1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNOVA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 3663 91-1453311
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
GATEWAY NORTH, BUILDING 2
3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168-1974
(206) 439-9121
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN M. HEMINGWAY, SECRETARY AND CHIEF FINANCIAL OFFICER
GATEWAY NORTH, BUILDING 2
3325 SOUTH 116TH STREET
SEATTLE, WASHINGTON 98168-1974
(206) 439-9121
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
JOHN M. STEEL, ESQ. H. JOHN MICHEL JR., ESQ.
BENJAMIN F. STEPHENS, ESQ. RACHEL GIULIANO, ESQ.
ALEJANDRO C. TORRES, ESQ. DRINKER BIDDLE & REATH LLP
GRAHAM & JAMES LLP PHILADELPHIA NATIONAL BANK BUILDING
1001 FOURTH AVENUE PLAZA, SUITE 4500 1345 CHESTNUT STREET
SEATTLE, WASHINGTON 98154 PHILADELPHIA, PENNSYLVANIA 19107-3426
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Approximate date of commencement of proposed sale to public: As soon as
possible after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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CALCULATION OF REGISTRATION FEE
=========================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, without par value........ $30,000,000 $10,345
=========================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INNOVA CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART 1 ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
---------------------------------------- ----------------------------------------------
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front and Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Outside Front Cover Page; Prospectus Summary;
Forward-Looking Statements; Risk Factors
4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price......... Outside Front Cover Page; Underwriting
6. Dilution................................ Dilution
7. Selling Security Holders................ Not Applicable
8. Plan of Distribution.................... Outside and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered.............................. Description of Capital Stock; Shares Eligible
for Future Sale
10. Interests of Named Experts and
Counsel................................. Not Applicable
11. Information With Respect to
the Registrant.......................... Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of
Proceeds; Capitalization; Dividend Policy;
Dilution; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Shareholders;
Certain Transactions; Description of Capital
Stock; Shares Eligible for Future Sale;
Underwriting; Additional Information;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities............................. Not Applicable
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EXPLANATORY NOTE
Unless otherwise indicated or the context requires otherwise, this
Registration Statement has been prepared on the assumption that, among other
things, (i) the Shareholders of the Company have approved the Articles of
Incorporation and Bylaws to be in the form presented in the Exhibits filed with
this Registration Statement; (ii) the Company's Directors' Stock Option Plan
described under the caption "Management -- Directors' Compensation" and an
amendment to the Company's 1990 Stock Option Plan have been approved by the
Company's shareholders; and (iii) the Company has effected a 24:1 reverse stock
split. Because there can be no assurances as to such matters, the Company
intends to amend this Registration Statement prior to the time it becomes
effective to reflect any material changes to the information contained herein.
The information contained in this Registration Statement should not be relied
upon for any purpose unless and until it becomes effective.
4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 18, 1997
2,500,000 SHARES
[LOGO]
COMMON STOCK
------------------------
All of the 2,500,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Innova Corporation ("Innova" or the "Company"). Prior to this
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of factors
considered in determining the initial public offering price. Application has
been made for quotation of the Common Stock on the Nasdaq National Market under
the symbol "INVA."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------------------------
Per Share...................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)....................... $ $ $
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 375,000 additional Shares of
Common Stock on the same terms set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ . See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of the shares of Common Stock will be
made through the office of UBS Securities LLC, 299 Park Avenue, New York, New
York, on or about August , 1997.
------------------------
UBS SECURITIES
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
August , 1997
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[Photograph of Company's XP4 Indoor and Outdoor Units]
[The artwork for the inside front cover of the Prospectus is a color photograph
of the Company's millimeter wave radio system, depicting the Indoor (IDU) and
Outdoor (ODU) units.]
[The artwork for the gate-fold within the front cover of the Prospectus is a
copy of the Company's XP4 radio system installation manual, which is two pages
in its entirety, and illustrates installation of the Company's radio systems.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M UNDER THE SECURITIES ACT. SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus and the information under "Risk Factors." Unless
otherwise indicated, all information in this Prospectus (i) assumes that the
Underwriters' over-allotment option will not be exercised; (ii) reflects a 24:1
reverse stock split to be effected by the Company prior to consummation of the
Offering; and (iii) reflects the conversion of all outstanding shares of the
Company's Preferred Stock into 8,682,310 shares of Common Stock upon
consummation of the Offering.
THE COMPANY
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communication links in telecommunications
networks in both developed and developing markets. Innova's products enable
telecommunications service providers to establish reliable and cost-effective
voice, data and video communications links within their networks. Innova's
products operate in frequencies ranging from 15-38 GHz and may be used in
various applications, including cellular and PCS/PCN networks, broadband
communications, local loop services, and long distance networks.
In recent years, growing demand for telecommunications services has been
driven by the emergence of improved technologies and by the recognition that
effective communications enhance business productivity and can accelerate
economic growth. Regulatory changes, including the privatization of state-run
telephone monopolies, allocation of additional radio spectrum and licensing of
new entrants to the telecommunications market, have created a competitive
environment in which an increasing number of service providers are seeking to
meet this demand and capture market share by rapidly establishing new networks
and expanding existing networks.
Millimeter wave radios have become an increasingly critical component of
telecommunications networks. As a result, telecommunications service providers
have focused on the quality and lifetime ownership cost of these systems. Innova
has combined its expertise in radio frequency ("RF") systems architecture and
software design to create reliable, cost-effective, intelligent and feature-rich
millimeter wave radio systems that are easy to install, maintain and upgrade.
Innova's millimeter wave radio systems are designed to operate at multiple
E1/T1 rates in the high frequency bands used for the transmission of voice, data
and video traffic. Innova's XP4 products are based on a common system
architecture and are software configurable. Innova's radio systems consist of an
Indoor Unit ("IDU"), which interfaces with the user's network and is digitally
linked to an Outdoor Unit ("ODU"), which transmits and receives the RF signal.
The common embedded software platform in the IDU and ODU is simple network
management protocol ("SNMP") compatible and provides the ability to remotely
monitor and manage Innova's radios within a network using the service provider's
network management system.
Innova's objective is to be a leading provider of digital millimeter wave
radios. Innova's strategy is to: (i) continue its focus on enhancing existing
and developing new solutions for the point-to-point millimeter wave radio
market; (ii) expand the geographic coverage and increase the market penetration
of its products by strengthening existing and establishing new strategic
distribution relationships; (iii) leverage its existing system architecture to
be first-to-market with high-quality, cost-effective radios; and (iv) further
automate its product calibration and test processes to promote quality control
and cost-effective manufacturing, and further reduce dependence on skilled
labor.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with MAS
Technology Limited ("MAS"), NERA ASA ("NERA") and Societe Anonyme de
Telecommunications ("SAT"). Innova also markets its products directly to service
providers in the U.S. and internationally. To date, the Company has supplied
products, either through distribution relationships or directly, to
Alestra(Mexico), Associated Communications(U.S.), Avantel(Mexico), Bouygues
Telecom (France), Globtel(Slovakia), Northern Telecom Limited ("Nortel")
(Canada), PacBell Mobile Services (U.S.) and Telcel (Venezuela), among others.
3
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THE OFFERING
Shares of Common Stock Offered by the Company........... 2,500,000 Shares of Common Stock
Shares of Common Stock Outstanding after the Offering... 12,124,012 Shares of Common
Stock(1)
Use of Proceeds......................................... Repayment of indebtedness,
equipment purchases, working
capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.................. INVA
SUMMARY FINANCIAL DATA
NINE MONTH FISCAL THREE MONTHS ENDED
YEAR ENDED MARCH 31, PERIOD ENDED MARCH 31,
------------------------------------- DECEMBER 31, ---------------------
1993 1994 1995 1996 1996 1996 1997
------- ------- ------- ------- ------------------ ------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues................... $ 200 $ 877 $ 2,358 $ 1,962 $ 2,104 $ 137 $ 4,910
Gross profit (loss).............. (464) (1,186) (2,157) (1,980) (1,635) (973) 829
Loss from operations............. (3,903) (5,234) (6,116) (8,816) (7,186) (3,345) (1,920)
Net loss......................... $(5,099) $(5,400) $(6,318) $(9,061) $ (7,329) $(3,415) $ (2,119)
Pro forma net loss per
share(3)....................... $ (0.73) $ (0.21)
Shares used in computing pro
forma net loss per share
calculation(3)................. 10,086,535 10,094,815
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 67 $ 27,070
Working capital................................................................. 2,658 30,933
Total assets.................................................................... 13,687 40,690
Redeemable preferred stock(1)................................................... 44,299 --
Total stockholders' equity (deficit)(1)......................................... (38,855) 33,719
- ---------------
(1) Based on shares outstanding as of March 31, 1997. Excludes: (i) 1,539,460
shares of Common Stock issuable upon exercise of stock options issued
pursuant to the Company's 1990 Stock Option Plan outstanding at March 31,
1997, at a weighted average exercise price of $1.62 per share; (ii) an
additional 7,687 shares of Common Stock reserved for future issuance under
the Company's 1990 Stock Option plan; (iii) 2,445,659 shares of Common Stock
issuable upon exercise of Warrants to Purchase Common Stock outstanding at
March 31, 1997, and (iv) 481,978 shares of Preferred Stock issuable upon
exercise of warrants to purchase Preferred Stock outstanding as of March 31,
1997. See "Management -- Benefit Plans" and "-- Certain Transactions",
"Description of Capital Stock" and Notes to Consolidated Financial
Statements.
(2) As adjusted to give effect to the (i) conversion of all outstanding shares
of Preferred Stock into shares of Common Stock upon consummation of the
Offering, (ii) sale of the shares of Common Stock being offered hereby at an
assumed initial public offering price of $11.00 per share (after deducting
the underwriting discounts and commissions and estimated expenses of the
Offering), (iii) the issuance of 502,866 shares of Series F Preferred Stock
in June, 1997 at $6.96 per share, for total cash consideration of
$3,500,000, before issuance costs and (iv) application of the estimated net
proceeds of the Offering. See "Use of Proceeds."
(3) See Note 1(q) to the Consolidated Financial Statements.
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8
RISK FACTORS
An investment in the shares of Common Stock being offered by this
Prospectus involves a high degree of risk. In addition, this Prospectus contains
forward-looking statements that involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "The Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business," as well as in this Prospectus generally. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of many factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. Accordingly,
prospective investors should consider carefully the following risk factors, in
addition to the other information concerning the Company and its business
contained in this Prospectus before purchasing the shares of Common Stock
offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES
The Company was incorporated in 1989 and was in the development stage until
mid-1996, when it began shipment of XP4 products, its first line of millimeter
wave radios to be shipped in commercial quantities. From inception through the
quarter ended March 31, 1997, the Company generated a cumulative net loss of
approximately $42.5 million. From April 1, 1996 through March 31, 1997, the
Company generated sales of approximately $7.0 million, of which $6.6 million, or
94%, was generated in the quarter ended December 31, 1996 and the quarter ended
March 31, 1997. During these two quarters, the Company's net losses were $2.5
million and $2.1 million, respectively. Due to the Company's limited operating
history, among other things, there can be no assurance that revenues will not
decline. In addition, the Company intends to continue to invest significant
amounts in its operations, particularly to support existing and new product
development, increased manufacturing capacity, and sales and marketing of its
recently introduced product line. Thus, the Company may continue to generate
losses even if revenues increase, and there can be no assurance that the Company
will become profitable. In view of its limited operating history, the Company
remains vulnerable to a variety of business risks generally associated with
rapidly growing companies. The likelihood of success of the Company must be
considered in light of the problems, expenses, complications and delays
frequently encountered in connection with the development of new products,
markets and operations. As a result of the Company's net losses and limited
operating and sales history, period-to-period comparisons of operating results
may not be meaningful and results of operations from prior periods may not be
indicative of future results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIGNIFICANT CUSTOMER CONCENTRATION; DEPENDENCE ON LARGE CONTRACTS
The Company is dependent, in large part, on significant contracts from a
limited number of customers. Such contracts are often with systems integrators,
which in turn provide the Company's products to service providers as part of
larger telecommunications infrastructure initiatives. To date, approximately
fourteen customers have accounted for all of the Company's sales. In 1996 and
the first quarter of 1997, three customers, Associated Communications, Nortel
and SAT, accounted for approximately 81% of the Company's sales of XP4 products
and six customers accounted for over 91% of XP4 sales. Similarly, as of March
31, 1997, two customers, Nortel and SAT, accounted for over 75% of the Company's
backlog. Historically, a significant percentage of the Company's products have
been purchased by customers for use in single large-scale projects. For example,
virtually all of the Company's sales to Nortel (or approximately 55% of the
Company's total XP4 sales through March 31, 1997) were for use in a single
large-scale project undertaken by Globtel in Slovakia. Due to the Company's
limited operating history and limited number of customers to date, it is
difficult, if not impossible, for the Company to accurately predict the mix or
nature of infrastructure projects which could be the basis for its product sales
to systems integrators. However, the Company anticipates that revenue derived
from current and future large customers and large-scale projects will continue
to represent a significant proportion of its total revenues. Because of the
small size of the Company's customer base, the loss of, or reduced demand for
products from any customer for any reason, including business failure of the
customer, abandonment or delay of the underlying project, change in government
policy or general economic conditions, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Customers."
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DEPENDENCE ON DISTRIBUTION RELATIONSHIPS
The Company's product distribution strategy is to rely principally on
developing relationships with wireless systems integrators for international
sales, with direct sales to service providers in North and Central America and
certain other countries on a case-by-case basis. To date, the Company has
established relationships with MAS, NERA and SAT. See "Business -- Distribution
Relationships." There can be no assurance that the Company will be able to
establish distribution relationships with other systems integrators or that
existing relationships will be successful. Thus, the loss of one or more major
distribution relationships, or any significant reduction of orders by or the
business failure of a significant customer or distributor, could have a material
adverse effect on the Company's business, financial condition and results of
operations. If the Company is unable to establish additional distribution
relationships, it will be unable to implement its distribution strategy and be
required to seek other distribution channels. There can be no assurance that the
Company will be able to successfully implement such alternative distribution
channels or that the costs of doing so, or the result of any delays on
establishing such channels, will not have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
if the Company is unable to produce its products at margins that permit it to
provide systems integrators with a sufficient financial incentive to distribute
the Company's products without adversely affecting the Company's profitability,
the Company's distribution strategy could adversely affect the Company's net
income.
There are a number of other risks inherent in the Company's distribution
strategy. Agreements with systems integrators are typically terminable on short
notice and may not prohibit the systems integrators from distributing products
competitive with those manufactured by the Company. Thus, there can be no
assurance that such distributors will promote the Company's products
aggressively or achieve greater market penetration for the Company's products
than for those of competing products, that such relationships will not be
terminated prior to achievement of the Company's marketing objectives, or that
the establishment of multiple relationships will not result in excessive
competition among authorized distributors, resulting in price erosion or
interference with service provider relationships, or other distribution
arrangements. In addition, because of its distribution strategy, the Company is
dependent upon the financial viability, reputation and success of its
distributors, with the result that the Company's business, financial condition
and results of operations could be adversely affected by factors unrelated to
the Company's performance.
The Company has granted SAT exclusive distribution rights with respect to
France, Hungary, Poland, Italy, Monaco and Andorra. To the extent that the
Company grants such exclusive rights to other distributors in the future, it
will be solely dependent upon the success of its chosen distributor for sales
into a particular territory. In certain instances, even the establishment of
non-exclusive distribution relationships may preclude or make it more difficult
to establish similar relationships with other systems integrators who compete
directly with the Company's distributors, or prevent the Company from marketing
the product directly. In certain instances, the Company may grant its
distributors rights to produce the Company's products. See "-- Risks Associated
with Grants of Limited Manufacturing Rights."
SIGNIFICANT FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company has experienced, and may in the future experience, significant
fluctuations in sales, gross margins and operating results. In connection with
its efforts to ramp-up production of recently introduced products, the Company
expects to continue to make substantial capital investments in equipment,
recruit and train additional personnel, and possibly increase outsourcing of
components or invest in additional manufacturing facilities. The Company
anticipates that these expenditures may be made in advance of, and in
anticipation of, increased sales and, therefore, that its gross margins will be
adversely affected from time-to-time due to short-term inefficiencies associated
with addition of equipment, personnel or facilities, and that each cost category
may increase as a percentage of revenues from time-to-time on a periodic basis.
As a result, the Company's operating results will vary. Because of the
relatively small size of the Company's customer base and the large-scale nature
of the projects in which the Company's products are typically used, revenues
derived from current and future large customers and large-scale projects will
likely represent a significant portion of revenue in any given period. Thus, a
decrease in demand for products from any customer for any reason, including the
business failure of the customer or abandonment of a particular project, may
result in significant periodic fluctuations in sales. Similarly, revenues
derived from large-scale projects are often difficult to forecast due to a
relatively long time frame for implementing such projects. Delays can be caused
by delays
6
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in site acquisition by service providers, late deliveries by other vendors,
changes in implementation priorities, slower than anticipated growth and
declining demand for the services that the Company's products support, and
delays in obtaining regulatory approvals for installation of such systems.
Delays and reductions in the planned deployment of systems utilizing the
Company's products can also be caused by declines in the local economy or
capital availability and by new import controls.
The Company has at times failed to fill orders on a timely basis due
principally to capacity constraints. The Company's operating results for a
particular period may also be materially adversely affected by a delay,
rescheduling or cancellation of one or more purchase orders. Moreover, purchase
orders are often received and accepted substantially in advance of shipment, and
the failure to reduce costs to the extent anticipated, or an increase in
anticipated costs before shipment, could materially adversely affect the gross
margins for such order, and as a result, the Company's business, financial
condition and results of operations. Much of the anticipated growth in
telecommunications infrastructure results from the entrance of new service
providers, many of whom do not have the financial resources of existing service
providers. To the extent these new service providers are unable to adequately
finance their operations, they may cancel orders. A delay in a shipment near the
end of a particular quarter, due to, for example, an unanticipated shipment
rescheduling, a cancellation or deferral by a customer, competitive or economic
factors, unexpected manufacturing or other difficulties, delays in deliveries of
components, subassemblies or services by suppliers, or the failure to receive an
anticipated order, may cause sales in a particular period to fall significantly
below the Company's expectations and may materially adversely affect the
Company's business, financial condition and results of operations for such
period.
A large portion of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. Furthermore, announcements by
the Company or its competitors of new products and technologies could cause
customers to defer or cancel purchases of the Company's systems, which would
materially adversely affect the Company's business, financial condition and
results of operations. Additional factors that have caused or may cause the
Company's sales, gross margins and results of operations to vary significantly
from period-to-period include: new product introductions and enhancements,
including related costs; the Company's ability to manufacture and produce
sufficient products to meet customer requirements; limitations on manufacturing
capacity; the Company's ability to reduce costs; gain or loss by the Company of
significant customers; existing and new product development expenses; changes in
pricing by the Company, its customers or suppliers; inventory obsolescence;
market acceptance and the timing of availability of new products by the Company
or its customers; use of different distribution and sales channels; natural
disasters or adverse weather; fluctuations in foreign currency exchange rates;
delays or changes in regulatory approval of the Company's products; warranty and
customer support expenses; and general economic and political conditions. In
addition, the Company's results of operations have been, and will continue to
be, influenced significantly by competitive factors including the pricing and
availability of, and demand for, competitive products. All of the above factors
could materially adversely affect the Company's business, financial condition
and results of operations. As a result, the Company believes that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock may be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON SINGLE PRODUCT LINE
Substantially all of the Company's product sales since mid-1996 have been
derived from sales of its 18GHz, 23 GHz and 38 GHz XP4 radio systems. The
Company's business strategy includes efforts to reduce its reliance on revenues
from its existing products by developing new products and product enhancements,
including a lower cost product line targeted at picocell applications and a high
capacity system targeted at high bandwidth applications in the U.S. There can be
no assurance that the Company will be able to reduce its reliance on sales of
its current XP4 products by developing new products that achieve market
acceptance or enhancing its existing products. As a result, any factor adversely
affecting the sales of such products would have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business -- Products."
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UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success will be substantially dependent upon market
acceptance of its recently developed XP4 radio systems. The Company believes
that this acceptance is dependent upon its products' ability to successfully
compete on the basis of performance, reliability, cost, ease of installation,
adaptability and upgradeability. The Company must, among other things, offer
products with superior price/performance characteristics, supply its products on
a timely and cost-effective basis in sufficient volume to satisfy prospective
customers' requirements and otherwise overcome any reluctance on the part of
system integrators or service providers to transition to new products. There can
be no assurance that service providers or system integrators will design
telecommunications networks to include the Company's products, or will continue
to include the Company's systems in their networks in the future, or that the
Company's products will replace existing products or achieve widespread
acceptance in the wireless telecommunications market.
Any failure of the XP4 radio systems to gain and maintain market
acceptance, or of the Company to improve upon its current market position or to
achieve acceptable gross margins would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED PRODUCTION CAPACITY; NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS
During the quarter ended December 31, 1996, and the quarter ended March 31,
1997, demand for the Company's products exceeded its production capacity. This
resulted in some delays in delivery of products and some lost orders. The
Company believes that its present manufacturing capacity continues to be
inadequate to meet anticipated demand on a timely basis. The Company's business
plan is to continue to expand its manufacturing capacity by purchasing
additional equipment, hiring additional personnel, further developing its
proprietary test software to reduce its reliance on skilled labor, increasing
the efficiency of its production processes, and, in certain instances,
externally subcontracting additional assembly, calibration and testing
processes. In addition, if the Company is to achieve its objectives, it will be
required to significantly expand its sales, marketing and customer support
capabilities. Due to the Company's limited experience with large scale
operations, there can be no assurance that the Company will be able to develop
internally or contract with third parties for additional manufacturing capacity
on acceptable terms, that it will be able to maintain the quality of its
products as production increases, or that it will develop the administrative and
other structures necessary to support expanded operations. If the Company is
unable to increase its production capacity significantly, it will not realize
its business plan.
The Company's arrangements with its customers typically require that orders
be shipped not more than 60 days after the order. There can be no assurance that
the Company will be able to increase its production capacity at an acceptable
cost or rapidly enough to fill its orders. The failure to assemble and ship
products on a timely basis could damage relationships with customers and result
in cancellation of orders or lost orders, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Manufacturing" and "-- Distributor Relationships."
The Company currently conducts its manufacturing operations for all of its
products in a single facility in Seattle, Washington. If the Company's
facilities or the facilities of its suppliers were incapable of operating, even
temporarily, or were unable to operate at or near full capacity for any extended
period, the Company's business, financial condition and results of operations
could be materially adversely affected. In connection with the expansion of its
capacity, the Company may seek to develop one or more additional manufacturing
facilities, including, possibly, facilities located outside the Seattle,
Washington area. The development of any such facilities would significantly
increase the complexity of the Company's operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company's ability to achieve sales will depend in significant part upon
its ability to obtain and fulfill orders from, maintain good relationships with,
and provide support to existing and new customers and manufacture products on a
timely and cost-effective basis to meet stringent customer performance
requirements, and shipment and delivery dates. From its inception in 1989 until
July 1996, the Company did not develop or manufacture products that enabled it
to obtain a market presence. In addition, some early shipments of XP4 products
experienced some problems
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with a power source component produced by a third party. Because of the
Company's short operating history and the short time that the XP4 products have
been in production, there can be no assurance that problems will not occur with
respect to the quality, performance and reliability of the Company's products.
If such problems occur, the Company could experience increased costs or delays
in, cancellations of or rescheduling of orders or shipments, any of which may
have a material adverse effect on the Company's business, financial condition
and results of operations.
REQUIREMENT FOR RESPONSES TO RAPID TECHNOLOGICAL CHANGE AND REQUIREMENT FOR
FREQUENT NEW PRODUCT INTRODUCTIONS
The wireless communications market is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence, changes in customer requirements and evolving industry standards.
To be competitive, the Company must successfully develop, introduce and sell new
products or product enhancements that respond to changing customer requirements
on a timely and cost-effective basis. Any success of the Company in developing
new and enhanced products will depend on a variety of factors including: timely
and efficient completion of system design; timely and efficient implementation
of assembly, calibration, and test processes; development and completion of
related software; the reliability, cost and quality of its products; market
acceptance; and development and introduction of competitive products by
competitors. The Company has experienced and may experience delays from
time-to-time in completing development and introduction of new products.
Moreover, there can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or product
enhancements. The inability of the Company to introduce in a timely manner new
products or product enhancements that contribute to sales could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, changes in manufacturing operations to incorporate new
products and processes could cause disruptions in production, which, in turn,
could adversely affect customer relationships and the market's acceptance of the
Company's products, and have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing" and "-- Research and Development."
MANAGEMENT OF GROWTH
The growth of the Company's operations since the introduction of the XP4
product line has imposed, and will continue to impose, a significant strain on
the Company's financial, manufacturing and other resources. To alleviate the
impact of the strain, the Company must successfully manage the transition to
higher manufacturing volume, the establishment of additional facilities, the
control of overhead expenses and inventories, the development, introduction,
marketing and sales of new products and product enhancements, the management and
training of its employees, and the monitoring of third-party contractors and
suppliers. Accordingly, the Company will need to significantly expand its
internal management systems and implement necessary procedures and controls.
Failure to develop and implement these systems, procedures and controls
efficiently to effectively manage the Company's growth in operations could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The principal means by which the Company maintains its books and records as
well as the bulk of its purchasing and manufacturing data is a relatively simple
PC-network based system. To the extent that the Company continues to grow, this
system may need to be replaced or upgraded.
NO ASSURANCE OF COST REDUCTIONS
To compete successfully, the Company believes that it needs to achieve
significant reductions in production costs. The Company's objective is to
achieve these reductions through engineering improvements and economies of scale
in production and purchasing. There can be no assurance that the Company will be
able to achieve the desired cost savings. Its failure to do so would have a
material adverse effect on its business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POSSIBLE DECLINE IN PRICES
The Company believes that average selling prices and gross margins for its
products will decline in the long-term as such products mature, as volume price
discounts in contracts take effect, and as competition intensifies, among other
factors. To offset declining selling prices, the Company believes that it must
successfully reduce the costs of
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production of its existing products, introduce and sell new products and product
enhancements on a timely basis at a lower cost or that incorporate features that
enable them to be sold at higher average selling prices. To the extent that the
Company is unable to reduce costs sufficiently to offset declining average
selling prices, the Company's gross margins will decline, and such decline would
have a material adverse effect on the Company's business, financial condition,
results of operations and particularly on the Company's ability to profitably
pursue its distribution strategy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Research and
Development" and "-- Distribution Relationships".
SINGLE OR LIMITED SOURCES OF SUPPLY
Certain parts and components used in the Company's products, including
field programmable gate arrays and monolithic microwave integrated circuits
("MMICs"), are only available from a single source or limited number of sources.
The Company's reliance on these single source or limited source suppliers
involves certain risks and uncertainties, including the possibility of a
shortage or discontinuation of certain key components and reduced control over
delivery schedules, manufacturing capability, quality and cost. Any reduced
availability of such parts or components when required could materially impair
the Company's ability to manufacture and deliver its products on a timely basis
and result in the cancellation of orders which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the purchase of certain key components involves long lead times
and, in the event of unanticipated increases in demand for the Company's
products, the Company may be unable to obtain such components in sufficient
quantities to meet its customers' requirements. The Company does not have
guaranteed supply arrangements with many of its single or limited source
suppliers, does not maintain an extensive inventory of parts or components and
customarily purchases single or limited source parts and components pursuant to
purchase orders. Business disruptions, production shortfalls or financial
difficulties of a single or limited source supplier could materially and
adversely impact the Company by increasing product costs, or reducing or
eliminating the availability of such parts or components. In such event, the
inability of the Company to develop alternative sources of supply quickly and on
a cost-effective basis could materially impair the Company's ability to
manufacture and deliver its products on a timely basis and could have a material
adverse effect on its business, financial condition and results of operations.
See "Business -- Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its key technical and senior management personnel,
many of whom would be difficult to replace. The development and manufacturing of
millimeter wave radios is extremely complicated, and the knowledge and
experience of any of these key technical and management personnel is critical to
the Company's ability to develop new products and product enhancements. The
Company has not entered into long-term employment or non-competition agreements
with any of its employees, and the Company does not maintain key-man life
insurance on any of its key technical or senior management personnel. In
addition, the Company anticipates that it will need additional management
personnel if it is to be successful in increasing production capacity and the
scale of its operations. There can be no assurance that it will be able to
obtain such personnel on acceptable terms.
The Company's future operating results also depend in significant part upon
its ability to attract and retain qualified engineering, manufacturing, quality
assurance, sales, marketing and customer support personnel. Competition for such
personnel is intense. The Company has experienced difficulties over the past
nine months in recruiting sufficient qualified engineering and manufacturing
personnel in the Seattle area, and there can be no assurance that the Company
will be successful in attracting or retaining such personnel. There may be only
a limited number of persons with the requisite skills to serve in these
positions, and it may be increasingly difficult for the Company to hire such
personnel over time. The loss of any key employee, the failure of any key
employee to perform in his or her current position, the Company's inability to
attract and retain skilled employees as needed or the inability of the officers
and key employees of the Company to expand, train and manage the Company's
employee base could materially adversely affect the Company's business,
financial condition and results of operations. See "Business -- Employees" and
"-- Management."
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RISKS ASSOCIATED WITH INTERNATIONAL SALES
Approximately 91% of the Company's XP4 sales through March 31, 1997 were
made to customers located outside of the United States. The Company anticipates
that international sales will continue to account for at least a majority of its
sales for the foreseeable future. The Company's international sales may be
denominated in foreign or United States currencies. The Company does not
currently engage in foreign currency hedging transactions as all sales to date
have been in U.S. dollars. However, if a material amount of future sales are
denominated in foreign currency, a decrease in the value of foreign currencies
relative to the United States dollar could result in losses from such
transactions. With respect to the Company's international sales that are United
States dollar denominated, such a decrease could make the Company's systems less
price-competitive, or could cause distributors or customers to renegotiate
prices for subsequent purchases, both of which could have a material adverse
effect upon the Company's business, financial condition and results of
operations. Additional risks inherent in the Company's international business
activities include changes in regulatory requirements, tariffs and other trade
barriers, political and economic instability, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, customs
requirements, potentially adverse tax consequences, the burden of complying with
a wide variety of complex foreign laws and treaties, difficulties in obtaining
necessary equipment authorizations and the possibility of difficulty in accounts
receivable collections. Distribution and sales agreements entered into with
foreign customers may be governed by foreign laws which may differ significantly
from U.S. laws. Therefore, the Company may be limited in its ability to enforce
its rights under such agreements and to collect damages, if awarded. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
If service providers in developing markets do not construct wireless
telecommunications systems, or construction of such systems is delayed for a
variety of reasons, demand for the Company's products in those markets will be
also limited or delayed. In relying on direct or indirect sales to service
providers in developing markets, the Company may also face economic, political
and foreign currency fluctuations that are more volatile than those commonly
experienced in the United States and other areas.
