1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-26747 AIRONET WIRELESS COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1758180 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3875 EMBASSY PARKWAY, AKRON, OHIO 44333 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (330) 664-7900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes [X] No [ ], and (2) has been subject to such filing requirements for the past 90 days Yes |X| No |_|. At November 12, 1999 there were 14,202,910 shares of Registrant's Common Stock outstanding. 2 AIRONET WIRELESS COMMUNICATIONS, INC. INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999.................................................................. 3 Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended September 30, 1999 and 1998................. 4 Consolidated Statements of Cash Flows for the Three-Month Periods Ended September 30, 1999 and 1998............................... 5 Notes to the Consolidated Financial Statements.......................................... 6 Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operation............................................................ 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 26 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds................................................ 28 Item 6. Exhibits and Reports on Form 8-K......................................................... 29 Signatures .................................................................................... 32 Exhibit Index.................................................................................... 33 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AIRONET WIRELESS COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, MARCH 31, 1999 1999 (UNAUDITED) ---------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 48,008 $ 6,137 Accounts receivable, trade, net 5,375 4,242 Accounts receivable, other 680 243 Receivable from affiliate 4,051 3,609 Inventories 5,039 4,625 Deferred tax asset 802 733 Prepaid expenses and other 678 404 Income taxes receivable 282 620 -------- -------- Total current assets 64,915 20,613 Property and equipment, net 2,717 2,381 Deferred tax asset 932 882 Intangible assets, net 2,725 3,191 Other long-term assets 5 131 -------- -------- Total assets $ 71,294 $ 27,198 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,838 $ 4,618 Payable to affiliate 1,015 2,085 Income taxes payable 239 30 Deferred tax liability -- 10 Accrued liabilities 4,599 3,358 -------- -------- Total current liabilities 10,691 10,101 Line of credit -- 2,500 -------- -------- Total liabilities 10,691 12,601 Stockholders' equity: Common stock, $.01 par value per share; 60,500,000 shares authorized; 14,203,544 shares issued and 142 96 outstanding Additional paid-in capital 63,638 19,101 Accumulated deficit (3,177) (4,600) -------- -------- Total stockholders' equity 60,603 14,597 -------- -------- Total liabilities and stockholders' equity $ 71,294 $ 27,198 ======== ======== See accompanying notes to the consolidated financial statements. 3 4 AIRONET WIRELESS COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Non-affiliate $ 10,298 $ 5,049 $ 19,763 $ 11,211 Affiliate product 3,231 2,470 4,724 3,904 Affiliate royalty 1,445 2,460 2,890 4,341 -------- -------- -------- -------- Total revenues 14,974 9,979 27,377 19,456 -------- -------- -------- -------- Cost of revenues: Non-affiliate 5,800 3,541 11,097 7,449 Affiliate 2,420 2,072 3,570 3,286 -------- -------- -------- -------- Total cost of revenues 8,220 5,613 14,667 10,735 -------- -------- -------- -------- Gross profit: Non-affiliate 4,498 1,508 8,666 3,762 Affiliate product 811 398 1,154 618 Affiliate royalty 1,445 2,460 2,890 4,341 -------- -------- -------- -------- Total gross profit 6,754 4,366 12,710 8,721 -------- -------- -------- -------- Operating expenses: Sales and marketing 2,432 1,274 4,791 2,756 Research and development 1,758 1,527 3,516 3,151 General and administrative 1,067 898 1,848 1,998 Goodwill amortization 216 216 432 432 -------- -------- -------- -------- Total operating expenses 5,473 3,915 10,587 8,337 -------- -------- -------- -------- Income from operations 1,281 451 2,123 384 Interest (income), net (372) -- (389) (10) -------- -------- -------- -------- Income before income taxes 1,653 451 2,512 394 Provision for income taxes 675 618 1,089 540 -------- -------- -------- -------- Net income (loss) $ 978 ($ 167) $ 1,423 ($ 146) ======== ======== ======== ======== Net income (loss) per common share: Basic $ 0.08 ($ 0.02) $ 0.13 ($ 0.02) -------- -------- -------- -------- Diluted $ 0.07 ($ 0.02) $ 0.12 ($ 0.02) -------- -------- -------- -------- Weighted average shares used in calculating net income (loss) per common share: Basic 12,303 9,339 10,838 9,277 -------- -------- -------- -------- Diluted 13,480 9,339 12,051 9,277 -------- -------- -------- -------- See accompanying notes to the consolidated financial statements. 4 5 AIRONET WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, 1999 1998 ---- ---- Cash flows from operating activities: Net income ...................................................................... $ 1,423 $ (146) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................................. 606 653 Amortization ................................................................. 561 577 Provision for doubtful accounts .............................................. 163 156 Provision for inventory obsolescence ......................................... 655 96 Deferred income taxes ........................................................ (129) (109) Stock compensation expense ................................................... 224 780 Changes in other assets and liabilities: Accounts receivable, trade ................................................ (1,296) 882 Accounts receivable, other ................................................ (437) (2,259) Receivable from affiliate ............................................... (442) (1,534) Inventories ............................................................. (1,069) (633) Prepaid expenses and other assets ....................................... (274) (89) Income taxes receivable ................................................. 338 -- Other long-term assets .................................................. (12) (46) Accounts payable ........................................................ 220 575 Payable to affiliate .................................................... (1,260) 121 Income taxes payable .................................................... 209 650 Accrued liabilities ..................................................... 1,241 680 -------- -------- Total adjustments ..................................................... (702) 500 -------- -------- Net cash provided by operating activities ............................. 721 354 Cash flows from investing activities: Capital expenditures ............................................................ (942) (563) Purchases of intangible assets .................................................. (95) -- -------- -------- Net cash used in investing activities ................................. (1,037) (563) -------- -------- Cash flows from financing activities: Payable to affiliate ............................................................ -- (3,648) Net proceeds from sales of stock ................................................ 45,664 1,918 Line of credit .................................................................. (2,500) 2,500 Options exercised ............................................................... 202 -- Deferred offering costs ......................................................... (1,179) -- -------- -------- Net cash provided by financing activities ............................. 42,187 770 -------- -------- Net (decrease) increase in cash and cash equivalents ............................... 41,871 561 Cash and cash equivalents at beginning of period ................................... 6,137 2,864 -------- -------- Cash and cash equivalents at end of period ......................................... $ 48,008 $ 3,425 ======== ======== See accompanying notes to the consolidated financial statements. 5 6 AIRONET WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The financial information herein includes the accounts of Aironet Wireless Communications, Inc. and its subsidiaries (the "Company"). The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the consolidated statement of financial position as of September 30, 1999 and the related statements of operations and cash flows for the three-month and six-month periods ended September 30, 1999 and 1998. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. For further information refer to the Consolidated Financial Statements and the Notes thereto included in the Company's Registration Statement on Form S-1, as amended (Registration No. 333-78507), filed with the Securities and Exchange Commission on May 14, 1999 and which became effective on July 29, 1999 (the "Registration Statement") and Form 10-Q filed September 10, 1999. The Company has no items of other comprehensive income. NOTE 2 -- INVENTORIES Inventories consisted of the following: SEPTEMBER 30, MARCH 31, 1999 1999 ---- ---- (IN THOUSANDS) Purchased components........................................................... $ 3,915 $ 3,723 Work-in-process................................................................ 401 290 Finished goods................................................................. 723 612 ---------- ---------- $ 5,039 $ 4,625 ========== ========== NOTE 3 -- NET INCOME PER COMMON SHARE Basic net income per common share is based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is based on the weighted average number of common shares outstanding during the period plus, if dilutive, the incremental number of common shares issuable on a pro forma basis upon the exercise of employee and non-employee stock options and stock purchase warrants, assuming the proceeds are used to repurchase outstanding shares at the average market price during the quarter. A reconciliation of the denominators of the basic and diluted per share computations is provided below: THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- SEPTEMBER 30, SEPTEMBER 30, -------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average common shares outstanding - basic ................ 12,303 9,339 10,838 9,277 Additional shares potentially issuable for stock options and stock purchase warrants ...................... 1,177 -- 1,213 -- ------ ------ ------ ------ Weighted average common shares outstanding - diluted .............. 