As filed with the Securities and Exchange Commission on April 10, 2000
Registration No. 333-30568
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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METAWAVE COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 3663 91-1673152
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
10735 Willows Road NE
Redmond, WA 98052
(425) 702-5600
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
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ROBERT H. HUNSBERGER
President and Chief Executive Officer
10735 Willows Road NE
Redmond, WA 98052
(425) 702-5600
(Name, address including zip code and telephone number including area code, of
agent for service)
Copies to:
SONYA F. ERICKSON PATRICK J. SCHULTHEIS
JOHN W. ROBERTSON ROBERT G. DAY
KIRK D. SCHUMACHER ALLISON L. BERRY
Venture Law Group Wilson Sonsini Goodrich & Rosati
A Professional Corporation Professional Corporation
4750 Carillon Point 650 Page Mill Road
Kirkland, WA 98033-7355 Palo Alto, CA 94304-1050
(425) 739-8700 (650) 493-9300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum
Offering Proposed
Title Of Each Class Of Amount Price Maximum
Securities To Be to be per Aggregate Amount Of
Registered Registered(1) share(2) Offering Price(2) Registration Fee(3)
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Common Stock, par value
$0.0001................ 7,187,500 $13.00 $93,437,500 $24,668
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(1) Includes 937,500 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
Preliminary Prospectus Dated April 10, 2000
PROSPECTUS
6,250,000 Shares
[LOGO OF METAWAVE COMMUNICATIONS CORPORATION]
Common Stock
-----------
This is Metawave Communications Corporation's initial public offering.
We expect the public offering price to be between $11.00 and $13.00 per
share. Currently, no public market exists for the shares. We have applied to
have our common stock quoted on the Nasdaq National Market under the symbol
"MTWV."
Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 7 of this prospectus.
-----------
Per Share Total
--------- -----
Public offering price............................... $ $
Underwriting discount............................... $ $
Proceeds, before expenses, to Metawave.............. $ $
The underwriters may also purchase up to an additional 937,500 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
-----------
Merrill Lynch & Co. Salomon Smith Barney
U.S. Bancorp Piper Jaffray
------------
The date of this prospectus is , 2000.
Stylized Metawave logo.
Text on top: Metawave provides smart antenna solutions that
increase the capacity of wireless networks.
Line art depiction of SpotLight Smart Antenna
System
Graphic of radio frequency spectrum
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 28
Management............................................................... 41
Certain Relationships and Related Party Transactions..................... 51
Principal Stockholders................................................... 53
Description of Securities................................................ 55
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 63
Index to Financial Statements............................................ F-1
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
PROSPECTUS SUMMARY
The summary highlights selected information contained elsewhere in the
prospectus. You should read the entire prospectus, including "Risk Factors" and
the financial data and related notes before making an investment decision.
Metawave Communications Corporation
We provide smart antenna systems to wireless network operators facing
capacity constraints in the wireless communications industry. Our SpotLight
smart antenna systems consist of antennas that improve the reception and
transmission of radio signals dynamically through the use of our proprietary
software. We believe that wireless operators can increase overall network
capacity, improve or maintain network quality, reduce network operating costs
and better manage network infrastructure by implementing our SpotLight systems.
As the demand for wireless services continues to grow, we will develop systems
based on our proprietary technologies that address the associated network
capacity problems faced by wireless network operators.
The recent increase in demand for wireless services has been driven by an
increased number of subscribers, lower prices and expanded availability of
existing services. In addition to these factors, the emergence of new data and
Internet-oriented wireless services is expected to contribute to the continued
increase in subscriber usage. For example, wireless subscriber usage in the
United States is expected to grow at a compound annual growth rate of 20.9%
through 2003, according to The Strategis Group. The growth rate in wireless
subscriber usage is not necessarily indicative of our growth rate.
This rapid growth in demand for wireless services and wireless usage has
strained the capacity of wireless networks given the fixed amount of radio
frequency spectrum allocated to wireless network operators. To address the
challenge of increasing capacity while maintaining signal quality, wireless
network operators generally have deployed more efficient digital technologies
or have built additional cell sites, which contain the transmitting and
receiving equipment used by wireless network operators to connect the wireless
network to subscribers' mobile phones. However, the high costs and technical
difficulties associated with building new cell sites, as well as the inherent
capacity limitations of digital technologies, have created the need for a cost-
effective solution to manage available spectrum.
As of March 31, 2000 we had sold a total of 149 SpotLight systems to a
variety of customers worldwide. The following customers accounted for more that
ten percent of our revenues in 1999: ALLTEL Communications Inc., which
accounted for 44.8% of our revenues, Grupo IUSACELL S.A. de C.V. of Mexico,
which accounted for 26.0% of our revenues; and Southwestco Wireless Inc., which
accounted for 20.9% of our revenues.
We have developed cost-effective smart antenna systems for expanding network
capacity while improving or maintaining overall network performance. These
systems are our primary product and have accounted for substantially all of our
revenues to date. Our SpotLight systems are designed to be compatible with base
station equipment for Code Division Multiple Access, or CDMA, and Global System
for Mobile Communications, or GSM, technologies, as well as analog
technologies. We have not completed any commercial sales of our SpotLight GSM
system. Our SpotLight systems provide solutions to wireless network operators
with the following benefits:
Cost-Effective Capacity Expansion. Our SpotLight systems enable wireless
network operators to increase the capacity of their existing networks and
therefore reduce the need to build and maintain expensive new cell sites. Our
SpotLight 2000 system has improved CDMA capacity in cell sites from 30% to 50%,
depending on network configuration. In addition, in a recent field trial, our
SpotLight GSM system demonstrated that GSM network capacity can be increased by
up to 100% without increasing the number of GSM cell sites. Adding SpotLight
systems in selected cell sites can increase overall network capacity.
3
Improved Network Performance. Our SpotLight systems allow wireless network
operators to increase capacity while maintaining or improving the level of
service and signal quality. Our SpotLight 2000 systems efficiently allocate
existing network resources to better match subscriber usage. We expect our
SpotLight GSM systems to provide better signal reception and reduced
interference.
Compatibility with Standards and Equipment. We design our SpotLight systems
to be compatible with most of the widely deployed wireless standards operating
at 800 MHz and 900 MHz and related installed base station equipment in order to
allow wireless network operators' to continue to use their existing equipment
and technology.
Our objective is to provide smart antenna systems to the wireless
communications market worldwide. To accomplish this objective we intend to:
. Continue to focus on delivering solutions that address the capacity
constraints of wireless network operators;
. Expand our presence and penetration of our current CDMA customers by
leveraging the performance and service of our existing system
deployments;
. Target additional large multi-system 800 MHz CDMA and 900 MHz GSM
wireless network operators around the world that serve substantial
concentrations of customers and have the greatest market share in their
respective markets; and
. Use our technology leadership and intellectual property to develop and
provide new capacity solutions to the existing and emerging wireless
communications markets, including Personal Communications System, or PCS,
operating at 1800 MHz and 1900 MHz.
We have had a history of significant losses and we expect to continue
generate substantial losses in 2000 and beyond, even if our revenues increase.
Our net loss for the three months ended March 31, 2000 was $7.7 million
compared to our revenues of $9.3 million and for the year ended December 31,
1999 our net loss was $42.4 million compared to our revenues of $22.6 million.
Our accumulated deficit was $128.4 million at March 31, 2000. In our limited
operating history, we have never achieved profitability. We anticipate that a
significant portion of the proceeds of this offering will be used to offset our
operating losses.
Our principal executive offices are located at 10735 Willows Road NE,
Redmond, Washington 98052, and our telephone number is (425) 702-5600. We were
originally incorporated in the state of Washington in January 1995 and
reincorporated in the state of Delaware in July 1995. Our Web site is
www.metawave.com. The information on this Web site does not constitute part of
this prospectus.