DEPENDENCE ON GROWTH OF WIRELESS COMMUNICATIONS MARKET
The future operating results of the Company depend to a significant extent
upon the continued growth and increased availability and acceptance of cellular
and PCS/PCN and wireless local loop access telecommunications services
internationally and, to a lesser extent, in the United States. There can be no
assurance that the volume and variety of wireless telecommunications services or
the markets for and acceptance of such services will grow, or that such services
will create a demand for the Company's systems. If the millimeter wave wireless
radio market for the Company's systems fails to grow, or grows more slowly than
anticipated, the Company's business, financial condition and results of
operations would be materially adversely affected. Certain sectors of the
communications market will require the development and deployment of an
extensive and expensive communications infrastructure. In particular, the
establishment of cellular and PCS/PCN networks in the U.S. and other countries
will require very large capital expenditures. There can be no assurance that
communications providers have the ability to, or will, make the necessary
investment in such infrastructure, or that the creation of this infrastructure
will occur in a timely manner. Moreover, purchase of the Company's systems for
local loop service is dependent on the pricing of wireless telecommunications
services at rates competitive with those charged by wireline telephone
companies. In the U.S., rates for wireless access are currently substantially
higher than those charged by wireline companies, and there can be no assurance
that rates for wireless access will be competitive with rates charged by
wireline companies in the U.S. or elsewhere. If wireless access rates are not
competitive, demand for wireless access may be materially adversely affected. If
the Company allocates its resources, or relies heavily on a system provider that
allocates it resources to any market segment that does not grow as rapidly as
projected, it may be unable to reallocate its resources to other market segments
in a timely manner, which may curtail or eliminate its ability to enter such
market segments, and may have a material adverse effect on the Company's
business, financial condition and results of operations.
INTENSELY COMPETITIVE INDUSTRY
The wireless communications market is intensely competitive. The Company's
millimeter wave radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission services.
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The principal competitive factors in this market include product performance and
reliability, ability to meet delivery requirements, price, ease of installation,
adaptability and upgradeability and other product features. The Company
experiences intense competition worldwide from a number of leading
telecommunications companies that offer a variety of competitive products and
broader telecommunications product lines, including Alcatel Network Systems,
California Microwave, Inc., Digital Microwave Corporation, Ericsson Limited,
Harris Corporation -- Farinon Division, Nokia Telecommunications and P-COM,
Inc., all of which have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than the Company. The Company may also face competition in the
future from new market entrants offering competing technologies. In addition,
the Company's current and prospective customers and distributors have developed,
are currently developing or could develop the capability to manufacture products
competitive with those that have been or may be developed or manufactured by the
Company. Certain of such customers and distributors have access to the Company's
technology or have been granted the right to use the technology for purposes of
manufacturing under defined circumstances. The Company's future results of
operations may depend in part upon the extent to which these customers elect to
purchase rather than develop and manufacture their own radio systems. The
Company expects that its competitors will continue to improve the performance
and lower the price of their current products and to introduce new products or
new technologies that may be comparable or superior to the Company's current
products, which could cause a significant decline in sales or loss of market
acceptance of the Company's products or cause the Company's technologies to be
obsolete or non-competitive. The Company expects to continue to experience
significant price competition that may materially adversely affect its gross
margins and its business, financial condition and results of operations. The
Company believes that to be competitive, it will be required to expend
significant resources on, among other items, new product development and
enhancements and to reduce the costs of its products. As a result there can be
no assurance that the Company will be able to compete successfully. See
"Business -- Competition."
POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company's future capital requirements will depend upon many factors,
including the success or failure of the Company's efforts to expand its
production, sales and marketing efforts, the status of competitive products, and
the requirements of the Company's efforts to develop new products and product
enhancements. The Company believes that current and future available capital
resources are adequate to fund its operations for at least twelve months. There
can be no assurance, however, that the Company will not require additional
financing prior to such date. In such event, there can be no assurance that
additional financing will be available to the Company on acceptable terms, or at
all, or that such financing may not result in further dilution to existing
stockholders. The Company may be required to obtain funds through its
arrangements with partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products or other assets. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate its expansion of production and its research and development
programs. Any inability to obtain needed financing by the Company could have a
material adverse effect on its business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POTENTIAL FLUCTUATIONS IN BACKLOG
The Company's current backlog consists of a relatively small number of
large orders for XP4 equipment, principally from SAT for use by Bouygues Telecom
and Nortel for use by Globtel, and is attributable largely to limitations in the
Company's current production capacity. Purchase orders are often received and
accepted substantially in advance of shipment and are generally cancelable prior
to shipment. As a result, backlog may not result in revenues. Furthermore, the
Company's business strategy is to reduce the period between receipt and shipment
of orders by increasing production capacity. Thus, it should not be expected
that the Company's backlog will remain at current levels. Furthermore, due to
the many factors affecting decisions by customers to place orders and the
relative impact of a small number of large orders, backlog may fluctuate
significantly. Such fluctuations may adversely affect the price of the Common
Stock. See "Business -- Backlog."
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RISKS ASSOCIATED WITH GRANTS OF LIMITED MANUFACTURING RIGHTS
Some of the Company's existing and anticipated distribution relationships
with systems integrators involve or may involve the granting of rights enabling
the systems integrators to manufacture millimeter wave radios using the
Company's proprietary designs and technologies. In some instances, these rights
arise only upon the occurrence of specified conditions, such as a material
failure by the Company to perform its contractual obligations as a supplier. In
other instances, such manufacturing rights may be immediately effective but
limited to the manufacture of products within a specified range of frequencies,
a particular geographic area or a certain percentage of the systems integrator's
total product requirements. See "Business -- Distribution Relationships." The
negotiation of limited manufacturing rights typically involves highly sensitive
business issues such as sharing of the Company's proprietary information, rights
to Company developed and jointly developed improvements, preservation of rights
to next-generation product designs, conditions and limitations under which such
manufacturing rights may be utilized and compensation for the use of proprietary
information and technologies. Because the negotiated compensation to the Company
from third-party manufactured units results in lower margins than those earned
on Company manufactured units, the Company attempts to negotiate limits on the
amount of third-party manufacturing and to contractually protect its business
interests. There can be no assurance that the negotiated limitations on the
exercise of such rights will be sufficient to prevent such exercise from having
a material adverse effect on the Company's business, financial condition and
results of operations. Nor is there any assurance that contractual provisions
and related legal remedies will in all cases be adequate to prevent distributors
from making unauthorized disclosures, or excessive or unanticipated uses of the
Company's proprietary designs and technologies or sales of such products.
Granting of manufacturing rights, in general may also create competition between
the Company and its distributors over access to critical components that may be
in limited or short supply. See "Business -- Manufacturing".
EXTENSIVE GOVERNMENT REGULATION
Radio communications are subject to extensive regulation by United States
and foreign laws and international treaties. The Company's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. In order for the Company's radios to be used in a
foreign jurisdiction, regulatory approval for its systems must be obtained and
end users must comply with such regulations. Regulatory bodies worldwide are
continuing the process of adopting new standards for wireless communication
products. The delays inherent in this governmental approval process may cause
the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of systems by the Company to such customers.
The failure to comply with current or future regulations could result in
suspension or cessation of operations. Such regulations could require the
Company to change the features of its radio systems and incur substantial costs
to comply with such time-consuming regulations. Equipment to support new
services can be marketed only if permitted by suitable frequency allocations,
auctions and regulations, and the process of establishing new regulations is
complex and lengthy. To the extent service providers are delayed in deploying
these systems, the Company could experience delays in orders. These delays could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting network development efforts by the Company's customers
or end users, making current systems obsolete or increasing the opportunity for
additional competition. Any such regulatory changes could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company might deem it necessary or advisable to modify its
systems to operate in compliance with such regulations. Such modifications could
be extremely expensive and time-consuming. See "Business -- Government
Regulation."
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
The Company does not hold any patents regarding the technology and
expertise involved in the assembly, calibration and testing of its XP4 products.
The Company relies on technological innovations, trade secrets and expertise to
develop and maintain its competitive position, and upon confidentiality
procedures, common-law remedies and contractual provisions to protect its
proprietary rights. The Company's agreements with its distributors
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generally contain non-competition and non-disclosure provisions prohibiting the
distributor from manufacturing products based on the Company's designs for the
term of the agreement and for a short period thereafter. In general, the Company
has not entered into non-competition agreements with its management and other
employees or into confidentiality and non-disclosure agreements with system
integrators or service providers. Furthermore, it is likely that the Company's
competitors can obtain samples of the Company's products and, through reverse
engineering, obtain access to proprietary knowledge regarding the Company's
product designs.
The Company's success will depend in part on its ability to protect its
technology and preserve its trade secrets through common law and contractual
restrictions. There can be no assurance that the trade secrecy or other measures
taken by the Company will be adequate to prevent misappropriation of its
technology, or that competitors will not be able to independently develop
technologies having similar or better functions or performance characteristics.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the Company will have adequate legal remedy to prevent
or seek redress for future unauthorized misappropriation of the Company's
technology.
The telecommunications industry is characterized by rapid technological
change, with frequent introductions of new products and technologies. As a
result, industry participants often find it necessary to develop products and
features similar to those introduced by others, increasing the risk that their
products and processes may give rise to claims that they infringe the patents of
others. Accordingly, the Company's current and future products and processes, or
uses thereof, may conflict with patents that have been granted or may be granted
to competitors or others. Such competitors or others could bring legal actions
against the Company or its customers, claiming damages and seeking to enjoin
manufacturing, marketing or use of the affected product or processes. Similarly,
the Company may in the future find it necessary to commence litigation in order
to enforce and protect its proprietary rights. If the Company becomes involved
in any such litigation, it could consume a substantial portion of the Company's
resources and result in a significant diversion of management's attention. If
the outcome of any such litigation were adverse to the Company or its customers,
its business, financial condition and results of operations could be materially
adversely affected. In addition to any potential liability for damages, the
Company or its customers could be enjoined from continuing to manufacture,
market or use the affected product or process, and could be required to obtain a
license in order to continue such manufacture, marketing or use. There can be no
assurance that the Company or its customers would prevail in any such action or
that any license required under any such patent would be made available on
acceptable terms, if at all.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the Representatives of the Underwriters
and may not be indicative of the market price for the Common Stock in the
future. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that an
active trading market will develop or be sustained after this Offering. The
Company believes that factors such as announcements of developments related to
the Company's business; announcements of technological innovations or new
products or enhancements by the Company or its competitors; sales by
competitors, including sales to the Company's customers; sales of the Company's
Common Stock into the public market, including by members of management;
developments in the Company's relationships with its customers, partners,
distributors and suppliers; shortfalls or changes in revenues, gross margins,
earnings or losses or other financial results from analysts' expectations;
regulatory developments; fluctuations in results of operations; and general
conditions in the Company's market, or the markets served by the Company's
customers, or the economy could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market,
in general, and the market for shares of small capitalization and technology
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. Many
companies in the telecommunications industry have recently experienced historic
highs in the market price of their common stock. There can be no assurance that
the market price of the Company's Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance. Such fluctuations could materially adversely affect the
market price of the Company's Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE AFTER THE OFFERING
Upon completion of this Offering, 12,139,029 shares of Common Stock will be
outstanding (12,514,029 shares if the Underwriters' over-allotment option is
exercised in full) of which the 2,500,000 shares offered hereby (2,875,000 if
the Underwriters over-allotment is exercised in full) will be freely tradable on
the public market, except to the extent that such shares are held by an
affiliate of the Company. Of the remaining 9,639,029 outstanding shares,
8,123,262 shares are eligible for public sales immediately after this Offering
pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), 50,231 shares will become eligible for public sale 90 days
after the date of this Offering pursuant to Rule 701 under the Securities Act
and 8,384,076 shares will become eligible for public sale 180 days after the
date of this Offering upon the expiration of lock-up agreements entered into by
holders of substantially all of the Common Stock not being sold in this Offering
(the "Lock-Up Agreements"). All officers, directors and significant shareholders
and substantially all of the other shareholders of the Company have agreed not
to sell, offer to sell, solicit an offer to buy, contract to sell, grant any
option to purchase, contract to require any other person to purchase, or
otherwise transfer or dispose of any interest in, any shares of capital stock of
the Company, or any securities convertible into or exercisable or exchangeable
for capital stock of the Company, for a period of 180 days after the date of
this Prospectus without the prior written consent of UBS Securities LLC,
Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C., with certain
limited exceptions, and the Company has agreed that it will not, until 180 days
following the date of this Prospectus, without the prior written consent of UBS
Securities LLC, sell, offer or agree to sell, contract to sell, grant any option
to purchase, make any short sale or otherwise dispose of any shares of Common
Stock, except that the Company may grant additional options and issue stock
under the 1990 Stock Option Plan and the Director Plan or issue shares of Common
Stock upon the exercise of outstanding stock options and warrants. As of March
31, 1997, an additional 1,539,460 shares were issuable upon exercise of
outstanding stock options, 82% of which are subject to Lock-Up Agreements, with
the remainder eligible for public sale 90 days after the date of this Offering
pursuant to Rule 701, subject to vesting.
An additional 2,949,169 shares of Common Stock are issuable upon exercise
of warrants. Of the shares issuable upon exercise of the warrants, 2,462,947
shares are subject to Lock-Up Agreements.
Shareholders who will hold an aggregate of 9,546,995 shares of Common Stock
after this Offering have the right to require the Company to register their
shares for sale under the Securities Act, beginning 180 days after the closing
of this Offering. Sales of substantial numbers of shares of Common Stock in the
public market following this Offering could materially adversely affect the
market price for the Common Stock. See "Shares Eligible for Future Sale" and
"Descriptions of Common Stock -- Registration Rights."
CONTROL BY EXISTING SHAREHOLDERS; EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Following the completion of this Offering, members of the Board of
Directors and the officers of the Company, together with entities that may be
deemed affiliates of or related to such persons or entities, will beneficially
own approximately 63.1% of the outstanding shares of Common Stock of the
Company. Accordingly, these stockholders are able to significantly influence the
election of the members of the Company's Board of Directors and significantly
influence the outcome of corporate actions requiring stockholder approval, such
as mergers and acquisitions. This level of ownership, together with certain
provisions of the Company's certificate of incorporation, equity incentive
plans, bylaws and Washington law, may have a significant effect in delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of other holders of Common Stock. See
"Management -- Directors and Executive Officers," "-- Principal Stockholders"
and "Description of Capital Stock."
DILUTION
Investors in Common Stock in the Offering will experience immediate
dilution in the net tangible book value of their shares. Assuming an initial
public offering price of $11.00 per share, dilution to new investors would be
$8.22 per share. Additional dilution will occur upon exercise of outstanding
stock options and warrants. If the Company seeks additional capital in the
future, the issuance of shares or convertible debt to obtain such capital may
lead to further dilution. See "Dilution."
15
19
LIMITATIONS ON USE OF NET OPERATING LOSS CARRYFORWARDS
Section 382 of the Internal Revenue Code of 1986 (the "Code") imposes
certain limitations on the ability of a "loss corporation" to use its net
operating losses ("NOLs") to offset its future taxable income in taxable years
following an "ownership change" (including an ownership change resulting from
the issuance of stock). In general, an ownership change occurs if the percentage
(as measured by value) of the loss corporation's stock (other than certain
preferred stock) which is owned, directly or indirectly, by one or more 5%
shareholders (or certain groups of shareholders collectively treated as a 5%
shareholder) is increased by more than 50 percentage points over the lowest
percentage of stock owned by such 5% shareholders at any time during the
applicable "testing period". In the event of an ownership change, the amount of
pre-change NOLs that the loss corporation can use to offset its taxable income
in a post-change taxable year will be limited to an amount equal to the product
of the "long-term tax-exempt rate" then in effect and the value of the loss
corporation's stock immediately prior to the ownership change (without taking
into account for such valuation purposes certain capital contributions received
by the loss corporation during the two-year period preceding the ownership
change) (the "Section 382 limitation"). The long-term tax-exempt rate is an
interest rate based upon certain specified U.S. Treasury debt obligations and
announced on a monthly basis by the Internal Revenue Service. In addition, if
the loss corporation does not continue its historic business or continue to use
a substantial portion of its historic assets in its business for a two-year
period following an ownership change, the Section 382 limitation would be
reduced to zero, with the effect that no portion of the pre-change NOLs would be
available to offset future taxable income (except in certain very limited
circumstances).
The Company has reviewed past issuances of stock, grants of options and
warrants to acquire Company stock and issuances of debt instruments convertible
into Company stock, as well as share transfers among its shareholders, to
determine the effect of such events under Section 382 of the Code. Based on such
review, the Company believes that an ownership change occurred on February 13,
1995, and that as a result, the NOLs incurred by the Company prior to that date
are subject to the Section 382 limitation. Thus, to the extent that the
Company's taxable income in a post-change taxable year exceeds the amount of the
Section 382 limitation, the Company's federal income tax liability for such
taxable year would be greater than it would otherwise be if the pre-change NOLs
were fully available to offset such taxable income. The Company further believes
that its issuance of Common Stock pursuant to the Offering, when combined with
other events subsequent to February 13, 1995, should not result in another
ownership change. However, there can be no assurance that future events, such as
the Company's issuance of additional shares of Common Stock or transfers of
outstanding shares of Common Stock by the Company's shareholder, will not cause
an ownership change to occur in the future. In the event of any such future
ownership change, the Company's ability to use some or all of its NOLs incurred
after February 13, 1995 to offset its future taxable income would also become
subject to the Section 382 limitation.
16
20
THE COMPANY
The Company was incorporated on June 30, 1989 as a Delaware corporation and
reincorporated as a Washington corporation through a merger with a wholly-owned
subsidiary on May 31, 1991. Unless the context otherwise requires, the term
"Company" refers to Innova Corporation and its subsidiaries, Innova Europe
Limited and Techinnova S.A. de C.V. The Company's principal executive offices
are located at Gateway North, Building 2, 3325 South 116th Street, Seattle,
Washington 98168-1974, and its telephone number is (206) 439-9121.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby based on the assumed initial public offering price
of $11.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, are
estimated to be $24,775,000 ($28,611,250 if the Underwriters' over-allotment
option is exercised in full).
The Company intends to use a portion of the net proceeds from the Offering
to retire the outstanding principal and accrued interest of its credit line with
Greyrock Business Credit, a Division of NationsCredit Commercial Corporation
("Greyrock Business Credit"). As of March 31, 1997, the outstanding balance of
this credit line was approximately $1.3 million. The Company will also use a
portion of the net proceeds of this offering to repay the Company's outstanding
principal balance and accrued interest on its term loan with Greyrock Business
Credit. As of March 31, 1997, there was no outstanding balance on this term
loan. The credit line and the term loan each bear interest at the greater of
4.75% above LIBOR or 8% per annum. The Company has used both the credit line and
the term loan for inventory, supplies and equipment in the manufacturing of XP4
products and for general working capital purposes. The Company expects to use
the balance of the proceeds from the Offering for general corporate purposes,
including the acquisition of equipment and the hiring of additional personnel in
connection with the Company's efforts to increase its production capacity and
scope of operations and for other working capital purposes, including to support
growth in inventory and receivables and research and development and sales and
marketing activities.
Pending their application, the Company intends to invest the net proceeds
from this Offering in government securities or short-term, interest- or
dividend-bearing investment-grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, to finance the growth and
development of its business and does not anticipate paying any cash dividends or
other distributions on its Common Stock in the foreseeable future.
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21
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at March 31, 1997 (after giving effect to a 24:1 reverse stock split
to be effective immediately prior to the closing of the Offering) and the
short-term debt and capitalization of the Company as adjusted to give effect to
the: (i) conversion of all outstanding shares of Preferred Stock upon
consummation of the offering; (ii) sale by the Company of the 2,500,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share, after deducting the underwriting discounts and commissions and
estimated Offering expenses; and (iii) the issuance of 502,866 shares of Series
F Preferred Stock in June 1997 at $6.96 per share, for total cash consideration
of $3,500,000, before issuance costs and (iv) application of the estimated net
proceeds of the Offering. See "Use of Proceeds" and Note 17 of Notes to
Consolidated Financial Statements. The information set forth below is unaudited
and should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
MARCH 31, 1997
-------------------------
ACTUAL AS ADJUSTED
-------- ------------
(in thousands)
Notes payable......................................................... $ 1,271 $ --
Current installments of obligations under capital leases.............. 750 750
-------- --------
Total short-term debt............................................... 2,021 750
Obligations under capital leases, excluding current installments...... 1,318 1,318
Redeemable preferred stock, no par value.
12,874,998 shares authorized; 8,179,444 shares issued and
outstanding; 5,000,000 shares authorized and 0 shares issued and
outstanding, as adjusted(1)...................................... 44,299 --
Stockholders' equity (deficit)
Common Stock, no par value: 15,625,000 shares authorized; 941,702
shares issued and outstanding; 30,000,000 authorized and
12,124,012 shares issued and outstanding, as adjusted(2)......... 1,378 73,952
Additional paid-in capital.......................................... 2,885 2,885
Deferred stock option compensation expense.......................... (663) (663)
Cumulative translation adjustment................................... 38 38
Accumulated deficit................................................. (42,493) (42,493)
Total stockholders' equity (deficit)............................. (38,855) 33,719
-------- --------
Total capitalization............................................. $ 6,762 $ 35,037
======== ========
- ---------------
(1) At March 31, 1997, the Company had 12,874,998 shares of preferred stock
authorized, of which 4,166,666 shares were designated as Series A Preferred
Stock, 2,083,333 shares were designated Series B Preferred Stock, 833,333
shares were designated Series C Preferred Stock, 625,000 shares were
designated Series C1 Preferred Stock, 4,166,666 shares were designated as
Series D Preferred Stock and 1,000,000 shares were designated as Series E
Preferred Stock.
(2) Based on shares outstanding as of March 31, 1997. Excludes: (i) 1,539,460
shares of Common Stock issuable upon exercise of stock options issued
pursuant to the Company's 1990 Stock Option Plan outstanding at March 31,
1997, at a weighted average exercise price of $1.62 per share; (ii) an
additional 7,687 shares of Common Stock reserved for future issuance under
the Company's 1990 Stock Option Plan and (iii) 2,445,659 shares of Common
Stock issuable upon exercise of Warrants to Purchase Common Stock
outstanding at March 31, 1997, and (iv) 481,978 shares of Preferred Stock
issuable upon exercise of warrants to purchase Preferred Stock outstanding
as of March 31, 1997. See "Management -- Benefit Plans" and "-- Certain
Transactions", "Description of Capital Stock" and Notes to Consolidated
Financial Statements.
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22
DILUTION
As of March 31, 1997, the pro forma net tangible book value of the
Company's Common Stock was approximately $8,944,000, or $0.93 per share. Pro
forma net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, after giving effect to pro forma adjustments consisting of the
conversion of the Redeemable Preferred Stock into Common Stock and the issuance
of Series F Preferred Stock. Additionally, after giving effect to the sale by
the Company of the shares of Common Stock offered hereby and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company, the pro forma net tangible book value of the Company as of March
31, 1997 would have been approximately $33,719,000 or $2.78 per share. This
represents an immediate increase in net tangible book value of $1.85 per share
to existing shareholders and an immediate dilution of $8.22 per Common Share to
new investors purchasing the Common Shares in this Offering. Dilution is
determined by subtracting pro forma net tangible book value per share after the
Offering from the amount of cash paid by a new investor for a Common Share.
The following table illustrates this per share dilution:
Public Offering price per share......................... $ 11.00
Pro forma net tangible book value per share as of March
31, 1997.............................................. $ 0.93
Increase per share attributable to the Offering......... $ 1.85
------
Pro forma net tangible book value per share after this
Offering.............................................. $ 2.78
-------
Dilution per share to investors......................... $ 8.22
=======
The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of Common Shares purchased from the Company, the total consideration
paid to the Company and the average price per share paid by existing
shareholders and by new investors purchasing the Common Shares offered hereby
(before deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ------------------
Existing shareholders(1)(2)......... 9,624,012 79% $49,510,598 64% $ 5.14
Investors(1)........................ 2,500,000 21 $27,500,000 36 $11.00
---------- --- ----------- --- ------
Total..................... 12,124,012 100% $77,010,598 100% $ 6.35
========== === =========== ===
- ---------------
(1) The foregoing table reflects ownership at March 31, 1997, giving effect to
the conversions of all outstanding shares of Preferred Stock into Common
Stock, the issuance of Series F Preferred Stock and a 24:1 reverse stock
split to be effective immediately prior to the closing of the offering, and
assumes no exercise of the Underwriters' overallotment option. Exercise of
the Underwriters' over-allotment option in full would reduce the proportion
of shares held by existing shareholders to 77% of the total number of Shares
of Common Stock outstanding after the Offering and increase the number of
shares held by investors in the offering to 2,875,000 shares or 23% of such
total number of shares.
(2) Based on shares outstanding as of March 31, 1997. Excludes: (i) 1,539,460
shares of Common Stock issuable upon exercise of stock options issued
pursuant to the Company's 1990 Stock Option Plan outstanding at March 31,
1997, at a weighted average exercise price of $1.62 per share; (ii) an
additional 7,687 shares of Common Stock reserved for future issuance under
the Company's 1990 Stock Option Plan; (iii) 2,445,659 shares of Common Stock
issuable upon exercise of Warrants to Purchase Common Stock outstanding at
March 31, 1997, and (iv) 481,978 shares of Preferred Stock issuable upon
exercise of warrants to purchase Preferred Stock outstanding as of March 31,
1997. See "Management -- Benefit Plans" and "-- Certain Transactions",
"Description of Capital Stock" and Notes to Consolidated Financial
Statements. To the extent such stock options and warrants are exercised,
there will be further dilution to new investors in the Offering. See
"Management -- Stock Options," "-- Benefit Plans" and "Risk
Factors -- Dilution."
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The selected financial data
for fiscal periods ended March 31, 1993, 1994, 1995 and 1996, and December 31,
1996 are derived from the Consolidated Financial Statements of the Company
audited by KPMG Peat Marwick LLP, independent accountants. The selected
financial data as of March 31, 1997 and for the three months ended March 31,
1996 and 1997 are derived from unaudited financial statements prepared by the
Company on a basis consistent with the Company's audited Consolidated Financial
Statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results for such periods. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31, 1997.
NINE MONTH
FISCAL PERIOD THREE MONTHS ENDED
YEARS ENDED MARCH 31, ENDED MARCH 31,
---------------------------------------- DECEMBER 31, ----------------------
1993 1994 1995 1996 1996 1996 1997
------- ------- ------- ------- ------------- ------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total Revenues:
Net product sales........................ $ 200 $ 877 $ 1,151 $ 445 $ 2,051 $ 12 $ 4,910
Manufacturing contract service
revenues............................... -- -- 1,207 1,517 53 125 --
------- ------- ------- ------- ------- ------- -------
200 877 2,358 1,962 2,104 137 4,910
Total cost of products sold:
Cost of products sold.................... 664 2,063 3,703 2,425 3,686 985 4,081
Manufacturing contract service
expenses............................... -- -- 812 1,517 53 125 --
------- ------- ------- ------- ------- ------- -------
664 2,063 4,515 3,942 3,739 1,110 4,081
Gross profit (loss)........................ (464) (1,186) (2,157) (1,980) (1,635) (973) 829
Operating expenses:
Selling, general and administrative
expenses............................... 1,132 1,566 2,067 2,317 2,585 796 1,638
Research and development expenses........ 2,307 2,482 1,892 4,519 2,966 1,576 1,111
------- ------- ------- ------- ------- ------- -------
Loss from operations....................... (3,903) (5,234) (6,116) (8,816) (7,186) (3,345) (1,920)
Other income (expense)..................... (13) (166) (202) (245) (143) (70) (199)
Loss from discontinued operations.......... (591) -- -- -- -- -- --
Loss on disposal of discontinued
operations............................... (592) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net loss................................... $(5,099) $(5,400) $(6,318) $(9,061) $ (7,329) $(3,415) $ (2,119)
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per share(1).......... $ (0.73) $ (0.21)
======= =======
Shares used in computing pro forma net
loss per share(1)...................... 10,086,535 10,094,815
------- -------
MARCH 31, MARCH 31, 1997
----------------------------------------- DECEMBER 31, -------------------------
1993 1994 1995 1996 1996 ACTUAL AS ADJUSTED(2)
-------- -------- -------- -------- ------------ -------- --------------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 713 $ 527 $ 1,922 $ 287 $ 173 $ 67 $ 27,070
Working capital (deficit).............. (1,763) (2,388) 1,815 2,156 (289) 2,658 30,933
Total assets........................... 1,968 2,798 5,093 6,747 7,305 13,687 40,690
Current liabilities.................... 2,916 4,353 1,206 2,156 4,809 6,925 5,653
Long term obligations.................. 150 -- 443 330 542 1,318 1,318
Mandatorily convertible notes payable
for preferred stock.................. -- -- -- 6,984 -- -- --
Redeemable preferred stock............. 9,540 13,198 24,497 27,362 39,313 44,299 --
Common stock........................... 6 1,290 1,302 1,330 1,377 1,378 73,952
Additional paid-in capital............. 1,605 1,605 1,605 1,605 1,605 2,885 2,885
Accumulated deficit.................... (12,267) (17,667) (23,985) (33,046) (40,375) (42,493) (42,493)
Total stockholders' equity (deficit)... (10,558) (14,753) (21,052) (30,085) (37,360) (38,855) 33,719
- ---------------
(1) See Note 1(q) to Consolidated Financial Statements.