13,480 9,339 12,051 9,277 ====== ====== ====== ====== 6 7 For the three months ended September 30, 1999 and 1998, 0 and 1,032,737 respectively, of stock options and stock purchase warrants were not included in the diluted per share computations due to not being "in the money." For the six months ended September 30, 1999 and 1998, 0 and 1,032,737 respectively, of stock options and stock purchase warrants were not included in the diluted per share computations due to not being "in the money." The computations of net income per common share for all periods presented do not include the effects of any dilutive incremental common shares related to stock options granted or common stock warrants issued with exercise rights that are contingent, so long as the contingency is not resolved. NOTE 4 -- STOCKHOLDERS' EQUITY AND STOCK WARRANTS AND OPTIONS STOCKHOLDER RIGHTS AGREEMENT On April 12, 1999, the Board of Directors adopted and approved a stockholder "Rights Plan" and the Board declared a dividend of one common stock purchase right on each share of common stock outstanding prior to the effectiveness of the plan; thereafter, shares are issued pursuant to the plan with a purchase right. The Company's Stockholders approved the Rights Plan on May 7, 1999. The Rights Plan is designed to deter abusive market manipulation or unfair takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all stockholders. Each purchase right, when exercisable, entitles the registered holder to purchase one share of common stock at a price of $125 per share, subject to adjustment. The purchase rights become exercisable in the event the Company is a party to certain merger or business combination transactions, as defined, or in the event an "acquiring person," as defined, becomes a beneficial owner of 15% or more of the Company's outstanding common stock. In these circumstances, each holder of a share right (other than the acquiring person) will have the right to receive shares of the acquiring company or the Company, as appropriate, having a market value of two times the exercise price of the purchase right. The rights expire ten years from the effective date of the plan unless earlier redeemed by the Company. The rights can be redeemed at a price of $.001 per right. CAPITAL STOCK On August 27, 1999, the Company's underwriters exercised their option to purchase an additional 846,800 shares to cover over-allotments sold by the underwriters in our Initial Public Offering ("Offering"), of which 564,562 shares were sold by the Company and 282,238 shares were sold by Telxon, as a selling stockholder. The closing of this transaction took place on September 1, 1999 with proceeds to the Company of $5,775,469.26. NOTE 5 -- SUBSEQUENT EVENTS Effective October 19, 1999, Aironet's Board of Directors entered into Change of Control agreements with five of its executives. Pursuant to these agreements, should an executive be terminated without cause or resigns with good cause within two years of a change of control, that executive will receive severance pay equivalent to one or two times the executive's prior years' annual compensation and receive benefit plan coverage for a period of up to two years from change in control. Effective October 29, 1999, the Compensation Committee of Aironet's Board of Directors adopted the First Amendment to the Aironet Wireless Communications, Inc, 1999 Employee Stock Purchase Plan. The amendment changes the commencement of the initial payment period from the first day of the first month following our initial public offering to the first pay day in November 1999 and makes a technical change relating to foreign subsidiaries. Pursuant to an Agreement and Plan of Merger and Reorganization dated as of November 8, 1999 (the "Merger Agreement") by and among Cisco Systems, Inc. ("Cisco"), Aironet and Osprey Acquisition Corporation, a wholly-owned subsidiary of Cisco ("Merger Sub"), Merger Sub will merge (the "Merger") with and into Aironet, with the separate corporate existence of Merger Sub ceasing and Aironet continuing as the surviving corporation and a wholly-owned subsidiary of Cisco. At the effective time of the Merger (the "Effective Time"), each share of Aironet's common stock issued and outstanding immediately prior to the Effective Time will be converted automatically into the right to receive 0.63734 shares of Cisco's common stock, and the Aironet stock will be deregistered and delisted. The value of the 7 8 transaction based on the trading price of Cisco's common stock on the date of the Merger Agreement is approximately $799 million. The consummation of the Merger is subject to various conditions precedent, including (i) approval of the Merger Agreement by the stockholders of Aironet and (ii) expiration or early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Aironet has granted Cisco an option to acquire 2,826,375 shares of its common stock, at an exercise price of $48 per share, exercisable upon the occurrence of certain events and has agreed to pay Cisco a fee of $25 million if the Merger is not consummated and certain events have occurred. In addition, certain stockholders of Aironet have agreed to vote in favor of the approval of the Merger Agreement. In connection with the Merger Agreement, Aironet's Board of Directors adopted Amendment No. 1 to the Stockholder Rights Agreement dated November 8, 1999. The amendment assures that the purchase rights associated with Aironet's common stock do not become exercisable as a result of Aironet entering into the Merger Agreement, consummating the Merger or in the event that Telxon Corporation transfers its shares of Aironet to a wholly owned subsidiary of Telxon prior to the Merger. In addition, the Company entered into an Agreement with Telxon and Cisco dated as of November 8, 1999, pursuant to which certain of Telxon's agreements with Aironet terminate at the Effective Time of the Merger and certain other agreements will come into force. Also in connection with the Merger, Aironet's Board of Directors took action not to accelerate outstanding options other than those granted under the 1999 Stock Option Plan for Non-Employee Directors and not to cash out any outstanding options which will be assumed by Cisco. Aironet's employee benefit plans will not be assumed by Cisco, rather after the Merger eligible employees will be able to participate in Cisco's benefit plans. On October 18, 1999, Aironet's Board of Directors granted options under the 1999 Omnibus Stock Incentive Plan to purchase 105,000 shares of the Company's common stock. ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS AMENDED. SUCH STATEMENTS ARE BASED UPON MANAGEMENTS' CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. FOR EXAMPLE, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. AIRONET'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DISCREPANCY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES" BELOW, AS WELL AS RISK FACTORS INCLUDED IN THE REGISTRATION STATEMENT. ALL FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO AIRONET AS OF THE DATE HEREOF AND AIRONET ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS. OVERVIEW Aironet designs, develops and markets high speed, standards-based wireless local area networking solutions. Our products utilize advanced radio frequency and data communication technologies to connect users to computer networks ranging in size and complexity from enterprise-wide LANs to home networks. Each of our product families is designed around our Microcellular Architecture, a distributed wireless network designed to support the unique requirements of mobile computing. Our wireless LAN solutions are used as extensions of existing enterprise networks, enabling personal computer users to maintain a wireless network connection anywhere throughout a building or around a campus. In addition, our LAN adapters are configurable as peer-to-peer wireless networks for providing shared access to files, peripherals and the Internet in small office/home office environments. We sell indirectly through a network of distributors, resellers and OEMs. We have a dedicated OEM sales organization. The typical OEM sales cycle involves six months during which evaluations and negotiations over price and sometimes volume levels take place. Our distributors sell product to our resellers. Our distributors generally maintain inventory to fulfill orders from 8 9 our resellers. We have a dedicated sales organization to support our resellers in their efforts to sell to end users. Resellers have a choice of directly purchasing through us or through our distributors. We recognize revenues from sales to resellers and OEMs at the time we ship the products. We are a party to contracts with our major distributors, wherein we either reserve against revenues from our sales to distributors or defer revenue recognition, depending on the nature and scope of the distributor's return right. Distributors under contract are afforded price protection. We reserve against revenue for those price protections, provided to the distributors under contract. We believe that these rights of return and price protections are standard negotiated terms provided by manufacturers to large distributors of high tech products. 9 10 RESULTS OF OPERATIONS The following table presents, for the periods indicated, our operating results expressed as a percentage of our total revenues. THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- SEPTEMBER 30, SEPTEMBER 30, -------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Non-affiliate.........................................................69% 51% 72% 58% Affiliate product.....................................................22 25 17 20 Affiliate royalty......................................................9 24 11 22 ----- ----- ----- ----- Total revenues...................................................100 100 100 100 ----- ----- ----- ----- Cost of revenues.........................................................55 56 54 55 ----- ----- ----- ----- Gross profit.............................................................45 44 46 45 Operating expenses: Selling and marketing.................................................16 13 17 14 Research and development..............................................12 15 13 16 General and administrative.............................................7 9 7 11 Goodwill amortization.....................................................2 2 1 2 .............................................................----- ----- ----- ----- Total operating expenses.................................................37 39 38 43 ----- ----- ----- ----- Income (loss) from operations.............................................8 5 8 2 Interest expense (income), net...........................................(3) 0 (1) 0 ----- ----- ----- ----- Income (loss) before income taxes........................................11 5 9 2 ----- ----- ----- ----- Provision (benefit) for income taxes......................................4 6 4 3 ----- ----- ----- ----- Net income................................................................7 (1) 5 (1) The following table presents, for the periods indicated, costs of revenues and gross profits specifically as a percentage of non-affiliate, affiliate product and affiliate royalty revenues. THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Cost of revenues: Non-affiliate.........................................................56% 70% 56% 66% Affiliate product.....................................................75 84 76 84 Affiliate royalty....................................................