4
The Offering
Common stock offered by Metawave........... 6,250,000 shares
Shares outstanding after the offering...... 36,844,478 shares
Use of proceeds............................ We intend to use the net
proceeds for general corporate
purposes, including working
capital and capital
expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..... MTWV
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at March 31, 2000.
This number excludes outstanding or available options and outstanding warrants
to purchase an aggregate of 4,169,233 shares. See "Capitalization. "
Unless otherwise indicated, the information in this prospectus, including
the outstanding share information below is based on the number of shares
outstanding as of March 31, 2000 and assumes:
. the conversion of 32,027,203 outstanding shares of preferred stock into
an aggregate of 27,972,907 shares of common stock, for further details
please see "Capitalization";
. a 2-for-3 reverse split of our common stock;
. no exercise of the underwriters' over-allotment option;
. no exercise of outstanding warrants; and
. no exercise of outstanding options under our stock option plans.
5
Summary Consolidated Financial Data
The summary consolidated financial data below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of Metawave and related
notes included elsewhere in this prospectus. The financial results as of March
31, 2000 and for the three months ended March 31, 1999 and 2000 are unaudited.
Three Months
Year ended December 31, Ended March 31,
---------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- -------
(unaudited)
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues..................... $ 1,450 $ 15,991 $ 22,596 $ 6,834 $ 9,329
Gross profit (loss).......... (278) (2,037) 360 (225) 2,235
Total operating expenses..... 22,228 35,728 39,599 9,366 10,042
Loss from operations......... (22,506) (37,765) (39,239) (9,591) (7,807)
Other income (expense), net.. 402 (6,563) (3,174) (3,108) 62
-------- -------- -------- -------- -------
Net loss..................... $(22,104) $(44,328) $(42,413) $(12,699) $(7,745)
======== ======== ======== ======== =======
Basic and diluted net loss
per share................... $ (12.18) $ (21.88) $ (18.98) $ (6.00) $ (3.04)
Shares used in computation of
basic and diluted net
loss per share.............. 1,815 2,026 2,235 2,118 2,549
Pro forma basic and diluted
net loss per share.......... $ (1.90) $ (0.32)
Shares used in computation of
pro forma net
loss per share.............. 22,375 23,901
The "pro forma" column below gives effect to the conversion of all
outstanding shares of preferred stock upon completion of this offering.
The "pro forma as adjusted" column below gives effect to the sale of the
shares of common stock in this offering at an assumed initial public offering
price of $12.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses. Please see "Use of Proceeds" and
"Capitalization."
March 31, 2000
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $ 14,497 $ 14,497 $ 83,247
Working capital............................. 15,821 15,821 84,571
Total assets................................ 36,418 36,418 105,168
Long-term obligations, net of current
portion.................................... 2,404 2,404 2,404
Convertible and redeemable preferred stock
and warrants............................... 144,102 -- --
Common stock................................ 6,384 150,486 219,236
Accumulated deficit......................... (128,385) (128,385) (128,385)
Stockholders' equity (deficit).............. (124,725) 19,377 88,127
6
RISK FACTORS
You should carefully consider the risks described below, as well as other
information contained in this prospectus, before making a decision to buy our
common stock.
Risks Related to Our Business
We have a limited operating history which makes it difficult for you to
evaluate our business and your investment.
We were incorporated in 1995 and were in the development stage until late
1997, when we commenced shipment for commercial sale of our first SpotLight
smart antenna system. We therefore have a limited operating history upon which
an investor may evaluate our operations and future prospects. The revenue and
profit potential of our business is unproven and our limited operating history
makes our future operating results difficult to predict because the market for
smart antenna systems is so new and wireless technologies change so rapidly.
Because our smart antenna systems were introduced relatively recently, we are
unable to predict with any degree of certainty whether our smart antenna
systems will achieve widespread market acceptance. In view of our limited
operating history, an investment in our common stock must be considered in
light of the risks and uncertainties that may be encountered by early stage
companies in the wireless communications equipment market. In addition,
period-to-period comparisons of operating results may not be meaningful and
operating results from prior periods may not be indicative of future
performance.
We have incurred net losses and negative cash flow for our entire history, we
expect to incur future net losses and we may never achieve profitability.
We have never achieved profitability and as of March 31, 2000, we had an
accumulated net deficit of approximately $128.4 million. We intend to continue
to make significant investments in our operations, particularly to support
product development, to increase manufacturing capacity and to market new
smart antenna systems. Accordingly, we expect to continue to generate
substantial losses in 2000 and beyond, even if revenues increase. To achieve
profitability, we must, among other things:
. successfully scale our current operations;
. introduce new smart antenna systems;
. implement and execute our business and marketing strategies;
. develop and enhance our brand;
. adapt to changes in the marketplace;
. respond to competitive developments in the wireless communications
industry; and
. continue to attract, integrate, retain and motivate qualified personnel.
We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could materially and
adversely affect our business, operating results and financial position
causing our stock price to decline. We cannot be certain that we can achieve
sufficient revenues to achieve profitability, or if we do, that we could
remain profitable.
We expect our quarterly revenues and operating results to fluctuate and these
fluctuations may cause the price of our stock to decline.
We base our operating expenses on anticipated revenue trends and a high
percentage of our expenses are fixed in the short term. As a result, any delay
in generating or recognizing revenues could cause our operating results to
fall below the expectations of securities analysts and investors, which would
likely cause our stock price to decline. Factors that may cause our quarterly
results to fluctuate include:
. gain or loss by us of significant customers;
. our ability to increase sales to our existing customers;
7
. delays in customer orders;
. delays in installing our smart antenna systems;
. our ability to reduce manufacturing costs of our smart antenna systems;
. our ability to introduce new smart antenna systems;
. market acceptance of any new smart antenna systems;
. introduction and enhancement of competitive or substitute products by our
competitors;
. limitations in our manufacturing capacity; and
. delays or changes in regulatory environments.
We depend on a limited number of wireless network operators for substantially
all of our revenues, so the loss of a customer or a delay in an order from a
customer could impair our operating results.
We derive our revenues from sales of our SpotLight 2000 system to a limited
number of wireless network operators. Due to the highly concentrated nature of
the wireless industry and industry consolidation, we believe that the number of
potential customers for future systems will be limited. Five customers have
accounted for substantially all of our system sales to date. The U.S. wireless
operations of three of our customers--AirTouch, Bell Atlantic and GTE--are
expected to be consolidated into one entity in 2000. On July 28, 1998, Bell
Atlantic and GTE announced a merger which is still awaiting final FCC approval.
On April 4, 2000, Bell Atlantic and Vodaphone AirTouch plc, the parent company
of AirTouch, completed the combination of their U.S. wireless properties into
an entity called Verizon Wireless. Bell Atlantic owns 47.2% of IUSACELL.
Finally, Southwestco has entered into an agreement with ALLTEL for the sale of
its FCC licenses and assets in Arizona, New Mexico and Texas. Failure by us to
capture a significant percentage of the wireless network operators as customers
could cause our operating results to be significantly less than anticipated and
lead to a decline in our stock price. Moreover, due to this customer
concentration, the loss, or reduced demand from, any customer could cause our
sales to fall significantly.
Because our contracts with new customers are subject to satisfying performance
criteria, the timing of purchases is difficult to predict and as a result our
revenue is unpredictable.
We believe that the purchase of our SpotLight systems is typically a
strategic decision that requires approval at senior levels of customers'
organizations, significant technical evaluation and a substantial commitment of
customers' personnel, financial and other resources. Our contracts with new
customers typically contain conditional acceptance provisions for the initial
system sales and we delay recognition of revenue until all conditions are
satisfied, which causes our sales cycle to last up to 18 months and to vary
substantially from customer to customer. This variability makes predicting our
revenues difficult. Typically, performance of our systems must be accepted in
an initial cell site or cluster of cell sites in a field trial prior to
completing any additional sales to a particular wireless network operator. This
makes the sales process associated with the purchase of our systems complex,
lengthy and subject to a number of significant risks. We may incur substantial
expenses and expend significant management and personnel resources in the
process of a field trial. If we do not satisfy conditions in these contracts or
if satisfaction of these conditions were delayed for any reason, revenues in
any particular period could fall significantly below our expectations.