(2) As adjusted to give effect to the (i) conversion of all outstanding shares
of Preferred Stock into shares of Common Stock upon consummation of the
Offering, (ii) sale of the shares of Common Stock being offered hereby at an
assumed initial public offering price of $11.00 per share (after deducting
the underwriting discounts and commissions and estimated expenses of the
Offering), (iii) the issuance of 502,866 shares of Series F Preferred Stock
in June, 1997 at $6.96 per share, for total cash consideration of
$3,500,000, before issuance costs and (iv) application of the estimated net
proceeds of the Offering. See "Use of Proceeds."
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24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communications links in developed and
developing telecommunications markets. The Company began shipping the 23, 26 and
38 GHz models of its XP4 radio systems in the quarter ended September 30, 1996.
As of March 31, 1997 the Company had sold its XP4 radios to a total of 14
customers, generating $5.4 million in total revenues, $3.9 million of which
occurred in the quarter ended March 31, 1997. Approximately 81% of XP4 sales
through March 31, 1997 have been to three customers. The Company was a
development stage company from its incorporation in 1989 through March 31, 1996.
As of March 31, 1997, the Company had an accumulated deficit of approximately
$42.5 million. See "Risk Factors -- Limited Operating History; History of
Significant Losses." After March 31, 1996 the Company changed its fiscal
year-end to December 31.
The Company's net sales consist primarily of sales of point-to-point
millimeter wave radios to system integrators, other equipment resellers and
service providers, principally for installation outside the U.S. See "Risk
Factors -- Dependence on Distribution Relationships" and "-- Risks Associated
With International Sales." Other revenues are generated from the resale of
related telecommunications equipment such as antennas, cables and enclosures.
The Company recognizes revenue upon shipment.
In the period from 1989 to 1992 the Company developed and manufactured a
line of TVRO (Television Receive Only) antennas. Approximately $4 million of
these antennas were sold, primarily to a single customer in Europe, before the
product line was discontinued in 1992. The Company began developing millimeter
wave radios early in calendar 1992. The Company generated its first revenue from
the shipment of radios, based on its initial XP3 architecture, in late calendar
1993. The Company subsequently determined that the technology and architecture
upon which the XP3 product line was based was not suitable to meet the evolving
needs of the target market. In late calendar 1994, the Company decided to
curtail further development of the XP3 product line and concentrate its
development efforts on a new product architecture, which it believed would be
more reliable and would incorporate features that would be more attractive to
customers. In November 1994, the Company ceased marketing XP3 products, and for
approximately the next year, its only material revenues consisted of
subcontractor fees for manufacturing a revised model of the XP3 for SAT. See
"Certain Transactions -- XP3 Product Arrangements." During this period, research
and development efforts were devoted to the development of the XP4 product line.
In calendar 1995, the Company began making significant additions of
experienced management in the engineering, manufacturing, sales and
administrative areas, including a new Chief Executive Officer who took office in
early calendar 1996. From late calendar 1995 to the latter part of calendar
1996, the Company continued to invest in product development and manufacturing
infrastructure, in anticipation of the launch of the XP4 product line, which
occurred in the quarter ended September 30, 1996. After an initial evaluation
period, orders for XP4 radios increased late in the final quarter of calendar
1996 and continued to increase in the first quarter of 1997. Since launching the
XP4 product line, the Company has increased expenditures in an effort to
increase sales and expand manufacturing capacity. In light of the fundamental
changes in the character of the Company's operations during the past three
years, as well as various other reasons, the Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an accurate indicator of future performance. See "Risk Factors -- Significant
Fluctuations in Results of Operations."
Since introduction of the XP4 product line, orders have increased more
rapidly than the Company has been able to expand its manufacturing capacity,
resulting in delayed shipping dates and lost orders. The Company's backlog was
approximately $6.1 million as of March 31, 1997. The Company includes in backlog
only customer commitments for which it has received signed purchase orders and
assigned shipment dates within the following 180 days. The Company's
distribution agreements generally provide that products are to be shipped not
more than 60 days after the order and that orders may be cancelled prior to
shipment. The Company believes the current level of backlog, as a percentage of
sales, is due to inadequate manufacturing capacity and anticipates that the
backlog will decrease as a
21
25
percentage of sales as manufacturing capacity increases and delivery times
decrease. The Company intends to continue its efforts to increase manufacturing
capacity but expects that sales may continue to be constrained by capacity
limitations through 1997 and into 1998. See "Risk Factors -- Potential
Fluctuation in Backlog."
As sales have increased since introduction of the XP4 in the quarter ended
September 30, 1996, the Company's gross margins have improved, due to the
Company's ability to absorb fixed and semivariable operating costs over larger
manufacturing volumes. The Company's gross profits over the past two quarters
have also been favorably affected by lower component costs, particularly
fabricated metal parts and transmit and receive hybrids. These component cost
savings are principally a result of higher volume purchasing, the substitution
of lower cost parts and the redesign of components and circuits. In addition to
component cost savings, the Company is pursuing programs to simplify and reduce
the cost of its assembly, test and manufacturing processes. Realization of
further planned savings is necessary if the Company is to improve gross margins.
There can be no assurance, however, that the Company will be successful in
achieving further cost reductions. The Company also expects that its gross
margins will continue to be affected by a variety of other factors, such as:
increases in lower-margin sales through large distributors; increased investment
in manufacturing facilities or equipment; changes in labor costs resulting from
increasing manufacturing capacity; increased manufacturing or testing
arrangements with distributors; changes in product mix; receipt of royalties
under limited manufacturing licenses; increased sourcing of components and
subassemblies from third-party manufacturers; and potential increased price
competition. See "Risk Factors -- No Assurance of Cost Reductions" and
"-- Possible Decline in Prices."
Continued expansion of the Company's manufacturing capacity will be
required for the Company to achieve its business plan. Such expansion will
require substantial investments in additional capital equipment, the recruiting
and training of additional personnel, and possibly increased sourcing of
components from third-parties or investment in additional manufacturing
facilities. Addition of a new facility and increased manufacturing capacity,
particularly if located in another state or country, is likely to add
significant amounts of fixed overhead to the Company's manufacturing costs and
to appreciably increase the complexity of the Company's operations. See "Risk
Factors -- Limited Production Capacity; No Assurance of Successful Expansion of
Operations" and "-- Management of Growth."
To the extent sales volumes continue to grow, the accounting and other
systems used by the Company may not be suitable to handle the volume and
complexity of the resulting transactions. At present, the principal means by
which the Company maintains its books and records, as well as the bulk of its
purchasing and manufacturing data, is a relatively simple PC-network based
system. To the extent the Company continues to grow, this system may need to be
replaced or upgraded. The Company is currently in the process of upgrading its
current information management software; however, this upgrade may prove to be
only a first step in dealing with the anticipated needs of the Company. See
"Risk Factors -- Management of Growth."
The Company has entered into distribution agreements whereby it has agreed
to sell XP4 products at various fixed prices. Certain of these distribution
agreements include "Most Favored Customer" pricing commitments which require the
Company to offer lower prices to such distributors in the event such prices are
offered under like terms and conditions to other customers. In addition, under
certain conditions some of these agreements grant limited manufacturing licenses
or impose penalties for late delivery. The Company anticipates that certain of
its distributors will manufacture a portion of the XP4 radios they sell. To the
extent such manufacturing by the Company's distributors decreases the number of
XP4 units built by the Company, the Company's manufacturing gross profit will be
reduced. As of March 31, 1997, no XP4 products have been manufactured by any of
the Company's distributors. See "Risk Factors -- Dependence on Distribution
Relationships" and "Business -- Distribution Relationships."
The Company's sales may also be affected by a variety of other factors
including the establishment of new distribution relationships, the addition of
direct sales personnel or sales offices, the introduction of new products by the
Company or its competitors, and competitive and other conditions affecting the
telecommunications industry generally. The Company remains dependent on
significant contracts from a limited number of customers. Such contracts are
often with systems integrators, which in turn provide the Company's products to
service providers as part of larger telecommunication system infrastructure
buildouts. Due to the Company's limited operating history and limited number of
customers to date, it is difficult, if not impossible for the Company to
accurately predict the mix or nature of infrastructure projects that provide the
basis for its product sales to systems integrators. However, the
22
26
Company anticipates that revenue derived from current and future large customers
and large-scale projects will continue to represent a significant portion of its
total revenues. Because of the small size of the Company's customer base, the
loss of or reduced demand for products from any customer for any reason,
including business failure of the customer, abandonment of the underlying
project, or changes in government policy or general economic conditions, for
example, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Significant
Customer Concentration; Dependence on Large Contracts," "-- Intensely
Competitive Industry," and "Business -- Customers." The Company believes that
price competition among manufacturers of millimeter wave radios is likely to
increase over time, which could adversely affect the Company's sales or margins.
See "Risk Factors -- Possible Decline in Prices."
In addition to expanding the XP4 product line with additional frequencies
and data rates, the Company is also developing point-to-point millimeter wave
radios with different architectures that are designed to address different
market needs than the XP4. To maintain current or target additional market
opportunities, the Company will need to undertake additional development
programs and to produce new products and product enhancements on a timely and
cost-effective basis. Accordingly, research and development costs are expected
to increase over time.
The Company has granted non-qualified stock options to its employees which
in some cases have required attainment of performance goals prior to vesting.
Generally, these options have been granted at exercise prices which the Company
believed to be no less than the fair market value of the underlying Common Stock
as of the date of grant. In 1997, the Company amended previously granted options
to eliminate performance-related vesting criteria. In connection with these
amendments, the Company recorded a non-cash charge to operations of $617,380 for
the three months ended March 31, 1997, which is due primarily to the estimated
fair market value of these amended options exceeding the exercise price on the
amendment date. Additional compensation expense totaling $662,520 will be
recorded over the next 4 years as these options vest.
The Company accrues for warranty expenses on an estimated basis, based on a
fixed dollar amount for each radio system shipped. Due to the limited operating
history of the Company, this estimate is based in part on experience with the
XP4 and, to a greater extent, on management's experience in the millimeter wave
radio industry generally. Actual warranty expenses for XP4 sales may vary
significantly from the Company's estimates.
The fifth, sixth, seventh, eighth, ninth, tenth and eleventh paragraphs of
this "Overview" Section contain forward looking statements ("Forward Looking
Statements") within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those projected in the Forward Looking Statements, as a
result of a number of factors, including those set forth in the section entitled
"Risk Factors." In particular, note the "Risk Factors" entitled "Potential
Significant Fluctuations in Results of Operations," "Significant Customer
Concentration; Dependence on Large Customers," "Intensely Competitive Industry"
and "Limited Production Capacity; No Assurance of Successful Expansion of
Operation."
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27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's Consolidated Statements of Operations expressed as a
percentage of total revenues.
NINE MONTH
FISCAL THREE MONTHS
PERIOD ENDED
YEAR ENDED MARCH 31, ENDED MARCH 31,
----------------------------------------- DECEMBER 31, -----------------
1993 1994 1995 1996 1996 1996 1997
-------- ------ ------ ------ ------------ -------- -----
(Unaudited)
STATEMENTS OF OPERATIONS DATA:
Total Revenues:
Net product sales.............................. 100.0% 100.0% 48.8% 22.7% 97.5% 8.7% 100.0%
Manufacturing contract service
revenues..................................... -- -- 51.2 77.3 2.5 91.3 --
100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total cost of products sold:
Cost of products sold.......................... 332.0 235.2 157.0 123.6 175.2 719.1 83.1
Manufacturing contract service
expenses..................................... -- -- 34.4 77.3 2.5 91.3 --
332.0 235.2 191.4 200.9 177.7 810.4 83.1
Gross margin (deficit)........................... (232.0) (135.2) (91.4) (100.9) (77.7) (710.4) 16.9
Operating expenses:
Selling, general and administrative............ 566.0 178.6 87.6 118.1 122.9 581.4 33.4
Research and development....................... 1,153.5 283.0 80.2 230.3 141.0 1,150.8 22.6
Loss from operations............................. (1,951.5) (596.8) (259.2) (449.3) (341.6) (2,442.6) (39.1)
Other income (expense)........................... (6.5) (18.9) (8.7) (12.5) (6.8) (51.4) (4.1)
Loss from discontinued operations................ (295.5) -- -- -- -- -- --
Loss on disposal of discontinued operations...... (2,960) -- -- -- -- -- --
------ ------ ------ ------ ------ -------- -----
Net loss......................................... (2,549.5)% (615.7)% (267.9)% (461.8)% (348.4)% (2,494.0)% (43.2)%
====== ====== ====== ====== ====== ======== =====
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
TOTAL REVENUES. Net product sales increased to $4.9 million for the three
months ended March 31, 1997, as compared to minimal levels for the three months
ended March 31, 1996. The increase is attributable to sales of XP4 radios, which
were not sold until the quarter ended September 30, 1996. International sales
represented 91% of total net product sales for the three months ended March 31,
1997. Manufacturing contract service revenues, which consisted of fees received
for manufacturing a revised XP3 for SAT, were eliminated due to SAT's decision
to discontinue production of XP3 radios in Innova's facilities for the quarter
ended March 31, 1996.
GROSS PROFIT (LOSS). Gross profit increased to $829,000 for the three
months ended March 31, 1997, as compared to a loss of $973,000 for the three
months ended March 31, 1996. The increase in gross profit was attributable to
the sales of XP4 radios, increased manufacturing volumes and reduced unit
material and outside processing costs resulting from higher-volume purchases and
lower, negotiated prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $1.6 million for the three months ended
March 31, 1997 as compared to $796,000 for the three months ended March 31,
1996. The increase was due primarily to a charge to compensation expense in
connection with amendments to stock options granted in calendar 1996 and
increased compensation expense associated with the addition of sales and
marketing staff in the U.S. and U.K. offices to support the launch of the XP4
product line. The Company may incur additional compensation expense in
connection with opening additional sales offices, particularly in certain
international markets. The Company anticipates that selling, general and
administrative expenses will continue to increase.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased to
$1.1 million for the three months ended March 31, 1997 as compared to $1.6
million for the three months ended March 31, 1996. The decrease in research and
development expenses was primarily due to a reduction in consulting expenses,
which was partially offset by an increase in employee compensation costs due to
increased headcount. Research and development expenses incurred for the three
months ended March 31, 1997 were related to refinements and expansion of the XP4
product line and development of other products.
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OTHER INCOME (EXPENSE). Other expense increased to $198,000 for the three
months ended March 31, 1997 as compared to $70,000 for the three months ended
March 31, 1996. The increase was due primarily to increases in interest expense
resulting from additional capitalized leases. The Company anticipates that net
interest expense will continue to increase due to increased balances outstanding
on the Company's working capital line.
INCOME TAXES. No provision for income taxes has been recorded, as the
Company incurred net operating losses through March 31, 1997. As of March 31,
1997, the Company had remaining net operating loss carryforwards of $35 million
and additional loss carryovers relating to its U.K. subsidiary. The U.S. net
operating loss carryforwards will expire in various amounts from 2005 to 2012.
The application of these amounts is subject to certain annual limitations under
the Internal Revenue Code of 1986, as amended. The Company anticipates that its
effective income tax rate will approach the statutory rate after these amounts
are applied or expire. The Company has provided a full valuation allowance on
the deferred tax assets because of the uncertainty regarding realizability. See
Note 11 of Notes to Consolidated Financial Statements.
NINE MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEARS
ENDED MARCH 31, 1996 AND 1995
TOTAL REVENUE. Net product sales increased to $2.1 million for the nine
month fiscal period ended December 31, 1996, as compared to $445,000 and $1.2
million for the fiscal years ended March 31, 1996 and March 31, 1995,
respectively. The increase in net product sales for the nine month fiscal period
ended December 31, 1996 was due to the launch of the XP4 product line in the
quarter ended September 30, 1996. International sales during this nine month
period represented 69% of net product sales. The decrease for the fiscal year
ended March 31, 1996, as compared to the fiscal year ended March 31, 1995, was
due to the decision to discontinue production of XP3 radios. Manufacturing
contract service revenues increased to $1.5 million for the fiscal year ended
March 31, 1996, as compared to $1.2 million for the fiscal year ended March 31,
1995. Manufacturing contract service revenues in each of these periods related
to manufacture of the XP3 radios for SAT, which was substantially discontinued
in the quarter ended March 31, 1996.
GROSS PROFIT (LOSS). The Company's gross profit increased to a loss of $1.6
million for the nine month fiscal period ended December 31, 1996, as compared to
a loss of $2.0 million and $2.2 million for the fiscal years ended March 31,
1996 and March 31, 1995, respectively. The increase in gross profit for the nine
month fiscal period ended December 31, 1996 was due to increased revenue
resulting from sales of the XP4 products, which more than offset increased
expenses and the decrease in manufacturing contract sales revenue and related
costs resulting from termination of subcontracting services. Losses in the
fiscal years ended March 31, 1996 and March 31, 1995 were the result of the
ramp-up of production capabilities for the XP3 and fixed manufacturing costs
associated therewith. Due to the planned introduction of the XP4, these fixed
costs were not reduced after the decision to end XP3 production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $2.6 million for the nine month fiscal
period ended December 31, 1996, as compared to $2.3 million and $2.1 million for
the fiscal years ended March 31, 1996 and March 31, 1995, respectively. The
increase for the nine month fiscal period ended December 31, 1996 was due to
increased staffing, both in the U.S. and U.K. offices, associated with launch of
the XP4 product line. Selling, general and administrative expenses for the
fiscal years ended March 31, 1996 and March 31, 1995 reflect continued
investment in marketing and other staff in anticipation of the launch of the XP4
after ending production of XP3 radios. Selling, general and administrative
expenses are anticipated to continue to increase.
RESEARCH AND DEVELOPMENT. Research and development expenditures were $3.0
million for the nine month fiscal period ended December 31, 1996 as compared to
$4.5 million and $1.9 million for the fiscal years ended March 31, 1996 and
March 31, 1995, respectively. The decrease for the nine month fiscal period
ended December 31, 1996, was due to the shorter period and to the Company's
decision to reduce consulting expenses, which were partially offset by increases
in internal research and development headcount. Research and development
expenses for the nine month fiscal period ended December 31, 1996 were devoted
to development of the XP4 product line, including the development of several
frequency and data rate product variations. The Company anticipates research and
development expenses will increase as the Company focuses on new products in
addition to the XP4 product line. The increase in expenses for the fiscal year
ended March 31, 1996 as compared to the fiscal year ended March 31, 1995 was
25
29
attributable to increased efforts associated with development of the XP4 product
line, and increased expenditures for engineering consulting services.
OTHER INCOME (EXPENSE). Other expense for the nine month fiscal period
ended December 31, 1996 decreased as compared to the fiscal year ended March 31,
1996. Other expense decreased due to offsetting interest income from investment
of proceeds of equity financing. The increase in interest expense for the fiscal
year ended March 31, 1996 as compared to the fiscal year ended March 31, 1995
was due primarily to higher average borrowings in anticipation of equity
financings. The Company anticipates that interest charges may increase
substantially over time if sales and, therefore, eligible accounts receivable
and working capital line borrowings, increase. However, the Company intends to
use the proceeds from the Offering to pay down working capital borrowings and
reduce interest expense.
The paragraphs entitled "Selling, General and Administrative Expenses,"
"Research and Development," and "Other Income (Expense)" in the Section entitled
"Three Months Ended March 31, 1997 Compared to the Three Months Ended March 31,
1996," and the paragraphs entitled "Selling, General and Administrative
Expenses," "Research and Development," and "Other Income (Expense)" in the
Section entitled "Nine Month Fiscal Period Ended December 31, 1996 Compared to
the Fiscal Years Ended March 31, 1996 and 1995," contain Forward Looking
Statements. Actual results could differ materially from those anticipated or
projected in the Forward Looking Statements as a result of a number of factors,
including those set forth in the Section entitled "Risk Factors." In particular,
note the Risk Factors entitled "Significant Fluctuations in Results of
Operations," "Significant Customer Concentration; Dependence on Large
Contracts," "Limited Production Capacity; No Assurance of Successful Expansion
of Operations" and "Intensely Competitive Industry."
QUARTERLY RESULTS OF OPERATIONS
The significant fluctuations in the Company's historical quarterly
operating results are principally a function of the fact that the Company was,
until mid-1996, a development stage company. In consequence, these fluctuations
are largely explained by variation in expenses incurred in connection with the
development of the Company's XP4 systems. In addition, the historical quarterly
operating results have been affected by the launch and subsequent
discontinuation of the XP3 radio line, along with the fluctuation in revenues
received by the Company under its agreement with SAT for the subcontract
manufacture for SAT of XP3 products. The discontinuation of XP3 manufacture or
subcontract manufacture did not result in a corresponding decrease in expenses
as the Company maintained staffing levels in anticipation of the launch of the
XP4 product line. The Company may continue to experience significant quarterly
fluctuations in sales, gross margins and operating results; however, these
fluctuations are likely to be caused by different factors than those that
existed in the past, making prediction of the Company's performance difficult,
if not impossible.
In connection with its efforts to ramp-up production of recently introduced
products, the Company expects to continue to make substantial capital
investments in equipment, recruit and train additional personnel, and may
increase outsourcing of components, or invest in additional manufacturing
facilities. The Company anticipates that these expenditures may be made in
advance of, and in anticipation of, increased sales and, therefore, that its
gross margins will be adversely affected from time-to-time due to short term
inefficiencies associated with addition of equipment, personnel or facilities,
and that each cost category will increase as a percentage of revenues from
time-to-time on a periodic basis. As a result, the Company's operating results
will vary. Because of the relatively small size of the Company's customer base
and large-scale nature of the projects in which the Company's products are
typically used, revenues derived from current and future large customers and
large-scale projects will likely represent a significant portion of revenue in
any given period. Thus, a decrease in demand for products from any customer for
any reason, including the business failure of the customer or abandonment of a
particular project, may result in significant periodic fluctuations in sales.
Similarly, revenues derived from large-scale projects are often difficult to
forecast due to a relatively long time frame for implementing such projects.
Delays can be caused by late deliveries by other vendors, changes in
implementation priorities, slower than anticipated growth and declining demand
for the services that the Company's products support, and delays in obtaining
regulatory approvals for installation of such systems. Delays and reductions in
the planned deployment of systems utilizing the Company's products can also be
caused by fluctuations in the local economy, capital availability, and changes
in import controls.
26
30
The Company has at times failed to fill orders on a timely basis due
principally to capacity constraints. Delay in a shipment near the end of a
particular quarter, for any reason, may cause sales in that quarter to fall
significantly below the Company's expectations and materially adversely effect
the Company's operating results for that quarter.
Additional factors that may cause the Company's sales, gross margins and
results of operations to vary significantly from period-to-period include: new
product introductions and enhancements, including related costs; the Company's
ability to manufacture and produce sufficient products to meet customer
requirements; limitations on the Company's manufacturing capacity; the Company's
ability to reduce costs; gain or loss by the Company of significant customers;
existing and new product development expenses; pricing changes by the Company,
its customers or suppliers; inventory obsolescence; natural disasters or adverse
weather; market acceptance and the timing of availability of new products by the
Company or its customers; use of different distribution and sales channels;
fluctuations in foreign currency exchange rates; delays or changes in regulatory
approval of the Company's products; warranty and customer support expenses; and
general economic and political conditions.
Because of the many factors which may effect the Company's performance in
any particular period, the Company believes that period-to-period comparisons
are not necessarily meaningful and should not be relied upon as indications of
future performance.
The following table sets forth the unaudited results of operations for each
of the five fiscal quarters beginning January 1, 1996 and ending March 31, 1997.
In the opinion of the Company's management, these unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein, when read in
conjunction with the Company's audited Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.
Results of operations for any quarter are not necessarily indicative of the
results that may be expected for any future period. There can be no assurance
that the Company will not experience significant variations in its future
results of operations. See "Risk Factors -- Significant Fluctuation in Operating
Results."
THREE MONTHS ENDED
----------------------------------------------------------
1996 1997
--------------------------------------------- --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- --------
(in thousands)
Total Revenues:
Net product sales......................................... $ 12 $ 21 $ 373 $1,657 $ 4,910
Manufacturing contract service revenues................... 125 42 4 7 --
------- ------- ------- ------- -------
137 63 377 1,664 4,910
Total cost of products sold:
Cost of products sold..................................... 985 900 1,097 1,689 4,081
Manufacturing contract service expenses................... 125 42 4 7 --
------- ------- ------- ------- -------
1,110 942 1,101 1,696 4,081
Gross profit (loss)......................................... (973) (879) (724) (32) 829
Operating expenses:
Selling, general and administrative....................... 796 737 754 1,094 1,638
Research and development.................................. 1,576 798 814 1,354 1,111
------- ------- ------- ------- -------
Loss from operations........................................ (3,345) (2,414) (2,292) (2,480) (1,920)
Other income (expense)...................................... (70) (59) (19) (65) (199)
------- ------- ------- ------- -------
Net loss.................................................... $(3,415) $(2,473) $(2,311) $(2,545) $(2,119)
======= ======= ======= ======= =======
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31
The following table sets forth, for the periods indicated, the unaudited
results of operations as a percentage of total revenues:
THREE MONTHS ENDED
--------------------------------------------------------------
1996 1997
------------------------------------------------- --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
---------- --------- -------- ------- --------
Total Revenues:
Net product sales....................................... 8.8% 33.3% 98.9% 99.6 % 100.0%
Manufacturing contract service revenues................. 91.2 66.7 1.1 0.4 --
------- ------- ------- ------- -------
100.0 100.0 100.0 100.0 100.0
Total cost of products sold:
Cost of products sold................................... 719.0 1,428.6 291.0 101.5 83.1
Manufacturing contract service expenses................. 91.2 66.7 1.1 0.4 --
------- ------- ------- ------- -------
Gross profit (loss)....................................... (710.2) (1,395.3) (192.1) (1.9) 16.9
Operating expenses:
Selling, general and administrative..................... 581.0 1,169.8 200.0 65.7 33.4
Research and development................................ 1,150.4 1,266.7 215.9 81.4 22.6
------- ------- ------- ------- -------
Loss from operations...................................... (2,441.6) (3,831.8) (608.0) (149.0) (39.1)
Other income (expense).................................... (51.1) (93.6) (5.0) (3.9) (4.1)
------- ------- ------- ------- -------
Net loss.................................................. (2,492.7)% (3,925.4)% (613.0)% (152.9)% (43.2)%
======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for capital equipment, investment
in product development activities and more recently for financing accounts
receivable and inventory. To date, the Company has financed its operations
primarily from private placements of equity securities, and, more recently, bank
borrowings. During the fiscal period ended December 31, 1996, and the fiscal
years ended March 31, 1996, 1995 and 1994, the Company raised $9,735,000,
$6,790,000, $9,143,000 and $16,274,000, respectively from the sale of debt and
equity securities. Since December 31, 1996, the Company has raised an additional
$8.5 million from the private placement of equity securities. Investing
activities were minimal during these periods.
The Company has a credit facility with a commercial bank, which provides
for a revolving credit line and a term loan. Outstanding balances on the credit
line bear interest at the greater of the LIBOR rate in effect each month plus
4.875% per annum or 8% per annum, and matures on October 31, 1997. The term loan
accrues interest at the same rate and is payable upon the consummation of the
Offering. The Company has used both the credit line and the term loan for
inventory, supplies and equipment in the manufacturing of XP4 products, and for
general working capital purposes.
The Company's cash and cash equivalents decreased to $67,000 at March 31,
1997 as compared to $173,000 at December 31, 1996. Working capital increased to
$2.7 million at March 31, 1997 as compared to a negative ($300,000) at December
31, 1996. This increase was partly due to receipt of $3.5 million in proceeds
from equity financing closed during the period. Accounts receivable increased to
$3.6 million at March 31, 1997, as compared to $1.7 million at December 31,
1996. This was the result of increased sales volumes in the quarter ended March
31, 1997. Inventories also increased to $5.8 million at March 31, 1997, as
compared to $2.5 million at December 31, 1996. This increase was related to the
increase in manufacturing levels necessary to support increased sales.
Outstanding working capital line increased to $1.3 million at March 31, 1997
compared to $506,000 at December 31, 1996. Notes payable to stockholders of $3.0
million were converted to redeemable preferred stock at March 31, 1997. Accounts
payable increased to $4.4 million at March 31, 1997 as compared to $1.9 million
at December 31, 1996 largely due to the ramp-up related to the XP4 product.
Expenditures for obligations under capital leases, excluding current
installments, equipment and leasehold improvements in the fiscal years ended
March 31, 1996 and the nine months fiscal period ended December 31, 1996 were
$1.0 million in both periods. Investment in equipment and leasehold improvements
in the quarter ended March 31, 1997 was $1.4 million.
Accounts receivable increased to $3.6 million at March 31, 1997, from $1.7
million at December 31, 1996. This increase resulted from the addition of
receivables from sales of the Company's XP4 products. While the Company
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32
anticipates that the proceeds from the Offering together with cash generated
from operations will be sufficient to finance an anticipated increase in
inventory and receivables, should receivables and inventories increase faster
than anticipated, the Company could be required to incur additional
indebtedness.
The Company intends to use a portion of the proceeds of this Offering to
retire outstanding borrowings under its credit facilities. Under the revolving
credit line, outstanding balances as of March 31, 1997 were $1.3 million. There
were no outstanding balances under the term loan. The Company believes that the
net proceeds of this Offering and financings since March 31, 1997, together with
funds provided by operations and bank borrowings, will be sufficient to meet its
liquidity requirements for at least the next 12 months. To the extent additional
capital is necessary, the Company could be required to sell additional equity,
debt or convertible securities, or obtain additional credit facilities. There
can be no assurance that additional financing will be available at the time or
in the amounts that may be needed, or that any financing which is available will
be on terms favorable to the Company and its shareholders.
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33
BUSINESS
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communication links in telecommunications
networks in both developed and developing markets. Innova's products enable
telecommunications service providers to establish reliable and cost-effective
voice, data and video communications links within their networks. Innova's
products operate in frequencies ranging from 15-38 GHz and may be used in
various applications, including cellular and PCS/PCN networks, broadband
communications, local loop services, and long distance networks.