--- --- --- --- Gross profit: Non-affiliate.........................................................44% 30% 44% 34% Affiliate product.....................................................25 16 24 16 Affiliate royalty....................................................100 100 100 100 10 11 THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1998 Revenues Total Revenues. Total revenues increased 50% from $10.0 million in the three months ended September 30, 1998 to $15.0 million in the three months ended September 30, 1999, and increased 41% from $19.5 million in the six months ended September 30, 1998 to $27.4 in the six months ended September 30, 1999. These increases resulted primarily from increased sales of our high speed (11 Mbps) and IEEE 802.11 products to our non-affiliate customers. During the three months ended September 30, 1999, we derived 21% of our total revenues from sales to customers outside the United States, compared to 23% of our total revenues in the three months ended September 30, 1998. International revenues grew 33% from $2.3 million in the three months ended September 30, 1998 to $3.1 million in the three months ended September 30, 1999. During the six months ended September 30, 1999, we derived 24% of our total revenues from sales to customers outside the United States, compared to 22% of our total revenues in the six months ended September 30, 1998. International revenues grew 54% from $4.3 million in the six months ended September 30, 1998 to $6.7 million in the six months ended September 30, 1999. These increases were due primarily to increased sales of our high speed and IEEE 802.11 based products. Our foreign sales are made in U.S. dollars, and therefore the adoption of the Euro as an European currency should not have a direct impact on our foreign exchange. Non-affiliate. Non-affiliate revenues grew 104% from $5.0 million in the three months ended September 30, 1998 to $10.3 million in the three months ended September 30, 1999, and 76% from $11.2 million in the six months ended September 30, 1999 to $19.8 million for the six months ended September 30, 1999. Increased non-affiliate revenues resulted from the continued success of our new high speed (11Mbps) 4800 Turbo DS in-building wireless LAN product line and the BR500 building-to-building product line. As a percentage of total revenues, non-affiliate revenues increased from 51% in the three months ended September 30, 1998 to 69% in the three months ended September 30, 1999 and from 58% to 72% in the comparable six month periods. This increase was as the result of higher non-affiliate sales and lower revenues from our affiliate. Affiliate. Affiliate revenues are derived from Telxon Corporation and consist of product and royalty revenues. As a percentage of total revenues, affiliate revenues decreased from 76% in fiscal year 1997 to 55% in fiscal year 1998 and 37% in fiscal year 1999. Affiliate revenues as a percentage of total revenues were 31% during the three months ended September 30, 1999 compared to 49% for the three months ended September 30, 1998 and 24% for the three months ended June 30, 1999. For the comparable six-month periods, the percentage declined from 42% to 28%. This continued decrease is due in large part to a significant increase in product sales to non-affiliate customers and reflects the market acceptance of our newer, high speed and standards-compliant products and growth of our customer base. This decrease is also due in part to a decrease in affiliate royalty revenue, offset in part by an increase in affiliate product revenue. Affiliate Product. Product revenues from Telxon increased 31% from $2.5 million in the three months ended September 30, 1998 to $3.2 million in the three months ended September 30, 1999 and increased 21% from $11.2 million to $19.8 million for the comparable six month periods. This increase was primarily due to increased sales to Telxon of our IEEE 802.11-based product lines: 4800 Turbo DS series, 4500 series and 3500 series. Affiliate Royalty. Royalty revenues from Telxon decreased 41% from $2.5 million in the three months ended September 30, 1998 to $1.4 million in the three months ended September 30, 1999 and decreased 33% from $4.3 million to $2.9 million for the comparable six month period. In the fiscal quarter ended March 31, 1999, the License, Rights and Supply agreement with Telxon was amended to provide for a decreasing fixed royalty, instead of a per unit royalty. The fixed royalty permits us to 11 12 recognize affiliate royalty income on a straight-line basis and resulted in lower royalty revenue in the three month and six-month periods ended September 30, 1999 compared to the three months and six months ended September 30, 1998. Gross Profit Total Gross Profit. Our total gross profit increased 55% from $4.4 million in the three months ended September 30, 1998 to $6.8 million in the three months ended September 30, 1999, and increased 46% from $8.7 million for the six month period ended September 30, 1998 to $12.7 million for the six month period ended September 30, 1999. Non-affiliate. Non-affiliate gross profit as a percentage of revenue increased to 44% in the three months ended September 30, 1999 from 30% in the 3 months ended September 30, 1998. For the six month's ended September 30, 1999, non-affiliate gross profit percentage was 44% as compared to 34% for the six month's ended September 30, 1998. These increases resulted primarily from the success of our new high speed BR500 building-to-building product lines and the 4800 Turbo DS in-building wireless LAN product line as well as cost reductions on our other 802.11 compliant products. Affiliate Product. Affiliate gross profit as a percentage of revenue increased to 25% in the three months ended September 30, 1999 from 16% in the 3 months ended September 30, 1998. For the six month's ended September 30, 1999, non-affiliate gross profit percentage was 24% as compared to 16% for the six month's ended September 30, 1998. This is primarily due to changes in product mix. Affiliate Royalty. Each dollar of royalty revenues results in an equivalent gross profit because there is a de minimus cost of revenues associated with royalties. Royalty gross profit decreased 41% from $2.5 million in the three months ended September 30, 1998 to $1.4 million in the three months ended September 30, 1999 and decreased 33% from $4.3 million in the six months ended September 30, 1998 to $2.9 million for the six months ended September 30, 1999. In the fiscal quarter ended March 31, 1999, the License, Rights and Supply agreement with Telxon was amended to recognize royalty income on a straight-line basis instead of a per unit basis. This resulted in lower royalty gross profit in the three-month and six-month periods ended September 30, 1999 compared to the three-month and six-month periods ended September 30, 1998. Operating Expenses Sales and Marketing. Our sales and marketing expenses increased 91% from $1.3 million in the three months ended September 30, 1998 to $2.4 million in the three months ended September 30, 1999, and increased 74% from $2.8 million in the six months ended September 30, 1998 to $4.8 million in the six months ended September 30, 1999. This increase is primarily due to increases in headcount and associated expenses along with increased emphasis on our value-added reseller program. As a percentage of total revenues, sales and marketing expenses increased from 13% in the three months ended September 30, 1998 to 16% in the three months ended September 30, 1999 and increased from 14% in the six months ended September 30, 1998 to 18% for the six months ended September 30, 1999. We expect that sales and marketing expenses will increase in absolute dollars as we expand our branding program and further develop our sales channels, but will vary from quarter to quarter due to timing of trade shows, advertising programs, and product launches during the year. Research and Development. Research and development expenses increased 15% from $1.5 million in the three months ended September 30, 1998 to $1.8 million in the three months ended September 30, 1999 and increased 12% from $3.2 million in the six months ended September 30, 1998 to $3.5 million for the six months ended September 30, 1999. This increase resulted primarily from increases in engineering headcount. As a percentage of total revenues, research and development expenses decreased from 15% in the three months ended September 30, 1998 to 12% in the three months ended September 30, 1999 and from 16% for the six months ended September 30, 1998 to 13% for the six months ended September 30, 1999. We expect that research and development expenses will increase in absolute dollars as we expand our offering of high speed networking solutions. General and Administrative. Our general and administrative expenses increased 19% from $0.9 million in the three months ended September 30, 1998 to $1.1 million in the three months ended September 30, 1999. Approximately half of the 12 13 increase over prior year related to incremental expenses related to being a public company in the current year along with increases in headcount. Our general and administrative expenses decreased 8% from $2.0 million for the six month period ended September 30, 1998 to $1.8 million for the six month period ended September 30, 1999. Included in the six month period ended September 30, 1998 is $0.8 million of non-cash compensation expense while there is only $0.2 million of non-cash compensation expense included in the six month period ending September 30, 1999. After consideration of this impact, general and administrative expenses increased $0.4 million. Approximately half of this increase is due to new hires while the rest is due to required insurance expense and other expenses related to being a public company in the current year. Provision for Income Taxes Our effective income tax rate of 137% exceeded the statutory rate for the three months ended September 30, 1998 primarily due to various permanent items such as goodwill, state taxes, foreign rate differential, and non-deductible compensation expense resulting from the exercise of specific stock options paid for by a note to us in February 1998. Our effective income tax rate for the three months ended September 30, 1999 was 41% which exceeded the statutory rate primarily due to various permanent items such as goodwill, state taxes, and the foreign rate differential. LIQUIDITY AND CAPITAL RESOURCES On July 30, 1999, we concluded the Offering of 6,000,000 shares of common stock, in which we sold 4 million shares of common stock and received approximately $40.9 million in cash after underwriter discounts and commissions but prior to deduction of unpaid offering expenses. A portion of the proceeds from the Offering was used to repay approximately $2.5 in outstanding debt under our line of credit, with the balance remaining for general corporate purposes. We believe that the proceeds of the Offering, cash and cash equivalents balances generated from operations and our existing line of credit will be sufficient to meet our operating and capital expenditure requirements for at least the next twelve months. To the extent necessary, we may also satisfy capital needs through bank borrowings and capital leases if these sources are available on satisfactory terms. We may also from time to time consider the acquisition of complementary technologies, although we have no present commitments or agreements with respect to any specific acquisitions. Any specific acquisitions could be of a size that would require us to raise additional funds through the issuance of additional equity or debt securities. There can be no assurance that these funds, if required, would be available on terms acceptable to us, if at all. As of September 30, 1999 we have no outstanding debt. 13 14 YEAR 2000 READINESS DISCLOSURE Year 2000 issues result from the fact that many computer programs were written with date-sensitive codes that utilize only the last two digits of a date rather than all four digits to refer to a particular year. As the year 2000 approaches, these computer programs may be unable to process