Any delay in customer acceptance or shipment could delay our recognition of
revenues which could cause our stock price to decline.
Delays in shipment or customer acceptance of our antenna systems can happen
for a variety of reasons, including:
. an unanticipated shipment rescheduling;
. cancellation or deferral by a customer;
. competitive or economic factors;
8
. unexpected manufacturing, installation or other difficulties;
. unavailability or delays in deliveries of components, subassemblies or
services by suppliers; or
. the failure to receive an anticipated order.
Our customers are typically large organizations and make equipment purchases on
their own schedules. We have no influence on their internal budgetary
decisions. Additionally, since orders must ordinarily be shipped within 90 days
of receipt of a purchase order, our inability to ship orders on a timely basis
because of our limited capacity could damage relationships with customers and
result in cancellation of orders or lost orders. Any delay in system shipment
could cause revenues and operating results in a particular period to fall below
our expectations as well as below the expectations of public market analysts or
investors. If this occurs, the trading price of our common stock would likely
decline.
Our future revenues depend on the sale of our SpotLight systems and if our
SpotLight systems fail to achieve market acceptance of our SpotLight systems,
our revenues will fail to meet expectations.
Our future success depends upon the degree to which our smart antenna
systems are accepted. We believe that substantially all of our revenues in the
foreseeable future will be derived from sales of our SpotLight systems. If our
SpotLight systems fail to achieve broad market acceptance among our customers
and potential customers, our revenues could fall below our and analysts'
expectations which could cause our stock price to decline. In light of the
relatively recent introduction of our SpotLight systems, in particular our
SpotLight GSM system which recently completed its first field trial, and the
rapidly evolving nature of the wireless communications industry, we cannot
predict with any degree of assurance whether our current or future smart
antenna systems will achieve broad market acceptance. We have not yet completed
any commercial sales of our SpotLight GSM system. We must demonstrate that our
systems provide a cost-effective spectrum management solution that expands
wireless network operators' capacity within each operator's unique network
configuration and specifications. If our smart antenna systems do not achieve
widespread acceptance with wireless network operators, we will be unable to
increase our revenues as expected.
Our smart antenna systems are complex and may have errors or defects that are
detected only after deployments in complex networks, which may lead to loss of
customers and revenues and increased costs.
Our smart antenna systems are highly complex and are designed to be deployed
in complex networks. Although our systems are tested during manufacturing and
prior to deployment, they can only be fully tested when deployed in networks.
Consequently, our customers may discover errors after the systems have been
fully deployed. If we are unable to fix errors or other problems that may be
identified in full deployment, we could experience:
. costs associated with the remediation of any problems;
. loss of or delay in revenues;
. loss of customers;
. failure to achieve market acceptance and loss of market share;
. diversion of deployment resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
Our limited experience in installing our systems may result in excessive costs
and delays which could cause us to lose customers.
Because we are one of the first companies to sell and deploy smart antenna
systems, there is little, if any, established field service expertise for the
installation of smart antenna systems in general or for the SpotLight
9
systems in particular. It is difficult to attract and maintain qualified field
service personnel and to train them to install our SpotLight systems. Failure
to have adequate numbers of trained field service personnel would adversely
affect our ability to competently install our systems on a timely basis, which
may adversely affect our customers and their business. In addition to our own
personnel, we have used and will continue to use subcontractors for some
installation and field service tasks. We may not be able to find sufficient
subcontractors with adequate experience and expertise and we may not be able to
retain their services on acceptable terms, if at all.
If we are unable to reduce our installation and optimization costs, we may not
be able to achieve profitability.
We charge a fixed fee to install and optimize our SpotLight systems. To
date, our costs to install and optimize our systems have significantly exceeded
the revenues associated with this work. Our smart antenna systems must be
installed, integrated and optimized with existing equipment installed in our
customers' cell sites. This process can be lengthy, causing delays in a
customer's commercial deployment of our systems. These delays may be the result
of factors outside of our control, including:
. zoning restrictions on installing additional equipment in a cell site;
. difficulties associated with the topography of the intended coverage area
of a cell site, such as the presence of water and hillsides;
. inability to easily access cell sites; and
. lack of experienced field service crews, particularly for international
deployments.
Failure to perform these field service tasks at a profit would adversely affect
our overall profitability. Additionally, our inability to correct field service
problems, whether or not in our control, may also harm our reputation and
competitive position in the industry.
We have limited manufacturing experience and facilities which may affect our
ability to expand our business.
Our manufacturing operations consist primarily of supplier and commodity
management and assembling finished goods from components and subassemblies
purchased from outside suppliers. We configure each SpotLight system to be
compatible with customer equipment, and our ability to achieve manufacturing
efficiencies by assembling systems before orders are received, therefore, is
limited. We intend to expand our manufacturing capacity, but due to our limited
experience with large scale operations, we may not be able to develop
internally the management structure or facilities needed to increase this
capacity.
Our current manufacturing facilities consist of a single facility in
Redmond, Washington. If our facilities or the facilities of our suppliers were
incapable of operating, even temporarily, or were unable to operate at or near
full capacity for any extended period, we would be unable to meet customers'
delivery expectations. In connection with our capacity expansion, we intend to
manufacture our SpotLight GSM systems in Taipei, Taiwan and may seek to develop
one or more additional manufacturing facilities. The addition of any facility
will likely increase the complexity of our operations and the risk of
inefficient management of our manufacturing operations. Our manufacturing
facilities are vulnerable to damage or interruption from earthquakes and other
natural disasters, power loss, sabotage, intentional acts of vandalism and
similar events. We do not have a formal disaster recovery plan, and we may not
carry sufficient business interruption insurance to compensate us for losses
that could occur.
Our inability to adequately subcontract our excess manufacturing needs may
cause delays in shipment of our systems and lost revenues.
We intend, in certain instances, to subcontract additional assembly
processes. If we are not able to successfully identify subcontractors with
adequate experience or fail to control the quality of systems produced
10
by these subcontractors, it may harm our reputation or cause our customers to
decrease spending on our systems. Additionally, we may not be able to contract
with third parties for additional manufacturing capacity on acceptable terms,
which may cause us to delay shipments of systems and consequently lose revenue.
Our reliance on a limited number of suppliers for our smart antenna systems
could impair our ability to manufacture and deliver our systems on a timely
basis.
Some parts and components used in our smart antenna systems are presently
available only from sole sources including linear power amplifiers supplied by
Powerwave Technologies, Inc. and integrated duplexer low-noise amplifiers
supplied by Filtronics Comtek, Ltd. Some other parts and components used in our
systems are available from a limited number of sources. Our reliance on these
sole or limited source suppliers involves certain risks and uncertainties,
including the possibility of a shortage or the discontinuation of certain key
components. Any reduced availability of these parts or components when required
could materially impair our ability to manufacture and deliver our systems on a
timely basis and result in the cancellation of orders, which could
significantly harm our business and operating results.
The long lead time of some of our components could impair our ability to timely
deliver our systems if we do not accurately predict future demand or maintain
an inventory.
The purchase of some key components involves long lead times and, in the
event of unanticipated increases in demand for our smart antenna systems, we
may be unable to obtain such components in sufficient quantities to meet our
customers' requirements. We do not have guaranteed supply arrangements with any
of these suppliers, do not maintain an extensive inventory of parts or
components and customarily purchase sole or limited source parts and components
pursuant to purchase orders. Business disruptions, quality issues, production
shortfalls or financial difficulties of a sole or limited source supplier could
materially and adversely affect us by increasing product costs, or eliminating
or delaying the availability of such parts or components. In such event, our
inability to develop alternative sources of supply quickly and on a cost-
effective basis could materially impair our ability to manufacture and deliver
our systems on a timely basis and could significantly affect our revenues.