Innova's millimeter wave radio systems are designed to operate at multiple
E1/T1 rates, are based on a common system architecture and are software
configurable. Innova's radio systems consist of an Indoor Unit, which interfaces
with the user's network and is digitally linked to an Outdoor Unit, which
transmits and receives the RF signal. The common embedded software platform in
the IDU and ODU is SNMP compatible and provides the ability to remotely monitor
and manage Innova's radios within a network using the service provider's network
management system.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with MAS,
NERA and SAT. Innova also markets its products directly to certain service
providers in the U.S. and internationally. To date, the Company has supplied
products, either through distribution relationships or directly, to Alestra
(Mexico), Associated Communications (U.S.), Avantel (Mexico), Bouygues Telecom
(France), Globtel (Slovakia), Nortel (Canada), PacBell Mobile Services (U.S.)
and Telcel (Venezuela), among others.
INDUSTRY BACKGROUND
In recent years, worldwide demand for telecommunications services has
increased dramatically. In developed countries, much of the demand has been for
mobile services, while in developing countries demand has been principally for
basic voice service. This demand has been driven by the recognition that
effective communications enhance business productivity and can accelerate
economic growth. Demand has also been driven by the emergence of technologies
that allow the development and deployment of cost-effective, reliable
telecommunications systems.
Changes in the regulatory environment in many countries, including the
ending of monopolies for public telecommunications services, privatization of
government-owned telecommunications organizations and allocation and licensing
of radio frequency spectrum by regulatory authorities, have led to an increase
in the number of telecommunications service providers seeking to meet this
demand. In Europe, for example, recent EU directives prohibit each member
country from restricting competitive access to mobile and local service after
January 1, 1998. In the U.S., the Telecommunications Act of 1996 mandated
competitive access to local telephone networks, and spectrum has been allocated
for five wireless carriers per market. Similar trends are occurring in
developing countries, creating significant opportunities for new entrants in the
telecommunications markets.
Telecommunications service providers are seeking to rapidly capture market
share by establishing new networks and expanding existing networks which respond
to the opportunities created by deregulation, technological advances and
increasing consumer demand. As demand for telecommunications services has
increased, mobile and local service providers have committed significant amounts
of capital to the installation of network infrastructure. In developed
countries, new service providers have the option to lease network capacity from
existing service providers, but often choose not to do so since such leasing
arrangements might often be with competitors, may be comparatively expensive and
would not allow control of the network by the service provider. As a result,
many new service providers are seeking to build their own networks to provide
new or improved service. In addition, existing service providers have continued
to upgrade and expand their networks to respond to customer demand, and
increased competition. In developing countries, both new and existing service
providers are investing heavily to build out network infrastructure to respond
to the demand for basic service.
Telecommunications links are a critical element of network infrastructure.
Service providers must choose between wireline or wireless equipment for each of
the many telecommunications links that connect various parts of their networks.
Wireless links are frequently used within telecommunications networks to
interconnect cell sites, switching systems, wireline transmission systems and
other fixed facilities. Wireless links generally involve relatively low initial
30
34
capital costs, and may be quickly deployed, especially in urban areas, as no
terrestrial rights of way need to be acquired or cables installed. In addition,
new wireless links can be rapidly added to upgrade or expand existing
telecommunications networks and installed links can be quickly relocated to
respond to shifts in demand.
Millimeter wave radio systems have been increasingly used for short- to
medium-distance wireless links. The narrower antenna beam width of millimeter
wave frequencies allows a higher density of links in a given geographic area as
compared to lower frequencies. The atmospheric attenuation of millimeter wave
frequencies also allows these frequencies to be re-used after relatively short
distances. As a result, millimeter wave radios are particularly well-suited to
providing wireless transmission over short- to medium-distances. The general
structure of a mobile telecommunications network and possible applications for
millimeter wave radios within such networks are illustrated in the following
diagram:
[DIAGRAM]
The diagram depicts a mobile telecommunications network as denoted by a
Mobile Telephone Switching Office ("MTSO") with an antenna tower. Mobile network
users are connected to the MTSO through the use of a cellular or PCS/PCN
telephone. The MTSO is in turn connected to a telephone exchange central office
via a millimeter wave radio system.
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35
The general structure of a local loop network and possible applications for
millimeter wave radios within such networks are illustrated in the following
diagram:
[DIAGRAM]
The diagram depicts a Wireless Local Loop ("WLL") telecommunications
network as denoted by a local telephone exchange office with an antenna tower.
Users' homes and offices are connected local exchange via wireless telephones.
The central office is in turn connected to a telephone exchange central office
via a millimeter wave radio system.
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36
As millimeter wave radios have become an increasingly critical component of
telecommunications networks, service providers have focused on the quality and
lifetime ownership cost of these systems. Thus, service providers now demand
more reliable millimeter wave radios in order to reduce costly service
interruptions resulting from the failure of critical links within their
telecommunications networks. Due to increased sensitivity to aesthetic concerns,
congestion in urban environments and use of wireless systems in developing
countries, base stations are becoming smaller and being placed in less suitable
locations. As a result, service providers now seek radio systems which are, in
turn, smaller and which perform reliably under adverse conditions. In addition,
larger and more complex telecommunications networks require millimeter wave
radios which can be easily integrated with other parts of the network, avoiding
the need for multiple network management systems. Moreover, the need to rapidly
deploy and upgrade networks requires millimeter wave radios which can be easily
installed without sophisticated tools or special skills, and which can be easily
and quickly reconfigured or field upgraded.
INNOVA SOLUTION
Innova's millimeter wave radio systems are reliable, intelligent,
feature-rich and easy to install, maintain and upgrade. The Company's XP4 radio
systems have been selected for deployment by a number of new service providers
and major systems integrators since their introduction in 1996. The Company
believes its products provide the following benefits:
Reliability. The Company develops and manufactures radio systems capable of
performing reliably under extreme temperatures. The Company believes the low
parts count, low power consumption and high tolerance to temperature extremes of
its XP4 radio systems make them inherently more reliable than competing
products. In addition, the all-digital communications interface between the XP4
radio systems' Indoor Unit and Outdoor Unit provides greater immunity to high
electromagnetic and radio-frequency-induced interference.
Ease of Installation and Maintenance. The lightweight XP4 can be easily
installed by a single technician without a PC, additional software, specialized
tools or test equipment. The comprehensive embedded software program facilitates
accurate installation by alerting the installer to configuration mistakes with
blinking LEDs. The diagnostic features of the embedded software platform
simplify maintenance by permitting field technicians to determine proper
operation of an installed terminal without disconnecting the radio unit from the
antenna. The XP4 software platform allows control of the entire radio link from
either end of the link, or from a single remote location. In addition, the SNMP
interface allows operation of the entire system from a central, common network
management center. XP4 radio systems also feature a very high degree of modular
commonality across frequency bands and data rates. The common architecture
reduces spare parts inventory and training costs.
Adaptability. The Company believes it is the first to provide millimeter
wave radio systems which provide an open network management capability,
facilitating inclusion of the systems into a variety of telecommunications
networks. Innova's compact XP4 radio systems are designed to occupy less space
and are well-suited to operate in various settings where small size and
resistance to temperature extremes are necessary. The high immunity to
interference provided by the digital communications link between the indoor unit
and the outdoor unit also allows the XP4 to be deployed in less suitable sites
currently prevalent in developing countries and congested urban areas.
Ease of Reconfiguration and Upgradeability. Common hardware and a common
software platform across all XP4 radio systems facilitate integration into
network management systems and provide remote reconfiguration and upgrade
capabilities. The comprehensive embedded software platform common to all of
Innova's XP4 radio systems allows network operators to download new code into
the radio units without interrupting traffic or upgrading each unit on-site. The
ability to easily reconfigure and upgrade the XP4 system allows service
providers to enhance and expand their networks without having to replace the
Company's products.
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INNOVA STRATEGY
Innova's objective is to be a leading provider of digital millimeter wave
radios. Innova intends to address the needs of major systems integrators using
millimeter wave radios for wireless connectivity solutions in mobile and local
loop networks, including broadband capability. Innova's strategy includes the
following key elements:
Continue To Focus on Millimeter Wave Radio Market. The Company intends to
continue to focus its product development efforts on new and existing
point-to-point millimeter wave radios, and to maintain its competitive advantage
by developing small, lightweight systems which perform reliably at extreme
temperatures and can be produced, installed and maintained on a cost-effective
basis. The Company believes it was the first to provide millimeter wave radio
systems with a SNMP-compatible architecture, and that it was the first to
develop, produce and deliver 24 GHz equipment for use in the U.S. market in
response to allocation of 24 GHz spectrum by the FCC. The Company intends to
further expand the frequency range and traffic capacity of its systems, and is
currently developing a lower cost system targeted at picocell applications and a
high capacity system targeted at high bandwidth applications in the U.S.
Expand Distribution Through Strategic Relationships. The Company intends to
expand the geographic coverage and increase the market penetration of its
products by strengthening existing and establishing new strategic relationships
with major systems integrators with strong regional presences throughout the
world. The Company believes that the cost-effective architecture of its products
provides a competitive advantage in developing relationships with major systems
integrators. The Company intends to focus on further reducing the cost of its
radio systems to maintain that advantage. The Company also believes its
relationships with major systems integrators will become increasingly important
as service providers more often rely on third parties to supply and build their
network infrastructure. The Company believes the ability of many major systems
integrators to offer financing on larger projects, and supply complementary
products and services necessary to build telecommunications networks,
facilitates sales of the Company's products.
Leverage System Architecture. The Company intends to leverage its system
architecture to realize efficiencies in its product design, assembly and test
processes. The Company believes these attributes will enable the Company to be
first to market with new, reliable products that are cost-effective and meet the
evolving demands of systems integrators and service providers. The Company plans
to continue to design its system architecture to minimize the number of
components in each system and to maximize the use of common components across
the full range of the Company's products. The Company believes its use of common
modules, components and a field-proven common software platform facilitates
product enhancement and new product development by reducing the number of
components that need to be re-engineered.
Simplify Product Assembly and Test Processes. The Company continually seeks
to refine and simplify its product design and assembly, calibration and test
processes, which are the most significant components of production cost. The
Company believes its rigorous testing processes, including operation of radio
systems at extreme temperatures and use of proprietary software and test
stations, provide a significant competitive advantage. The Company intends to
continue to develop software that increases automation and process reliability
and reduces dependence on skilled labor. The Company believes the reduced
dependence on skilled labor will enable it to establish additional manufacturing
facilities in locations which maximize market opportunity.
PRODUCTS
The Company's radio systems are designed to operate in millimeter wave
bands used for the transmission of voice, data and video traffic over short- to
medium- distances. The Company's XP4 products are based on a common system
architecture and are software configurable. The Company's XP4 systems operate at
data rates up to and including 4E1 and 4T1, and have been certified for use in
the Czech Republic, France, Germany, Mexico, Slovakia, the U.K. and the U.S.
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The following table provides transmission distances and the number of
access lines offered by the 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz and 38 GHz
systems currently being marketed by the Company.
XP4 PRODUCT LINE
NUMBER OF ACCESS LINES
-----------------------------
FREQUENCY IN 2E1/4E1 AND 4T1 OR OPERATIONAL
GHZ 4E1/8E1(1) 4T1/8T1(1) RANGE IN MILES
- ------------ ----------- ------------- --------------
15 (2) Yes Yes 15
18 Yes Yes 10
23 Yes Yes 6
24 No Yes 5
26 Yes No 5
38 Yes Yes 3
- ---------------
(1) The Company expects that the 8E1 and 8T1 configurations will be available
for volume shipments in July 1997.
(2) Available for shipment on July 1, 1997.
The Company's products are designed to connect to the end user's network
through multiple high capacity lines. In transmission mode, the Company's Indoor
Unit accepts the customer's traffic from these multiple lines. The
microprocessors in the IDU then combine the multiple signals into a single,
digital signal, which is combined with data used to control functions and
parameters of the radio link, and digitally transmitted over a single coaxial
cable to the Outdoor Unit. The frequency shift key ("FSK")
modulator/demodulator, housed in the ODU, converts the digital signal into the
appropriate radio frequency. The RF signal is then fed into the hybrid
"transmit" module, which increases the signal to the transmitting frequency. The
high frequency, millimeter wave signal is then passed through a diplexer filter
to the antenna and broadcast to the receiving unit. In receive mode, the signal
is passed from the antenna through the diplexer filter to the hybrid "receive"
module, where the signal is amplified and stepped down to a lower frequency. The
signal is then passed through the demodulator and converted into a digital
signal, before being routed down the coaxial cable to the IDU. In the IDU, the
end user's traffic is separated from the system control data and delivered to
multiple lines for transmission to the end user's network.
[DIAGRAM]
The diagram depicts the Company's millimeter wave radio system with a graphical
representation of an Indoor Unit ("IDU") and an Outdoor Unit ("ODU") as
described in the paragraphs below the diagram.
Indoor Unit. The IDU is the interface to the user's network. It is an
assembly mounted indoors or in a base station, that contains digital signal
processing electronics, including line interface and digital multiplexing
circuitry. The IDU also includes the alarm and diagnostic ports, service channel
and SNMP-compatible network management capability. The IDU provides for the
ability to set capacity, frequency and power output of the radio link through
software configuration without requiring access to the outdoor unit.
Configuration of the Company's radio systems, including frequency
selection, power output setting, capacity and link ID, along with alarm
monitoring and receive signal level indications, are performed using the
five-button keypad located on the front panel of the IDU, or by using a PC and
the Company's proprietary XPView software interface. In
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contrast, many competing millimeter wave systems require mechanical adjustment
and manual tuning, which involve sending maintenance personnel with test
equipment to the radio's installed location. Software embedded in the Company's
radio system also facilitates upgrades of system capacity, with minimal hardware
changes.
Outdoor Unit. The ODU consists of a lightweight, compact, integrated RF
electronics enclosure that attaches directly to an antenna. The RF enclosure
contains electronics that, when transmitting, convert, modulate and amplify the
digital signal received from the IDU. Typically, the ODU is installed outdoors
on a tower or rooftop. A simple latch secures the ODU to the antenna, allowing
for vertical or horizontal installation, and permits removal of the ODU without
tools and without affecting antenna alignment.
Software. The Company's embedded software platform is common to all XP4
frequency bands and capacity models. It enables control of user configurable
features from the five-button keypad on the IDU. The embedded software code is
also compatible with the Company's custom manufacturing test and calibration
software. This approach facilitates automation of the final test process by
enabling adjustments to equipment parameters through software commands, rather
than the traditional method of manual dip-switch or pods.
The Company's XPView software provides a remote means of configuring the
Company's radio systems, as well as providing for advanced diagnostics and
maintenance capabilities, including code downloading.
The optional SNMP feature is implemented via a small plug card in the IDU
which provides Ethernet, RS232, and RS422 communication ports for remote link
control and remote collection of status and alarm data.
[ARCHITECTURE DESIGN]
The diagram depicts the internal system architecture of the Company's millimeter
wave radio system, as described in the paragraphs below the diagram.
SYSTEM ARCHITECTURE
The Company's system architecture is designed to achieve advantages in
reliability, cost, installation and maintenance when compared to competitive
systems. The Company employs a common set of modules and components for all data
rates and frequencies with the exception of the transmit and receive modules and
diplexer filters. This substantially simplifies the logistics of customer
support, purchasing, and manufacturing. The Company incorporates the four-level
FSK modulator/demodulator into the ODU, rather than including it in the IDU. The
Company believes this results in a more reliable design by permitting digital
communications between the IDU and ODU, thereby reducing interference from EMI
or ground loop by permitting filtering of undesirable noise and eliminating
cable equalization circuitry completely. This also reduces the electronics
contained in the IDU, resulting in a compact indoor unit which occupies only one
rack unit mounting space in telecom cabinets or base stations.
The Company's ODU uses advanced miniature, multifunction transmit or
receive hybrid modules which provide for lower power consumption, smaller size
and fewer interconnection cables or assemblies than conventional millimeter wave
radio systems. In addition the Company's proprietary compact diplexer filter
design eliminates the need for bulky separate transmit and receive filters and
an associated circulator. This design approach results in a lighter, more
compact ODU than competing systems.
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The embedded software platform reduces the number of manufacturing models
by facilitating production of radio systems for use with varying frequency plans
in different countries. In contrast, traditional systems require hardware
variations to adjust to different frequency plans in each country. In addition,
each ODU will support multiple traffic capacities without any hardware changes,
as these modifications are also governed by software. Transmit power level is
also controlled electronically from the IDU. As a result, no field adjustments,
switch settings or other modifications are required to operate an ODU within its
designated tuning range regardless of frequency plan, traffic capacity or
transmitter output power. The intuitive built-in software interface permits
terminal configuration without extensive training or special tests using the
five button keypad on the face of the IDU. The embedded software platform also
facilitates accurate installation by alerting the installer to mistakes with
blinking LEDs. Software configurability enables the provision of advanced field
diagnostic tools such as RF terminal loopback. In this mode, the transmitter is
tuned to the frequency of the local receiver, enabling operation of the terminal
in RF loopback and verification of proper, error-free performance. In order to
perform similar functions, competing systems require either the use of a bulky,
external turnaround oscillator or the use of complex, internal mechanical
assemblies.
CUSTOMERS
The Company's customers consist principally of systems integrators, which
incorporate XP4 radio systems into a variety of telecommunications networks to
be sold to telecommunications service providers. Systems integrators provide
engineering and installation services and project financing for service
providers. These systems integrators develop the network design and provide the
field effort necessary to install, commission and maintain the Company's
systems. Systems integrators are extensively used by local and mobile service
providers in Europe, Asia and developing countries. The Company also sells its
products directly to service providers, principally in North America. Service
providers can use the Company's products for various applications, including
cellular and PCS/PCN networks, broadband communications, local loop services,
and access to long distance networks.
The systems integrators and service providers set forth below have each
accounted for more than 1% of gross revenues from sales of the XP4 product line
since its introduction in the quarter ended September 30, 1996. The Company has
also sold lesser quantities, principally for use as demonstration units, to
Bosch Telecom, Lucent Technologies, MAS and Mitec.
SYSTEMS INTEGRATORS SERVICE PROVIDERS
---------------------------- -------------------------------------
Ericsson Alestra (Mexico)
NERA Associated Communications (U.S.)
Nortel Avantel (Mexico)
SAT Bachow Communications
Simtel Bouygues Telecom (France)*
Globtel (Slovakia)
Iusacel (Mexico)
Infocom (Philippines)*
PacBell Mobile Services (U.S.)
Smartcom (Philippines)*
Telcel (Venezuela)*
Telefonica Movil (Spain)*
- ---------------
* Indicates service providers that purchased equipment from a systems
integrator.
To date, approximately fourteen customers have accounted for all of the
Company's sales of XP4 systems. Sales to Associated Communications, Bachow
Communications and Nortel accounted for approximately 15%, 12% and 44% of the
Company's XP4 sales, respectively, in calendar 1996. For the three months ended
March 31, 1997, Associated Communications, Nortel and SAT accounted for 10%, 59%
and 22%, respectively, of the Company's sales, and as of March 31, 1997, two
customers, Nortel and SAT, accounted for 75% of the Company's backlog scheduled
for shipment in the six months subsequent to March 31, 1997. Paul Bachow, a
director and greater-than-10% beneficial owner of the Company's Common Stock, is
the only shareholder and the President of Bachow Communications. SAT is a
greater-than-5% beneficial owner of the Company's Common Stock. See "Principal
Shareholders and Certain
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Transactions." The Company has entered into agreements with SAT for exclusive
distribution in France, Italy, Poland, Hungary, Andorra and Monaco and
non-exclusive distribution in other countries; NERA for sales to Asia, Latin
America and parts of Europe; and MAS for distribution in New Zealand and
Southeast Asia. The Company has also sold a significant portion of its products
to Nortel. The Company anticipates that its sales will continue to be to a
relatively small group of customers, consisting principally of international
systems integrators and, in North America, service providers.
The Company's ability to achieve or increase its sales in the future will
depend in significant part upon its ability to obtain and fulfill orders from
existing and new customers and maintain relationships with and provide support
to existing and new customers, its ability to manufacture systems on a timely
and cost-effective basis and to meet stringent customer performance and other
requirements and shipment delivery dates. As a result, any cancellation,
reduction or delay in orders by or shipments to any customer, as a result of
manufacturing difficulties or otherwise may have a material adverse effect upon
the Company's business, financial condition and results of operations. There can
be no assurance that the Company's sales will increase in the future or that the
Company will be able to retain and support existing customers or to attract new
customers.
DISTRIBUTION RELATIONSHIPS
The Company markets its products principally to systems integrators with a
strong regional presence in countries in Europe, Latin America and Asia. The
Company believes these relationships are a critical component of its ability to
include its systems in major network buildout projects. To date, the Company has
entered into agreements with NERA and SAT as well as other system integrators.
NERA Arrangements. The Company has entered into an OEM Purchase and Limited
Licensing Agreement with NERA ASA (the "NERA Agreement") to purchase at least $5
million of XP4 product kits and components prior to May 30, 1998. The NERA
Agreement authorizes NERA and its affiliated companies to purchase products from
the Company on most-favored-customer pricing and terms and to distribute such
products on a non-exclusive basis in all countries other than the SAT
Territories, where sales by NERA are to be coordinated with SAT on a
case-by-case basis. Under the NERA Agreement, the Company and NERA have
committed to cooperative development of certain new XP4 products and features,
and the Company has granted NERA certain design approval rights, as well as
testing rights on XP4 kits purchased from the Company. The Company has also
granted NERA a royalty-free right to manufacture and test XP4 indoor units
solely for sale with the Company's outdoor units; and a royalty-bearing
conditional right to use the Company's designs and technologies for the purpose
of manufacturing XP4 products, effective only upon the occurrence of certain
restrictive conditions, such as the failure of the Company to timely deliver
products for over two months or the bankruptcy of the Company. The NERA
Agreement provides for the Company to pay penalties for late delivery, to the
extent NERA is obligated to make penalty payments to its customers due to the
late delivery. The NERA Agreement has a five-year term expiring May 30, 2002, at
which time all distribution, manufacturing and other rights will terminate.
However, the Company's warranty, maintenance and repair obligations survive
termination. NERA is obligated, during the term of the agreement and for a
two-year period following its termination, not to develop, manufacture or sell
any product based on the Company's products or technologies. The Company also
intends to outsource some circuit board assembly to NERA's Singapore facility.
SAT Arrangements. Under a Cooperation Agreement entered into in late 1996,
the Company granted distribution rights to SAT for its XP4 products, including
exclusive rights in France, Hungary, Poland, Italy, Monaco and Andorra
collectively, the "SAT Territories"), and non-exclusive rights in all other
countries except in North America, Australia and New Zealand. The Cooperation
Agreement prohibits the Company from selling XP4 products directly or indirectly
in any of the SAT Territories. The Cooperation Agreement also grants
distribution rights to the Company with respect to certain SAT products; assures
each of the parties most-favored-customer pricing and terms; specifies the
maximum production capacity required to be allocated to SAT by the Company;
assures SAT access to the Company's supply relationships for custom design parts
and components, on comparable commercial terms; and provides for cooperation in
the development of certain features of the Company's XP4 product line, and
sharing of technical data on an ongoing basis, subject to confidentiality and
other restrictions on use.
The Cooperation Agreement also grants SAT a right to immediate use of the
Company's XP4 designs and technologies for the purpose of developing and
manufacturing certain products solely for sale and installation in
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France, subject to quantity limitations, and the right to advertise such
products as its own. SAT is also granted certain conditional rights to use the
Company's designs and technologies for the purpose of manufacturing certain
other XP4 products in France, without quantity limitations, effective only upon
the occurrence of certain restrictive conditions. SAT is required to pay
specified royalties to the Company on products manufactured pursuant to these
rights. The Cooperation Agreement has an initial term of 5 years, expiring
October 31, 2001, but is automatically renewed for another five year term unless
terminated by either party with one year's notice. Upon expiration, all
manufacturing rights which are at that time effective will become irrevocable
and fully paid, and SAT will thereafter be entitled to manufacture certain XP4
products free of any royalties or other compensation to the Company.
RESEARCH AND DEVELOPMENT
The Company has an ongoing research and development program to enhance its
existing products and to introduce new products. The Company invested
approximately $4.5 million and $2.5 million in the fiscal years ended March 31,
1996 and 1995, respectively, and $3 million in the nine month fiscal period
ended December 31, 1996 in research and development efforts. The Company expects
to continue to invest significant resources in product research and development.
The Company's research and development efforts focus on using existing
product architectures and technology to maintain commonality and minimize
time-to-market for new products and enhancements. The Company's research and
development efforts are currently focused on developing additional models of the
Company's XP4 product line to address higher capacity applications and greater
modulation efficiency and on leveraging the Company's temperature resistant
technology to develop a low-cost, all-outdoor radio. The common architecture of
the Company's XP4 products, by limiting the number of new components needed to
develop products or new frequencies, also allows the Company to react quickly to
changing regulatory environments. The Company was the first manufacturer to
develop and ship radios operating in the 24 GHz range in response to the recent
licensing of the 24 GHz spectrum in the United States. The Company's research
and development efforts continually strive to enhance software features
contained in its products, and to develop products which can be manufactured in
a simple and cost effective manner.
The wireless communications market is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence, changes in customer requirements and evolving industry standards.
To be competitive, the Company must successfully develop, introduce and sell new
products or product enhancements that respond to changing customer requirements
on a timely and cost-effective basis. Any success of the Company in developing
new and enhanced products will depend on a variety of factors including: timely
and efficient completion of system design; timely and efficient implementation
of assembly, calibration, and test processes; development and completion of
related software; the reliability, cost and quality of its products; market
acceptance; and development and introduction of competitive products by
competitors. The Company has experienced and may experience delays from
time-to-time in completing development and introduction of new products.
Moreover, there can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or product
enhancements. The inability of the Company to introduce in a timely manner new
products or product enhancements that contribute to sales could have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING
The Company performs final assembly and test, quality assurance, packaging
and shipping at its facility in Seattle, Washington. The Company purchases all
of the circuit boards, integrated circuits and other components used in its
products from third-party suppliers. The Company inspects these components for
quality, groups the components into kits by production order and ships the kits
to its subcontractors for initial assembly. As a result of the use of common
components across the full range of XP4 products, the Company's manufacturing
process is extremely flexible and can accommodate significant changes in the
frequency or data rate of radios produced on a daily basis. This flexibility
also reduces the Company's need to maintain a large inventory of finished goods,
as radios may be produced to meet specific customer requirements without the
need for significant lead times, setup costs or changes to the manufacturing
process.
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The Company designs its products to provide a high degree of reliability.
The Company thoroughly inspects and tests its product during the assembly
process and tests finished products using internally developed procedures. The
Company believes its testing procedures at extreme temperatures are among the
most rigorous in the industry. The Company's quality inspection and testing also
include "burn-in" procedures throughout the assembly process to ensure the
quality and reliability of the Company's products. The Company has extensively
invested in computerized test stations reducing dependency on skilled labor and
enabling a gradual increase in capacity. The Company believes that its practice
of conducting all testing and calibration internally has contributed to the
reliability of its products and its low-cost structure. To date, the Company's
installed base of XP4 radio systems have achieved a field failure rate of less
than 2%. The Company believes that this reliability is the result of its careful
quality assurance procedures. The Company received ISO 9001 certification in May
1996.
Certain parts and components used in the Company's products, including
field programmable gate arrays and MMICs, are only available from a single
source or limited number of sources. The Company's reliance on these single
source or limited source suppliers involves certain risk and uncertainties,
including the possibility of a shortage or discontinuation of certain key
components and reduced control over delivery schedules, manufacturing
capability, quality and cost. Any reduced availability of such parts or
components when required could materially impair the Company's ability to
manufacture and deliver its products on a timely basis and result in the
cancellation of orders which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the purchase of certain key components involves long lead times and, in the
event of unanticipated increases in demand for the Company's products, the
Company may be unable to obtain such components in sufficient quantities to meet
its customers' requirements. The Company has established dual sources for
transmit and receive hybrids with Hewlett-Packard Company ("Hewlett-Packard"),
among others, through blanket order arrangements covering estimated requirements
for 1997 and 1998. The Company does not have guaranteed supply arrangements with
many of its single or limited source suppliers, does not maintain an extensive
inventory of parts or components and customarily purchases single or limited
source parts and components pursuant to purchase orders. Business disruptions,
production shortfalls or financial difficulties of a single or limited source
supplier could materially and adversely impact the Company by increasing product
costs, or reducing or eliminating the availability of such parts or components.
In such event, the inability of the Company to establish alternative sources of
supply quickly and on a cost-effective basis could materially impair the
Company's ability to manufacture and deliver its products on a timely basis and
could have a material adverse effect on its business, financial condition and
results of operations.
SALES, MARKETING AND CUSTOMER SUPPORT
Innova's sales and marketing efforts are headquartered in the Company's
executive offices in Seattle, Washington. The Company has also established and
staffed a sales, service and customer support facility in Shirley, England. In
addition, the Company has sales and customer support personnel in Nashua, New
Hampshire and Dallas, Texas. The Company has recently opened a service and
support facility in Mexico City, Mexico. The Company may increase its overseas
presence by opening sales and support offices in countries not served by its
distribution partners. The Company markets its products directly to service
providers in North America and certain other countries. The Company believes
that the contact it achieves with service providers through such direct sales
provides valuable feedback on product performance and customer needs, which
assists the Company in developing new and enhanced products. The Company
promotes its products through participation and exhibition at trade shows in
North America and through promotion of its products by its system integrators in
Europe and Asia.
The Company believes that the ability of its customer service personnel to
work with system integrators in resolving any technical problems experienced by
service providers is fundamental to its success. Although system integrators are
responsible for providing customer support to the service providers, the
Company's technical support team must work closely with the system integrator's
support personnel to promptly and efficiently identify and resolve technical
issues.