accurately date- dependent information, as a program might interpret the year 2000 as 1900. The potential for Year 2000 issues arise primarily in three areas: - - the products we sell, which might be date dependent and, as a result, improperly operate; - - our dependence on vendors and contract manufacturers for components and subassemblies that might be impacted by the Year 2000 issues, and their inability to provide us with goods on a timely basis and within specifications due to their unresolved Year 2000 issues; and - - our internal use of hardware or software computing resources which improperly recognize the true date and which could cause us to, among other things, improperly process customer orders or business information, and could result in failure of our internal systems. In the fiscal quarter ended March 31, 1999, we hired an independent Year 2000 consultant to augment our internal efforts to complete a plan for systematically assessing our Year 2000 exposure. Our assessment plan has been completed, and we are now taking actions consistent with that plan. How Far Along Are We? We have completed testing of 100% of our critical systems and a majority of our non-critical systems, with the following results. Our Products. We have evaluated our product line for year 2000 issues and found that our products are not date-dependent, and we will be making no Year 2000 product revisions. Vendors. We have obtained a Year 2000 compliance response from 72% of our vendors. We continue to request vendor certifications from our remaining vendors. Internal Systems. Consistent with the results of our readiness assessment, we have performed a live Year 2000 test of our payables, receivables and financial reporting systems, and our manufacturing, purchasing and sales systems. Of these systems, two add-on software packages which perform non- critical functions had Year 2000 deficiencies. These deficiencies have been corrected. We have completed testing of our desktop PCs. Of these PCs, only one PC was not Year 2000 compliant. This PC has been upgraded and is currently Year 2000 compliant. Laboratory PCs will not be tested as they are known not to be Year 2000 compliant and they perform only non date sensitive tasks. Our computer servers have been fully tested. One unit was not Year 2000 compliant and was replaced in July 1999. Year 2000 Problems Experienced to Date We have experienced no Year 2000 problems to date. No information technology projects have been deferred due to our Year 2000 efforts. 14 15 Timetable Our Year 2000 readiness plan is task oriented by department. We use no independent verification or validation process to assure reliability, risks or costs estimates. The following table illustrates our Year 2000 readiness. CATEGORY TESTING PROBLEMS DETECTED REMEDIATION - -------- ------- ----------------- ----------- Internal Systems 100% completed Two add-on software packages, Software packages and the PC one PC and one computer server have been upgraded and the server was replaced in July 1999 Products 100% completed None to date None required to date Vendors Response received from None to date None required to date 72% of vendors Cost of Remediation. We currently estimate that our Year 2000 assessment efforts and correction of any internal Year 2000 issues identified during our assessment, will total less than $100,000; however, in the event we discover a Year 2000 issue which was previously unanticipated, we could incur costs far in excess of this amount which would have a material adverse effect on our business and financial results. Will We Be Ready? Most Likely Consequences of Year 2000 Problems. We expect to identify and resolve all Year 2000 problems that could materially adversely affect our business operations. However, we believe that it is not possible to determine with complete certainty that all Year 2000 problems affecting us have been identified or corrected. The number of devices and systems that could be affected and the interactions among these devices and systems are too numerous to address. In addition, no one can accurately predict which Year 2000 problem-related failures will occur or the severity, timing, duration or financial consequences of these potential failures. We believe that a significant number of operational inconveniences and inefficiencies for us, our contract manufacturers and our customers will divert management's time and attention, financial and human resources from ordinary business activity if any of these Year 2000 problem related failures occur. Contingency Plans. We continue to discus contingency plans to be implemented if our efforts to identify and correct Year 2000 problems are not effective. We have begun to formalize our contingency plan and will test the plan when complete. Depending on the systems affected, these plans could include: - - accelerated replacement of affected equipment or software; - - short to medium-term use of backup equipment and software or other redundant systems; - - increased work hours for our personnel or the hiring of additional information technology staff; and - - the use of contract personnel to correct, on an accelerated basis, any Year 2000 problems that arise or to provide interim alternate solutions for information system deficiencies. Our implementation of any of these contingency plans could have a material adverse effect on our business, financial condition and results of operations. 15 16 OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES WE MAY NOT COMPLETE OUR MERGER WITH CISCO If our Merger with Cisco is not completed for any reason, we may be subject to a number of material risks, including the following: (i) Aironet may be required to pay Cisco a termination fee of $25 million, (ii) the option granted to Cisco by Aironet may become exercisable, under certain circumstances, (iii) the price of Aironet common stock may decline to the extent that the current market price of Aironet common stock reflects a market assumption that the merger will be completed and (iv) costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. In addition, Aironet's customers may, in response to the announcement of the merger, delay or defer purchasing decisions. Any delay or deferral in purchasing decisions by Aironet customers could have a material adverse effect on Aironet's business, regardless of whether or not the merger is ultimately completed. Similarly, current and prospective Aironet employees may experience uncertainty about their future role with Cisco until Cisco's strategies with regard to Aironet are announced and executed. This may adversely affect Aironet's ability to attract and retain key management, sales, marketing and technical personnel. Further, if the merger is terminated and Aironet's board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner willing to pay an equivalent or more attractive price than that which would be paid in the merger. In addition, while the merger agreement is in effect and subject to certain limited exceptions, Aironet is prohibited from soliciting, initiating or encouraging or entering into certain extraordinary transactions, such as merger, sale of assets or other business combination, with any party other than Cisco. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS We were incorporated in 1993 and therefore have only a short operating history for you to evaluate. Your evaluation of our business and results of operations must take into account this short operating history, which may not be indicative of future results. Our business and prospects should also be considered in light of the risks frequently encountered by companies in their early stages of development in new and rapidly evolving markets. Because of our short existence, our limited operating history as an independent company, fluctuations in our past results, past operating deficits and the early stage of development of our market, we cannot assure you that we will sustain profitability. Only since March 1998 has our business operated without the financial support of Telxon. A significant portion of the revenues reflected in our financial statements are still earned from Telxon based on agreed upon prices determined when Telxon was our majority stockholder. For the periods presented, our financial statements do not represent our performance as an independent company. In the future, loss of this revenue for any reason could adversely affect our results of operations. We lease two facilities from Telxon and are parties to various agreements with Telxon, including our license and sales agreement. Arrangements with Telxon cannot be considered to be arm's length, and therefore they do not necessarily reflect terms which could have been negotiated with unrelated third parties. As a large stockholder and customer, Telxon may be able to assert influence over us, which could impact our business or prevent us from realizing benefits in some situations. FLUCTUATIONS IN OUR OPERATING RESULTS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK Our quarterly and annual operating revenues, expenses and operating results may fluctuate due to a number of factors including: - - the timing and cancellation of customer orders; - - our ability to introduce new products and technologies on a timely basis; - - market acceptance of our and our customers' products; - - introduction of products by our competitors; - - the level of orders received which can be shipped in a quarter; 16 17 - - the timing of our investments in research and development; - - the timing and provision of pricing protection and returns from our distributors; - - whether our customers buy from a distributor, an OEM or directly from us; - - cost and availability of components and subassemblies; - - competitive pressures on selling prices; - - finished product availability and quality; - - general economic conditions; and - - changes in product mix. Our business is characterized by short-term orders and shipment schedules. We have experienced difficulties efficiently managing our production and inventory levels because, among other reasons, customers can typically cancel or reschedule orders without significant penalty. Since we do not have a substantial, noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Significant customer cancellations or unforeseen fluctuations in customer demand could cause us to over or under produce products, which could lead to overstocking or to frustrating customer expectations, either of which could negatively affect operating results or cause significant variations in our operating results from quarter to quarter. DECLINING SELLING PRICES OF NETWORKING EQUIPMENT MAY ADVERSELY AFFECT OUR REVENUES Historically, average selling prices of networking equipment have decreased over the life of a product. As a result, the average selling prices of our products should be expected to decrease in the future, which may adversely affect our operating results if we do not correspondingly decrease our costs. OUR OPERATING RESULTS WILL SUFFER IF SALES DO NOT INCREASE AS ANTICIPATED TO SUPPORT THE EXPENSES OF EXPANDING OUR BUSINESS Because our operating expenses for personnel, new product development and inventory continue to increase, we must continue to generate increased sales to offset these increased expenses. We have limited ability to reduce expenses quickly in response to any revenue shortfalls. In response to anticipated long lead times to obtain inventory and materials from our contract manufacturers and suppliers, we have in the past and may continue to need to order in advance of anticipated customer demand. This advance ordering has and may continue to result in higher inventory levels, and we have and will continue to depend on an increase in customer demand. Any significant shortfall in customer demand would adversely impact our quarterly and annual operating results. IF THE WIRELESS NETWORKING MARKET DOES NOT CONTINUE TO EVOLVE, OR IF OUR PRODUCT DEVELOPMENT DOES NOT KEEP PACE WITH ITS EVOLUTION, DEMAND FOR OUR PRODUCTS MAY DECLINE SIGNIFICANTLY The wireless networking market is at an early stage of development, is rapidly evolving and its future is uncertain. Demand and market acceptance for recently introduced wireless networking products and services like ours are subject to a high level of uncertainty. It is likely that new wireless LAN products will not be generally accepted unless they operate at higher speeds and are sold at competitive prices. We cannot predict whether the wireless networking market will continue to develop in a way that sufficient demand for our products will emerge and become sustainable. Our prospects must be evaluated in light of the uncertainties relating to the new and evolving market in which we operate. If the wireless networking market does not develop sufficiently, or if our products are not sufficiently accepted, our business, financial condition and operating results will suffer. 