Our success is dependent on continuing to hire and retain qualified personnel,
and if we are not successful in attracting and retaining these personnel, we
may not be able to operate our business.
The success of our business depends upon the continued contributions of each
of our key technical and senior management personnel each of whom would be
difficult to replace. We have not entered into employment agreements with any
of our employees other than severance arrangements with Robert H. Hunsberger,
Richard P. Henderson, Dr. Douglas O. Reudink, Victor K. Liang, Stuart W.
Fuhlendorf and Andrew Merrill. Except for Dr. Reudink, our founder and Chief
Technical Officer, we have not entered into any non-competition agreements with
any of our employees. We do not maintain key-man life insurance on any of our
key technical or senior management personnel. In addition, we anticipate that
we will need additional management personnel, if we are to be successful in
increasing production capacity and the scale of our operations as well as
operating as a public company.
To effectively manage our recent growth as well as any future growth, we
will need to attract and retain qualified engineering, financial,
manufacturing, quality assurance, sales, marketing and customer support
personnel. Competition for such personnel, particularly qualified engineers, is
intense in our market. We have experienced difficulties in recruiting
sufficient numbers of qualified engineers in the past and we expect to continue
to experience difficulties in the future. There may be only a limited number of
persons with the requisite skills to serve in these positions, particularly in
the market where we are located, and it may be increasingly difficult for us to
hire such personnel over time. As our product development efforts relate to
wireless standards that are widely deployed in foreign countries, such as GSM,
we may be required to recruit foreign engineers who have expertise in such
standards. Current U.S. immigration laws restrict our ability to hire foreign
employees, which could impair our product development efforts. The loss of any
key employee,
11
the failure of any key employee to perform in his or her current position, our
inability to attract and retain skilled employees as needed or the inability of
our officers and key employees to expand, train and manage our employee base
could limit our ability to expand and become profitable.
Our management resources may become strained due to the rapid expansion of our
operations.
The growth of our operations has placed, and is expected to continue to
place, a significant strain on our financial and management resources as well
as our system design, manufacturing, sales and customer support capabilities.
From January 1, 1997 to March 31, 2000, we expanded from 107 to 272 employees.
Most of our executive officers have no prior experience as executive officers
of publicly traded companies. Our new employees include a number of key
managerial, technical and operations personnel who have not yet been fully
integrated into our operations, including our Chief Financial Officer, who was
hired in March 2000, and we expect to add additional key personnel in the near
future. We have sales offices in Redmond, Washington and Allen, Texas, and
overseas locations, including Taipei, Taiwan, Shanghai, China and Sao Paulo,
Brazil. As we expand our operations to multiple domestic and international
locations, management of our operations has become and will continue to become
increasingly complex, difficult and expensive. In order to manage growth
effectively and increase or maintain profitability, we must implement and
improve our operational, financial and management information systems,
procedures and controls on a timely basis.
Because we need to expand manufacturing capacity and sales, we require
substantial working capital which we may not be able to acquire.
We require substantial working capital to fund our business. Our future
capital requirements will depend upon many factors, including the success or
failure of our efforts to expand our production, sales and marketing efforts,
the status of competitive products, and the requirements of our efforts to
develop new smart antenna systems and system enhancements. We believe that
current capital resources, together with the estimated net proceeds from this
offering, are adequate to fund our operations for at least 12 months.
Thereafter, we may be required to raise additional capital to maintain growth
or expand capacity which may not be available to us on acceptable terms, if at
all. We maintain a line of credit with Imperial Bank with customary commercial
rates and restrictions, which we have currently renewed and increased. Any
inability to obtain needed financing by us could constrain our ability to meet
current obligations or continue growing.
Our substantial sales of our SpotLight systems in international markets subject
us to various risks and costs which may harm our business.
We anticipate that international sales of our SpotLight systems in Asia,
Latin America and other international markets will continue to account for a
significant portion of our revenues for the foreseeable future. Risks and
associated costs inherent in our international business activities include:
. difficulties obtaining foreign regulatory approval for our smart antenna
systems;
. unexpected changes in regulatory requirements relating to the
telecommunications industry;
. greater difficulties collecting delinquent or unpaid accounts;
. lack of suitable export financing for our SpotLight systems;
. dependence upon independent sales representatives and other indirect
channels of distribution of our SpotLight systems;
. political and economic instability in the regions where we sell our
SpotLight systems; and
. enforceability of contracts with foreign customers and distributors
governed by foreign laws.
As more of our international sales are derived from sales in Asia, an
increasing portion of our revenues could be subject to the economic and
political risks associated with that region.
We expect to begin to derive revenues from the sale of our SpotLight GSM
systems in 2000 in Asia in general and the greater China market in particular.
Changes in political or economic conditions in the region
12
could adversely affect our operations, in particular any deterioration of
political relations between the United States and the People's Republic of
China or the People's Republic of China and Taiwan could negatively affect our
business. If economic growth rates decline in Asia in general and the greater
China market in particular, expenditures for telecommunications equipment and
infrastructure improvements could decrease, which would negatively affect our
business and our operating results.
We may engage in future acquisitions that dilute our stockholders, cause us to
incur debt or assume contingent liabilities and subject us to other risks.
We may make acquisitions of businesses, products or technologies in the
future. Since we have not made any material acquisitions in the past, no
assurance can be given as to our ability to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and our failure to do so could significantly affect our business and
operating results. Moreover, we may not be able to locate suitable acquisition
opportunities and this inability could impair our ability to grow as quickly as
possible or obtain access to technology that may be important to the
development of our business. Further, acquisitions entail numerous operational
risks, including:
. difficulties in assimilating operations;
. potential loss of key employees, technologies, products and the
information systems of the acquired companies;
. diversion of management's attention from other business concerns; and
. risks of entering geographic and business markets in which we have no or
limited prior experience.
Our limited ability to protect our intellectual property may affect our ability
to compete and we could lose customers.
We rely on a combination of patent, trade secret, copyright and trademark
protection, nondisclosure agreements and other measures to protect our
proprietary rights. We also enter into confidentiality or license agreements
with our employees, consultants, and corporate partners, and control access to
and distribution of our proprietary information. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our intellectual property or technology. If our methods of
protecting our intellectual property are not adequate, our competitors may
misappropriate our technology and we could lose customers to these competitors.
In addition, third parties may develop alternative wireless communication
technologies or products that do not infringe on any of our patents or
intellectual property. Steps taken to protect our intellectual property may not
be sufficient to deter independent third party development of similar wireless
communications technologies. Moreover, competing dissimilar technologies, such
as those using wireline communication or using new or different protocols, may
be deployed which would cause us to lose customers.
The use of radio waves is heavily regulated and licensed by the federal
government. Wireless communications are often subject to technology protocols
established by various standards bodies which are subject to changes beyond our
control. These changes could render some or all our patents or intellectual
property ineffective or otherwise affect our ability to protect our
intellectual property or sell products and serve customers.
Claims that we infringe third party intellectual property rights could result
in significant expense and restrictions on our ability to sell our systems in
particular markets.
In recent years there have been significant investments in wireless
communication technologies. This will likely result in claims of proprietary
rights in wireless communication technologies, some of which may be protected
by patents that have already been applied for but have not been issued and
therefore we may not be aware of these proprietary rights and patent
applications. From time to time, third parties have asserted patents,
copyrights and other intellectual property rights with regard to wireless and
other technologies that are
13
important to our ability to develop smart antenna systems. We expect that we
will increasingly be subject to infringement claims as the number of products
and competitors in the spectrum management market grows and the functionality
of products overlaps. Infringement claims could result in costly litigation or
require us to obtain a license to intellectual property rights of such parties.
Compliance with technology protocols established by various standards bodies
may require configuration or operation of our products in a manner which would
infringe third party patents or other intellectual property. This could require
us to obtain a license in order to provide products for particular customers or
markets. Standards may be adopted which require the use of antenna
configurations which could require licensing of third party patents or other
intellectual property. There can be no assurance that these licenses would be
available on terms acceptable to us, if at all. Any failure to obtain a license
from any third party asserting claims in the future or defense of any third
party lawsuit could result in costly defenses or restrict our ability to sell
our systems. See "Business--Intellectual Property" for more information
regarding risks relating to protecting our intellectual property rights and
risks relating to claims of infringement of other intellectual property rights.