If the Company is selected to submit a proposal or bid by a new customer,
the Company may also be required to conduct system trials or provide units for
customer type approval. If system trials or testing are required and
successfully completed, the Company then negotiates a contract with the customer
to set technical and commercial terms of sale. The Company generally targets
system integrators that are involved in multiple projects including large
quantities of radios. Once a radio system has been tested by a system
integrator, determined to meet its specification
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and designed into a service integrator's network, further testing or contract
negotiations are generally not required for successive orders from that system
integrators, substantially shortening the sales cycle. The process for sales
directly to service providers by the Company is similar to the sales process for
the first sale to a system integrator, in that it may involve field trials,
contract negotiation, and take from three to six months to complete.
COMPETITION
The wireless communications market is intensely competitive. The Company's
millimeter wave radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media. The principal
competitive factors in this market include product performance and reliability,
ability to meet delivery requirements, price, and product features. The Company
experiences intense competition worldwide from a number of leading
telecommunications companies that offer a variety of competitive products and
broader telecommunications product lines, including Alcatel Network Systems,
California Microwave, Inc., Digital Microwave Corporation, Ericsson Limited,
Harris Corporation -- Farinon Division, Nokia Telecommunications and P-COM,
Inc., most of which have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than the Company. The Company may also face competition in the
future from new market entrants offering competing technologies. In addition,
the Company's current and prospective customers, including Nortel, and certain
others which have access to the Company's technology or under some circumstances
are granted the right to use the technology for purposes of manufacturing, could
develop or manufacture products competitive with those that have been or may be
developed or manufactured by the Company. The Company's future results of
operations may depend in part upon the extent to which the Company's customers
elect to purchase from outside sources rather than develop and manufacture their
own radio systems. There can be no assurance that such customers will rely on or
expand their reliance on the Company as an external source of supply for their
radio systems.
The Company's future results of operations may depend in part upon the
extent to which these customers elect to purchase from outside sources rather
than develop and manufacture their own radio systems. Recently, certain of the
Company's competitors have announced the introduction of competitive products,
and the acquisition of other competitors and competitive technologies. Within
the near future, the Company expects its competitors to continue to improve the
performance and lower the price of their current products and to introduce new
products or new technologies that provide added functionality and other features
that may or may not be comparable to the Company's products, which could cause a
significant decline in sales or loss of market acceptance of the Company's
systems, or make the Company's systems or technologies obsolete or
noncompetitive. The Company expects to continue to experience significant price
competition that may materially adversely affect its gross margins and its
business, financial condition and other results of operations. The Company
believes that to be competitive, it will continue to be required to expend
significant resources on, among other items, new product development and
enhancements and to reduce the costs of its systems. There can be no assurance
that the Company will be able to compete successfully.
GOVERNMENT REGULATION
Radio communications are subject to extensive regulation by United States
and foreign laws and international treaties. The Company's systems must conform
to a variety of domestic and international requirements established to, among
other things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. In order for the Company's radios to be used in a
foreign jurisdiction, regulatory approval for its systems must be obtained and
end users must comply with such regulations. Regulatory bodies worldwide are
continuing the process of adopting new standards for wireless communication
products. The delays inherent in this governmental approval process may cause
the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of systems by the Company to such customers.
The failure to comply with current or future regulations could result in
suspension or cessation of operations. Such regulations could require the
Company to change the features of its radio systems and incur substantial costs
to comply with such time-consuming regulations. Equipment to support new
services can be marketed only if permitted by suitable frequency allocations,
auctions and regulations, and the process of establishing new regulations is
complex and lengthy. To the extent PCS/PCN operators and others are delayed in
deploying these systems, the Company could experience delays in orders. These
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.
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The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting network deployment efforts by the Company's customers
or end users, making current systems obsolete or increasing the opportunity for
additional competition. Any such regulatory changes could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company might deem it necessary or advisable to modify its
systems to operate in compliance with such regulations. Such modifications could
be extremely expensive and time-consuming.
INTELLECTUAL PROPERTY
The Company does not hold any patents regarding the technology and
expertise involved in the assembly, calibration and testing of its XP4 products.
The Company relies on technological innovations, trade secrets and expertise to
develop and maintain its competitive position, and upon confidentiality
procedures, common-law remedies and contractual provisions to protect its
proprietary rights. The Company's agreements with its distributors generally
contain non-competition and non-disclosure provisions prohibiting the
distributor from manufacturing products based on the Company's designs for the
term of the agreement and for a short period thereafter. In general, the Company
has not entered into non-competition agreements with its management and other
employees or into confidentiality and non-disclosure agreements with system
integrators or service providers. Furthermore, it is likely that the Company's
competitors can obtain samples of the Company's products and, through reverse
engineering, obtain access to proprietary knowledge regarding the Company's
product designs.
The Company's success will depend in part on its ability to protect its
technology and preserve its trade secrets through common law and contractual
restrictions. There can be no assurance that the trade secrecy or other measures
taken by the Company will be adequate to prevent misappropriation of its
technology, or that competitors will not be able to independently develop
technologies having similar or better functions or performance characteristics.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the Company will have adequate legal remedy to prevent
or seek redress for future unauthorized misappropriation of the Company's
technology.
The telecommunications industry is characterized by rapid technological
change, with frequent introductions of new products and technologies. As a
result, industry participants often find it necessary to develop products and
features similar to those introduced by others, increasing the risk that their
products and processes may give rise to claims that they infringe the patents of
others. Accordingly, the Company's current and future products and processes, or
uses thereof, may conflict with patents that have been granted or may be granted
to competitors or others. Such competitors or others could bring legal actions
against the Company or its customers, claiming damages and seeking to enjoin
manufacturing, marketing or use of the affected product or processes. Similarly,
the Company may in the future find it necessary to commence litigation in order
to enforce and protect its proprietary rights. If the Company becomes involved
in any such litigation, it could consume a substantial portion of the Company's
resources and result in a significant diversion of management attention. If the
outcome of any such litigation were adverse to the Company or its customers, its
business, financial condition and results of operations could be materially
adversely affected. In addition to any potential liability for damages, the
Company or its customers could be enjoined from continuing to manufacture,
market or use the affected product or process, and could be required to obtain a
license in order to continue such manufacture, marketing or use. There can be no
assurance that the Company or its customers would prevail in any such action or
that any license required under any such patent would be made available on
acceptable terms, if at all.
EMPLOYEES
As of March 28, 1997, the Company employed 122 full-time and temporary
employees. None of the Company's employees is represented by a collective
bargaining agreement. The Company's future performance will depend in large
measure on its ability to attract and retain highly skilled employees. The
Company has never experienced a work stoppage and believes its relationship with
its employees to be good.
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FACILITIES
The Company's corporate offices and research, development and manufacturing
facilities are located in Seattle, Washington, in two leased buildings
aggregating approximately 60,000 square feet. The Company also leases 2,200
square feet of office space in Shirley, England.
BACKLOG
The Company's backlog was approximately $6.1 million as of March 31, 1997.
The Company includes in backlog only customer commitments for which it has
received signed purchase orders and assigned shipment dates within the following
180 days. The Company's experience has been that customers generally request
shipment within 60 days of their order date. Backlog is not necessarily
indicative of future sales for any particular period. Customer orders have
exceeded the Company's ability to manufacture radio systems. The Company intends
to increase its manufacturing capacity and believes that backlog will decrease,
as a percentage of sales, as the Company becomes able to fill orders on a more
timely basis. Moreover, a majority of the Company's backlog scheduled for
shipment in the next six months can be canceled since orders are often made
substantially in advance of shipment, and the Company's contracts typically
provide that orders may be canceled with limited or no penalties up to a
specified period (typically 30 to 90 days) before shipment, and in some cases at
any time.
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MANAGEMENT
The members of the Board of Directors, executive officers and other key
employees of the Company are as follows:
NAME AGE POSITION
---------------------------------------- --- ------------------------------------------------
Jean-Francois Grenon.................... 41 President, Chief Executive Officer and Director
V. Frank Mendicino(1)................... 58 Chairman of the Board of Directors
Colin J.R. Pallemaerts.................. 67 Executive Vice President -- Sales and Marketing
Barbara J. Williams..................... 53 Chief Operating Officer
John M. Hemingway....................... 50 Secretary and Chief Financial Officer
Randy J. Karr........................... 40 Vice President -- Manufacturing
Paul H. Lemson.......................... 50 Director of Engineering
Patric W. McDonald...................... 59 Chief Technical Officer
William J. Meighan...................... 50 Director of Quality Assurance
Paul S. Bachow(1)....................... 46 Director
Frances N. Janis(2)..................... 38 Director
Harold O. Shattuck(1)(2)................ 60 Director
Bernard D. Tarr, Jr.(2)................. 37 Director
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
EXECUTIVE OFFICERS AND DIRECTORS
JEAN-FRANCOIS GRENON joined the Company in February 1996 as its President
and Chief Executive Officer and has served as a Director of the Company since
June 1996. From March 1994 to December 1995, Mr. Grenon served as President of
Microwave Radio Corporation, Digital Radio Group, a division of California
Microwave Radio that he helped found, which develops and manufactures digital
millimeter radios. From April 1990 to March 1994, Mr. Grenon served as Vice
President and General Manager of Microwave Radio Corporation, a developer of
microwave radio transmission equipment. Mr. Grenon holds an MBA from Harvard
Business School and a BSEE from Ecole Polytechnique, Universite de Montreal.
V. FRANK MENDICINO has served as a Director of the Company since July 1989
and as its Chairman since February 1992. Since 1983, Mr. Mendicino has served as
a General Partner of Woodside Fund, Woodside Fund II and Woodside Fund III, each
of which is a private investment fund. He has also served as a director of over
15 private companies.
COLIN J.R. PALLEMAERTS joined the Company as Vice President of Sales and
Marketing -- Telecommunications in April 1992, and now serves as Executive Vice
President -- Sales and Marketing since April 1992. He also served as Chief
Operating Officer of the Company for approximately six months in 1995. From
November 1991 to April 1992, Mr. Pallemaerts served as Vice President of
Marketing at P-Com, Inc., a manufacturer of millimeter wave radio equipment. Mr.
Pallemaerts holds a Higher National Certificate in Electrical Engineering from
Mid Essex Technical College and is a Graduate Member of the British Institute
for Electrical Engineers, which is a BSEE equivalent.
BARBARA J. WILLIAMS has served as the Company's Chief Operating Officer
since November 1995. From May 1995 to November 1995, she served as the XP4
Project Manager and from November 1994 to May 1995 as the Company's
Manufacturing Information Systems Manager. From June 1984 to November 1994, she
held various product manager positions at Hewlett-Packard, an electronics
manufacturer, including (1) Project Manager of Research and Development, (2)
Manager of Customer Support, Surface Mount Technology Center and (3) Production
Manager, Surface Mount Technology Center. Ms. Williams holds a Ph.D. in
Biostatistics from the University of Washington, an M.S. in Mathematics from the
University of Alaska and a B.A. in Microbiology from the University of Missouri.
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JOHN M. HEMINGWAY has served as the Company's Secretary and Chief Financial
Officer since joining the Company in June 1991. From September 1988 to December
1990, Mr. Hemingway served as a consultant to Disenos Industriales Plasticus, a
manufacturer of video cassettes and similar products located in Mexico and a
wholly-owned subsidiary of Grupo Televisa. From April 1978 to September 1988,
Mr. Hemingway served as Chief Financial Officer and a director of Shape, Inc., a
manufacturer of audio and video cassettes, computer tape and diskettes, compact
disks and automatic assembly equipment. Mr. Hemingway holds a B.A. degree from
Yale University in Latin American Studies and an M.B.A. from Dartmouth College.
He is a Certified Public Accountant.
RANDY J. KARR has served as Vice President-Manufacturing of the Company
since January 1997. He joined the Company as Director of Manufacturing in
December 1995. From December 1992 to December 1995, Mr. Karr served as Director
of Operations for MRC-Digital, a position he held since the inception of
MRC-Digital in 1992, in which he, inter alia, developed production plans and
various testing procedures in connection with the manufacture of a 40 GHz
digital microwave system. From August 1982 to December 1992, Mr. Karr managed
the design and development of the Micro-Beam broad-band microwave link business
at Channel Master, a division of AVNET Corporation, a distributor of electronic
components. Mr. Karr holds a BSEE from Missouri State University.
PAUL S. BACHOW has served as a Director of the Company since January 1993.
He has been President of Bachow & Associates, Inc. ("Bachow & Associates"),
since its formation in December 1989. Mr. Bachow also acts as President of the
General Partner of each of Paul S. Bachow Co-Investment Fund, L.P., and Bachow
Investment Partners III, L.P. Mr. Bachow serves as a director of Deb Shops,
Inc., a publicly traded company in the women's clothing business, Anadigics,
Inc., a publicly traded manufacturer of gallium arsenide chips for use in a
broad array of communications devices, and several private companies. He has a
B.A. from American University, a J.D. from Rutgers University and a Masters
Degree in tax law from New York University, and is a C.P.A.
FRANCES N. JANIS has served as a Director of the Company since April 1996.
Since February 1994, Ms. Janis has been the Executive Vice President of Pomona
Partners Inc., which is the General Partner of Pomona Capital II, L.P., where
she is responsible for making direct investments in private companies and
purchasing limited partnership interests in Venture Capital/Leveraged Buyout
funds. From 1983 to 1994 she served as General Partner in Hambro International
Venture Fund II, a private investment firm, where Ms. Janis' responsibilities
included investing in early-stage private companies.
HAROLD O. SHATTUCK has served as a Director of the Company since February
1992. Since May 1991, he has been President of MC Tecinvest Inc., a consulting
company specializing in operations, executive consulting and financial advising
to early- and growth-stage companies in the computer, software and
communications industries. In that capacity, he has advised such clients as
Xerox Venture Capital and MC Partners I and II, offshore funds investing in U.S.
venture capital funds.
BERNARD D. TARR, JR. has served as a Director of the Company since February
1995. Since April 1997, Mr. Tarr has served as a Managing Director of Arete
Ventures, Inc. and as a Managing Director of Arete Ventures, LLC. From September
1990 to April 1997 he served as a Vice President of Arete Ventures, Inc. Arete
Ventures, Inc. is the Managing Partner of the UVCC Funds. Arete Ventures, LLC is
the Managing Member of the Utility Competitive Advantage Fund, LLC, which
invests in private telecommunications, information technology and customer
service companies.
Directors of the Company serve one-year terms or until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors, subject to the terms of any employment
agreements with the Company.
The Board of Directors has a standing Audit Committee and Compensation
Committee. The Audit Committee, currently composed of Messrs. Tarr and Shattuck,
and Ms. Janis, reviews the Company's internal accounting procedures and consults
with and reviews the services provided by the Company's independent accountants.
The Compensation Committee, currently composed of Messrs. Bachow, Mendicino and
Shattuck, reviews and makes recommendations to the full Board of Directors with
respect to the compensation and benefits to be provided to the Company's
officers and directors and general policy matters relating to employee
compensation and benefits.
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OTHER KEY EMPLOYEES
PAUL H. LEMSON joined the Company in January 1997 as Director of
Engineering. From March 1995 to October 1996, he served as Engineering Manager
and then Senior Scientist at AT&T Wireless Services, Inc. (formerly McCaw
Cellular), a provider of cellular telephone services, where he supervised RF and
digital hardware engineers, realtime embedded software engineers and
administrative staff. From January 1989 to March 1995, Mr. Lemson served as
Senior Technologist and then as Principal Member of Technical Staff at
Southwestern Bell Technology Resources, Inc., a technology development
subsidiary of the Southwestern Bell family of companies, where he worked in
development of Southwestern Bell's technology for PCS and wireless local loop.
Mr. Lemson holds a BSEE from the University of Houston.
WILLIAM J. MEIGHAN joined the Company in May 1996 as Director of Quality
Assurance. From June 1995 to May 1996 he served as a consultant to the Company
as Director at Rainday Professional Services, a consulting service specializing
in ISO 9000 implementation, continuous improvement training and quality auditing
services. From September 1990 to May 1993, Mr. Meighan served as
Operations/Program Manager at BP Chemicals Advanced Materials Division, an
aerospace composites company. Mr. Meighan holds a B.S. in Physics from the
University of Washington and a M.S. in Applied Statistics from Utah State
University.
PATRIC W. MCDONALD has served as Chief Technical Officer since joining the
Company in July 1991. From February 1988 to July 1991, Mr. McDonald served as
Chief Executive Officer of Sierra Digital Communications Incorporated, a
designer and manufacturer of digital and analog microwave communication systems,
a company he co-founded. From December 1985 to February 1988, Mr. McDonald
served as Engineering Manager at the Transmission Systems Division of Avantek,
Inc., a designer and manufacturer of millimeter-wave digital communications
equipment. He was also employed by General Electric in the Microwave Products
Department for over 20 years. Mr. McDonald holds a BSEE from the University of
Evansville.
DIRECTOR COMPENSATION
All directors of the Company are reimbursed for out-of-pocket expenses
incurred attending meetings of the Board of Directors.
The Board of Directors granted Mr. Shattuck, as compensation for his
service as a director during 1996, (i) $1,000.00 in cash for each regularly
scheduled Board meeting attended and (ii) options to purchase 1,420 shares of
Common Stock, with an exercise price of $1.968 per share and, as compensation
for his service as a director during 1997, $1,000.00 in cash for each regularly
scheduled Board meeting attended, and options to purchase 1,736 shares of Common
Stock, with an exercise price of $2.88 per share of Common Stock.
The Company's Director Stock Option Plan (the "Director Plan") was
implemented in June 1997. In connection with the adoption of the Director Plan,
each non-employee director was eligible to receive options to purchase 10,000
shares of Common Stock at an exercise price of $10.00 per share. The Director
Plan provides for additional grants to non-employee directors of options to
purchase 4,000 shares of Common Stock. The exercise price of options granted
under the Director Plan is determined by a formula based on the trading price of
the Common Stock for the 20 trading days preceding the grant. One quarter of the
options granted vest after one year, with the remainder vesting in 36 equal
monthly increments. Unvested options under the Director Plan expire upon
termination of service other than by death or disability to the extent not
exercised. The options are granted automatically without further action from the
Board of Directors, except to the extent necessary to determine the fair market
value of the Common Stock on the date of grant. As of June 17, 1997, there were
48,263 outstanding options to purchase Common Stock of the Company pursuant to
the Director Plan.
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EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth information regarding
compensation earned during calendar 1996 by the Chief Executive Officer and the
four next most highly compensated executive officers during that year (the
"named executive officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION(1) ------------------
-------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------------------- -------- ------- ------------------ ------------
Jean-Francois Grenon................... $131,539 611,750 --
President, Chief Executive Officer,
and Director
Colin J.R. Pallemaerts................. 137,198 $10,000 67,198 --
Executive Vice President -- Sales and
Marketing
Barbara J. Williams.................... 119,246 -- 90,294 --
Chief Operating Officer
John M. Hemingway...................... 117,692 -- 62,318 --
Secretary and Chief Financial Officer
Randy J. Karr.......................... 88,561 20,000(3) 89,702 --
Vice President -- Manufacturing
- ---------------
(1) In January 1996, the Board of Directors of the Company changed the fiscal
year end from March 31 to December 31. Fiscal year 1996 commenced on April
1, 1996 and ended December 31, 1996. Accordingly, amounts reported are for
the calendar year ended December 31, 1996.
Option Grants. The following table shows information concerning stock
options granted to the named executive officers in calendar 1996.
OPTION GRANTS DURING THE CALENDAR YEAR 1996
INDIVIDUAL GRANTS
---------------------------------------- POTENTIAL REALIZABLE
NUMBER VALUE AT ASSUMED ANNUAL
OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM(3)
OPTIONS TO EMPLOYEES IN PRICE(2) EXPIRATION ------------------------
NAME GRANTED(1) CALENDAR YEAR ($/SHARE) DATE 5% 10%
- ------------------------- -------- ---------------- --------- ----------- ----------- -----------
Jean-Francois Grenon 611,750 58.7 1.968 2/20/2016 $1,990,445 $6,895,475
Colin J.R. Pallemaerts 67,198 6.5 1.968 12/17/2016 218,641 757,437
John M. Hemingway 62,318 6.0 1.968 12/17/2016 202,763 702,431
Barbara J. Williams 90,294 8.7 1.968 12/17/2016 293,789 1,017,767
Randy J. Karr 89,702 8.6 1.968 12/17/2016 291,862 1,011,096
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- ---------------
(1) All of the options granted to the named executive officers in calendar year
1996 were non-qualified stock options. Half of these options vest over 48
months beginning January 1, 1997. Twenty-five percent of the options held by
Mr. Grenon vested in February 1997; the remaining options vest monthly for
36 months commencing March 9, 1997. The vesting of half of the granted
options for the above named executive officers were subject to performance
criteria. In April 1997, the options were amended to eliminate performance
criteria.
(2) The exercise price of each option was not less than the estimated fair value
of the Common Stock on the date of grant.
(3) Based upon the estimated fair value of the Common Stock on the date of grant
and assumed appreciation over the term of the options at the respective
annual rates of stock appreciation shown. Potential gains are net of the
exercise price but before taxes associated with the exercise. The 5% and 10%
assumed annual rates of compounded stock appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of the Common Stock.
Actual gains, if any, on stock option exercises are dependent on the future
financial performance of the Company and overall market conditions. The
actual value realized may be greater or less than the potential realizable
value set forth in the table.
Year-End Option Values. None of the named executive officers exercised any
stock options during calendar year 1996. The following table sets forth certain
information regarding the number and value of unexercised options held by the
named executive officers at December 31, 1996.
YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL YEAR-
YEAR-END(1)(#) END(2)($)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------- ------------- ----------- -------------
Jean-Francois Grenon -- 611,750 -- 5,525,326
Colin J.R. Pallemaerts 56,515 85,827 510,443 775,189
John M. Hemingway 35,000 65,115 316,120 588,119
Barbara J. Williams 10,611 114,536 95,839 1,034,489
Randy J. Karr 2,604 97,514 23,519 880,746
- ---------------
(1) Does not include options granted in 1997.
(2) Represents the value of the shares of Common Stock subject to outstanding
options, based on an assumed initial public offering price of $11.00 per
share, less the aggregate option exercise price.
BENEFIT PLANS
Stock Options. The Company's 1990 Stock Option Plan (Amended and Restated
July 31, 1992) (the "Plan") permits options to purchase up to an aggregate of
2,083,333 shares of Common Stock to be granted to employees and nonemployees of
the Company. The Plan is administered by the Board of Directors, which has the
authority to select individuals who are to receive options and to specify the
terms and conditions of each option so granted, including the number of shares
covered by the option, the type of option (incentive stock option or
nonqualified option), the exercise price (which, in case of options granted
after the effective date of the Offering, must be at least 100% of the fair
market value of the Common Stock), vesting provisions, and the overall option
term. At March 31, 1997, options to purchase an aggregate of 1,539,460 shares of
Common Stock were outstanding under the Plan.
401(k) Plan. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors, but no such contributions have
been made to date. Under the 401(k) portion of the plan, eligible employees may
make pre-tax elective contributions of up to 10% of their compensation, subject
to maximum limits on contributions prescribed by law.
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CERTAIN TRANSACTIONS
Series A Financings and Related Bridge Financings. In April 1994, the
Company issued 338,187 shares of Series A Preferred Stock pursuant to the
antidilution rights of certain holders of Series A Preferred Stock. Woodside
Fund, Woodside Fund II and Woodside Fund III (collectively, "Woodside Funds")
and UVCC Fund II and UVCC II Parallel Fund, L.P. (collectively, "UVCC") were
issued 96,100 and 23,936 shares of Series A Preferred Stock, respectively. The
Company issued $246,934 in promissory notes convertible into shares of Series A
Preferred Stock and granted the right to receive warrants to purchase shares of
Common Stock based on the amount invested, at an exercise price of $0.84 per
share to Woodside Funds, and three other investors. Woodside Funds were issued
$46,934 in convertible promissory notes. In May 1994, the right to receive
warrants to purchase common stock was amended to the right to receive either
warrants to purchase Common Stock at an exercise price of $0.84 or warrants to
purchase Series A Preferred Stock at an exercise price of $0.84 per share.
In May 1994, $1,700,000 of outstanding convertible promissory notes issued
in connection with the Series A Financings were converted into Series A
Preferred Stock at a price of $7.9168 per share, and warrants were issued to
purchase a total of 462,640 shares of Series A Preferred Stock with an exercise
price of $0.84 per share, to 17 investors. Woodside Funds and Woodside Fund III
together, and UVCC, purchased $757,852 and $131,386 of Series A Preferred Stock,
respectively, and warrants to purchase 177,429 and 37,540 shares of Series A
Preferred Stock, respectively. In December 1994, the remaining convertible
promissory notes issued in connection with the Series A Financings were
converted into $500,000 of Series A Preferred Stock at a price of $7.9168 per
share and warrants were issued to purchase a total of 19,338 shares of Series A
Preferred Stock at an exercise price of $0.84 per share.
In May 1994, the Company issued to Tregor Electronique, S.A. ("Tregor"), a
holding company of SAT, a warrant to purchase 56,378 shares of Series A
Preferred Stock pursuant to the Company's contractual obligation to adjust SAT's
percentage ownership of the Company to 10% in connection with the Series A
financing.
The Company has granted certain registration rights for the shares of
Common Stock issuable upon the conversion of the Series A Preferred Stock. All
shares of Series A Preferred Stock will be automatically converted into
1,574,155 shares of Common Stock upon consummation of the offering and all
material contractual covenants by the Company in favor of the Series A Preferred
Stock investors will automatically terminate, other than the registration
rights. See "Shares Eligible for Future Sales -- Outstanding Registration
Rights."
Series B Financing. In April 1994, the Company issued a single $1,000,000
convertible promissory note (the "Bachow Note") payable to Bachow Investment
Partners III, L.P. ("Bachow Investment Partners"), Paul S. Bachow Co-Investment
Fund, L.P. ("Bachow Co-Investment Fund"), and Paul S. Bachow ("Bachow")
(collectively, the "Bachow Entities"), the total amount due under which,
including interest of $20,135, was converted into Series B Preferred Stock at a
price of $6.0850 per share in May 1994 in connection with the closing of the
Series B Financing. In May 1994, the Company sold an additional $1,199,997 of
Series B Preferred Stock at a price of $6.0850 per share to the Bachow Entities
along with three options to purchase additional shares of Series B Preferred
Stock, at a price of $1 per option. In July and August of 1994, the first of the
three options was fully exercised. Pursuant to the exercise, the Bachow Entities
purchased a total of $2,800,000 of Series B Preferred Stock at $6.3679 per
share. The second and third options were not exercised and have expired.
The Company has granted certain registration rights for the shares of
Common Stock issuable upon the conversion of the Series B Preferred Stock. All
shares of Series B Preferred Stock will be automatically converted into 804,553
shares of Common Stock upon consummation of the offering and all material
contractual covenants of the Company in connection with the Series B Financing
will terminate upon consummation of the offering, other than the registration
rights. See "Shares Eligible for Future Sales -- Outstanding Registration
Rights."
Bridge Notes. In September 1994, the Company issued a $178,650 promissory
note to Woodside Fund III. In October 1994, the Company issued $500,000 in
nonconvertible promissory notes, payable on or before October 31, 1994 and
bearing interest at the rate of 10.75% per annum, with a default interest rate
of 15% per annum, to the Bachow Entities. The amount due under the note was used
to purchase Series C Preferred Stock at a price of $6.3672 per share in
connection with the Series C financing described below.
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SAT Note. In October 1994, the Company issued a promissory note in the
amount of $300,000, payable on demand on or after December 31, 1994, to Societe
Anonyme de Telecommunications. This note has been paid in full and is no longer
outstanding.
Series C and C1 Financing. In February and April 1995, the Company sold
$4,229,792 of Series C Preferred Stock at a price of $6.3672 per share, $11,957
of Common Stock at a price of $.024 per share, and issued warrants to purchase a
total of 1,204,050 shares of Common Stock at an exercise price of $.024 per
share to the Bachow Entities, Tregor, UVCC, Woodside Fund III, Brian Flynn,
former Acting CEO, Daniel Nelson, former Vice President of Manufacturing and 13
other investors. The Bachow Entities, Tregor, UVCC, Woodside Funds, Brian Flynn
and Daniel Nelson purchased $997,181, $1,495,771, $159,549, $944,225, $29,915
and $7,579 of Series C Preferred Stock, respectively, $2,819, $4,229, $451,
$2,669, $85 and $21 of Common Stock, respectively, and received warrants to
purchase 283,859 shares, 425,789 shares, 45,416 shares, 268,784 shares, 8,515
shares and 2,157 shares, of Common Stock, respectively.
All shares of Series C and C1 Preferred Stock will be automatically
converted into 1,121,543 shares of Common Stock upon consummation of the
offering and all contractual covenants by the Company in favor of the Series C
and C1 Preferred Stock investors will automatically terminate, other than the
registration rights. See "Shares Eligible for Future Sales -- Outstanding
Registration Rights."
In September and November 1995, the Company sold $2,890,428 of Series C1
Preferred Stock at a price of $6.3672 per share, $8,171 of Common Stock at a
price of $.024 per share, and issued warrants to purchase a total of 680,917
shares of Common Stock at an exercise price of $.024 per share to the Bachow
Investment Partners, Bachow, UVCC, Woodside Funds, and 14 other investors.
Bachow Investment Partners and Bachow, UVCC and Woodside Funds purchased
$1,520,661, $249,296, and $648,168 of Series C1 Preferred Stock, respectively,
$4,229, $705, and $1,832 shares of Common Stock, respectively, and received
warrants to purchase 358,239, 58,728, and 152,695 shares of Common Stock,
respectively. The holders of the Series C and C1 Preferred Stock have the same
registration rights as holders of previously issued Preferred Stock.
Bridge Loan Financing. In November 1995 through January 1996 the Company
issued promissory notes in the aggregate principal amount of $1,000,000 to
Bachow Investment Partners, UVCC, Woodside Fund III, and nine other investors.
Bachow Investment Partners, UVCC and Woodside Fund III were issued notes in the
principal amount of $491,921, $87,828, and $291,922, respectively. These notes
were payable on demand on or after April 1, 1996, bearing interest at a rate of
16% per year for 90 days from the date of issuance and at the rate of 21% per
year thereafter until paid in full. The investors to whom these notes were
issued were also granted the right to receive warrants to purchase Common Stock
based on the amount invested and the terms of a future financing.
