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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-87693
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. Our common stock
has been approved for quotation 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 $14.00 $77,000,000
Underwriting Discount $ 0.98 $ 5,390,000
Proceeds to AirNet Communications Corporation (before
expenses) $13.02 $71,610,000
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about December 10,
1999.
------------------
SALOMON SMITH BARNEY HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
December 6, 1999
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[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.
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[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> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<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............................................... 62
Experts..................................................... 62
Change in Independent Accountants........................... 62
Additional Information...................................... 63
Index to Financial Statements............................... F-1
</TABLE>
Until January 1, 2000, 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.
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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.
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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.
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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."
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;
- reflects the initial public offering price of $14.00 per share; and
- reflects a one for 66.38 reverse stock split which will be effected
prior to this offering.
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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 $ 97,364
Working capital............................................. 30,238 100,606
Total assets................................................ 47,689 118,057
Long-term debt.............................................. 230 230
Total stockholders' equity.................................. 33,449 103,817
</TABLE>
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(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.
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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
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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
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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
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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> 13
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> 14
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> 15
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.
11
<PAGE> 16
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 $9.33 per share at the initial public
offering price of $14.00 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> 17
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.
13
<PAGE> 18
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 $14.00 per share initial
public 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 initial public offering price
of $14.00, 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 $4.67 per share after this
offering ($103,817,467 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 $14.00 for a share of common stock having a pro forma net tangible book
value of approximately $4.67 per share after this offering. That is, their
investment would have been diluted by approximately $9.33 per share. At the same
time, our current stockholders would have realized an increase in pro forma net
tangible book value of $2.67 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............. $14.00
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............. 2.67
------
Pro forma net tangible book value per share after this
offering.................................................. 4.67
------
Dilution per share to the new investors..................... $ 9.33
======
</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 63.1% $ 7.89
New stockholders.................... 5,500,000 24.8 77,000,000 36.9 14.00
---------- ---- ------------ ----
Total..................... 22,223,736 100% $208,880,911 100%
========== ==== ============ ====
</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.
14
<PAGE> 19
USE OF PROCEEDS
Our net proceeds from this offering, at the initial public offering price
of $14.00 per share, are estimated to be $70.4 million, or $81.1 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.
15
<PAGE> 20
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 $ 97,364
======== ========
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................................ 120,373 201,581
Deferred stock compensation............................... (1,629) (1,629)
Accumulated deficit....................................... (96,157) (96,157)
-------- --------
Total stockholders' equity........................ 33,449 103,817
-------- --------
Total capitalization........................................ $ 33,679 $104,047
======== ========
</TABLE>
- ---------------
(1) As restated, see Note 4 to Notes to Unaudited Financial Statements.
16
<PAGE> 21
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> 22
<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> 23
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> 24
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
$1.0 million and $1.7 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 $0.9 million and $0.2 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> 25
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> 26
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> 27
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> 28
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, $0.4 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> 29
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> 30
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.
26
<PAGE> 31
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
27
<PAGE> 32
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 digital
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. 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.
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.
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.
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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 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 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.
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.
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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 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.
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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.
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
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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> 43
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> 44
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 Manager of VFAM-I, L.L.C., 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
40
<PAGE> 45
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.
41
<PAGE> 46
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> 47
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 $188,230
Glenn A. Ehley........ 45,235 5.4 1.33 2/19/08 37,767 97,709
</TABLE>
- ---------------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of our stock appreciates
from the date of grant to the expiration of the option at annualized rates
of 5% and 10%. These assumed rates of appreciation have been specified by
the SEC for illustrative purposes only and are not intended to forecast
future financial performance or possible future appreciation in the price of
our stock. The actual amount the executive officer may realize will depend
on the extent to which the stock price exceeds the exercise price of the
options on the date the option is exercised.
Option Exercises in Last Fiscal Year and Option Values at Fiscal Year
End. The following table sets forth certain information with respect to option
exercises during 1998 by the executive officers and the stock options held as of
December 31, 1998 by the executive officers.
43
<PAGE> 48
OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AT FISCAL YEAR END
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998($)(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 $3,672,951
30,130 2.9 8.63 9/01/09 161,798
Glenn A. Ehley................ 75,324 7.1 2.39 2/16/09 874,512
Gerald Y. Hattori............. 77,545 7.4 2.39 3/22/09 900,297
Mark G. Demange............... 77,545 7.4 2.39 3/08/09 900,297
William J. Lee................ 15,065 1.4 2.39 6/21/09 174,905
7,533 0.7 8.63 9/01/09 40,452
52,727 5.0 10.62 10/19/09 178,217
</TABLE>
--------------------
(1) Based on the initial public offering price of $14.00.