Our systems and the business our customers are subject to significant
government regulation which may cause uncertainty in the compliance of our
systems and delay in the purchase of our systems.
Many of our smart antenna systems are required to comply with numerous
domestic and international government regulations and standards, which vary by
market. As standards for products continue to evolve, we will need to modify
our systems or develop and support new versions of our systems to meet emerging
industry standards, comply with government regulations and satisfy the
requirements necessary to obtain approvals. Compliance with government
regulations and industry standards can each be a lengthy process, taking from
several months to longer than a year. It may be difficult for us to obtain
additional necessary regulatory approvals or comply with new industry standards
in a timely manner, if at all. Our inability to obtain regulatory approval and
meet established standards in a timely manner could delay or prevent entrance
into or force our departure from markets, which would harm our sales.
In addition, our customers' operations are subject to extensive government
regulations. To the extent that our customers are delayed in deploying their
wireless systems as a result of existing or new standards or regulations, we
could experience delays in orders. Any delay could contribute to fluctuations
in our results of operations. See "Business--Government Regulation" for more
information regarding the governmental control and approval of our business.
Risks Related to the Wireless Industry
We depend on the capital spending patterns of wireless network operators, and
if capital spending is decreased or delayed it may result in lower than
expected revenues.
Since we rely on wireless network operators to purchase our smart antenna
systems, any substantial decrease or delay in capital spending patterns in the
industry would negatively affect our revenues which could cause our stock price
to decline. The demand for our smart antenna systems depends to a significant
degree upon the magnitude and timing of capital spending by these operators for
constructing, rebuilding or upgrading their systems. The capital spending
patterns of wireless network operators depend on a variety of factors outside
our control, including access to financing, the status of federal, local and
foreign government regulation and deregulation, changing standards for wireless
technology, overall demand for analog and digital wireless services,
competitive pressures and general economic conditions. In addition, capital
spending patterns in the wireless industry can be subject to some degree of
seasonality, with lower levels of spending in the first calendar quarter, based
on annual budget cycles.
We must reduce our costs and introduce new systems in order to achieve and
maintain profitability.
We anticipate that average selling prices for our smart antenna systems will
need to decrease in the future in response to competitive pricing pressures and
new product introductions by competitors. To achieve
14
profitability we will need to reduce our manufacturing costs. If the price of
base station equipment continues to decrease, the addition of new cell sites
may be viewed as a more cost-effective alternative for wireless network
operators seeking increased capacity. In order to compete, we must lower
average selling prices. To lower average selling prices without adversely
affecting gross profits, we will have to reduce the manufacturing costs of our
smart antenna systems through engineering improvements and economies of scale
in production and purchasing. We may not be able to achieve cost savings at a
rate needed to keep pace with competitive pricing pressures. If we are unable
to reduce costs sufficiently to offset the expected declining average selling
prices, we may not achieve profitability. Further, if we cannot provide our
distribution partners with sufficient financial incentive to distribute our
systems without adversely affecting our profitability, our distribution
strategy would be harmed which could result in the loss of current and
potential customers.
If we do not respond quickly to changing customer needs and product
introductions by our competition, our sales will decline and our products may
become obsolete.
The market for our current smart antenna systems and planned future systems
is subject to rapid technological change, frequent new system introductions and
enhancements, product obsolescence, changes in customer requirements and
evolving industry standards. To be competitive, we must successfully develop,
introduce and sell new smart antenna systems or system enhancements that
respond to changing customer requirements on a timely and cost-effective basis.
Our future success will depend on our ability to develop new smart antenna
systems and system enhancements designed to:
. operate with different digital technologies and in some cases across
other principal manufacturers' base stations;
. achieve market acceptance of our present and future smart antenna
systems; and
. keep pace with the development and introduction of competitive products
by competitors.
We have in the past experienced and may in the future experience delays in
development and introduction of smart antenna systems and system enhancements.
We may be required to obtain licenses to intellectual property rights held by
third parties to develop new smart antenna systems or system enhancements and
there can be no assurance that such licenses will be available on acceptable
terms, if at all. If we fail to timely and cost-effectively develop new smart
antenna systems or system enhancements that respond to new technologies and
customer needs, the demand for our smart antenna systems may fall and we could
lose revenues.
If we fail to obtain cooperation from base station manufacturers, our smart
antenna systems may no longer be compatible with customers' equipment and we
may not be able to sell our smart antenna systems.
Our product strategy relies on ensuring the compatibility of our systems
with base stations sold by wireless equipment manufacturers. If base station
manufacturers change or modify their equipment so that our smart antenna
systems are no longer compatible, we would need to redesign our systems to meet
any changed technology or modified equipment. This may involve substantial
costs and potentially a prolonged development stage for new systems.
Consequently, we may need to rely on the cooperation of customers or base
station manufacturers to ensure that our smart antenna systems remain
compatible if base station equipment is modified. As our systems are designed
to reduce the need to purchase incremental base stations for capacity expansion
of wireless networks, obtaining cooperation from base station manufacturers may
prove difficult. If we are unable to obtain this cooperation and as a result
cannot make our systems compatible with base station equipment, we may not be
able to sell our smart antenna systems.
Intense competition in the wireless infrastructure equipment market may lead to
reduced prices, revenues and market shares causing the price of our stock to
decline.
The market for spectrum management solutions is relatively new but we expect
it to become increasingly competitive. This market is part of the broader
market for wireless infrastructure equipment which is dominated
15
by a number of large companies including Lucent, Motorola, Ericsson, Nortel,
Nokia, Siemens, Alcatel and others. Our smart antenna systems compete with
other solutions to expand network capacity. These alternative solutions include
other smart antenna systems, adding base stations for capacity, deploying
efficient digital technologies and various enhancements to digital
technologies. We believe that the principal competitive factor is the cost-
effective delivery of increased capacity to wireless network operators. If our
systems are not the most cost-effective solution, our ability to attract and
retain customers would be harmed. We believe that base station manufacturers,
which provide wireless network capacity through sales of additional base
stations or the development of competitive technologies, represent the most
significant competitive threat to us. For more information on the competitive
risks facing us, please see "Business--Competition."
The failure of the wireless communications services industry to grow at the
rates currently anticipated would seriously harm our business, results of
operation and financial condition.
Our future operating results will depend upon the continued growth and
increased availability and acceptance of wireless communications services.
There can be no assurance that the volume and variety of wireless services or
the markets for and acceptance of such services will grow, or that such growth
will create a demand for our systems. If the wireless communications market
fails to grow, or grows more slowly than anticipated, our sales will be lower
than expected, which would seriously harm our business.
The wireless communications industry has developed different technologies
and standards based on the type of service provided and geographical region.
There is uncertainty as to whether all existing wireless technologies will
continue to achieve market acceptance in the future. If a digital technology
for which we develop a smart antenna system is not widely adopted, the
potential size of the market for this system would be limited, and we may not
recover the cost of development. Further, we may not be able to redirect our
development efforts toward those digital wireless technologies that do sustain
market acceptance in a timely manner, which would impede our ability to achieve
or sustain profitability once achieved.
Risks Related to this Offering
Our existing stockholders have significant control of our management and
affairs, which they could exercise against your best interests.
Following the completion of this offering, our officers and directors,
together with entities that may be deemed affiliates of or related to such
persons or entities, will beneficially own approximately 43.4% of our
outstanding common stock. As a result, these stockholders, acting together, may
be able to control our management and affairs and matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control of Metawave and might affect the
market price of our common stock.
Technology company stock prices have been volatile and you may be unable to
sell your shares at or above the offering price.