17 18 WE MAY NOT SUCCEED OR MAY LOSE SIGNIFICANT MARKET SHARE AS A RESULT OF THE INTENSE COMPETITION IN THE WIRELESS LAN MARKET The market for our products is very competitive, and we expect that competition will increase in the future. Increased competition could adversely affect our revenues and profitability through pricing pressure, loss of market share and other factors. This market has historically been dominated by relatively few companies, including Lucent, Proxim and BreezeCom. We believe we will encounter competition from a number of other companies that develop, or have announced plans to develop, wireless networking products. We believe that our success will depend in part on our ability to compete favorably in the following areas: - - expertise and familiarity with 2.4 GHz spread spectrum technology, wireless data communication protocols and LAN technology; - - product performance, features, functionality and reliability; - - price/performance characteristics; - - timeliness of new product introductions; - - adoption of emerging industry standards; - - customer service and support; - - size and scope of distribution network; and - - brand name. We have also historically faced competitive pressure from companies that have increased their brand awareness by dedicating significant resources to marketing and advertising. We face the risk that our competitors may introduce faster, more competitively priced products. Many of our current and potential competitors have significantly greater financial, marketing, research, technical and other resources. If we are unable to compete successfully, we could experience price reductions, reduced operating margins and loss of market share, any of which could have a material adverse effect on our business and operating results. OUR SUCCESS DEPENDS ON THE TIMELY DEVELOPMENT OF NEW PRODUCTS We derive substantially all of our product revenues from sales of products for wireless networking solutions. This market is characterized by: - - intense competition; - - rapid technological change; - - short product life cycles; and - - emerging industry standards. We have in the past experienced delays in product development which resulted in delayed commercial introduction of new products. These kinds of delays could be repeated and could have an adverse effect on our business. The development of new wireless LAN products is highly complex. Our success in developing and introducing new products depends on a number of factors, including: - - accurate new product definition; - - timely completion and introduction of new product designs; - - achievement of cost efficiencies in design and manufacturing; and - - market acceptance of the new products. We cannot guarantee that we will be successful in these efforts or that our competitors will not be more successful, which, in either case, would have a material adverse effect on our business and results of operations. 18 19 WE RELY ON LIMITED SOURCES OF KEY COMPONENTS AND IF WE ARE UNABLE TO OBTAIN THESE COMPONENTS WHEN NEEDED, WE WILL NOT BE ABLE TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS ON TIME We rely on Atmel Corporation, M/A-COM, Raytheon Company, Hewlett-Packard Company, Harris Semiconductor and Sawtek, Inc. as our critical sole source suppliers. Although we have been informed by some of these suppliers that they have redundant manufacturing facilities, there is no assurance that they will be able to manufacture or provide these components in a timely way. Should any supply disruption occur, we may not be able to develop an alternative source for these components. We have experienced limited delays and shortages in the supply of other less critical components which have slowed the manufacturing schedule of our products or caused us to revise or adjust these schedules. We could experience delays and shortages in the future. We generally do not maintain a significant inventory of components and do not have long-term supply contracts with our suppliers. Our reliance on sole or limited source suppliers involves several risks, including: - - suppliers could increase component prices significantly, without notice and with immediate effect; - - suppliers could discontinue the manufacture or supply of components or delay delivery of components used in our products for reasons such as inventory shortages, new product offerings, increased cost of materials, destruction of manufacturing facilities, labor disputes and bankruptcy; and - - in order to compensate for potential component shortages or discontinuance, we may in the future decide to hold more inventory than is immediately required, resulting in increased inventory costs. Though we have not in the past experienced any significant delays in shipping or sales of product due to delays or shortages of components, if our suppliers were unable to deliver or ration components to us, we could experience interruptions and delays in product manufacturing, shipping and sales. This could result in our inability to fulfill customer orders, the cancellation of orders for our products, substantial delays in our product shipments, increased manufacturing costs and increased product prices. Further, we might not be able to develop alternative sources for these components in a timely way, if at all, and might not be able to modify our products to accommodate alternative components. These factors could damage our relationships with current and prospective customers lasting longer than any underlying shortage or discontinuance. Any of these risks, if realized, could materially and adversely affect our business operating results and financial condition. A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES AND DECREASED DEMAND BY THESE CUSTOMERS WOULD ADVERSELY AFFECT OUR REVENUES Historically, a relatively small number of customers, especially Telxon, have accounted for a significant portion of our total revenues in any particular period. Two of our customers, Telxon, and Business Partner Solutions, Inc. each accounted for over 10% of our total revenues for the three months ended September 30, 1999 and for the six months ended September 30, 1999. For the three months and six months ended September 30, 1999, Telxon accounted for 31% and 28% of our total revenues respectively. Our four largest customers accounted for 59% and 54% of our non-affiliate revenues or 41% and 39% of our total revenues for the same periods. We have no long-term volume purchase commitments from any of our customers. We anticipate that sales of our products to relatively few customers will continue to account for a significant portion of our total revenues, because our customers generally resell our products to end users. Due to these factors, some of the following may reduce our operating results: - - reduction, delay or cancellation of orders from one or more of our significant customers; - - development by one or more of our significant customers of other, competitive sources of supply; - - selection by one or more of our significant customers of equipment manufactured by one of our competitors as a preferred solution; 19 20 - - loss of one or more of our significant customers or a disruption in our sales and distribution channels to these customers; or - - failure of one of our significant customers to make timely payment of our invoices. We cannot be certain that these significant customers will continue purchasing levels of previous periods and a decline in these levels for any reason would negatively affect our revenues. WE MUST EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO INCREASE SALES OF OUR PRODUCTS To increase revenues, we believe we must increase the number of our distribution partners. Our strategy includes an effort to reach a greater number of end users through indirect channels. We are currently investing, and plan to continue to invest, significant resources to develop these indirect channels. This could adversely affect our operating results if we do not generate the revenues necessary to offset these investments. We will be dependent upon the acceptance of our products by distributors and their active marketing and sales efforts relating to our products. The distributors to whom we sell our products are independent and are not obligated to deal with us exclusively or to purchase any specified amount of our products. Because we do not generally fulfill orders by end users of our products sold through distributors, we will be dependent upon the ability of distributors to accurately forecast demand and maintain appropriate levels of inventory. If we are unable to expand our distribution channels, we may not be able to increase sales of our product. OUR DISTRIBUTORS MAY NOT GIVE PRIORITY TO OUR PRODUCTS WHICH MIGHT RESULT IN LOWER PRODUCT SALES We expect that our distributors will also sell competing products. These distributors may not continue, or may not give a high priority to, marketing and supporting our products. This and other channel conflicts could result in diminished sales through the indirect channel and adversely affect our operating results. Additionally, because lower prices are typically charged on sales made through indirect channels, increased indirect sales could adversely affect our average selling prices and result in lower gross margins. COMPLIANCE WITH EXISTING AND POTENTIAL INDUSTRY STANDARDS MAY BE DIFFICULT AND COSTLY We have developed and continue to develop our products to comply with existing industry standards and anticipated future standards. We may not introduce products that comply with future industry standards on a timely basis. In particular, we expend, and intend to continue to expend, substantial resources in developing products and product features that are designed to conform to the IEEE 802.11 wireless LAN standard, as well as to other industry standards that have not yet been formally adopted. Further, our high speed 4800 Turbo DS series of products is designed to conform with the proposed high speed addition to the IEEE 802.11 standard. Our products may fail to meet future industry standards or the standards ultimately adopted by the industry may vary from those anticipated by us. We participated in the promulgation of the IEEE 802.11 standard through two of our senior officers who are members of the IEEE 802.11 Standards Committee. Companies participating in the promulgation of the IEEE 802.11 standard have represented to the IEEE that they will grant licenses to their patents on a fair and equitable basis if those patents are required to implement products that comply with the standard. Our ability to market IEEE 802.11 compliant products may depend upon our ability to obtain these licenses from the other participating companies. Our failure to obtain any required license at a commercially reasonable cost could have a material adverse effect on our competitive position and results of operations. 