In March and April 1996, the Company issued promissory notes in the
aggregate principal amount of $6,069,869 to Bachow Investment Partners, Bachow,
UVCC, Woodside Fund III, and 13 other investors to reflect advances for
purchases of Series D Preferred Stock. Bachow Investment Partners and Bachow,
UVCC, and Woodside Fund III were issued notes in the principal amount of
$3,543,263, $350,000, and $1,258,078, respectively. The investors to whom the
notes were issued were also granted a right to receive warrants to purchase
Common Stock based on the amount invested and the terms of a future financing.
In April 1996, the principal amount due under all the notes, except
$69,869, was converted into Series D Preferred Stock at a per share price of
$3.228. Upon the closing of the Series D financing, as described below, warrants
to purchase 193,611 shares of common stock of the Company at an exercise price
per share of $2.5824 were issued. Bachow Investment Partners, UVCC, and Woodside
Fund III were issued warrants to purchase 95,244, 17,004, and 56,521 shares of
the Common Stock of the Company, respectively. Warrants to purchase 367,082
shares of Common Stock at an exercise price of $.024 per share were issued.
Bachow Investment Partners and Bachow, UVCC, and Woodside Fund III were issued
$4,035,184, $437,828, and $1,550,000 Series D Preferred Stock, respectively,
upon conversion of their notes. Bachow Investment Partners and Bachow, UVCC, and
Woodside Fund III were issued warrants to purchase 211,610, 22,960 and 81,284
shares of common stock, respectively. The $155,931 due in interest on the notes
was paid in cash. The $69,869 of notes that was not converted was paid in cash.
All notes have been paid in full and are no longer outstanding.
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Series D Financing. In April 1996, the Company sold $5,000,000 Series D
Preferred Stock at a price of $3.228 per share to Pomona Capital II, LP
("Pomona") and Baupost Limited Partnership 1983 C-1 ("Baupost"). The holders of
the Series D Preferred stock have the same registration rights as holders of
other Preferred Stock.
All shares of Series D Preferred Stock will be automatically converted into
3,717,463 shares of Common Stock upon consummation of the offering, and all
contractual covenants by the Company in favor of the Series D Preferred Stock
investors will automatically terminate, other than the registration rights. See
"Shares Eligible for Future Sales -- Outstanding Registration Rights."
November 1996 Through March 1997 Bridge Financing. In November 1996 and
December 1996, the Company issued $1,500,000 in promissory notes to Bachow
Investment Partners, Baupost and Pomona, Brian Flynn, UVCC and Woodside Fund III
in the amounts of $572,513, $326,535, $6,507, $71,114 and $282,450,
respectively. The notes bore interest at 12% per year and payable on demand 90
days after issuance. The notes were convertible into Series D Preferred Stock at
the option of the holder 90 days from the date of issuance if not repaid by the
Company prior to 91 days from the date of issuance. The conversion price was
$.1345 per share. An additional $3,000,000 in convertible promissory notes were
issued in March 1997, $1,500,000 of which retired the notes issued in November
and December. Notes in the remaining $1,500,000 were converted into Series E
Preferred Stock in connection with the Series E financing described below. Of
the $3,000,000 issuance, Bachow Investment Partners and Bachow received notes in
the amount of $1,541,395, Baupost and Pomona received notes in the amount of
$371,303, UVCC received notes in the amount of $172,902 and Woodside Fund III
received notes in the amount of $686,739.
Series E Financing. In March 1997, the Company sold $4,999,999 of Series E
Preferred Stock at a price of $5.19384 per share, to the Bachow Investment
Partners, Bachow, UVCC, Woodside Fund III, Pomona, Baupost and 14 other
investors. The Bachow Investment Partners and Bachow, UVCC, Woodside Fund III,
Pomona and Baupost purchased $2,336,581, $287,314, $1,141,171 and $618,838 of
Series E Preferred Stock, respectively. The holders of the Series E Preferred
stock have the same registration rights as holders of other Preferred Stock.
All shares of Series E Preferred Stock will be automatically converted into
962,669 shares of Common Stock upon consummation of the offering, and all
contractual covenants by the Company in favor of the Series E Preferred Stock
investors will automatically terminate, other than the registration rights. See
"Shares Eligible for Future Sales -- Outstanding Registration Rights."
Bridge Notes. In May 1997, Bachow & Associates and Woodside Fund III each
advanced the Company $250,000 in anticipation of the Series F Financing
described below. These amounts were repaid in full at the closing of the Series
F Financing.
Series F Financing. In June 1997, the Company sold $3,500,000 of Series F
Preferred Stock at a price per share of $6.96 to V. Frank Mendicino and the V.
Frank Mendicino Defined Benefit Pension Plan (the "Benefit Plan") and 10 other
investors. Mr. Mendicino and the Benefit Plan purchased $87,355 of Series F
Preferred Stock. The holders of the Series F Preferred Stock have the same
registration rights as holders of other Preferred Stock.
All shares of Series F Preferred Stock will be automatically converted into
502,866 shares of Common Stock upon consummation of the offering, and all
contractual covenants by the Company in favor of the Series F Preferred Stock
investors will automatically terminate, other than the registration rights.
Additional Note Issuances. In October and November 1994, and November 1995,
the Company issued promissory notes in an aggregate amount of $470,000 to
Woodside Fund III. In November and December 1994, the Company issued promissory
notes in an aggregate amount of $1,300,000 to SAT. In February 1996, the Company
issued a promissory note in the amount of $135,000 to Brian Flynn, who was
Acting Chief Executive Officer at the time.
Societe Anonyme de Telecommunications. The Company has entered into several
agreements with Societe Anonyme de Telecommunications ("SAT") concerning
technical cooperation in the development of the Company's products, and the
purchase, distribution and manufacture of such products by SAT.
XP3 Product Arrangements. In October 1992, the Company entered into a
Master Agreement which provided for cooperative development of certain products
based on the Company's XP3 architecture, payment by SAT of $800,000 to the
Company upon achievement of certain development milestones, and the granting to
SAT of certain marketing and manufacturing rights as to XP3 products. In June
1993, the Company and SAT entered into an OEM Distributor Agreement pertaining
to the XP3 product line (as modified by four subsequent amendments, the "XP3 OEM
Agreement"), which granted SAT a right to purchase XP3 products on most-favored
customer terms, and a right to
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distribute such products on an exclusive basis in France and certain other
European countries and on a non-exclusive basis elsewhere; imposed certain
limits on the Company's sales of XP3 products; granted SAT a right to
manufacture XP3 products in France subject to certain conditions, limitations
and royalty obligations; provided for cooperation in product development and
access to component suppliers; and granted SAT a right of first refusal as to
XP4 distribution and manufacturing rights in France and certain other countries.
In December 1994, following a decision by the Company to concentrate development
efforts on its new XP4 product architecture, the Company and SAT executed a
Processor For Hire Agreement (as modified by subsequent amendments, the
"Processing Agreement"), under which SAT acquired the Company's inventory of XP3
parts and work in process for approximately $2.6 million (paid for in part by
satisfying approximately $1.9 million of advances made to the Company by SAT),
and the Company agreed to continue manufacturing XP3 products for SAT in return
for a processing fee based on the Company's actual costs of manufacturing.
The Company's sales of XP3 products to SAT constituted substantially all of
the Company's sales of $1,151,605 and $445,229 in the years ended March 31, 1995
and 1996, respectively, and were $3,000 and $833,000 in the nine month fiscal
period ended December 31, 1996 and the three months ended March 31, 1997,
respectively. Processing fees received by the Company from SAT under the
Processing Agreement amounted to $1,206,894, $1,516,870, $53,257, and $0 in the
years ended March 31, 1995 and 1996, the nine month fiscal period ended December
31, 1996, and the three months ended March 31, 1997, respectively. The
Processing Agreement was terminated by mutual agreement of the parties in April
1997. Upon expiration of the XP3 OEM Agreement at the end of 1999, SAT's
manufacturing rights as to XP3 products will become unlimited and fully paid up.
Having transitioned its product development, sales and marketing, and strategic
focus to the XP4 product line, the Company does not believe that SAT's
continuing distribution and manufacturing rights as to XP3 products pose either
a competitive threat or a significant impediment to the Company's ability to
distribute its XP4 products through SAT.
XP4 Product Arrangements. In November 1995, the Company and SAT entered
into a Memorandum of Understanding providing for joint development of a product
specification for the Company's XP4 product line, joint ownership of an XP4
interface specification subject to certain transfer limitations, efforts by both
parties to develop compatible and complementary product lines, and development
of a plan for purchases of products by each party from the other. This
Memorandum of Understanding has terminated. On October 31, 1996, the Company and
SAT entered into a more detailed Cooperation Agreement, which provides for
cooperative development of XP4 products, and grants SAT certain exclusive and
nonexclusive distribution rights as to XP4 products, as well as certain
unconditional and conditional limited rights to manufacture certain XP4
products. See "Business -- Sales and Marketing -- Distribution
Relationships -- SAT Arrangements." Simultaneously with the Cooperation
Agreement, the Company and SAT entered into a Master Purchase Agreement, which
includes a confidential conditional commitment by SAT to purchase a fixed number
of XP4 products in various frequencies and configurations from the Company, as
well as other provisions regarding product acceptance testing procedures
applicable to SAT's purchase commitment. Orders satisfying SAT's purchase
commitment have been placed and shipments are expected to have been completed by
the fourth quarter. The Company's sales of XP4 products to SAT were $833,000 in
the three months ended March 31, 1997.
XP4 Sales to Bachow Communications
During the fiscal period ended December 31, 1996, the Company sold XP4
radios with an aggregate purchase price of $194,560 to Bachow Communications,
Inc. Paul S. Bachow, a director of the Company, is the sole shareholder and
President of Bachow Communications.
Compensation to Bachow & Associates for Acting CEO's Services. In May 1996,
Bachow & Associates received $217,500 for the services provided by Mr. Brian
Flynn, formerly Managing Director of Bachow & Associates, who served as the
acting Chief Executive Officer of the Company from January 1995 to February
1996. Mr. Paul S. Bachow is Senior Managing Director of Bachow & Associates.
The Company has adopted a policy prohibiting transactions with its
directors, officers or controlling shareholders or their affiliates other than
those that result from competitive bidding or that a majority of the Company's
disinterested directors conclude are expected to benefit the Company and are on
terms no less favorable to the Company than could be obtained in arm's-length
transactions with unaffiliated third parties. See "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 17, 1997, and as adjusted to reflect
the sale of shares of Common Stock in the Offering for (i) each person known to
the Company to own beneficially more than 5% of the Common Stock, (ii) each of
the Company's directors, (iii) each of the Company's named executive officers
and (iv) all of the Company's executive officers and directors as a group.
Except as otherwise noted, the named beneficial owner has sole voting and
investment power with respect to the shares indicated as beneficially owned by
such person.
NUMBER OF SHARES PERCENT PERCENT
NAME AND ADDRESS(1) BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------- ------------------ --------------- --------------
DIRECTORS, OFFICERS AND SHAREHOLDERS
Paul S. Bachow(2) 4,145,455 39.2 31.7
c/o Bachow & Associates
3 Bala Plaza, Suite 502
Bala Cynwyd, PA 19004
V. Frank Mendicino(3) 2,307,028 22.3 17.9
c/o Woodside Funds
4133 Mohr Avenue, Suite H
Pleasanton, CA 94566
Frances N. Janis(4) 1,668,094 17.3 13.7
c/o Pomona Capital II, L.P.
780 Third Avenue, 23rd Floor
New York, NY 10017-7076
Societe Anonyme de Telecommunications(5) 1,083,402 10.7 8.6
c/o Tregor Electronique S.A.
11 Rue Watt, B.P. 370
75626 Paris, CEDEX13
France
Bernard D. Tarr, Jr.(6) 574,300 5.9 4.7
c/o Arete Ventures, Inc.
6110 Executive Blvd., Suite 1040
Rockville, MD 20852
Jean-Francois Grenon(7)(8) 216,660 2.2 1.18
Harold O. Shattuck[(7)] 11,014 * *
Colin J.R. Pallemaerts(7)(9) 61,229 * *
John M. Hemingway(7)(10) 46,885 * *
Barbara J. Williams(7)(12) 28,997 * *
Randy J. Karr(7)(11) 17,203 * *
All Directors and Executive Officers
as a Group (10 persons)(13) 9,076,865 76.4 63.1
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares
of Common Stock subject to options currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage
ownership of the person holding the options but are not deemed outstanding
for computing the percentage ownership of any other person. Except as
indicated, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(2) Includes 2,615,091 shares held by Bachow Investment Partners III, L.P.
("Bachow Investment Partners"), and 277,457 shares held by Paul S. Bachow
Co. - Investment Fund, L.P. ("Bachow Co-Investment Fund"), both limited
partnerships. Mr. Bachow is the President of the General Partner of the
General Partner of each of Bachow Investment Partners and Bachow
Co-Investment Fund. Also includes 786,889 shares issuable upon exercise of
warrants to purchase Common Shares held by Bachow Investment Partners, and
73,052 shares issuable upon exercise of warrants to purchase Common Shares
held by Bachow Co-Investment Fund.
(3) Represents 9,000 shares held by V. Frank Mendicino Defined Benefit Pension
Plan, 243,212 shares held by Woodside Fund, 130,912 shares held by Woodside
Fund II, and 1,185,414 shares held by Woodside Fund III. Also represents
294,006 shares
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issuable upon exercise of warrants to purchase Common Shares held by
Woodside Fund, 149,509 shares issuable upon exercise of warrants to
purchase Common Shares held by Woodside Fund II, and 293,200 shares
issuable upon exercise of warrants to purchase Common Shares held by
Woodside Fund III. Mr. Mendicino is a General Partner of Woodside Funds and
has shared investment power and shared voting power over such shares with
the two other General Partners, Vincent M. Occhipinti and Robert E. Larson.
(4) Represents 1,202,529 shares held by Pomona Capital II, L.P. ("Pomona
Capital") and 465,565 shares held by Baupost Limited Partnership 1983 C-1
("Baupost"), both limited partnerships. Ms. Janis is Executive Vice
President of Pomona Partners, Inc., the General Partner of Pomona Capital,
and Executive Vice President of Pomona Management Co., Inc.,
attorney-in-fact of Baupost. Ms. Janis has shared investment power and
shared voting power over such shares with each of (i) Michael D. Granoff,
President of Pomona Partners, Inc., and Pomona Management Co., Inc., and
(ii) Stephen Fotrell, Treasurer of Pomona Partners, Inc., and Pomona
Management Co., Inc.
(5) Tregor Electronique S.A. is a company organized under the laws of France,
and a holding company of Societe Anonyme de Telecommunications, a company
organized under the laws of France.
(6) Represents 196,324 shares held by UVCC Fund II ("UVCC Fund II") and 196,324
shares held by UVCC II Parallel Fund, L.P. ("UVCC Parallel Fund"). Also
includes 90,826 shares issuable upon exercise of warrants to purchase
Common Shares held by UVCC Fund II, and 90,826 shares issuable upon
exercise of warrants to purchase Common Shares held by UVCC Parallel Fund.
Mr. Tarr is Managing Director of Arete Ventures, the General Partner of the
UVCC funds.
(7) The address for each of these shareholders is that of the Company.
(8) Represents options to purchase 216,660 Common Shares exercisable within 60
days of June 17, 1997. Excludes options to purchase 395,088 Common Shares
exercisable more than 60 days after June 12, 1997.
(9) Represents options to purchase 61,229 Common Shares exercisable within 60
days of June 17, 1997. Excludes options to purchase 62,662 Common Shares
exercisable more than 60 days after June 12, 1997.
(10) Represents options to purchase 46,885 Common Shares exercisable within 60
days of June 17, 1997. Excludes options to purchase 53,230 Common Shares
exercisable more than 60 days after June 12, 1997.
(11) Represents options to purchase 28,997 Common Shares exercisable within 60
days of June 17, 1997. Excludes options to purchase 96,150 Common Shares
exercisable more than 60 days after June 12, 1997.
(12) Represents options to purchase 17,203 Common Shares exercisable within 60
days of June 17, 1997. Excludes options to purchase 82,913 Common Shares
exercisable more than 60 days after June 12, 1997.
(13) Includes options to purchase an aggregate of 370,974 Common Shares
exercisable within 60 days of June 17, 1997, and an aggregate of 1,867,322
Common Shares issuable upon exercise of warrants to purchase Common Shares.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock.
COMMON STOCK
As of June 17, 1997, 9,632,819 shares of Common Stock were outstanding and
were held of record by 82 shareholders. Holders of Common Stock are entitled to
one vote per share on all matters submitted to a vote of the shareholders and do
not have the right to cumulate votes with respect to elections of directors.
Accordingly, holders of a majority of the shares of Common Stock voting in any
election of directors will have the ability to elect all of the directors
standing for election. All directors hold office until the next annual meeting
of shareholders and until their successors have been duly elected and qualified.
Directors may be removed with or without cause by the holders of a majority of
the outstanding shares of Common Stock.
Holders of Common Stock are entitled to receive ratably any dividends as
may be declared by the Board of Directors out of legally available funds,
subject to any preferences that may be afforded to any outstanding preferred
stock. In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any outstanding
preferred stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All of the outstanding shares of Common Stock
are, and all shares of Common Stock to be outstanding upon consummation of the
Offering will be, when issued and paid for, fully paid and nonassessable. The
Company's Articles of Incorporation and Bylaws provide for release and
indemnification of the Company's directors and officers as to certain
liabilities arising from their actions in such capacities to the fullest extent
permitted by law.
PREFERRED STOCK
The Board of Directors has the authority to issue 5,000,000 shares of
preferred stock in one or more series and to fix the relative rights,
preferences and privileges thereof, including dividend rights, conversion
rights, voting rights, redemption terms, liquidation preferences and number of
shares constituting any series up to the maximum number of preferred stock. The
market price for the Common Stock, and the voting and other rights of the
holders thereof, may be adversely affected by the rights, preferences and
privileges accorded to any preferred stock issued by the Company. Issuances of
preferred stock in certain circumstances may also have the effect of delaying,
deferring or preventing a change in control of the Company, or discouraging bids
for the Company's Common Stock at a premium over the market price. Upon
consummation of the Offering, the Company will have no shares of preferred stock
outstanding. The Company has no present plans to issue any preferred stock.
WARRANTS TO PURCHASE COMMON STOCK
As of June 17, 1997, warrants to purchase 2,949,169 shares of Common Stock
were outstanding. Of these, (i) warrants to purchase 481,978 shares of Common
Stock at an exercise price of $.84 per share expire May 31, 1999, (ii) warrants
to purchase 1,204,050 shares of Common Stock expire on February 13, 2000, (iii)
warrants to purchase 680,917 shares of Common Stock expire on September 5, 2000,
(iv) warrants to purchase 193,611 shares of Common Stock at an exercise price of
$2.5824 per share and warrants to purchase 367,082 shares of Common Stock at an
exercise price of $.024 per share, expire on April 26, 2001 and (v) a warrant to
purchase 21,500 shares of Common Stock at an exercise price of $6.96 per share
expire on April 30, 2002. All warrants are currently exercisable. See "Shares
Eligible for Future Sale."
CERTAIN VOTING AND OTHER MATTERS
Under the Washington Business Corporation Act (the "Act"), shareholder
approval is required in order for the Company to participate in certain mergers
and share exchanges or to sell substantially all of its assets, and for certain
other actions. Within certain limits, the Act permits a corporation's articles
of incorporation to specify the level of shareholder approval required for such
transactions. The Company's Articles of Incorporation generally require any such
transaction to be approved by the holders of a majority of the outstanding
shares of Common Stock.
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Under the Company's Articles of Incorporation and Bylaws, special meetings
of the shareholders may be called only by the Board of Directors, the Chairman
of the Board, or the President, or the holders of at least 25% of all the votes
entitled to be cast on any issues proposed to be considered at such special
meeting. Amendments to the Articles of Incorporation must generally be approved
by the Board of Directors and the holders of a majority of the outstanding
shares of Common Stock.
The Company's Bylaws provide that shareholders seeking to bring business
before, or to nominate directors at, any meeting of shareholders must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive office of the
Company not less than 70 days prior to the date of the meeting, or the tenth day
after notice of the meeting is first given to shareholders, whichever is later
if the meeting is an annual meeting or if a special meeting at which directors
are to be elected. The Bylaws also contain specific requirements for the form of
a shareholder's notice. These provisions may preclude or may make it difficult
for some shareholders from bringing matters before the shareholders or from
making nominations for directors. The Bylaws may be amended or repealed by the
Board of Directors or by the majority of the holders of the outstanding shares
of Common Stock.
Holders of shares of preferred or other capital stock hereafter issued by
the Company may also be entitled to vote in connection with the matters
described above, and separate approval may be required to the extent of any
class voting rights accorded to the holders of such other stock. It is possible
that the provisions of the Company's Articles of Incorporation and Bylaws
described above may have the effect of delaying, deterring or preventing a
change in control of the Company.
ANTITAKEOVER RESTRICTIONS
Washington law contains certain provisions that may have the effect of
delaying, deferring or preventing a takeover or change of control of the Company
which is not supported by the Board of Directors. Chapter 23B.19 of the
Washington Business Corporation Act prohibits the Company, with certain
exceptions, from engaging in certain significant business transactions with an
"acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. The Company may not exempt itself from coverage of this statute.
These statutory provisions may have the effect of delaying, deferring or
preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, 12,139,029 shares of Common Stock will
be outstanding (10,014,028 shares if the Underwriters' over-allotment option is
exercised in full), of which the 2,500,000 shares offered hereby (2,875,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable on the public market without restriction or further registration
under the Securities Act, except to the extent such shares are held by an
affiliate of the Company. The remaining 9,639,029 shares were issued and sold by
the Company in private transactions, and public sale thereof is restricted
except to the extent they are registered under the Securities Act or sold in
accordance with an exemption from such registration. Of these 9,639,029
remaining shares, 8,123,262 will be eligible for public sale immediately after
this offering pursuant to Rule 144, 50,231 shares will be eligible for public
sale 90 days after the date of this offering pursuant to Rule 701 under the
Securities Act of 1933, as amended (the "Securities Act"), and 962,669 and
502,867 shares will be eligible for sale to the public on March 19, 1998 and
June 16, 1998, respectively, pursuant to Rule 144, or earlier if registered
under the Securities Act pursuant to certain contractual rights. Shareholders
who will hold an aggregate of 9,546,995 shares of Common Stock after this
offering have the right to require the Company to register their shares for sale
under the Securities Act. Sales of substantial numbers of shares of Common Stock
in the public market following this offering could materially adversely affect
the market price for the Common Stock. See "Shares Eligible for Future Sale."
The Company and the holders of 8,384,076
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of the 9,639,029 "restricted" shares have entered into Lock-up Agreements with
the Underwriters. As of June 16, 1997, an additional 545,526 shares were
issuable upon exercise of outstanding stock options. Of these shares, 373,449
are subject to Lock-up Agreements and the remaining will be eligible for public
sale 90 days after the date of this Offering pursuant to Rule 701, subject to
vesting.
An additional 2,949,169 shares of Common Stock are issuable upon exercise
of warrants, and will be eligible for sale to the public one year after the date
of exercise or earlier if registered under the Securities Act pursuant to
contractual rights. Of the shares issuable upon exercise of the warrants,
2,462,947 shares are subject to Lock-up Agreements.
In general, Rule 144 as currently in effect provides that any person who
has beneficially owned shares for at least one year, including an "affiliate"
(as defined in Rule 144), is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the shares of Common
Stock then outstanding or the reported average weekly trading volume of the
Common Stock during the four calendar weeks immediately preceding the date on
which notice of the sale is sent to the Securities and Exchange Commission (the
"SEC"). Sales under Rule 144 are subject to certain manner of sale restrictions,
notice requirements and availability of current public information concerning
the Company. A person who is not an affiliate of the Company, and who has not
been an affiliate within three months prior to the sale, generally may sell
shares without regard to the limitations of Rule 144 provided that the person
has held such shares for a period of at least two years.
Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the Offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock
of Company and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of Common Stock will have on the market price of
the Common Stock. Nevertheless, sales of substantial amounts of such shares in
the public market could adversely affect the market price of the Common Stock.
OUTSTANDING REGISTRATION RIGHTS
Under a Registration Agreement dated as of May 26, 1994, as amended on
April 26, 1996, April 30, 1997, and June 13, 1997 (the "Registration Rights
Agreement"), the holders of an aggregate of 9,546,995 shares of Common Stock
issuable upon the conversion of the Preferred Stock at the closing of the
Offering ("Registrable Securities") have certain rights as to the registration
of their shares of Common Stock under the Securities Act of 1933 (the
"Securities Act"). Holders of Registrable Securities have the right at any time
and from time to time after the consummation of the Offering: (i) to demand
registrations under the Securities Act of all or a part of the Registrable
Securities held by them on Form S-1 or any similar form; (ii) to an unlimited
number of demand registrations on Form S-2 or Form S-3 (or any equivalent
successor form) if the anticipated aggregate offering price of the Registrable
Securities covered by such form exceeds $1,000,000; (iii) in the case of any
demand registration, to select the investment bankers and managers of the
offering, subject to the Company's approval; and (iv) to have shares of Common
Stock comprising Registrable Securities held by them included in any
registration statement filed by the Company, subject to certain limitations, and
provided that such shares cannot be sold publicly without registration or
compliance with Rule 144 and to the pro rata exclusion of their shares from a
primary offering by the Company if the managing underwriters for the primary
offering advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering.
The Registration Rights Agreement requires the Company to pay all expenses
incident to its performance of or compliance with the Agreement other than
underwriting discounts and commissions allocable to the sale of a holder's
securities and the fees and expenses of the holder's own counsel, accountants
and other professional advisors.
Registrable Securities cease to be Registrable Securities when they have
been distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force). No holders of registration rights under the Registration Rights
Agreement have exercised their registration rights with respect to the Offering.
57
61
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock.
UNDERWRITER NUMBER OF SHARES
------------------------------------------------------------- -----------------
UBS Securities, LLC..........................................
Hambrecht & Quist LLC........................................
Wessels, Arnold & Henderson, L.L.C...........................
-------
Total..............................................
=======
The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent, including the absence of any material
adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
of the shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a commission not exceeding $ per share. The Underwriters may
allow and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the public offering of the shares of
Common Stock the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell such shares to
the Underwriters to the extent the option is exercised.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
All officers, directors and significant shareholders and substantially all
other shareholders of the Company, have agreed not to sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase,
contract to require any other person to purchase, or otherwise transfer or
dispose of any interest in, any shares of capital stock of the Company, or any
securities convertible into or exercisable or exchangeable for capital stock of
the Company, for a period of 180 days after the date of this Prospectus without
the prior written consent of UBS Securities LLC, Hambrecht & Quist LLC and
Wessels, Arnold & Henderson, L.L.C., except for (i) securities donated as
charitable contributions which qualify as such under Section 170 of the Internal
Revenue Code of 1986, as amended, (ii) securities given by a shareholder to
members of such shareholder's "immediate family" (as such term is defined under
Item 404 of Regulation S-K under the Securities Act of 1933, as amended), or
transferred by such shareholder to one or more trusts established for the
benefit of members of such shareholder's immediate family, and (iii) securities
disposed of by the laws of testamentary or intestate descent or pursuant to a
final and non-appealable order of a court or other body of competent
jurisdiction; provided that, the shareholder may exercise presently outstanding
options, warrants or rights so long as he does not transfer the shares obtained
in violation of the Lock Up Agreement. The Company has agreed that it will not,
until 180 days following the date of this Prospectus, without the prior written
consent of the UBS Securities LLC, sell, offer or agree to sell, contract to
sell, grant any option to purchase, make any short sale or otherwise dispose of
any shares of Common Stock, except that the Company may grant additional options
58
62
and issue stock under the 1990 Stock Option Plan and the Director Plan or issue
shares of Common Stock upon the exercise of outstanding stock options and
warrants.
The Representatives have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to public will be determined by agreement between the
Company and the Representatives. In determining the initial price to public, the
Company and the Representatives will consider, among other things, the history
of and prospects for the industry in which the Company operates, past and
present operations and earnings of the Company and the trend of such earnings,
the qualifications of the Company's management, the general condition of the
securities markets at the time of the Offering and the market prices for other
publicly traded companies.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid or the purchase of the Common Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP, Seattle, Washington. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania.
EXPERTS
The consolidated balance sheets at December 31, 1996 and March 31, 1996 and
the consolidated statements of operations, stockholders' deficit and cash flows
for each of the years in the two-year period ended March 31, 1996 and the nine
month fiscal period ended December 31, 1996 included in this Prospectus and in
the Registration Statement have been included herein in reliance on the reports
of KPMG Peat Marwick LLP, independent auditors, given on the authority of that
firm as experts in accounting and auditing.
59
63
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders of record annual reports
containing financial statements audited and reported upon by independent public
accountants and quarterly reports containing unaudited financial information for
each of the first three quarters of each fiscal year.
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement (the "Registration Statement") on Form S-1 under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
SEC pursuant to the Securities Act and the rules and regulations of the SEC
thereunder. Statements contained in this Prospectus concerning the provisions or
contents of any contract or other document referred to in this Prospectus are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including exhibits and schedules thereto,
may be inspected and copied at the Public Reference Section maintained by the
SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549-1004, and at
the SEC's regional offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may also be obtained at prescribed
rates from the Public Reference Section of the SEC at its principal office in
Washington, D.C. The SEC maintains a web site at http://www.sec.gov that
contains registration statements, and other information regarding registrants,
like the Company, that file electronically with the SEC. The Company has applied
for quotation of the Common Stock on the Nasdaq National Market. If such
application is approved, reports and other information concerning the Company
will be available for inspection at the National Association of Securities
Dealers, Inc. located at 9513 Key West Avenue, Rockville, Maryland 20850.