The stock markets have experienced extreme price and volume fluctuations
that have affected and continue to affect the market prices of equity
securities of many wireless communication companies. These fluctuations often
have been unrelated or disproportionate to the operating performance of those
companies and the wireless communications industry. The market price of our
common stock could be subject to wide fluctuations in response to many risk
factors listed in this section, and others beyond our control, including:
. changes in financial estimates of our operating results or the operating
results of other wireless communication companies by securities
analysts;
. fluctuations in the valuation of companies perceived by investors to be
comparable to us;
. performance of similar companies; and
. share price and volume fluctuations attributable to inconsistent trading
volume levels of our shares.
16
Because our initial public offering price will be substantially higher than the
book value per share of our outstanding common stock, new investors will incur
immediate and substantial dilution in the amount of $9.61 per share.
Immediately after this offering, the initial public offering price will be
substantially higher than the book value per share based on the total value of
our assets less our total liabilities. Therefore, if you purchase common stock
in this offering, you will experience immediate and substantial dilution of
approximately $9.61 per share in the price you pay for the common stock as
compared to its book value. Furthermore, investors purchasing common stock in
this offering will own only 17.0% of our shares outstanding even though they
will have contributed 34.6% of the total consideration received by us in
connection with our sales of common stock. To the extent outstanding options to
purchase common stock are exercised, there will be further dilution.
Following this offering, a substantial number of our shares of common stock
will become available for sale in the public market, which could cause the
market price of our stock to decline.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price acceptable to
us. Upon completion of this offering, we will have 36,844,478 outstanding
shares of common stock based upon shares outstanding as of March 31, 2000,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after March 31, 2000. Of these shares, the 6,250,000
shares sold in this offering will be freely transferable without restriction
under the Securities Act, unless held by "affiliates" of Metawave as that term
is used in the Securities Act and the Regulations promulgated thereunder. The
remaining shares of common stock outstanding after this offering will be
available for sale in the public market as follows:
Number
Date of Availability of Sale of Shares
---------------------------- ----------
Upon the closing of this offering............................... 480,475
91 days after the date of this prospectus....................... 401,745
181 days after the date of this prospectus...................... 29,722,829
Periodically thereafter upon the expiration of one-year holding
periods........................................................ 10,571
17
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
the wireless communications industry. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including the risks faced
by us and described in the preceding pages and elsewhere in this prospectus.
USE OF PROCEEDS
We estimate our net proceeds from the sale of 6,250,000 shares of our common
stock offered in this offering to be approximately $68.8 million, or
approximately $79.2 million if the underwriters' over-allotment option is
exercised in full, based on an assumed initial public offering price of $12.00
per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses.
We intend to use the net proceeds for general corporate purposes, including
working capital to fund anticipated operating losses. We expect to use
approximately $2.8 million of the net proceeds in 2000 for capital expenditures
primarily associated with expanding our manufacturing facilities and acquiring
additional testing equipment. In addition, we plan to use approximately
$22.6 million of the net proceeds in 2000 to fund research and development
activities. We may, when and if the opportunity arises, use a portion of the
proceeds to acquire or invest in complimentary businesses, products or
technologies; however, we currently have no commitments or agreements and are
not involved in any negotiations with respect to any transactions of this
nature. Pending such uses, we intend to invest such funds in short-term,
investment grade, interest-bearing obligations.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying cash dividends in the foreseeable future. The terms of our
credit agreement with Imperial Bank restrict our ability to pay dividends and
in the future the terms of other credit agreements may impose restrictions or
limitations on the payment of dividends.
18
CAPITALIZATION
The actual column in the following table sets forth our actual
capitalization as of March 31, 2000.
The pro forma column in the following table gives effect to:
. The conversion on a 0.66667 to one basis of an aggregate of 8,240,743
outstanding shares of Series A and Series B preferred stock into
5,493,821 shares of common stock upon completion of this offering;
. The conversion on a 0.87190-to-one basis of an aggregate of 2,491,880
outstanding shares of Series C preferred stock into 2,172,677 shares of
common stock upon completion of this offering;
. The conversion on a 0.96096-to-one basis of an aggregate of 3,018,429
outstanding shares of Series D preferred stock into 2,900,577 shares of
common stock upon completion of this offering; and
. The conversion on a 0.95238-to-one basis of an aggregate of 18,276,151
outstanding shares of Series E preferred stock into 17,405,832 shares of
common stock upon completion of this offering.
The pro forma as adjusted column gives effect to the sale by us of the
6,250,000 shares of common stock offered hereby at an assumed initial public
offering price of $12.00 per share, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, and
the change in the authorized number of shares following completion of this
offering.
March 31, 2000
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands)
Long-term obligations........................ $ 2,404 $ 2,404 $ 2,404
Convertible and redeemable preferred stock... 143,945 -- --
Convertible and redeemable preferred stock
warrants.................................... 157 -- --
Stockholders' equity (deficit):
Preferred stock, actual--37,000,000 shares
authorized, 32,027,203 shares which have
been designated as convertible and
redeemable; pro forma and pro forma as
adjusted--10,000,000 shares authorized,
none outstanding........................... -- -- --
Common stock, actual--50,000,000 shares
authorized, 2,621,571 shares issued and
outstanding; pro forma--50,000,000 shares
authorized, 30,594,478 shares issued and
outstanding; pro forma as adjusted--
150,000,000 shares authorized, 36,844,478
shares issued and outstanding.............. 6,384 150,486 219,236
Deferred stock compensation.................. (2,676) (2,676) (2,676)
Accumulated other comprehensive income....... (48) (48) (48)
Accumulated deficit.......................... (128,385) (128,385) (128,385)
--------- --------- ---------
Total stockholders' equity (deficit)....... (124,725) 19,377 88,127
--------- --------- ---------
Total capitalization....................... $ 21,781 $ 21,781 $ 90,531
========= ========= =========
The information in the table excludes as of March 31, 2000:
. 3,489,623 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $6.38 per share;
. 90,870 shares of common stock issuable upon the conversion of preferred
stock after the exercise of outstanding preferred stock warrants at a
weighted average exercise price of $6.20 per share on an as if converted
basis;
. 20,833 shares issuable upon exercise of an outstanding common stock
warrant at an exercise price of $6.75 per share; and
. an aggregate of 567,907 shares available for future issuance of stock
options under our stock plans.
19
DILUTION
As of March 31, 2000, we had a pro forma net tangible book value of
approximately $19.4 million, or $0.63 per share of common stock. Pro forma net
tangible book value represents total tangible assets less total liabilities
divided by the pro forma number of shares of common stock outstanding, assuming
the conversion of convertible and redeemable preferred stock to common stock
and the conversion of preferred stock warrants to common stock warrants.
Without taking into account any other changes in the pro forma net tangible
book value after March 31, 2000, other than to give effect to the receipt by us
of the net proceeds from the sale of the 6,250,000 shares of common stock
offered hereby at an assumed initial public offering price of $12.00 per share,
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, the pro forma net tangible book
value at March 31, 2000 would have been approximately $88.1 million, or $2.39
per share. This represents an immediate increase in net tangible book value of
$1.76 per share to existing stockholders and an immediate dilution of $9.61 per
share to new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share as of March 31,
2000............................................................ $0.63
Increase per share attributable to new investors................. 1.76
-----
Pro forma net tangible book value per share after the offering.... 2.39
------
Dilution per share to new investors............................... $ 9.61
======
The following table summarizes, on a pro forma basis, as of March 31, 2000,
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid by existing stockholders and new
investors (before deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us):
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
Existing stockholders......... 30,594,478 83.0% $141,469,477 65.4% $ 4.62
New investors................. 6,250,000 17.0% $ 75,000,000 34.6% $12.00
---------- ----- ------------ -----
Total..................... 36,844,478 100.0% $216,469,477 100.0%
========== ===== ============ =====
The information presented with respect to existing stockholders excludes as
of March 31, 2000:
. 3,489,623 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $6.38 per share;
. 90,870 shares of common stock issuable upon the conversion of preferred
stock after the exercise of 123,880 outstanding preferred stock warrants
at a weighted average exercise price of $6.20 per share on an as if
converted basis;
. 20,833 shares issuable upon exercise of an outstanding common stock
warrant at an exercise price of $6.75 per share; and
. an aggregate of 567,907 shares available for future issuance under our
stock plans.