Option Exercises in Current Fiscal Year and Option Values at October 26,
1999. The following table sets forth certain information with respect to option
exercises during 1999 by the executive officers and the stock options held as of
October 26, 1999 by the executive officers.
OPTION EXERCISES IN CURRENT FISCAL YEAR AND OPTION VALUES AT OCTOBER 26, 1999
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SUBJECT TO UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT UPON COMPLETION OF
SHARES OCTOBER 26, 1999 OFFERING($)(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 $1,577,078 $4,209,345
Glenn A. Ehley......... -- -- 40,936 110,046 537,888 1,321,510
Gerald Y. Hattori...... -- -- -- 77,545 -- 900,297
Mark G. Demange........ -- -- -- 77,545 -- 900,297
William J. Lee......... -- -- -- 75,325 -- 393,574
</TABLE>
--------------------
(1) Based on the initial public offering price of $14.00.
44
<PAGE> 49
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..................................... 1,735,023(6) 10.3 7.8
c/o VFAM-I, L.L.C.
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> 50
(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., 49,067 shares issuable upon
exercise of a warrant, and options which are exercisable within 60 days of
September 30, 1999 for 419 shares. The options are assignable to HVFM-I,
L.P. by Mr. Mullins pursuant to an agreement between HVFM-I, L.P. and Mr.
Mullins.
(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.
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(11) Includes 1,685,537 shares held by HVFM-I, L.P., 49,067 shares issuable upon
exercise of a warrant, and options which are exercisable within 60 days of
September 30, 1999 for 419 shares. Mr. Mullins is one of two managers of
VFAM-I, L.L.C., 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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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 one of two managers of VFAM-I,
L.L.C., 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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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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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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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 $30,955,190
HVFM-I, LP(4).............................................. 14,162,609 24,173,716
Funds Managed by Adams Capital Management, Inc.(5)......... 13,292,444 37,788,422
SCP Private Equity Partners, LP(6)......................... 13,710,034 53,367,034
Harris Corporation......................................... 8,652,313 32,951,422
Tandem PCS Investments, LP(7).............................. 9,648,027 32,326,294
Milo D. Harrison(8)........................................ 316,847 275,212
</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 the initial public offering price of $14.00 per share.
(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 the initial public offering price of $14.00 per
share, will be approximately $175,000 upon completion of this offering.
(4) Mr. Mullins, a director of the company, is one of two Managers of VFAM-I,
L.L.C., 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 the initial public offering price of $14.00 per
share, will be approximately $618,812 upon completion of this offering which
includes an interest valued at $185,661 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 the initial public offering price of $14.00 per share, will
be approximately $1,895,833 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 the initial
public offering price of $14.00 per share, will be approximately $705,135
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 the initial public offering
price of $14.00 per share, will be approximately $696,312 upon completion of
this offering.
(8) Mr. Harrison is a director of the company.
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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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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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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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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> 60
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
As of October 26, 1999, options to acquire 2,006,145 shares of our common
stock were 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> 61
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> 62
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> 63
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. ................................ 2,223,000
Hambrecht & Quist LLC..................................... 1,728,000
Volpe Brown Whelan & Company, LLC......................... 988,000
BancBoston Robertson Stephens Inc. ....................... 67,000
Goldman, Sachs & Co. ..................................... 67,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 67,000
The Chapman Company....................................... 45,000
Dain Rauscher Wessels..................................... 45,000
McDonald Investments Inc., a KeyCorp Company.............. 45,000
Needham & Company, Inc. .................................. 45,000
Brad Perry Inc. .......................................... 45,000
Raymond James & Associates, Inc. ......................... 45,000
The Robinson-Humphrey Company, LLC........................ 45,000
Wachovia Securities, Inc. ................................ 45,000
---------
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 $0.60
per share. The underwriters may allow, and such dealers may reallow, a discount
not in excess of $0.10 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 and
individuals associated or affiliated with our directors, 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
59
<PAGE> 64
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.
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.
Our common stock has been approved 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.................................... $ 0.98 $ 0.98
Total........................................ $ 5,390,000 $ 6,198,500
</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
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<PAGE> 65
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.
61
<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
62
<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
DECEMBER 6, 1999
------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
VOLPE BROWN WHELAN & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