20 21 EXISTING AND POTENTIAL WIRELESS LAN STANDARDS MAY NOT ACHIEVE MARKET ACCEPTANCE AND MAY LOWER BARRIERS TO MARKET ENTRY, EITHER OF WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS Because we develop our products to comply with industry standards, sales of our products could decline if these standards do not gain market acceptance or if consumers ultimately prefer to purchase products which do not comply with these standards, or which comply with new or competing standards, or which are based on proprietary designs. Also, product standardization may have the effect of lowering barriers to entry in the markets in which we seek to sell our products, by diminishing product differentiation. This would increase competition based upon criteria such as the relative size and marketing skills of competitors and we may not compete favorably. COMPLIANCE WITH VARYING GOVERNMENT REGULATIONS IN MULTIPLE JURISDICTIONS WHERE WE SELL PRODUCTS MAY BE DIFFICULT AND COSTLY In the United States, our products are subject to various Federal Communications Commission rules and regulations. Current FCC regulations permit license-free operation in certain FCC-certified bands in the radio frequency spectrum. FCC rules require compliance with administrative and technical requirements as a condition to the operation or marketing of devices that emit radio frequency energy, such as our products. Our products comply with Part 15 of the current FCC regulations permitting license-free operation of radio devices in the 902-928 MHz and 2.4-2.4835 GHz radio frequency bands. The Part 15 regulations are designed to minimize the probability of interference to the other users of those frequency bands and accord Part 15 systems secondary status. In order of priority, the primary users of those band widths are the following: - - devices which use radio waves to produce heat rather than to communicate; - - governmental uses; - - vehicle monitoring systems; and - - amateur radio. In the event of interference between a primary user in those band widths and a Part 15 user, the primary user can require the Part 15 user to curtail transmissions that create interference. Our products are also subject to regulatory requirements in markets outside the United States, where we have limited experience in gaining regulatory approval. The regulatory environment in which we operate subjects us to several risks, including: - - if users must cease use of our products because their operation causes interference to authorized users of the radio frequency spectrum, or authorized users cause interference which must be accepted by users of our products, market acceptance of our products and our results of operations could be adversely affected; - - regulatory changes, including changes in the allocation of available radio frequency spectrum or requirements for licensed operation, may significantly impact our operations by rendering current products non-compliant or restricting the applications and markets served by our products; and - - we may not be able to comply with all applicable regulations in each of the countries where our products are sold or proposed to be sold, and we may need to modify our products to meet local regulations. 21 22 OUR SUCCESS DEPENDS ON OBTAINING AND PROTECTING INTELLECTUAL PROPERTY Our success depends in part on our ability to obtain and preserve patent and other intellectual property rights covering our products and development and testing tools. The process of seeking patent protection can be time consuming and expensive. We cannot assure you that: - - patents will issue from currently pending or future applications; - - our existing patents or any new patents will be sufficient in scope to provide meaningful protection or any commercial advantage to us; - - foreign intellectual property laws will protect our intellectual property rights; or - - others will not independently develop similar products, duplicate our products or design around any patents issued to us. Intellectual property rights are uncertain and involve complex legal and factual questions. Though we are not aware of any third party intellectual property rights that would prevent our use and sale of our products, we may unknowingly infringe the proprietary rights of others. Any infringement could result in significant liability to us. If we do infringe the proprietary rights of others, we could be forced to either seek a license to those intellectual property rights or alter our products so that they no longer infringe those proprietary rights. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. We also rely on trade secrets, proprietary know-how and confidentiality provisions in agreements with employees and consultants to protect our intellectual property. Other parties may not comply with the terms of their agreements with us, and we may not be able to adequately enforce our rights against these parties. WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS WHICH COULD SERIOUSLY HARM OUR BUSINESS Any dispute regarding intellectual property, whether ours or that of another company, may result in legal proceedings. These types of proceedings may be costly and time consuming for us, even if we eventually prevail. If we do not prevail, we might be forced to pay significant damages, the prevailing party's litigation expenses and obtain a license or stop making the subject product. IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS, FINANCIAL CONDITION AND PROSPECTS COULD BE SERIOUSLY HARMED We have expanded our operations in recent years, and we anticipate that further expansion will be required to address potential growth in our customer base and market opportunities, as well as to provide corporate services previously provided to us by Telxon. This expansion has placed, and future expansion is expected to place, a significant strain on our management, technical, operational, administrative and financial resources. We have recently hired new employees, including a number of key managerial and operations personnel, who have not yet been fully integrated into our operations. Our current and planned expansion of personnel, systems, procedures and controls may be inadequate to support our future operations. We may be unable to attract, retain, motivate and manage required personnel, including finance, administrative and operations staff, or to successfully identify, manage and exploit existing and potential market opportunities because of inadequate staffing. We may also be unable to manage further growth in our multiple relationships with our OEMs, distributors and other third parties. If we are unable to manage growth effectively, our business, financial condition and results of operations could be adversely affected. 22 23 OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY ADDITIONAL RISKS UNIQUE TO THOSE MARKETS Revenues from customers outside of the United States accounted for approximately 21% and 24% of our total revenues for the three months ended September 30, 1999 and six months ended September 30,1999 respectively. We anticipate that revenues from customers outside of the United States will continue to account for a significant portion of our total revenues for the foreseeable future. Expansion of our international operations has required, and will continue to require, significant management attention and resources. In addition, we remain heavily dependent on distributors to market, sell and support our products internationally. Our international operations are subject to additional risks, including the following: - - difficulties of staffing and managing foreign operations; - - longer customer payment cycles and greater difficulties in collecting accounts receivable; - - unexpected changes in regulatory requirements, exchange rates, trading policies, tariffs and other barriers; - - uncertainties of laws and enforcement relating to the protection of intellectual property; - - language barriers; - - potential adverse tax consequences; and - - political and economic instability. We currently sell products in countries that have recently experienced significant problems with their economies, the value of their currency, availability of credit and their ability to engage in foreign trade in general, including in Russia and Japan. We are unable to determine whether economic downturns in any particular country will adversely effect our business or results of operations. We cannot predict the impact that any future fluctuations in foreign currency exchange rates or the adoption of the Euro, the single European currency introduced in January 1999, may have on our operating results and financial condition. RISKS RELATING TO YEAR 2000 ISSUES MAY ADVERSELY AFFECT OUR BUSINESS Many existing computer systems and software products do not properly recognize dates after December 31, 1999. This "Year 2000" problem could result in miscalculations, data corruption, system failures or disruptions of operations. We reasonably expect that at worst these disruptions could result in our inability to process transactions, manufacture and ship products, send invoices or engage in similar normal business activities for an indefinite period of time, which could impair our viability. The Year 2000 problem could also affect embedded systems, such as building security systems, machine controllers, telephone switches and other equipment. Our systems may suffer from date related problems, and if so, we may need to upgrade or replace our computer systems, software and other equipment, which could result in significant expenditures. Neither our current products nor our prior products utilize internal calendars that are dependent upon the input of, or reference to, a specific date, and we do not anticipate designing any products that are date dependent. Furthermore, the purchasing patterns of our customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available for network equipment and other purchases, which could have a material adverse effect on our business, operating results and financial condition. We rely on numerous third parties who may not be Year 2000 compliant. This includes our contract manufacturers, our sole and limited source component suppliers and other vendors, and our distributors, resellers and OEMs. Failure of any of these third parties to be Year 2000 compliant could require us to incur significant unanticipated expenses to remedy any resulting problems or to replace the affected third party. This could reduce our revenues and could have a material adverse effect on our business, operating results and financial condition. To date, we have not developed contingency plans for those eventualities. 