To the extent that any of the options or warrants are exercised, or
additional options are issued and exercised, there will be further dilution to
new investors. For additional information about our capitalization and the
options and warrants described above, see "Description of Securities" and notes
4 and 5 of Notes to Consolidated Financial Statements.
20
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and notes to our
consolidated financial statements and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
elsewhere in this prospectus. The consolidated statements of operations data
for the years ended December 31, 1997, 1998 and 1999, and the balance sheet
data at December 31, 1998 and 1999, are derived from audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
statement of operations data for the period from inception to December 31, 1995
and for the year ended December 31, 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from audited consolidated
financial statements not included in this prospectus. The consolidated
statement of operations data for the three-month periods ended March 31, 1999
and 2000, and the consolidated balance sheet data at March 31, 2000, are
derived from unaudited interim financial statements that have been prepared on
a basis consistent with our audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of the financial positions and results of
operations at those dates. See notes 1 and 9 of Notes to Consolidated Financial
Statements for an explanation of the number of shares used to compute shares
used in calculation of basic and diluted net loss per share. The "pro forma"
consolidated balance sheet data gives effect to the conversion of all
outstanding shares of preferred stock upon completion of this offering.
Period from
January 19, 1995 Three Months
(inception) to Year ended December 31, Ended March 31,
December 31, -------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
---------------- -------- -------- -------- -------- -------- -------
(in thousands, except per share
data) (unaudited)
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ 1,291 $ 1,450 $ 15,991 $ 22,596 $ 6,834 $ 9,329
Cost of revenues........ -- 1,097 1,728 18,028 22,236 7,059 7,094
------- -------- -------- -------- -------- -------- -------
Gross profit (loss)..... -- 194 (278) (2,037) 360 (225) 2,235
Operating expenses:
Research and
development........... 883 7,186 13,083 18,495 22,787 5,392 6,374
Sales and marketing.... 84 1,704 5,383 11,346 11,080 2,694 2,343
General and
administrative........ 168 2,434 3,762 5,887 5,732 1,280 1,325
------- -------- -------- -------- -------- -------- -------
Total operating
expenses............ 1,135 11,324 22,228 35,728 39,599 9,366 10,042
------- -------- -------- -------- -------- -------- -------
Loss from operations.... (1,135) (11,130) (22,506) (37,765) (39,239) (9,591) (7,807)
Other income (expense),
net.................... 135 335 402 (6,563) (3,174) (3,108) 62
------- -------- -------- -------- -------- -------- -------
Net loss................ $(1,000) $(10,795) $(22,104) $(44,328) $(42,413) $(12,699) $(7,745)
======= ======== ======== ======== ======== ======== =======
Basic and diluted net
loss per share......... $ (0.55) $ (5.89) $ (12.18) $ (21.88) $ (18.98) $ (6.00) $ (3.04)
======= ======== ======== ======== ======== ======== =======
Shares used in
computation of basic
and diluted net loss
per share.............. 1,833 1,833 1,815 2,026 2,235 2,118 2,549
======= ======== ======== ======== ======== ======== =======
Pro forma basic and
diluted net loss per
share.................. $ (1.90) $ (0.32)
======== =======
Shares used in
computation of pro
forma net loss per
share.................. 22,375 23,901
======== =======
December 31, March 31, March 31,
------------------------------------------- 2000 2000
1995 1996 1997 1998 1999 Actual Pro forma
------ ------- ------- ------- -------- --------- ---------
(in thousands)
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $1,422 $19,092 $13,334 $10,763 $ 20,165 $ 14,497 $ 14,497
Working capital......... 4,280 17,722 15,677 (17,135) 22,759 15,821 15,821
Total assets............ 6,135 21,747 22,575 32,510 40,946 36,418 36,418
Long term obligations,
net of current
portion................ 96 1,757 2,978 4,413 2,503 2,404 2,404
Convertible and
redeemable preferred
stock and warrants..... 5,500 30,100 49,410 61,595 144,102 144,102 --
Common stock............ 10 10 1,968 2,179 3,573 6,384 150,486
Accumulated deficit..... (1,000) (11,795) (33,899) (78,227) (120,640) (128,385) (128,385)
Stockholders' equity
(deficit).............. (990) (11,785) (33,136) (76,596) (117,954) (124,725) 19,377
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide smart antenna systems that address the capacity constraints faced
by wireless network operators. From inception in January 1995 through December
31, 1997, our operating activities related primarily to conducting research and
development, building market awareness, recruiting management and technical
personnel and building an operating infrastructure. Shipment for commercial
sale of our initial SpotLight system began late in the fourth quarter of 1997
and we first recognized revenues for the sale of our SpotLight system in the
first quarter of 1998. Since the beginning of 1998, our operating activities
have been focused on increasing sales, new product development and expanding
manufacturing capacity. Since inception, we have incurred significant losses
and as of March 31, 2000, had an accumulated deficit of $128.4 million.
Our revenues are derived primarily from sales of our SpotLight systems,
which includes the sale of hardware and the licensing of software, and from
related installation and optimization services. We believe that substantially
all of our revenues in the foreseeable future will be derived from sales of our
SpotLight systems. Our sales cycles can be lengthy and the related contracts
typically include performance specifications and customer acceptance conditions
in connection with the sale of each system to a new customer.
Revenues. We generate revenues through the sale of our smart antenna systems
and related installation and optimization services. Our systems revenues are
recognized when title to the system and risk of loss is transferred to the
customer and all customer acceptance conditions, if any, have been satisfied,
and collection probable. Services revenues, generally for installation and
optimization, are recognized when the services have been performed and all
customer acceptance conditions, if any, have been satisfied. Our maintenance
contract revenues are recognized ratably over the term of the agreement
(typically one year). Any billings in excess of our revenues are classified as
deferred revenue and related systems are recorded as inventory.
Our contract terms including pricing and acceptance criteria, if any,
typically vary depending upon the order. Consequently, our revenues may vary
from quarter to quarter depending on the length of the sales cycle and the
applicable contract terms. To date, our international sales have been
denominated in U.S. dollars. However, in the future, a portion of our
international sales may be denominated in foreign currencies. Sales to ALLTEL,
IUSACELL, and Southwestco represent substantially all our revenues for the year
ended December 31, 1999, and we expect a limited number of customers will
account for a substantial percentage of revenues for the foreseeable future.
Cost of Revenues. Our cost of revenues typically consists of material
components, system assembly and testing, and overhead expenses. Our gross
margins are generally higher for hardware revenues than for service revenues.
We anticipate that our overall gross margins will fluctuate from period-to-
period as a result of shifts in product mix, the proportion of direct and
indirect sales, anticipated decreases in average selling prices and our ability
to reduce costs.
Research and Development. Our research and development expense consists
principally of salaries, related personnel expenses, consultant fees and
prototype expenses related to the design, development, testing and enhancement
of our SpotLight systems. As of March 31, 2000, all of our research and
development costs had been expensed as incurred. We believe that continued
investment in research and development is critical to achieving our strategic
product development and cost reduction objectives and, as a result, expect this
expense to continue to increase significantly in absolute dollars in the
future.
Sales and Marketing. Our sales and marketing expense consists of salaries,
sales commissions and related expenses for personnel engaged in marketing,
sales and field service support for new installations and installed base, as
well as promotional expenditures. We believe that these expenses will increase
in absolute dollars as the marketing campaigns for our SpotLight 2000 and
SpotLight GSM systems expand and we increase our sales personnel.
22
General and Administrative. Our general and administrative expense consists
primarily of salaries and personnel related expenses, recruiting and relocation
expenses, professional and consulting fees, and other general corporate
expenses. We expect this expense to increase as we add personnel and incur
additional costs related to our operation as a public company.
