.D. Except as otherwise expressly provided in
this ARTICLE IV.D., all shares of Common Stock shall be identical and shall
entitle the holders thereof to the same rights and privileges.
1. Dividends. When, as and if dividends on Common Stock are
declared by the Corporation's Board of Directors, whether payable in cash, in
property or in securities of the Corporation, the holders of Common Stock shall
be entitled to share equally in and
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to receive, in accordance with the number of Common Stock held by each such
holder, all such dividends.
Dividends payable under this Article IV.D. shall be paid to the holders
of record of the outstanding Common Stock as their names shall appear on the
stock register of the Corporation on the record date fixed by the Board of
Directors of the Corporation in advance of declaration and payment of each
dividend. Any Common Stock issued as a dividend pursuant to this Article IV.D.
shall, when so issued, be duly authorized, validly issued, fully paid and
non-assessable and free of all liens and charges. The Corporation shall not
issue fractions of Common Stock on payment of such dividend but shall issue a
whole number of shares to such holder of Common Stock rounded up or down in the
Corporation's sole discretion to the nearest whole number, without compensation
to the stockholder whose fractional share has been rounded down or from any
stockholder whose fractional share has been rounded up.
Notwithstanding anything contained herein to the contrary, no dividends
on Common Stock shall be declared by the Corporation's Board of
Directors or paid or set apart for payment by the Corporation at any time that
such declaration, payment, or setting apart is prohibited by applicable law.
2. Stock Split, Reclassification, etc. The Corporation shall not in
any manner subdivide (by any stock split, reclassification, stock dividend,
recapitalization or otherwise) or combine the outstanding shares of one class of
Common Stock unless the outstanding shares of all classes of Common Stock shall
be proportionately subdivided or combined.
3. Liquidation. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, after payment shall
have been made to holders of outstanding Post-IPO Preferred Shares, if any, of
the full amount of which they are entitled pursuant to this Certificate of
Incorporation and any resolutions that may be adopted from time to time by the
Corporation's Board of Directors, in accordance with Article IV.E. below (for
the purpose of fixing the voting rights, designations, preferences and relative
participating, optional or other special rights of any class or series of
Post-IPO Preferred Shares), the holders of Common Stock shall be entitled, to
the exclusion of the holders of Post-IPO Preferred Shares, if any, to share
ratably, in accordance with the number of shares of Common Stock held by each
such holder, in all remaining assets of the Corporation available for
distribution among the holders of Common Stock, whether such assets are capital,
surplus, or earnings. For the purposes of this Article IV.D., neither the
consolidation or merger of the Corporation with or into any other corporation or
corporations in which the stockholders of the Corporation receive capital stock
and/or other securities (including debt securities) of the acquiring corporation
(or of the direct or indirect parent corporation of the acquiring corporation),
nor the sale, lease or transfer by the Corporation of all or any part of its
assets, nor the reduction of the capital stock of the Corporation, shall be
deemed to be a voluntary or involuntary liquidation, dissolution, or winding-up
of the Corporation as those terms
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are used in this Article IV.D..
4. Voting. Each holder of Common Stock shall be entitled to
one vote for each share of such stock issued and outstanding and registered in
such holder's name and shall be entitled to vote upon such matters and in such
manner as may be provided by Delaware law and this Certificate of Incorporation.
5. No Pre-emptive or Subscription Rights. No holder of Common Stock
shall be entitled to pre-emptive or subscription rights.
E. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF POST-IPO
PREFERRED SHARES. Shares of Post-IPO Preferred Shares may be issued from time to
time in one or more series as may be determined by the Board of Directors of the
Corporation. Subject to the provisions of this Certificate of Incorporation and
this Article IV.E, the Board of Directors of the Corporation is authorized to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued class or series of Post-IPO Preferred
Shares and, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors of the Corporation originally fixing the
number of shares constituting any such additional series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such additional series subsequent to the issue of
shares of that series.
Authorized and unissued shares of Post-IPO Preferred Shares may be issued
with such designations, voting powers, preferences and relative participating
optional or other special rights, and qualifications, limitations and
restrictions on such rights, as the Board of Directors of the Corporation may
authorize by resolutions duly adopted prior to the issuance of any shares of any
class or series of Post-IPO Preferred Shares, including, but not limited to: (i)
the distinctive designation of each series and the number of shares that will
constitute such series; (ii) the voting rights, if any, of shares of such series
and whether the shares of any such series having voting rights shall have
multiple votes per share; (iii) the dividend rate on the shares of such series,
any restriction, limitation or condition upon the payment of such dividends,
whether dividends shall be cumulative and the dates on which dividends are
payable; (iv) the prices at which, and the terms and conditions on which, the
shares of such series may be redeemed, if such shares are redeemable; (v) the
purchase or sinking fund provisions, if any, for the purchase or redemption of
shares of such series; (vi) any preferential amount payable upon shares of such
series in the event of the liquidation, dissolution or winding-up of the Company
or the distribution of its assets; and (vii) the prices or rates of conversion
at which, and the terms and conditions on which, the shares are convertible.
Any and all Post-IPO Preferred Shares issued and for which full
consideration has been paid or delivered shall be deemed fully paid stock and
the holder thereof shall not be liable for any further payment thereon.