23 24 WE ARE DEPENDENT ON KEY PERSONNEL AND IF WE ARE UNABLE TO HIRE OR RETAIN NEEDED PERSONNEL, OUR ABILITY TO DO BUSINESS PROFITABLY COULD BE HARMED There are a limited number of skilled design, process and testing engineers and marketing professionals involved in the wireless data communication industry. The competition for these employees is intense. Skilled professionals often move among the various competitors in this industry. Our future growth depends in large part on retaining our current employees and attracting new technical, marketing and management personnel. The loss of key employees or failure to attract new key employees could materially affect our business. RECENTLY HIRED KEY EMPLOYEES MAY NOT SUCCESSFULLY INTEGRATE INTO OUR MANAGEMENT TEAM We have recently hired a number of our officers, including our Senior Vice President and Chief Financial Officer in January 1999, and Senior Vice President, Sales and Marketing in August 1998. These individuals have not previously worked together and are in the process of integrating as a management team, together and with existing management. There can be no assurances that they will be able to effectively work together or successfully manage any growth we experience. THERE MAY BE POTENTIAL HEALTH AND SAFETY RISKS RELATED TO OUR PRODUCTS WHICH COULD NEGATIVELY AFFECT PRODUCT SALES There has been public concern regarding the potential health and safety risks of electromagnetic emissions. Our wireless networking products emit electromagnetic radiation, but we do not believe that our products pose a safety concern. If safety or health issues do arise, product sales could decline or cease. These issues could have a material adverse effect on our business and results of operations. Even if safety concerns ultimately prove to be without merit, negative publicity could have a material adverse effect on our ability to market products. OUR COMMON STOCK PRICE MAY BE VOLATILE The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. Our stock price may also be volatile. DELAWARE LAW AND OUR CORPORATE DOCUMENTS INCLUDE ANTI-TAKEOVER PROVISIONS WHICH MAY LIMIT THE VALUE STOCKHOLDERS CAN REALIZE FROM OUR STOCK Our corporate documents and applicable provisions of the Delaware General Corporation Law could discourage, delay or prevent a third party or significant stockholder from acquiring or gaining control of us. These provisions: - - authorize the issuance of preferred stock with rights senior to those of common stock, which our Board of Directors can create and issue without prior stockholder approval; - - prohibit stockholder action by written consent; - - establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting; and - - establish staggered terms for members of the Board of Directors. In addition, we are a party to a Rights Agreement, pursuant to which each share of our common stock includes a companion purchase right. Under circumstances controlled by our Board of Directors, the purchase rights may impose severe impediments to any person seeking to acquire us or gain control over us. Any of these anti-takeover provisions could lower the market price of the common stock and could deprive our stockholders of the opportunity to receive a premium for their shares in the event that we are sold. 24 25 THE NUMBER OF OUR SHARES WHICH ARE PUBLICALLY TRADED MAY INCREASE IN THE NEAR FUTURE Over six million of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well All of our officers, directors, stockholders, warrant holders and each holder of more than 5,000 options have executed lock up agreements in which they agreed not to sell any shares of common stock during the period ending 180 days after the date of the prospectus in the Registration Statement. This restriction can be waived by the underwriters at any time without notice to us, our stockholders or the public in general. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to the impact of interest rate changes and, to a lesser extent, foreign currency fluctuations. We are experiencing increases in our sales into foreign markets of products manufactured in the United States. Foreign currency fluctuations could effect the price competitiveness and margins of foreign sales. We have not entered into interest rate or foreign currency transactions for speculative purposes or otherwise. Our foreign currency exposures were immaterial at September 30, 1999. Our exposure to interest rate changes also results from investment of funds in excess of current operating requirements. We invest our funds in short-term, interest-bearing, investment grade securities. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required. 25 26 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) We are furnishing the following information with regard to all securities sold by us during the period covered by this report that were not registered under the Securities Act of 1933. We granted options to purchase an aggregate of 105,000 shares of common stock, at exercise prices ranging from $25 to $30 per share. The sales of these securities were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act of 1933, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate legends were affixed to share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. (d) We are furnishing the following information with respect to the use of proceeds from our initial public offering. A Registration Statement on Form S-1, as amended (Registration No. 333- 78507), was initially filed with the Securities and Exchange Commission on May 14, 1999, was declared effective on July 29, 1999 and the offering commenced on July 30, 1999. The managing underwriters for the offering were Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Prudential Securities and CIBC World Markets. Of the 6,000,000 shares of common stock, $0.01 par value, offered, we sold 4,000,000 shares and a selling stockholder sold 2,000,000 shares. In addition, our underwriters exercised their option to purchase an additional 846,800 shares to cover over-allotments sold by the underwriters in the Offering, of which we sold 564,562 shares and a selling stockholder sold 282,238. We received no proceeds from the shares sold by the selling stockholder. Payment of expenses from the proceeds were to persons other than our directors, officers, general partners or their associates, persons owning 10% or more of our equity securities or affiliates of the Company. The following table sets forth approximate proceeds and expenses. Our aggregate public offering price..................................... $ 50,210,182 Selling stockholder's aggregate public offering price................... $ 25,104,618 Our underwriting discounts and commissions.............................. $ 3,514,713 Selling stockholder's underwriting discounts and commissions............ $ 1,757,323 Our offering expenses................................................... $ 2,336,591 Our aggregate net proceeds.............................................. $ 44,358,878 During the period covered by this report we used approximately $320,000 of the Offering proceeds for working capital. 26 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1*** Agreement and Plan of Merger and Reorganization dated as of November 8, 1999 by and among Cisco Systems, Inc., a California corporation, Osprey Acquisition Corporation, a Delaware corporation, and Aironet Wireless Communications, Inc., a Delaware corporation 3.1** Amended and Restated Certificate of Incorporation of Aironet Wireless Communications, Inc. 3.2* Second Amended and Restated Bylaws of Aironet Wireless Communications, Inc. 4.1* Specimen of certificate for shares of Aironet's common stock 4.2** Rights Agreement between Aironet Wireless Communications, Inc. and Harris Trust and Savings Bank, as Rights Agent, dated as of June 25, 1999, including form of rights certificate 4.2.1*** Amendment No. 1 to Rights Agreement dated November 8, 1999 4.3* Warrant certificate issued to Furneaux & Company, LLC 4.4 Registration Rights Agreement by and among Aironet and certain of its security holders, dated as of March 31, 1998 included as Exhibit 10.4.3 to Aironet's Registration Statement on Form S-1, as amended (Registration No. 333-78507) 4.5 Stock Option Agreement dated as of November 8, 1999 by and between Cisco Systems, Inc. and Aironet Wireless Communications, Inc. incorporated by reference to Exhibit 99.1 to Aironet's Current Report on Form 8-K filed on November 12, 1999 4.6 Form of Stockholder Agreement dated as of November 8, 1999 by and among Cisco Systems, Inc., Osprey Acquisition Corporation and certain stockholders of Aironet Wireless Communications, Inc. incorporated by reference to Exhibit 99.2 to Aironet's Current Report on Form 8-K filed on November 12, 1999 10.1 Aironet's Compensation and Benefits Plans 10.1.1* Aironet Wireless Communications, Inc. 1996 Stock Option Plan 10.1.2* Amended and Restated Aironet Wireless Communications, Inc. 1996 Stock Option Plan 10.1.3* First Amendment to Amended and Restated Aironet Wireless Communications, Inc. 1996 Stock Option Plan 10.1.4* Aironet Wireless Communications, Inc. 1999 Employee Stock Purchase Plan 10.1.4.1+ First Amendment to the Aironet Wireless Communications, Inc. 1999 Employee Stock Purchase Plan 10.1.5* Aironet Wireless Communications, Inc. 1999 Omnibus Stock Incentive Plan 10.1.6* Aironet Wireless Communications, Inc. 1999 Stock Option Plan for Non-Employee Directors 10.1.7* Employment Agreement between Aironet and Roger J. Murphy, Jr. 10.1.8* Employment Letter Agreement between Aironet and Richard G. Holmes 27 28 EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 10.1.9* Employment Letter Agreement between Aironet and Ronald B. Willis 10.1.10* Employment Letter Agreement between Aironet and Harvey A. Ikeman 10.1.11* Promissory Note made by Roger J. Murphy, Jr. to the order of Aironet in the principal amount of $372,000 10.1.11.1* Amendment to Promissory Note, included as Exhibit 10.1.11 10.1.12* Telxon's Retirement & Uniform Matching Profit Sharing Plan, as amended (in which Aironet's employees participate pursuant to the Services Agreement included as Exhibit 10.7) 10.1.12.1* Supplemental Participation Agreement and Certificate of Resolution to Telxon's Retirement & Uniform Matching Profit Sharing Plan, as amended 10.1.13* Telxon 1995 Employee Stock Purchase Plan 10.1.14+ Change in Control Agreement between Aironet and Roger J. Murphy, Jr. dated October 19, 1999 10.1.15+ Change in Control Agreement between Aironet and Richard G. Holmes dated October 19, 1999 10.1.16+ Change in Control Agreement between Aironet and Ronald B. Willis dated October 19, 1999 10.1.17+ Change in Control Agreement between Aironet and Harvey A. Ikeman dated October 19, 1999 10.1.18+ Change in Control Agreement between Aironet and Donald I. Sloan dated October 19, 1999 10.2 Material Leases 10.2.1* Lease between Aironet and Telxon Corporation for 91 Springside Drive, Akron, Ohio, dated as of April 1, 1998 10.2.2* Sublease Agreement between Aironet and Telxon Corporation for 3875 Embassy Parkway, Bath, Ohio dated as of September 1, 1998 10.2.3* Lease renewal between Telxon Corporation and Aironet, dated June 16, 1999, for Lease included as Exhibit 10.2.1 and Sublease included as 10.2.2 10.3* Loan Agreement between Aironet and The Huntington National Bank, dated as of July 24, 1998 10.3.1** First Amendment to Loan Agreement dated April 30, 1999 amending the Loan Agreement included as