60
64
INNOVA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997, and December 31, 1996.... F-3
Consolidated Statements of Operations for the Years Ended March 31, 1995 and 1996,
the
Nine Month Fiscal Period Ended December 31, 1996, and the Three Months Ended
March 31, 1996 and March 31, 1997................................................ F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended March 31, 1995
and 1996, the Nine Month Fiscal Period Ended December 31, 1996 and the Three
Months Ended March 31, 1997...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1995 and 1996,
the
Nine Month Fiscal Period Ended December 31, 1996, and the Three Months Ended
March 31, 1996 and 1997.......................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
F-1
65
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Innova Corporation:
We have audited the accompanying consolidated balance sheets of Innova
Corporation and subsidiary as of March 31, 1996 and December 31, 1996, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the years in the two-year period ended March 31, 1996 and for
the nine month fiscal period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innova
Corporation and subsidiary as of March 31, 1996 and December 31, 1996, and the
results of their operations and their cash flows for each of the years in the
two-year period ended March 31, 1996 and for the nine month fiscal period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
April 30, 1997, except as to note 17,
which is as of June 17, 1997
F-2
66
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
------------ ------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents........................... $ 287,193 $ 172,764 $ 66,593
Accounts receivable................................. 78,027 1,740,383 3,643,342
Inventories......................................... 608,165 2,533,970 5,833,212
Stock subscriptions receivable...................... 3,281,871 -- --
Other current assets................................ 56,755 73,157 40,167
------------ ------------ ------------
Total current assets........................ 4,312,011 4,520,274 9,583,314
Equipment and leasehold improvements, net............. 2,323,188 2,647,361 3,886,997
Other assets.......................................... 112,204 137,230 216,458
------------ ------------ ------------
$ 6,747,403 $ 7,304,865 $ 13,686,769
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable....................................... $ -- $ 506,180 $ 1,271,503
Current installments of obligations under capital
leases........................................... 487,180 503,827 749,600
Notes payable to stockholders....................... 69,869 1,500,000 --
Accounts payable.................................... 1,258,741 1,944,073 4,362,515
Accrued liabilities................................. 340,129 355,282 541,345
------------ ------------ ------------
Total current liabilities................... 2,155,919 4,809,362 6,924,963
------------ ------------ ------------
Obligations under capital leases, excluding current
installments........................................ 330,338 542,259 1,317,760
Mandatorily convertible notes payable for preferred
stock, subject to stock subscriptions receivable.... 6,984,090 -- --
Redeemable preferred stock, no par value. Authorized
12,874,998 shares -- issued and outstanding
3,496,963 shares at March 31, 1996, 7,216,775 shares
at December 31, 1996 and 8,179,444 shares at March
31, 1997 (liquidation preference of $28,007,528 at
March 31, 1996, $40,022,486 at December 31, 1996 and
$45,022,481 at March 31, 1997 and redemption value
of $24,459,274 at March 31, 1996, $36,474,201 at
December 31, 1996 and $41,473,919 at March 31,
1997)............................................... 27,361,894 39,312,836 44,299,301
Stockholders' equity (deficit):
Common stock, no par value. Authorized 15,625,000
shares; issued and outstanding 881,900 shares at
March 31, 1996, 940,392 shares at December 31,
1996 and 941,702 shares at March 31, 1997........ 1,329,869 1,376,715 1,378,178
Additional paid-in capital.......................... 1,604,997 1,604,997 2,884,897
Deferred stock option compensation expense.......... -- -- (662,520)
Cumulative translation adjustment................... 26,363 33,599 37,636
Accumulated deficit................................. (33,046,067) (40,374,903) (42,493,446)
------------ ------------ ------------
Total stockholders' deficit................. (30,084,838) (37,359,592) (38,855,255)
------------ ------------ ------------
Commitments, contingency and subsequent events
$ 6,747,403 $ 7,304,865 $ 13,686,769
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
67
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTH
FISCAL
YEARS PERIOD THREE MONTHS
ENDED MARCH 31, ENDED ENDED MARCH 31,
------------------------ DECEMBER 31, ------------------------
1995 1996 1996 1996 1997
----------- ----------- ------------ ----------- -----------
(unaudited)
Net product sales................... $ 1,151,605 $ 445,229 $ 2,050,245 $ 11,868 $ 4,909,810
Manufacturing contract service
revenues.......................... 1,206,894 1,516,870 53,257 125,066 --
----------- ---------- ---------- ---------- ----------
Total revenues............ 2,358,499 1,962,099 2,103,502 136,934 4,909,810
----------- ---------- ---------- ---------- ----------
Cost of products sold............... 3,703,624 2,425,473 3,685,395 984,725 4,080,411
Manufacturing contract service
expenses.......................... 811,621 1,516,870 53,257 125,066 --
----------- ---------- ---------- ---------- ----------
Total cost of products
sold and manufacturing
contract service
expenses................ 4,515,245 3,942,343 3,738,652 1,109,791 4,080,411
----------- ---------- ---------- ---------- ----------
Gross profit (loss)....... (2,156,746) (1,980,244) (1,635,150) (972,857) 829,399
----------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative............... 2,067,077 2,316,302 2,584,423 796,102 1,637,806
Research and development....... 1,891,918 4,519,095 2,965,933 1,575,784 1,111,719
----------- ---------- ---------- ---------- ----------
Total operating
expenses................ 3,958,995 6,835,397 5,550,356 2,371,886 2,749,525
----------- ---------- ---------- ---------- ----------
Loss from operations...... (6,115,741) (8,815,641) (7,185,506) (3,344,743) (1,920,126)
Other income (expense):
Interest income................ 17,380 37,962 102,422 1,412 401
Interest expense............... (211,048) (287,253) (249,294) (71,813) (198,818)
Other income (expense)......... (8,970) 3,754 3,542 -- --
----------- ---------- ---------- ---------- ----------
(202,638) (245,537) (143,330) (70,401) (198,417)
----------- ---------- ---------- ---------- ----------
Net loss.................. $(6,318,379) $(9,061,178) $ (7,328,836) $(3,415,144) $(2,118,543)
=========== ========== ========== ========== ==========
Pro forma net loss per share........ $ (0.73) $ (0.21)
========== ==========
Shares used in computing pro forma
net loss per share................ 10,086,535 10,094,815
See accompanying notes to consolidated Financial Statements.
F-4
68
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
DEFERRED
COMMON STOCK ADDITIONAL STOCK OPTION CUMULATIVE
PRICE PER ------------------------- PAID-IN COMPENSATION TRANSLATION
DESCRIPTION SHARE SHARES AMOUNT CAPITAL EXPENSE ADJUSTMENT
- ----------------------------------- ------------- ----------- ---------- ---------- ------------ ----------
Balances at March 31, 1994......... $ - 24,636 $1,290,062 $1,604,997 $ -- $ 18,119
Sale of common stock for cash...... 0.024 498,232 11,958 -- -- --
Net loss........................... - -- -- -- -- --
Translation adjustment............. - -- -- -- -- 7,417
-------- ------- ---------- ---------- ----------- --------
Balances at March 31, 1995......... - 522,868 1,302,020 1,604,997 -- 25,536
Sale of common stock for cash...... 0.024 340,467 8,171 -- -- --
Common stock issued upon exercise
of stock options................. 0.792- 18,565 19,678 -- -- --
2.880
Net loss........................... - -- -- -- -- --
Translation adjustment............. - -- -- -- -- 827
-------- ------- ---------- ---------- ----------- --------
Balances at March 31, 1996......... - 881,900 1,329,869 1,604,997 -- 26,363
Common stock issued upon exercise
of employee options.............. - 10,684 11,900 -- -- --
Stock issued to vendors for
services......................... - 47,808 34,946 -- -- --
Net loss........................... - -- -- -- -- --
Translation adjustment............. - -- -- -- -- 7,236
-------- ------- ---------- ---------- ----------- --------
Balances at December 31, 1996...... - 940,392 1,376,715 1,604,997 -- 33,599
Deferred compensation expense
related to common stock options
(unaudited)...................... - -- -- 1,279,900 (1,279,900) --
Amortization of deferred stock
option compensation
(unaudited)...................... - -- -- -- 617,380 --
Common stock issued upon exercise
of stock options (unaudited)..... 0.792- 1,310 1,463 -- -- --
2.880
Net loss for the three months ended
March 31, 1997 (unaudited)....... - -- -- -- -- --
Translation adjustment
(unaudited)...................... - -- -- -- -- 4,037
-------- ------- ---------- ---------- ----------- --------
Balances at March 31, 1997
(unaudited)...................... $ - 941,702 $1,378,178 $2,884,897 $ (662,520) $ 37,636
======== ======= ========== ========== =========== ========
TOTAL
ACCUMULATED STOCKHOLDERS'
DESCRIPTION DEFICIT DEFICIT
- ----------------------------------- ------------ -------------
Balances at March 31, 1994......... $(17,666,510) $ (14,753,332)
Sale of common stock for cash...... -- 11,958
Net loss........................... (6,318,379) (6,318,379)
Translation adjustment............. -- 7,417
------------ -------------
Balances at March 31, 1995......... (23,984,889) (21,052,336)
Sale of common stock for cash...... -- 8,171
Common stock issued upon exercise
of stock options................. -- 19,678
Net loss........................... (9,061,178) (9,061,178)
Translation adjustment............. -- 827
------------ -------------
Balances at March 31, 1996......... (33,046,067) (30,084,838)
Common stock issued upon exercise
of employee options.............. -- 11,900
Stock issued to vendors for
services......................... -- 34,946
Net loss........................... (7,328,836) (7,328,836)
Translation adjustment............. -- 7,236
------------ -------------
Balances at December 31, 1996...... (40,374,903) (37,359,592)
Deferred compensation expense
related to common stock options
(unaudited)...................... -- --
Amortization of deferred stock
option compensation
(unaudited)...................... -- 617,380
Common stock issued upon exercise
of stock options (unaudited)..... -- 1,463
Net loss for the three months ended
March 31, 1997 (unaudited)....... (2,118,543) (2,118,543)
Translation adjustment
(unaudited)...................... -- 4,037
------------ -------------
Balances at March 31, 1997
(unaudited)...................... $(42,493,446) $ (38,855,255)
============ =============
See accompanying notes to consolidated financial statements.
F-5
69
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH
YEARS FISCAL PERIOD THREE MONTHS
ENDED MARCH 31, ENDED ENDED MARCH 31,
------------------------- DECEMBER 31, -------------------------
1995 1996 1996 1996 1997
----------- ----------- ------------- ----------- -----------
(unaudited)
Cash flows from operating activities:
Net loss............................................ $(6,318,379) $(9,061,178) $(7,328,836) $(3,415,144) $(2,118,543)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 771,390 759,273 633,616 185,124 201,843
Stock issued to vendors for services.............. -- -- 48,677 -- --
Compensation expense recorded on stock options to
employees....................................... -- -- -- -- 617,380
Change in certain assets and liabilities:
(Increase) decrease in accounts receivable...... (12,068) 159,999 (1,662,356) (47,083) (1,902,959)
Decrease (increase) in inventories.............. 606,533 (22,048) (1,925,805) 307,256 (3,299,242)
(Increase) decrease in other current assets..... (39,891) 3,173 (16,402) 1,223 32,990
Increase (decrease) in accounts payable and
accrued liabilities.......................... (1,393,515) 797,900 700,485 584,243 2,604,505
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities........ (6,385,930) (7,362,881) (9,550,621) (2,384,381) (3,864,026)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.... (1,147,417) (549,426) (324,944) (88,241) (220,879)
Increase in other assets............................ (16,043) (42,694) (25,026) 3,751 (79,228)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities........ (1,163,460) (592,120) (349,970) (84,490) (300,107)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayments of obligations under capital leases...... -- (560,602) (404,277) (162,715) (199,326)
Net proceeds from notes payable..................... -- -- 506,180 -- 765,323
Net repayment of notes payable to vendor............ (205,900) -- -- (994,937) --
Proceeds from (repayments of) notes payable to
stockholders...................................... -- 69,869 (69,869) 69,869 --
Net proceeds from issuance of convertible notes
payable........................................... 246,934 3,702,219 4,781,871 3,702,219 1,500,000
Proceeds from sale of redeemable preferred stock.... 8,884,234 3,079,829 4,953,121 -- 1,986,465
Proceeds from sale of common stock.................. 11,958 8,171 -- -- --
Proceeds from exercise of common stock options...... -- 19,678 11,900 13,191 1,463
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities.... 8,937,226 6,319,164 9,778,926 2,627,627 4,053,925
----------- ----------- ----------- ----------- -----------
Effect of translation and exchange rate changes on
cash flows.......................................... 7,417 827 7,236 778 4,037
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................ 1,395,253 (1,635,010) (114,429) 159,534 (106,171)
Cash and cash equivalents at beginning of period...... 526,950 1,922,203 287,193 127,659 172,764
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 1,922,203 $ 287,193 $ 172,764 $ 287,193 $ 66,593
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information -- cash paid during the period for
interest............................................ $ 191,594 $ 17,273 $ 364,227 $ -- $ 170,803
=========== =========== =========== =========== ===========
Supplemental schedule of noncash financing activities:
Notes payable to stockholders converted into
redeemable preferred stock........................ $ 2,200,000 $ -- $ 6,984,090 $ -- $ 3,000,000
Notes payable to stockholders converted into
manditorily convertible notes payable............. -- 1,000,000 -- -- --
Capital lease obligations incurred to acquire
equipment......................................... 847,604 530,516 632,845 132,629 1,220,600
Stock subscriptions receivable...................... 214,506 3,281,871 -- 3,281,871 --
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
70
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Innova Corporation (Company) was formed to develop, manufacture and market
communication systems utilizing conical horn technology. In November 1993, the
Company shipped the first production units of the point-to-point radios. In
November 1994, the Company discontinued manufacture for its own account of the
original radio line; however, production of this product was continued under a
"Processor For Hire Agreement" for the account of one of Innova's stockholders
[see note 7(a), Related Party Transactions] until approximately March 31, 1996.
Also in 1994, a program to redesign the original radios was launched. The
redesign program was undertaken due to changing market demands. For the period
from January 17, 1989 (inception) through March 31, 1996, the Company was
considered to be in the development stage as the Company had not generated
significant revenues from its research and development efforts and "Processor
For Hire Agreement" and operations had been financed primarily through the
issuance of equity securities. Subsequent to March 31, 1996, the Company
effected a change in its year-end to December 31. During the nine month fiscal
period ended December 31, 1996, the Company began manufacturing and selling
redesigned radios and emerged from the development stage.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiary, Innova Europe Limited.
Innova Europe Limited was formed to sell products developed and
manufactured by the Company to customers in Europe. All significant intercompany
balances and transactions have been eliminated in consolidation.
(C) CASH EQUIVALENTS
The Company considers all short-term investments with a maturity of three
months or less at date of purchase to be cash equivalents.
(D) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(E) DEPRECIATION AND AMORTIZATION
Depreciation of equipment and amortization of leasehold improvements is
provided on the straight-line method over the estimated useful lives of the
assets which range from two to five years, not to exceed lease terms for
leasehold improvements.
(F) PATENTS
The Company has filed several patent applications in the United States and
other countries. Costs associated with filing patent applications are expensed
as incurred.
(G) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
F-7
71
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
Based on the Company's product development process, software development
costs incurred by the Company between the establishment of technological
feasibility and the point at which the product is ready for general release have
not been significant.
(H) REVENUE RECOGNITION
The Company recognizes revenue on product sales upon shipment. The Company
provides certain service and support for its products and accrues for the
estimated amount of these costs at the time of sale. These costs have not been
significant through December 31, 1996. Under the Processor For Hire
Agreement -- (PFHA) as discussed in note 7(a), manufacturing contract service
revenues were recognized as the services were performed.
(I) INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established for deferred tax
assets to the extent there is uncertainty regarding the Company's ability to
generate taxable income in the future and when it is more likely than not that
such deferred tax assets will not be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in net deferred tax assets and liabilities.
(J) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Innova Europe Limited have been translated to
U.S. dollars using rates of exchange in effect at the end of the fiscal year.
Income and expense accounts have been translated to U.S. dollars using annual
average rates of exchange. The net gain or loss resulting from translation is
shown as a cumulative translation adjustment in stockholders' equity.
(K) RECLASSIFICATIONS
Certain reclassification amounts have been made to the March 31, 1995 and
1996 balances to conform to the December 31, 1996 presentation.
(L) CONCENTRATION OF CREDIT RISK AND SUPPLIER CONCENTRATION
The Company currently purchases an important component of its products from
two principal suppliers. Although there are a limited number of potential
manufacturers of such component, management believes that other suppliers could
provide similar components on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing and a possible loss of sales, which could
have a material adverse effect on the manufacturing and delivery of the
Company's products. Purchases from these principal suppliers were as follows:
YEARS ENDED MARCH 31, NINE MONTH FISCAL
--------------------- PERIOD ENDED
1995 1996 DECEMBER 31, 1996
------- ------- -----------------
Supplier A........................... $ -- $64,000 $ 945,000
Supplier B........................... -- -- 131,000
Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required. The Company's customers
consist principally of telecommunications service providers and system
integrators. The Company will maintain an allowance for doubtful accounts to
reduce the effects of credit losses. As of
F-8
72
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
December 31, 1996, actual credit losses have not been significant and,
therefore, no allowance for doubtful accounts has been recorded.
The Company actively markets its products in numerous geographical
locations, including North America, Europe, Asia, and South America. As of
December 31, 1996, two customers individually account for more than 10% of
accounts receivable as shown below:
CUSTOMER PERCENT
-------- -------
A 60
B 15
(M) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on April 1, 1996. This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the consolidated financial statements.
(N) PRODUCT WARRANTIES
The Company provides warranties which generally last for two years, on the
products that it sells. The provision for warranty expense is based on
historical industry and Company experience and is accrued when products are
sold.
(O) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangement in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense under fixed plans would be recorded on the date of
grant only if the fair value of the underlying stock at the date of grant
exceeded the exercise price. Statement of Financial Accounting Standard (SFAS)
No. 123, Accounting for Stock-Based Compensation, requires entities that
continue to apply the provisions of APB Opinion No. 25 for transactions with
employees to provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied to these
transactions.
(P) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the March 31, 1997 and 1996
unaudited interim financial statements include all adjustments consisting only
of normal recurring adjustments, necessary for a fair presentation.
(Q) PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period. Common stock equivalents include all warrants
and stock options which would have a dilutive effect, applying the treasury
stock method. Additionally,
F-9
73
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
common and common equivalent shares issued during the twelve months immediately
preceding the initial filing of the Company's initial public offering have been
included in the calculation of common and common equivalent shares as if they
were outstanding for all periods presented, including loss years where the
impact of the incremental shares is antidilutive, using the treasury stock
method and an assumed initial public offering price of $11 per share. Due to the
significant impact of the assumed conversion of the redeemable preferred stock
upon closing of the IPO, historical net loss per share is not meaningful and is
therefore not presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (Statement 128).
This statement establishes standards for the computation, presentation and
disclosure of earnings per share (EPS), replacing the presentation of currently
required Primary EPS with a presentation of Basic EPS. It also requires dual
presentation of Basic EPS and Diluted EPS on the face of the income statement
for entities with complex capital structures. Basic EPS is based on the
weighted-average number of common shares outstanding during the period. Diluted
EPS is based on the potential dilution that would occur, upon exercise or
conversion of securities into common stock using the treasury stock method.
Statement 128 is effective for financial statements for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
(2) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ ----------
(unaudited)
Raw materials......................... $ 608,165 $1,874,765 $4,782,468
Work-in-progress...................... -- 503,984 683,967
Finished goods........................ -- 155,221 366,777
---------- ---------- ----------
$ 608,165 $2,533,970 $5,833,212
========== ========== ==========
F-10
74
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
---------- ------------ ----------
(unaudited)
Equipment and molds................. $4,221,195 $5,152,170 $6,578,934
Leasehold improvements.............. 114,026 140,840 155,555
---------- ---------- ----------
4,335,221 5,293,010 6,734,489
Less accumulated depreciation and
amortization...................... 2,012,033 2,645,649 2,847,492
---------- ---------- ----------
$2,323,188 $2,647,361 $3,886,997
========== ========== ==========
Included in equipment and leasehold improvements are the gross amount of
equipment and related accumulated amortization recorded under capital leases as
follows:
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
---------- ------------ ----------
(unaudited)
Equipment............................. $2,054,332 $2,632,721 $3,853,321
Less accumulated amortization....... 829,852 1,181,895 1,280,243
---------- ---------- ----------
$1,224,480 $1,450,826 $2,573,078
========== ========== ==========
Amortization of assets held under capital leases is included with
depreciation expense.
(5) NOTES PAYABLE
In October 1996, the Company entered into a $5 million revolving credit
agreement which bears interest at the LIBOR rate plus 4.875% with a minimum of
8% per annum (10.545% at December 31, 1996 and 10.505% at March 31, 1997).
Amounts outstanding were $0, $506,180, and $1,271,503 at March 31, 1996,
December 31, 1996 and March 31, 1997, respectively. Under the terms of the
agreement, advances under the credit facility are limited to 80% of billed trade
receivables outstanding. The agreement is subject to automatic renewals for
successive one-year terms. In April 1997, the Company amended the credit
agreement to include an additional term loan for $1,500,000 due on the earlier
of:
(a) April 30, 1998;
(b) the date the initial October 1996 revolving credit agreement
terminates; or
(c) the date the Company first issues equity, debt or other
securities, other than the Series F financing discussed in note 17,
subsequent to April 1997.
Interest is payable monthly with interest at the LIBOR rate plus 4.875%
with a minimum of 8% per annum. In connection with the term loan, the Company
issued to the lender a warrant to purchase 21,500 shares of the Company's common
stock, at $6.96 per share. The warrant expires in April 2003. The value of the
warrant will be recorded as debt discount and amortized to interest expense over
the period that the debt is outstanding.
F-11
75
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(6) ACCRUED LIABILITIES
A summary of accrued liabilities is as follows:
MARCH 31, DECEMBER 31, MARCH 31,
1996 1996 1997
--------- ------------ -----------
(unaudited)
Accrued compensation expense............. $ 171,954 $288,965 $ 400,608
Provision for warranty................... -- 20,479 82,978
Other accruals........................... 168,175 45,838 57,759
-------- -------- --------
$ 340,129 $355,282 $ 541,345
======== ======== ========
(7) RELATED PARTY TRANSACTIONS
(A) SALES, MANUFACTURING AND SERVICE REVENUES
Sales totaling approximately $212,000 were made to a stockholder during the
nine month fiscal period ended December 31, 1996.
Substantially all of the total revenues recorded in the year ended March
31, 1996 were to a stockholder of the Company, Societe Anonyme de
Telecommunications (SAT). In November 1994, the Company entered into an
agreement [Processor For Hire Agreement -- (PFHA)] with SAT whereby SAT
purchased substantially all of the Company's inventories as of November 1994 for
cash. The PFHA called for the Company to continue to manufacture radios for SAT;
however, SAT was responsible for supplying the materials used in the manufacture
of these radios. Under the PFHA, SAT reimbursed the Company for the costs
incurred by the Company in the assembly and testing of the radios. In addition,
SAT paid to the Company a fee to cover administrative costs plus a profit. This
fee was based on the volume of materials purchased for SAT for the production of
the radios. The Company managed all of the manufacturing and purchasing
functions associated with the manufacture of radios and the purchase of radio
components. The PFHA was substantially terminated as of March 31, 1996.
The reimbursement of the costs of manufacture along with the administration
fee during the fiscal year ended March 31, 1995 and 1996 and the nine month
fiscal period ended December 31, 1996 have been recorded as manufacturing
contract service revenues in the consolidated statements of operations. The
identifiable costs associated with the manufacture of the radios covered by the
PFHA have been summarized in the consolidated statements of operations as
manufacturing contract service expenses.
Product sales made to SAT for the nine month fiscal period ended December
31, 1996 were approximately $3,000 and for the three months ended March 31, 1997
were approximately $833,000.
(B) ACCOUNTS RECEIVABLE
Accounts receivable due from SAT were $76,523, $58,283 and $868,787 at
March 31, 1996, December 31, 1996 and March 31, 1997, respectively.
(C) MANDATORILY CONVERTIBLE NOTES PAYABLE FOR PREFERRED STOCK, STOCK
SUBSCRIPTIONS RECEIVABLE AND RELATED EQUITY TRANSACTIONS
On March 27, 1996, the Company entered into stock subscription agreements
with certain existing stockholders for the purpose of selling Series D preferred
stock for an aggregate price of $7,000,000. As of March 31, 1996, proceeds of
$3,702,219 net of offering costs of $15,910, had been received by the Company
related to the stock subscription agreements. The remaining $3,281,871 was
received during the nine month fiscal period ended Decem-
F-12
76
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
ber 31, 1996. Mandatorily convertible notes payable were issued as the cash was
received by the Company. Mandatorily convertible notes payable accrued interest
at 16% annually and were convertible into Series D preferred shares at the
earlier of a "qualified financing" event or April 26, 1996. A "qualified
financing" event, as defined in the stock subscription agreements, was
consummated on April 26, 1996 when the Company issued 1,548,940 shares of Series
D preferred stock, at $3.228 per share to a new stockholder for proceeds of
$4,953,121. The mandatorily convertible notes payable outstanding at April 26,
1996 were then converted into 2,168,523 shares of Series D preferred stock at
$3.228 per share, and contingent common stock purchase warrants (contingent upon
the pricing of the "qualified financing" event) totaling 367,082 with an
exercise price of $0.024 per share, were issued to the former holders of the
mandatorily convertible notes payable. No separate value has been assigned to
the warrants as the value was not significant at the date of issuance.
Unsecured notes payable to stockholders were issued in November and
December 1995 totaling $1,000,000, bearing interest at rates ranging from
16%-21%. In connection with these notes, 193,611 warrants were issued to
purchase common stock for $2.5824 per share which expire April 26, 2001. No
separate value has been assigned to the warrants as the value was not
significant at the date of issuance. On March 27, 1996, these unsecured notes
payable were exchanged for mandatorily convertible notes payable as part of the
stock subscription agreements described above.
Interest expense on unsecured borrowings from stockholders amounted to
$79,357, $107,648, $70,101 and $62,934 for the years ended March 31, 1995 and
1996, the nine month fiscal period ended December 31, 1996 and the three months
ended March 31, 1997, respectively.
In November 1996, the Company issued $1,500,000 in unsecured 12%
convertible promissory notes payable to stockholders, which were subsequently
repaid by notes which in turn were converted into Series E preferred stock in
March 1997.
(D) COMPENSATION EXPENSE
In May 1996, the Company paid a representative of a stockholder $217,500
for services rendered from January 1995 to February 1996, who served as the
acting Chief Operating Officer of the Company.
(8) COMMON AND REDEEMABLE PREFERRED STOCK
The Company has authorized issuance of common and redeemable preferred
stock as follows:
SHARES ISSUED AND OUTSTANDING LIQUIDATION
SHARES --------------------------------- PREFERENCE
TYPE SERIES AUTHORIZED 3/31/96 12/31/96 3/31/97 PER SHARE
- ------------------------------------ ------- ---------- ------- --------- ----------- -----------
(unaudited)
Common.............................. 15,625,000 881,900 940,392 941,702 None
A Preferred......................... A.1 833,333 667,125 667,125 667,125 $ 13.2360
A Preferred......................... A.2 833,333 -- -- -- 0.8400
A Preferred......................... A.3 2,500,000 907,030 907,030 907,030 7.9176
B Preferred......................... B 2,083,333 804,553 804,553 804,553 6.0600
C Senior Preferred.................. C 833,333 664,305 664,305 664,305 6.3672
C Senior Preferred.................. C1 625,000 453,950 456,299 456,299 6.3672
D Preferred......................... D 4,166,666 -- 3,717,463 3,717,463 3.2280
E Preferred......................... E 1,000,000 -- -- 962,669 5.1936
F-13
77
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
The following table summarizes activity of the Company's preferred stock
for the years ended March 31, 1995 and 1996, the nine month fiscal period ended
December 31, 1996 and the three months ended March 31, 1997:
PREFERRED STOCK
PRICE --------------------------
DESCRIPTION PER SHARE SHARES AMOUNT
- ------------------------------------------------------ --------- ------------ -----------
Balances at March 31, 1994............................ $ -- 958,077 $13,197,831
Issuance of Series A.1 preferred stock pursuant to
antidilution agreements............................. -- 324,143 --
Issuance of Series A.3 preferred stock pursuant to
antidilution agreements............................. -- 14,045 --
Conversion of notes payable to Series A.3 preferred
stock............................................... 7.916808 214,733 1,700,000
Sale of B preferred stock for cash, net of issuance
costs of $120,430................................... 6.084984 364,854 2,099,707
Sale of B preferred stock for cash.................... 6.367992 439,699 2,800,000
Conversion of notes payable to Series A.3 preferred
stock............................................... 7.916808 63,157 500,000
Sale of Series C senior preferred stock for cash, net
of issuance costs of $30,759........................ 6.367992 664,305 4,199,033
--------- ---------- -----------
Balances at March 31, 1995............................ -- 3,043,013 24,496,571
Sale of Series C1 senior preferred stock, net of
issuance costs of $21,633........................... 6.3672 422,628 2,669,359
Sale of Series C1 senior preferred stock, net of
issuance costs of $3,472............................ 6.3672 31,322 195,964
--------- ---------- -----------
Balances at March 31, 1996............................ -- 3,496,963 27,361,894
Sale of Series D preferred stock for cash, net of
issuance costs of $46,879........................... 3.228 1,548,940 4,953,121
Conversion of convertible notes for Series D preferred
stock............................................... 3.228 2,168,523 6,984,090
Series C1 preferred stock issued to vendors for
services............................................ -- 2,349 13,731
--------- ---------- -----------
Balances at December 31, 1996......................... -- 7,216,775 39,312,836
Conversion of notes payable to Series E preferred
stock (unaudited) .................................. 5.19384 288,799 1,500,000
Sale of Series E preferred stock for cash, net of
issuance costs of $13,530 (unaudited)............... 5.19384 673,870 3,486,465
--------- ---------- -----------
Balances at March 31, 1997 (unaudited)................ $ -- 8,179,444 $44,299,301
========= ========== ===========
The shares of preferred stock are convertible into an equal number of
common shares at any time, are automatically convertible upon the consummation
of an initial public offering (IPO), have certain liquidation and dividend
preferences over common shares, and also have certain antidilution rights. The
preferred shares are redeemable, at the holder's option (subject to approval by
50% of all preferred shares then outstanding), at any time after October 1,
1997. The redemption value is $7.9176 per share for the A preferred shares. The
redemption value is equal to the liquidation preference for all other preferred
shares (appropriately adjusted for stock splits, stock dividends, combinations,
recapitalizations, reclassification and similar corporate rearrangements) plus
the amount of all declared and unpaid dividends thereon. All C Senior Preferred
and D Preferred shares have preference to other preferred shares with regard to
liquidation. Holders of all preferred shares have the right as a group to elect
three members of the Company's Board of Directors. The remaining directors are
elected by the holders of all outstanding preferred and common shares. The
voting rights are the same for all preferred and common shares. Pursuant to the
rules of the Securities and Exchange Commission, the Company has classified
redeemable preferred stock outside stockholders' equity (deficit).