ARTICLE V
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The Board of Directors shall have the power, in addition to the
stockholders, to make, repeal, alter, amend and rescind any or all of the bylaws
of the Corporation.
ARTICLE VI
Subject to Article IV.C.8 hereof, the Board of Directors of the
Corporation shall have no more than nine (9) members; provided, however, that
upon the closing of a Qualified Public Offering, the Board of Directors shall be
constituted as follows:
(i) The number of directors which will constitute the whole Board of
Directors of the Corporation shall be fixed exclusively by one or more
resolutions adopted by the Board of Directors of the Corporation or as otherwise
provided in the By-Laws of the Corporation.
(ii) At the first annual meeting of stockholders following the closing
of a Qualified Public Offering, the nominees for directors shall be divided into
three classes, as nearly equal in number as possible, designated as Class I,
Class II, and Class III, respectively, and assigned to such classes in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of a Qualified
Public Offering, (i) the Class I directors shall be nominated for election for a
term to expire at the third succeeding annual meeting of stockholders following
their election, (ii) the Class II directors shall be nominated for election for
a term to expire at the second succeeding annual meeting of stockholders
following their election, and (iii) the Class III directors shall be nominated
for election for a term to expire at the first annual meeting of stockholders
following their election. At each succeeding annual meeting of stockholders,
directors shall be elected for a term to expire at the third succeeding annual
meeting of stockholders following their election to succeed the directors of the
class whose terms expire at such annual meeting.
(iii) Notwithstanding the foregoing provisions of this ARTICLE VI, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. Neither the Board of Directors nor any
individual director may be removed without cause. Subject to any limitation
imposed by law, any individual director or directors may be removed with cause
by the holders of a majority of the voting power of the corporation entitled to
vote at an election of directors. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
(iv) In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors shall have the power to make, adopt, amend or
repeal the Bylaws, or adopt new Bylaws for this Corporation, by a resolution
adopted by a majority of the directors.
(v) Vacancies in the Board of Directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director.
(vi) Elections of directors need not be by written ballot unless the
bylaws of the Corporation shall so provide.
ARTICLE VII
Meetings of stockholders may be held within or without the State of
Delaware, as the
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bylaws may provide. The books of the Corporation may be kept (subject to any
provision contained in the General Corporation Law of Delaware) outside the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the bylaws of the Corporation.
ARTICLE VIII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of Title 8 of the General Corporation
Law of Delaware, or (iv) for any transaction from which the director derived any
improper personal benefit. The foregoing sentence notwithstanding, if the
General Corporation Law of Delaware is hereafter amended to authorize further
limitations of the liability of a director of a corporation, then a director of
the Corporation, in addition to the circumstances in which a director is not
personally liable set forth in the preceding sentence, shall not be liable to
the fullest extent permitted by the General Corporation Law of Delaware as so
amended. Any repeal or modification of the foregoing provisions of this Article
VIII by the stockholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE IX
The Corporation shall indemnify and hold harmless any director and
officer of the Corporation from and against any and all expenses and liabilities
that may be imposed upon or incurred by such person in connection with, or as a
result of, any proceeding in which such person may become involved, as a party
or otherwise, by reason of the fact that such person is or was such a director
or officer of the Corporation, whether or not such person continues to be such
at the time such expenses and liabilities shall have been imposed or incurred.
It is the intention of this Article IX to provide indemnification to the fullest
extent permitted by the laws of the State of Delaware, as they may be amended
from time to time.
ARTICLE X
Subject to the provisions contained herein, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation.
This Sixth Amended and Restated Certificate of Incorporation was duly
adopted, and written consent has been given, in accordance with the provisions
of Sections 242 and 228 (with notice having been given in accordance therewith)
of the General Corporation Law of the State of Delaware.
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<PAGE> 55
I, THE UNDERSIGNED, being the President and Chief Executive Officer of
the Corporation, hereby declare, under penalties of perjury, that this is the
act and deed of the Corporation and the facts herein stated are true, and
accordingly, I have executed this Sixth Amended and Restated Certificate of
Incorporation as of the ____ day of November, 1999.
AIRNET COMMUNICATIONS CORPORATION
By: /s/ R. LEE HAMILTON, JR.
--------------------------------------------
Print Name: R. Lee Hamilton, Jr.
--------------------
Title: President and Chief Executive Officer
-------------------------------------
ATTESTED:
Janice L. Fitzgerald
Assistant Secretary
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<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-87693 of AirNet Communications Corporation on Form S-1 of our report dated
September 22, 1999, (October 27, 1999 as to the last paragraph of Note 11 and
November 11, 1999 as to Note 12) appearing in the Prospectus, which is part of
this Registration Statement, and to the reference to us under the headings
"Selected Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Orlando, Florida
November 11, 1999
<PAGE> 1
Exhibit 23.3
CONSENT
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated March 6, 1998 with
respect to the financial statements of AirNet Communications Corporation
included in Amendment No. 2 to the Registration Statement Form S-1 dated
November 12, 1999 and related Prospectus of AirNet Communications Corporation
for the registration of its common stock.
/s/ ERNST & YOUNG LLP
Orlando, Florida
November 11, 1999