Exhibit 10.3 10.4* Subscription Agreement by and among Aironet and the investors who executed the same, dated as of March 31, 1998 10.4.1* Form of warrant issued pursuant to the Subscription Agreement included as Exhibit 10.4 10.4.2* Stockholders Agreement by and among Aironet and its stockholders party thereto, dated as of March 31, 1998, in connection with the transactions under the Subscription Agreement included as Exhibit 10.4 10.4.2.1* Form of Addendum to Stockholders Agreement included as Exhibit 10.4.2 28 29 EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 10.4.3* Registration Rights Agreement by and among Aironet and certain of its security holders, dated as of March 31, 1998 10.4.3.1* Form of Addendum to Registration Rights Agreement included as Exhibit 10.4.3 10.4.3.2* Addendum by Telantis Venture Partners IV, Inc. to Registration Rights Agreement included as Exhibit 10.4.3 10.5* License, Rights and Supply Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.5.1* First Amendment to License, Rights and Supply Agreement dated as of March 31, 1999 10.6* Tax Benefit and Indemnification Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.6.1* Promissory Note made by Aironet to the order of Telxon Corporation with the Tax Benefit and Indemnification Agreement included as Exhibit 10.6 10.7* Services Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.8* Assignment of Patent Applications made by Telxon Corporation in favor of Aironet, dated as of March 30, 1998 10.9* Assignment of Patent Applications made by Aironet in favor of Telxon Corporation, dated as of March 30, 1998 10.10* Cross Covenant Not to Sue between Aironet and Telxon Corporation, dated as of March 31, 1998 10.11* AirAware Acknowledgment between Aironet and Telxon Corporation, dated as of March 30, 1998 10.12* LM3000 Software Agreement between Aironet and Telxon Corporation, dated as of March 30, 1998 10.13* Patent Continuation in Part Agreement between Aironet and Telxon Corporation, dated as of March 30, 1998 10.14* Patent License Agreement between Aironet and Telxon Corporation, dated as of March 30, 1998 10.15* Nondisclosure Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.16+ Assignment of Patent Application made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.17+ Patent License Agreement between Aironet and Telxon Corporation, dated as of August 4, 1999 10.18+ Assignment of Canadian patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.19+ Assignment of European patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 29 30 EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 10.20+ Deed of Assignment of Australian patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.21+ Deed of Assignment of Israel patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.22+ Agreement dated as of November 8, 1999 by and among Telxon Corporation, Cisco Systems, Inc. and Aironet Wireless Communications, Inc. 27+ Financial Data Schedule +Filed herewith. *Incorporated by reference to this exhibit number to Aironet's Registration Statement on Form S-1, as amended (Registration No. 333-78507) filed on May 14, 1999 and declared effective on July 29, 1999. **Incorporated by reference to this exhibit number to Aironet's periodic report on Form 10-Q for the fiscal quarter ended June 30, 1999. ***Incorporated by reference to this exhibit number to Aironet's current report on Form 8-K filed on November 12, 1999. (b) We filed no reports on Form 8-K during the quarter ended June 30, 1999. 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 15, 1999 Aironet Wireless Communications, Inc. By /s/ Richard G. Holmes Richard G. Holmes Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 31 32 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 2.1*** Agreement and Plan of Merger and Reorganization dated as of November 8, 1999 by and among Cisco Systems, Inc., a California corporation, Osprey Acquisition Corporation, a Delaware corporation, and Aironet Wireless Communications, Inc., a Delaware corporation 3.1** Amended and Restated Certificate of Incorporation of Aironet Wireless Communications, Inc. 3.2* Second Amended and Restated Bylaws of Aironet Wireless Communications, Inc. 4.1* Specimen of certificate for shares of Aironet's common stock 4.2** Rights Agreement between Aironet Wireless Communications, Inc. and Harris Trust and Savings Bank, as Rights Agent, dated as of June 25, 1999, including form of rights certificate 4.2.1*** Amendment No. 1 to Rights Agreement dated November 8, 1999 4.3* Warrant certificate issued to Furneaux & Company, LLC 4.4 Registration Rights Agreement by and among Aironet and certain of its security holders, dated as of March 31, 1998 included as Exhibit 10.4.3 to Aironet's Registration Statement on Form S-1, as amended (Registration No. 333-78507) 4.5 Stock Option Agreement dated as of November 8, 1999 by and between Cisco Systems, Inc. and Aironet Wireless Communications, Inc. incorporated by reference to Exhibit 99.1 to Aironet's Current Report on Form 8-K filed on November 12, 1999 4.6 Form of Stockholder Agreement dated as of November 8, 1999 by and among Cisco Systems, Inc., Osprey Acquisition Corporation and certain stockholders of Aironet Wireless Communications, Inc. incorporated by reference to Exhibit 99.2 to Aironet's Current Report on Form 8-K filed on November 12, 1999 10.1 Aironet's Compensation and Benefits Plans 10.1.1* Aironet Wireless Communications, Inc. 1996 Stock Option Plan 10.1.2* Amended and Restated Aironet Wireless Communications, Inc. 1996 Stock Option Plan 10.1.3* First Amendment to Amended and Restated Aironet Wireless Communications, Inc. 1996 Stock Option Plan 10.1.4* Aironet Wireless Communications, Inc. 1999 Employee Stock Purchase Plan 10.1.4.1+ First Amendment to the Aironet Wireless Communications, Inc. 1999 Employee Stock Purchase Plan 10.1.5* Aironet Wireless Communications, Inc. 1999 Omnibus Stock Incentive Plan 10.1.6* Aironet Wireless Communications, Inc. 1999 Stock Option Plan for Non-Employee Directors 10.1.7* Employment Agreement between Aironet and Roger J. Murphy, Jr. 10.1.8* Employment Letter Agreement between Aironet and Richard G. Holmes 33 EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 10.1.9* Employment Letter Agreement between Aironet and Ronald B. Willis 10.1.10* Employment Letter Agreement between Aironet and Harvey A. Ikeman 10.1.11* Promissory Note made by Roger J. Murphy, Jr. to the order of Aironet in the principal amount of $372,000 10.1.11.1* Amendment to Promissory Note, included as Exhibit 10.1.11 10.1.12* Telxon's Retirement & Uniform Matching Profit Sharing Plan, as amended (in which Aironet's employees participate pursuant to the Services Agreement included as Exhibit 10.7) 10.1.12.1* Supplemental Participation Agreement and Certificate of Resolution to Telxon's Retirement & Uniform Matching Profit Sharing Plan, as amended 10.1.13* Telxon 1995 Employee Stock Purchase Plan 10.1.14+ Change in Control Agreement between Aironet and Roger J. Murphy, Jr. dated October 19, 1999 10.1.15+ Change in Control Agreement between Aironet and Richard G. Holmes dated October 19, 1999 10.1.16+ Change in Control Agreement between Aironet and Ronald B. Willis dated October 19, 1999 10.1.17+ Change in Control Agreement between Aironet and Harvey A. Ikeman dated October 19, 1999 10.1.18+ Change in Control Agreement between Aironet and Donald I. Sloan dated October 19, 1999 10.2 Material Leases 10.2.1* Lease between Aironet and Telxon Corporation for 91 Springside Drive, Akron, Ohio, dated as of April 1, 1998 10.2.2* Sublease Agreement between Aironet and Telxon Corporation for 3875 Embassy Parkway, Bath, Ohio dated as of September 1, 1998 10.2.3* Lease renewal between Telxon Corporation and Aironet, dated June 16, 1999, for Lease included as Exhibit 10.2.1 and Sublease included as 10.2.2 10.3* Loan Agreement between Aironet and The Huntington National Bank, dated as of July 24, 1998 10.3.1** First Amendment to Loan Agreement dated April 30, 1999, amending the Loan Agreement included as Exhibit 10.3 10.4* Subscription Agreement by and among Aironet and the investors who executed the same, dated as of March 31, 1998 10.4.1* Form of warrant issued pursuant to the Subscription Agreement included as Exhibit 10.4 10.4.2* Stockholders Agreement by and among Aironet and its stockholders party thereto, dated as of March 31, 1998, in connection with the transactions under the Subscription Agreement included as Exhibit 10.4 34 EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 10.4.2.1* Form of Addendum to Stockholders Agreement included as Exhibit 10.4.2 10.4.3* Registration Rights Agreement by and among Aironet and certain of its security holders, dated as of March 31, 1998 10.4.3.1* Form of Addendum to Registration Rights Agreement included as Exhibit 10.4.3 10.4.3.2* Addendum by Telantis Venture Partners IV, Inc. to Registration Rights Agreement included as Exhibit 10.4.3 10.5* License, Rights and Supply Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.5.1* First Amendment to License, Rights and Supply Agreement dated as of March 31, 1999 10.6* Tax Benefit and Indemnification Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.6.1* Promissory Note made by Aironet to the order of Telxon Corporation with the Tax Benefit and Indemnification Agreement included as Exhibit 10.6 10.7* Services Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.8* Assignment of Patent Applications made by Telxon Corporation in favor of Aironet, dated as of March 30, 1998 10.9* Assignment of Patent Applications made by Aironet in favor of Telxon Corporation, dated as of March 30, 1998 10.10* Cross Covenant Not to Sue between Aironet and Telxon Corporation, dated as of March 31, 1998 10.11* AirAware Acknowledgment between Aironet and Telxon Corporation, dated as of March 30, 1998 10.12* LM3000 Software Agreement between Aironet and Telxon Corporation, dated as of March 30, 1998 10.13* Patent Continuation in Part Agreement between Aironet and Telxon Corporation, dated as of March 30, 1998 10.14* Patent License Agreement between Aironet and Telxon Corporation, dated as of March 30, 1998 10.15* Nondisclosure Agreement between Aironet and Telxon Corporation, dated as of March 31, 1998 10.16+ Assignment of Patent Application made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.17+ Patent License Agreement between Aironet and Telxon Corporation, dated as of August 4, 1999 10.18+ Assignment of Canadian patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.19+ Assignment of European patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 35 EXHIBIT NUMBER DESCRIPTION - ------- ---------------- 10.20+ Deed of Assignment of Australian patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.21+ Deed of Assignment of Israel patent made by Telxon Corporation in favor of Aironet, dated as of August 4, 1999 10.22+ Agreement dated as of November 8, 1999 by and among Telxon Corporation, Cisco Systems, Inc. and Aironet Wireless Communications, Inc. 27+ Financial Data Schedule +Filed herewith. *Incorporated by reference to this exhibit number to Aironet's Registration Statement on Form S-1, as amended (Registration No. 333-78507) filed on May 14, 1999 and declared effective on July 29, 1999. **Incorporated by reference to this exhibit number to Aironet's periodic report on Form 10-Q for the fiscal quarter ended June 30, 1999. ***Incorporated by reference to this exhibit number to Aironet's current report on Form 8-K filed on November 12, 1999.