F-14
78
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
In March 1997, the Company revised its Articles of Incorporation,
increasing the authorized number of preferred shares to 12,874,998 of which
1,000,000 shares are designated as Series E Preferred stock which have identical
preferences as the Series C Senior Preferred and D Preferred, except that the
liquidation preference is $5.1936 per share.
In conjunction with various financing rounds, warrants have been issued. No
separate value has been assigned to the warrants as the values were not
significant at the date of issuance, other than the 21,500 warrants with an
exercise price of $6.96 per share issued in connection with the debt financing
in April 1997. Outstanding warrants at March 31, 1996 and December 31, 1996 are
summarized as follows:
WARRANTS OUTSTANDING
------------------------ EXERCISE PRICE
ISSUED IN CONJUNCTION WITH: 3/31/96 12/31/96 OF WARRANT EXPIRE
- ---------------------------------- ----------- ----------- -------------- --------------------------
Series A.2 preferred stock........ 481,978 481,978 $ 0.8400 May 31, 1999
Series C and D preferred stock.... 2,252,048 2,252,048 0.0240 February 13, 2000
through April 26, 2001
Series D preferred stock.......... 193,611 193,611 2.5824 April 26, 2001
----------- -----------
Total...................... 2,927,637 2,927,637
=========== ===========
(9) STOCK OPTION PLAN
The Company has a stock option plan (Plan) to compensate key employees,
consultants and vendors for past and future services and has authorized a total
of 1,458,333 shares of common stock to be reserved for grants. In the first
quarter of 1997, a plan amendment was approved increasing shares available for
grant by 125,000 bringing the total authorized to 1,583,333. Options may be
granted under the Plan as either incentive stock options or as nonqualified
stock options.
Incentive stock options may be granted at prices not less than fair market
value of the stock, generally are exercisable based on continued employment over
a five-year period in equal increments each year beginning one year from the
date of grant, and expire ten years from the date of grant. The Company has
granted no incentive stock options to date.
Nonqualified options may be granted at prices determined by the Company and
generally expire twenty years from the date of grant. The options vest and
become exercisable over one to four years in cumulative increments beginning one
year from the date of grant. A distinction is made between nonqualified time
vesting and nonqualified time and performance vesting options. Nonqualified time
and performance vesting options require the attainment of certain performance
goals in addition to the passage of time prior to vesting.
In accounting for the options requiring the attainment of certain
performance goals, the Company must include a determination of compensation cost
at the end of each period if the market value of the shares of the Company's
stock exceeds the exercise price. Any compensation cost shall be charged to
expense over the periods the employee performs the related service. During the
first quarter in 1997, the Company amended the terms of 460,633 stock options by
eliminating the performance criteria. The table below reflects these performance
options as being amended to time vesting. The Company has recorded deferred
stock option compensation totaling $1,279,900 and has recognized a charge
against operations of $617,380 during the first quarter in 1997. The deferred
stock option compensation relates principally to the 460,633 options with
performance goals outstanding prior to the elimination of the performance
criteria. In addition, the deferred stock option compensation includes some
amounts recorded for nonqualified time vesting grants where the estimated market
value of the shares of the Company's stock exceeded the exercise price at the
date of the grant. The estimated market value of the Company's common stock used
in calculating the majority of the deferred stock option compensation was
approximately $4.32 per share.
F-15
79
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
A summary of nonqualified time vesting and time and performance vesting
stock options is as follows:
OUTSTANDING OPTIONS
--------------------------
NUMBER OF SHARES
SHARES --------------------------
AVAILABLE TIME AND WEIGHTED
FOR FUTURE TIME PERFORMANCE AVERAGE
GRANT VESTING VESTING EXERCISE PRICE
----------- ---------- ----------- --------------
Balances at March 31, 1995.............. 64,006 347,033 -- $ 1.0584
Options granted......................... (1,235,293) 602,780 632,513 1.5840
Options expired......................... 299,657 (136,338) (163,319) 0.8736
Options exercised....................... -- (18,565) -- 1.0608
Plan amendment.......................... 1,041,667 -- -- --
----------- ---------- -----------
Balances at March 31, 1996.............. 170,037 794,910 469,194 1.5120
Options granted......................... (409,896) 255,138 154,758 1.7280
Options expired......................... 238,753 (75,434) (163,319) 0.7560
Options exercised....................... -- (10,684) -- 1.1136
----------- ---------- -----------
Balances at December 31, 1996........... (1,106) 963,930 460,633 1.6128
Options granted (unaudited)............. (142,874) 142,874 -- 1.7472
Options canceled (unaudited)............ 26,667 (26,667) -- 0.9936
Options exercised (unaudited)........... -- (1,310) -- 1.1160
Options amended (unaudited)............. -- 460,633 (460,633) 1.9680
Plan amendment (unaudited).............. 125,000 -- -- --
----------- ---------- -----------
Balances at March 31, 1997
(unaudited)........................... 7,687 1,539,460 -- $ 1.6248
=========== ========== ===========
The Company applies APB Opinion No. 25 in accounting for its Plans, and no
compensation cost for the years ended March 31, 1995 and 1996 and the nine month
fiscal period ended December 31, 1996 has been recognized for its employee stock
options in the consolidated financial statements. Had the Company determined
compensation cost of employee stock options based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's pro forma net loss
would not have been significantly different than the reported net loss.
The weighted-average fair value per share of the grants made during the
year ended March 31, 1996 and the nine month fiscal period ended December 31,
1996 was approximately $0.02 and $0.054 respectively. The fair value of the
stock options granted was estimated on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: for the
year ended March 31, 1996 -- expected dividend yield 0%, risk-free interest rate
averaging approximately 6.1%, and an expected life ranging from two to six
years; for the nine month fiscal period ended December 31, 1996 -- expected
dividend yield 0%, risk-free interest rate averaging approximately 6.3%, and an
expected life ranging from two to six years.
F-16
80
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING --------------------------------
--------------------------------------------------------------- WEIGHTED-
EXERCISE NUMBER WEIGHTED-AVERAGE REMAINING WEIGHTED- AVERAGE NUMBER AVERAGE EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- -------------- ----------- -------------------------- ---------------- ----------- ----------------
$ 0.024 -0.144 4,224 1.5 years $ 0.096 4,224 $ 0.096
0.240 -0.288 10,832 1 year 0.240 10,832 0.240
0.792 452,640 1.5 years 0.792 225,158 0.792
1.968 921,265 2 years 1.968 -- --
2.880 -6.360 35,602 1.5 years 2.976 34,876 2.976
---------- ----------
1,424,563 1.75 years $ 1.613 275,090 $ 1.037
========== ==========
(10) EMPLOYEE BENEFIT PLAN
In January 1996, the Company implemented a 401(k) plan that covers all
employees who satisfy certain eligibility requirements relating to minimum age,
length of service and hours worked. Under the profit sharing portion of the
plan, the Company may make an annual contribution for the benefit of eligible
employees in an amount determined by the Board of Directors. As of March 31,
1997, the Company had not made any contributions to the plan. Under the 401(k)
portion of the plan, eligible employees may make pretax elective contributions
of up to 10% of their compensation, subject to maximum limits on contributions
prescribed by law.
(11) INCOME TAXES
The Company has not recorded an income tax benefit for the years ending
March 31, 1995 and 1996, and the nine month fiscal period ended December 31,
1996 due to the recording of a valuation allowance as an offset to net deferred
tax assets. A valuation allowance is provided due to uncertainties relating to
the realization of deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
DECEMBER
MARCH 31, 31, MARCH 31,
1996 1996 1997
----------- ----------- -----------
(UNAUDITED)
Writedown of inventories, deductible in different
years for tax purposes............................ $ 203,000 $ 158,500 $ 207,000
Equipment and leasehold improvements, principally
due to differences in depreciation and
amortization...................................... 230,000 236,700 168,000
Accrued liabilities deductible in different years
for tax purposes.................................. 219,000 199,600 136,300
Amortization of stock option expense deductible in
different years for tax purposes.................. 292,600 292,600 502,000
Net operating loss carryforwards.................... 10,147,000 12,544,900 13,138,000
----------- ----------- -----------
Total gross deferred tax assets........... 11,091,600 13,432,300 14,151,300
Less valuation allowance.......................... 11,091,600 13,432,300 14,151,300
----------- ----------- -----------
Net deferred tax assets................... $ -- $ -- $ --
=========== =========== ===========
F-17
81
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
The valuation allowance for deferred tax assets increased $1,826,500 for
the year ended March 31, 1995, $3,616,600 for the year ended March 31, 1996,
$2,340,700 for the nine month fiscal period ended December 31, 1996 and $719,000
for the three months ended March 31, 1997.
At December 31, 1996, the Company had tax net operating loss carryforwards
available to offset future Federal taxable income, if any, of approximately $35
million expiring in 2005 through 2012. At December 31, 1996, the Company also
has net operating tax loss carryforwards available to offset future United
Kingdom taxable income, if any, of approximately $1.8 million expiring in 2006
through 2011.
The utilization of the tax net operating loss carryforwards may be limited
due to ownership changes that have occurred as a result of the sale of common
and preferred stock.
(12) LEASE COMMITMENTS
The Company is obligated under various capital leases for certain equipment
that expire at various dates during the next three years. The Company also has
certain noncancelable operating leases that expire over the next two years and
require the Company to pay certain executory costs such as maintenance and
taxes. Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1996 are:
CAPITAL OPERATING
LEASES LEASES
---------- -------
Years ending December 31:
1997................................................ $ 611,455 $63,335
1998................................................ 356,654 21,934
1999................................................ 178,575 --
---------- -------
Total minimum lease payments................ 1,146,684 $85,269
=======
Less amount representing interest (at rates averaging
15%)................................................ 100,598
----------
Present value of net minimum capital lease
payments.................................. 1,046,086
Less current installments of obligations under capital
leases.............................................. 503,827
----------
Obligations under capital leases, excluding
current installments...................... $ 542,259
==========
Rental expense for these operating leases totaled $235,003 for the year
ended March 31, 1996, $240,917 for the nine month fiscal period ended December
31, 1996 and $75,494 for the three months ended March 31, 1997.
Subsequent to December 31, 1996, the Company entered into certain capital
leases with terms of three years for manufacturing and test equipment. Lease
payments over the next three years for this equipment will total approximately
$548,000 per year.
F-18
82
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(13) MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company currently operates in a single segment selling millimeter wave
radio systems. Product sales during the nine month fiscal period ended December
31, 1996 to individual customers and by geographic region accounting for more
than 10% of total revenues are shown below:
GEOGRAPHIC
CUSTOMER REGION PERCENT
------------------------------- ---------- -------
A Canada 50
B Mexico 13
C U.S. 10
Manufacturing contract service revenues for all periods presented were to a
single customer.
(14) OPERATIONS AND FINANCING
The Company's consolidated financial statements have been prepared on a
going concern basis.
The Company incurred a net loss of $7,328,836, had negative cash flows from
operations of $9,550,621, and an accumulated deficit of $40,374,903 as of and
for the nine month fiscal period ended December 31, 1996. The Company has
expended a significant amount of cash in developing its technology and
redesigned radios and during the nine month fiscal period ended December 31,
1996, the Company commenced principal operations. The Company expects to expand
its manufacturing and sales efforts during 1997 and to reach profitable levels
during 1997. Although, as of April 1997, the Company has a significant sales
order backlog, and is successfully manufacturing its redesigned radios,
management recognizes that to sustain the rate of growth projected and to meet
working capital requirements, additional resources may be necessary.
Accordingly, in March 1997, the Company closed a Series E preferred stock
financing transaction totaling $5 million. Included in the $5 million financing
was the conversion of unsecured convertible promissory notes payable to
stockholders. Additional financing is discussed in note 17. In addition, the
Company has retained investment banking counsel to advise it on the possible
sale of additional equity securities in connection with a proposed IPO. The
Company intends to offer for sale, as part of the IPO, 2,500,000 shares of
common stock at a price ranging from $10 to $12 per share.
Management expects that these efforts will result in adequate near term
financing. No assurances can be given that the Company will achieve
profitability or positive cash flow.
(15) CONTINGENCIES
The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when ultimately
concluded and determined will not, in the opinion of management, have a material
effect on results of operations or the financial condition of the Company.
(16) FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities,
obligations under capital leases, notes payable and notes payable to
stockholders. The fair value of obligations under capital leases, notes payable
and notes payable to stockholders estimates their recorded values based on
current rates available to the Company. The remaining financial instruments have
a short-term until maturity or settlement in cash and, therefore, the carrying
value approximates fair value.
F-19
83
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(17) SUBSEQUENT EVENTS
In June 1997:
- - The Board of Directors authorized the increase in the number of preferred
shares to 13,379,164 of which 504,166 shares are designated as Series F
Preferred Stock which have identical preferences as the Series C Senior
Preferred, D and E Preferred, except that the liquidation preference is $6.96
per share. Also in June 1997, the Company issued 502,866 shares of Series F
Preferred Stock at $6.96 per share, for total cash consideration of
$3,500,000, before issuance costs.
- - The Company effected a 24:1 reverse stock split on its common and preferred
stock and eliminated the par values related thereto. These consolidated
financial statements and notes thereto have been restated for these actions.
- - A plan amendment to the Company's Stock Option Plan was approved increasing
shares available for grant by 500,000 bringing the total authorized to
2,083,333.
- - The Board of Directors authorized a Stock Option Plan for Nonemployee
Directors for which 120,000 shares of common stock were reserved for sale and
issuance under the plan. Under the provisions of the plan, 48,263 options were
granted with an exercise price of $10 per share and a vesting period of 4
years.
- - Subsequent to March 31, 1997, the Board of Directors granted 122,729
non-qualified stock options to employees with exercise prices averaging
approximately $9.60 per share. In addition, the Board of Directors authorized
for future grant 56,250 options that vest upon the attainment of certain
performance goals. The exercise price of these performance options range from
$3.60 to $6.00 per share.
F-20
84
[PHOTOGRAPH OF COMPANY'S LOGO AND MISSION STATEMENT]
The artwork for the inside back cover of the Prospectus is a color photograph of
the Company's logo (which is the word Innova with an inverted triangle over the
"I" in "Innova"), and the Company's mission statement ("Dramatically Changing
the Economics of Wireless Networks").
85
======================================================
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the Common Shares offered hereby, nor does it constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
to any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary..................... 3
Risk Factors........................... 5
The Company............................ 17
Use of Proceeds........................ 17
Dividend Policy........................ 17
Capitalization......................... 18
Dilution............................... 19
Selected Financial Data................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 21
Business............................... 30
Management............................. 44
Certain Transactions................... 49
Principal Shareholders................. 53
Description of Capital Stock........... 55
Shares Eligible for Future Sale........ 56
Underwriting........................... 58
Legal Matters.......................... 59
Experts................................ 59
Additional Information................. 60
Index to Consolidated Financial
Statements........................... F-1
------------------------------
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
Offering, may be required to deliver a Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
======================================================
======================================================
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
August , 1997
---------------------------
UBS SECURITIES
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
======================================================
86
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
Registration Fee -- Securities and Exchange Commission.................... $ 10,345
NASD Filing Fee........................................................... 3,500
Nasdaq National Market Listing Fee........................................ 47,848
Accountants' Fees and Expenses............................................ 105,000
Blue Sky Filing and Counsel Fees and Expenses............................. 15,000
Printing and Engraving Expenses........................................... 125,000
Legal Fees and Expenses................................................... 200,000
Transfer Agent and Registration Fees...................................... 5,000
Miscellaneous Expenses.................................................... 288,307
--------
TOTAL........................................................... $800,000
========
- ---------------
* All expenses other than the Securities and Exchange Commission Registration
Fee, the NASD Filing Fee and the Nasdaq National Market Fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article V, Section 5.1, of the Registrant's Second Restated
Articles of Incorporation (Exhibit 3.1 hereto) and Article X of the Registrant's
Amended and Restated Bylaws (Exhibit 3.2 hereto) provide for mandatory
indemnification of the Registrant's directors, officers, employees and agents to
the maximum extent permitted by law. (The directors and officers of the
Registrant also may be indemnified against liability they may incur for serving
in that capacity pursuant to a liability insurance policy maintained by the
Company for such purpose.)
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, self-dealing or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article V, Section 5.2, of the Registrant's
Amended and Restated Articles of Incorporation contains provisions implementing,
to the fullest extent permitted by Washington law, such limitations on a
director's liability to the Registrant and its shareholders.
Reference is made to the Registrant's Second Restated Articles of
Incorporation, filed as Exhibit 3.1 to this Registration Statement, and the
Registrant's Amended and Restated Bylaws, filed as Exhibit 3.2 to this
Registration Statement.
Reference is also made to the form of Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors of the Registrant by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 31, 1994, the Registrant has issued the following unregistered
securities (all share amounts have been adjusted as necessary to reflect a 24:1
reverse stock split to be effected prior to the offering):
(1) An aggregate of 214,724 shares of Series A Preferred Stock were
issued in May 1994 at $7.9168 per share to seventeen investors, all of whom
were venture funds and other accredited investors, for an aggregate
consideration of $1,700,000 in outstanding promissory notes. In addition,
warrants for 462,640 shares of Series
II-1
87
A Preferred Stock, exercisable at $0.84 per share were issued in May 1994
and warrants for 19,338 shares of Series A Preferred Stock, exercisable at
$0.84 per share, were issued in December 1994.
(2) An aggregate of 364,855 shares of Series B Preferred Stock were
issued in May 1994 upon (i) the conversion of a $1,000,000 promissory note
plus $20,135 in accrued interest and (ii) the payment of $1,999,997 in
cash, at a price per share of $6.0850 to three investors, all of whom were
venture funds and other accredited investors. In addition, the Company sold
three options exercisable for an aggregate of 882,286 shares at various
exercise prices. Only the first of these options was exercised, for 439,698
shares at an exercise price of $6.3679 per share, in July and August 1996.
(3) An aggregate of 63,156 shares of Series A Preferred Stock issued
in December 1994 at $7.9168 per share to a venture fund and another
accredited investor, pursuant to the conversion of promissory notes.
(4) In February 1995, 253,084 shares of Series C Senior Preferred
Stock were issued at $6.3672 per share and 189,810 shares of Common Stock
were issued at $0.024 per share to twelve investors, all of whom were
venture funds and other accredited investors. In April 1995, 411,221 shares
of Series C Senior Preferred Stock were issued at $6.3672 per share and
308,410 shares of Common Stock were issued at $0.024 per share, to fifteen
investors, all of whom were venture funds and other accredited investors.
In addition, warrants for 1,204,050 shares of Common Stock, exercisable at
$0.024 per share, were issued in connection with these financings.
(5) In September 1995, 422,630 shares of Series C1 Senior Preferred
Stock were issued at $6.3672 per share, and 316,965 shares of Common Stock
were issued at $0.024 per share, to seventeen investors, all of whom were
venture funds and other accredited investors. In November 1995, 31,320
shares of Series C1 Senior Preferred Stock were issued at $6.3672 per
share, and 23,488 shares of Common Stock were issued at $0.024 per share,
to seven investors, all of whom were venture funds and other accredited
investors. In addition, warrants for 680,917 shares of Common Stock,
exercisable at $0.024 per share, were issued in connection with the Series
C1 Senior Preferred Stock financing.
(6) In April 1996, an aggregate of 3,717,463 shares of Series D
Preferred Stock were issued at $3.228 per share to 21 investors, all of
whom were venture funds and other accredited investors. In addition,
warrants for 193,611 shares of Common Stock, exercisable at $2.5824 per
share, and warrants for 367,082 shares of Common Stock, exercisable at
$0.024 per share, were issued.
(7) In May 1996, 2,349 shares of Series C1 Senior Preferred Stock, and
5,285 shares of Common Stock, were issued to William C. Eatherly, a
consultant to the Company, in consideration for his services.
(8) In June 1996, 42,521 shares of Common Stock were issued to Berson
& Associates and the Berson & Associates Employee Retirement Trust in
consideration for consulting services rendered to the Company by Berson &
Associates.
(9) In March 1997, 962,669 shares of Series E Preferred Stock were
issued at $5.1938 per share to 21 investors, all of whom were venture funds
and other accredited investors, for cash and upon conversion of various
promissory notes issued in the period of November 1996 through March 1997.
(10) In April 1997, the Company issued a warrant to purchase 21,500
shares of Common Stock to Greyrock Capital, a commercial lending
institution, in connection with the execution of a credit facility made
available to the Company.
(11) In June 1997, 502,867 shares of Series F Preferred Stock were
issued at a price of $6.96 per share to ten investors, all of whom were
venture funds and other accredited investors.
(12) Employees exercised compensatory stock options received pursuant
to Innova Corporation 1990 Stock Option Plan (Amended and Restated 1992)
for an aggregate of 50,231 shares of Common Stock issued at prices ranging
from $0.144 to $6.36 per share.
No underwriters were engaged in connection with the sale of securities
described above. The issuance of stock to Mr. Eatherly and Berson & Associates
in compensation for services rendered to the Company were made in reliance upon
the exemption from registration set forth in Section 3(b) of the Securities Act
of 1933 (the "Securities Act") and
II-2
88
Rule 701 promulgated thereunder. All other sales of securities described above
were made in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act relating to sales by an issuer not involving a public
offering. Upon consummation of the Offering, all shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Senior Preferred Stock, Series C1
Senior Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock will automatically convert into an equal number of
shares of Common Stock. Each of the investors in such financings represented
that the shares were being purchased with investment intent and that they were
accredited investors, and agreed to placement of a legend on the securities
restricting transfer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------- ------------
1.1 Proposed Form of Underwriting Agreement.........................
3.1 Proposed Form of Second Restated Articles of Incorporation......
3.2 Proposed Form of Amended and Restated Bylaws....................
4.1 Specimen Stock Certificate*.....................................
5.1 Opinion of Graham & James LLP*..................................
10.1 Innova Corporation 1990 Stock Option Plan (Amended and Restated
July 31, 1992), as amended......................................
10.2 Director Stock Option Plan*.....................................
10.3 Form of Stock Option Agreement..................................
10.4 Form of Warrant to Purchase Common Stock........................
10.5 Form of Warrant to Purchase Series A Preferred Stock............
10.6 Warrant to Purchase 516,000 shares of the Company's Common Stock
issued to Greyrock Capital (including Antidilution
Agreement)......................................................
10.7 Registration Rights Agreement dated as of May 26, 1994, by and
among the Registrant, Bachow Investment Partners III, L.P., Paul
S. Bachow Co-Investment Fund, L.P., and Paul S. Bachow, as
amended April 26, 1996, and further amended April 30, 1997......
10.8 Business Park Net Lease, dated April 16, 1996, between Gateway
Corporate Properties, L.L.C., a Delaware limited liability
corporation, as lessor, and Innova Corporation, as lessee
(amended by Exhibit 10.9).......................................
10.9 Lease Amendment No. 1, dated January 28, 1997, between Gateway
North Properties, L.L.C., a Delaware limited liability
corporation, as lessor, and Innova Corporation, as lessee.......
10.10 Sublease Agreement, dated January 21, 1997, between Yamato
Transport USA, Inc., a New York corporation, as sublessor, and
Innova Corporation, as sublessee................................
10.11 Cooperation Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecomunications) Networks and
Telecommunications Division and Innova Corporation**............
10.12 Master Purchase Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecomunications) Networks and
Telecommunications Division and Innova Corporation**............
II-3
89
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ---------------------------------------------------------------- ------------
10.13 OEM Purchase and Limited Licensing Agreement, dated May 30,
1997, between NERA ASA and Innova Corporation**.................
10.14 Memorandum of Understanding, dated November 17, 1995 between SAT
Telecommunications Division and Innova Corporation..............
10.15 Heads of Agreement, Slovtel OEM Purchase Agreement, dated
November 29, 1996, between Northern Telecom Limited and Innova
Corporation (as amended on February 27, 1997, and further
amended on April 24, 1997)**....................................
11.1 Statement re Computation of Per Share Earnings..................
21.1 Subsidiaries of the Registrant..................................
23.1 Consent of Graham & James LLP (included in its opinion filed as
Exhibit 5.1 hereto).............................................
23.2 Consent of KPMG Peat Marwick LLP................................
24.1 Power of Attorney (included on page II-[5]).....................
27.1 Financial Data Schedule.........................................
- ---------------
* To be filed by amendment
** Confidential treatment requested
(B) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on June 18, 1997.
INNOVA CORPORATION
By JEAN-FRANCOIS GRENON
------------------------------------
Jean-Francois Grenon
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby constitutes and
appoints Jean-Francois Grenon and John M. Hemingway, and each of them severally,
as his true and lawful attorney-in-fact, with full power of substitution, to
execute in the name and on behalf of such person, individually and in each
capacity stated below, and to file, any and all amendments to this Registration
Statement, including any and all post-effective amendments, and any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------ -------------
JEAN-FRANCOIS GRENON President and Chief Executive June 12, 1997
- ----------------------------------------------- Officer (Principal Executive
Jean-Francois Grenon Officer)
and Director
JOHN M. HEMINGWAY Chief Financial Officer June 14, 1997
- ----------------------------------------------- (Principal Financial and
John M. Hemingway Accounting Officer)
V. FRANK MENDICINO Chairman of the Board June 17, 1997
- -----------------------------------------------
V. Frank Mendicino
PAUL S. BACHOW Director June 17, 1997
- -----------------------------------------------
Paul S. Bachow
FRANCES N. JANIS Director June 17, 1997
- -----------------------------------------------
Frances N. Janis
HAROLD O. SHATTUCK Director June 17, 1997
- -----------------------------------------------
Harold O. Shattuck
BERNARD D. TARR, JR. Director June 17, 1997
- -----------------------------------------------
Bernard D. Tarr, Jr.
II-5
91
INNOVA CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
NINE MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 AND
YEARS ENDED MARCH 31, 1996 AND 1995
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------------- ----------- ---------- ---------- ---------- ----------
Nine month fiscal period ended December 31, 1996:
Valuation accounts deducted from assets:
Lower of cost or market reserve on
inventories................................. $ 596,256 -- -- $(130,077) $ 466,179
======== ======== ======== ========= ========
Year ended March 31, 1996:
Valuation accounts deducted from assets:
Lower of cost or market reserve on
inventories................................. $ 426,631 $169,625 -- -- $ 596,256
======== ======== ======== ========= ========
Year ended March 31, 1995:
Valuation accounts deducted from assets:
Lower of cost or market reserve on
inventories................................. $ 149,344 $277,287 -- -- $ 426,631
======== ======== ======== ========= ========
S-1
92
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
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1.1 Proposed Form of Underwriting Agreement.........................
3.1 Proposed Second Restated Articles of Incorporation (As will be
effective on closing of the Offering)...........................
3.2 Proposed Form of Amended and Restated Bylaws....................
4.1 Specimen Stock Certificate*.....................................
5.1 Opinion of Graham & James LLP*..................................
10.1 Innova Corporation 1990 Stock Option Plan (Amended and Restated
July 31, 1992), as amended......................................
10.2 Director Stock Option Plan*.....................................
10.3 Form of Stock Option Agreement..................................
10.4 Form of Warrant to Purchase Common Stock........................
10.5 Form of Warrant to Purchase Series A Preferred Stock............
10.6 Warrant to Purchase 516,000 shares of the Company's Common Stock
issued to Greyrock (including Antidilution Agreement)...........
10.7 Registration Rights Agreement dated as of May 26, 1994, by and
among the Registrant, Bachow Investment Partners III, L.P., Paul
S. Bachow Co-Investment Fund, L.P., and Paul S. Bachow, as
amended April 26, 1996, April 30, 1997 and June 13, 1997 (All
holders of the Company's Preferred Stock and Greyrock were
granted the same registration rights as in the Registration
Rights Agreement as if deemed parties to the such agreement)....
10.8 Business Park Net Lease, dated April 16, 1996, between Gateway
Corporate Properties, L.L.C., a Delaware limited liability
corporation, as lessor, and Innova Corporation, as lessee
(amended by Exhibit 10.9).......................................
10.9 Lease Amendment No. 1, dated January 28, 1997, between Gateway
North Properties, L.L.C., a Delaware limited liability
corporation, as lessor, and Innova Corporation, as lessee.......
10.10 Sublease Agreement, dated January 21, 1997, between Yamato
Transport USA, Inc., a New York corporation, as sublessor, and
Innova Corporation, as sublessee................................
10.11 Cooperation Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecomunications) Networks and
Telecommunications Division and Innova Corporation**............
10.12 Master Purchase Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecomunications) Networks and
Telecommunications Division and Innova Corporation**............
10.13 OEM Purchase and Limited Licensing Agreement, dated May 30,
1997, between NERA ASA and Innova Corporation**.................
10.14 Memorandum of Understanding, dated November 17, 1995 between SAT
Telecommunications Division and Innova Corporation..............
10.15 Heads of Agreement, Slovtel OEM Purchase Agreement, dated
November 29, 1996, between Northern Telecom Limited and Innova
Corporation (as amended on February 27, 1997, and further
amended on April 24, 1997)**....................................
11.1 Statement re Computation of Per Share Earnings..................
93
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
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21.1 Subsidiaries of the Registrant..................................
23.1 Consent of Graham & James LLP (included in its opinion filed as
Exhibit 5.1 hereto).............................................
23.2 Consent of KPMG Peat Marwick LLP................................
24.1 Power of Attorney (included on page II-[5]).....................
27.1 Financial Data Schedule.........................................
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* To be filed by amendment
** Confidential treatment requested