Stock compensation expense. We have recorded stock-based compensation
expense of $5.6 million related to stock options granted below fair market
value for accounting purposes through March 31, 2000. Of this amount, we
amortized approximately $2.9 million through that same period. This amount
represents the difference between the exercise price of these stock option
grants and the deemed fair value of the common stock at the time of grant. The
remaining $2.7 million will be amortized over the remaining vesting period of
the options, generally four years. As a result, the amortization of stock-based
compensation will impact our reported results of operations through fiscal
2002. The stock-based compensation expense has been allocated to research and
development expense, sales and marketing expense and general and administrative
expense, as appropriate.
Results of Operations
Three Months Ended March 31, 2000 and 1999
Revenues. Revenues were $9.3 million in the three months ended March 31,
2000 and $6.8 million in the three months ended March 31, 1999, an increase of
36.5%. This increase was primarily due to increased unit sales of our CDMA
SpotLight systems and increased revenues derived from sales of optional
equipment. International sales of our systems accounted for 56.5% of revenues
in the three months ended March 31, 2000 while 100% of our revenues were
derived from sales in the United States in the three months ended March 31,
1999.
Cost of Revenues. Our cost of revenues remained constant at $7.1 million in
the three months ended March 31, 2000 and 1999. In 1999 we began to include in
cost of revenues the personnel expenses related to field installation and
engineering services. This change was made to properly align direct costs and
overhead with revenues.
Our cost of revenues and gross profit may be affected by the mix of systems
sold, the mix of distribution channels used by us, the mix of services
provided, and the average order size. We expect to realize higher gross margins
on direct channel sales relative to indirect channel sales. If sales through
indirect channels increase as a percentage of total revenues our gross margins
will likely decrease.
Research and Development. Research and development expense was $6.4 million
in the three months ended March 31, 2000 and $5.4 million in the three months
ended March 31, 1999, an increase of 18.2%. The increase was primarily due to
increased personnel related to the development and testing of our SpotLight GSM
system and our SpotLight 2000 CDMA system.
Sales and Marketing. Sales and marketing expense was $2.3 million in the
three months ended March 31, 2000 and $2.7 million in the three months ended
March 31, 1999, a decrease of 13.0%. The decrease was primarily due to
headcount reductions made in sales, marketing, and service support in August
1999, and a realignment of our commission plan reducing the basic rate paid and
increased quotas.
General and Administrative. General and administrative expense remained
constant at 1.3 million in the three months ended March 31, 2000 and 1999.
Other Income (Expense), Net. Our total other income (expense), net amounted
to an income of $62,000 in the three months ended March 31, 2000 compared to an
expense of $3.1 million in the three months ended March 31, 1999. The decreased
expense was primarily the result of reduced interest expense as a result of the
repayment of our $29.0 million Senior Secured Bridge Notes bearing interest at
13.75% in April 1999.
23
We invest cash in highly secure short-term investments. We received interest
income from short-term investments of $210,000 in the three months ended March
31, 2000, and received $119,000 in the three months ended March 31, 1999.
Years Ended December 31, 1999 and 1998
Revenues. Revenues were $22.6 million in 1999 and $16.0 million in 1998, an
increase of 41.3%. This increase was primarily due to increased unit sales of
our SpotLight systems, increased revenues per unit sold and the introduction of
a new version of our SpotLight 2000 CDMA system in July 1999. International
sales of our systems accounted for 26.0% of revenues in 1999 and 23.5% in 1998.
Cost of Revenues. Our cost of revenues was $22.2 million in 1999 and $18.0
million in 1998, an increase of 23.3%. The increase in cost of revenues was
primarily the result of increased units sold and change in product mix from
analog systems to our SpotLight 2000 CDMA system. Also, in 1999 we began to
include in cost of revenues the personnel expenses related to field
installation and engineering services. This change was made to properly align
direct costs and overhead with revenues.
Research and Development. Research and development expense was $22.8 million
in 1999 and $18.5 million in 1998, an increase of 23.2%. The increase was
primarily due to increased personnel related to the development and testing of
our SpotLight GSM system and our SpotLight 2000 CDMA system.
Sales and Marketing. Sales and marketing expense was $11.1 million in 1999
and $11.3 million in 1998, a decrease of 2.3%. The decrease was primarily due
to including in cost of revenues the personnel of expenses associated with
field installation and engineering services.
General and Administrative. General and administrative expense was $5.7
million in 1999 and $5.9 million in 1998, a decrease of 2.6%. The decrease was
primarily due to the reduction of administrative personnel and reductions in
outside professional services.
Other Income (Expense), Net. Our total other income (expense), net amounted
to an expense of $3.2 million in 1999 compared to an expense of $6.6 million in
1998. The decreased expense was primarily the result of reduced interest
expense as a result of the repayment of our $29.0 million Senior Secured Bridge
Notes bearing interest at 13.75% in April 1999. Gross other income increased by
$271,000 from 1998 to 1999 due to income from short-term investments in 1999
made with the proceeds from the Series E preferred stock financing.
Years Ended December 31, 1998 and 1997
Revenues. Revenues were $16.0 million in 1998 and $1.5 million in 1997. This
increase reflected our first full year of revenues resulting from the
commercial deployment of our SpotLight systems. Our revenues for 1997 consisted
primarily of services provided by the Network Services division which was
discontinued and sold in March 1998.
Cost of Revenues. Our cost of revenues was $18.0 million in 1998 and $1.7
million in 1997. The increase was primarily related to costs associated with
introducing our analog system and the first version of our SpotLight CDMA
system.
Research and Development. Research and development expense was $18.5 in 1998
and $13.1 million in 1997, an increase of 41.4%. The increase was primarily
attributable to increased personnel related to the introduction of our analog
system, development of the first version of our SpotLight CDMA system, and
start up costs related to the development of our GSM system.
Sales and Marketing. Sales and marketing expense was $11.3 million in 1998
and $5.4 million in 1997, an increase of 110.8%. The increase was primarily
attributable to expansion of our direct sales force, marketing
24
and service support staff. Also in 1998, we increased expenses associated with
initial field trials, marketing communications, and training and documentation.
General and Administrative. General and administrative expense was $5.9
million in 1998 and $3.8 million in 1998, an increase of 56.5%. The increase
reflected the addition of administrative staff, new facilities in Redmond,
Washington and Allen, Texas, increased outside professional services associated
with financings and expenses associated with the implementation of our
enterprise resource planning system.
Other Income (Expense), Net. Our total other income (expense), net amounted
to an expense of $6.6 million in 1998 compared to income of $402,000 in 1997.
The increased interest expense was primarily the result of issuing the $29.0
million Senior Secured Bridge Notes in May 1998, bearing interest at 13.75% per
annum.
Selected Quarterly Results of Operations
The following table sets forth certain unaudited quarterly consolidated
statement of operations data for the nine quarters ended March 31, 2000. This
unaudited information has been prepared substantially on the same basis as the
annual audited financial statements appearing elsewhere in this prospectus, and
includes all necessary adjustments that we consider necessary to present fairly
the financial information for the periods presented. The quarterly data should
be read in conjunction with the audited consolidated financial statements and
the notes thereto appearing elsewhere in this prospectus.
Quarter ended
-------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(in thousands)
Consolidated Statement
of Operations Data:
Revenues................ $ 2,538 $ 3,963 $ 6,557 $ 2,933 $ 6,834 $ 1,553 $ 5,725 $ 8,484 $ 9,329
Cost of revenues........ 2,910 3,486 6,374 5,258 7,059 1,860 5,768 7,549 7,094
------- ------- -------- -------- -------- -------- ------- -------- -------
Gross profit............ (372) 477 183 (2,325) (225) (307) (43) 935 2,235
Operating expenses:
Research and
development........... 3,575 4,450 5,525 4,945 5,392 5,651 5,301 6,443 6,374
Sales and marketing.... 1,996 2,091 3,347 3,912 2,694 2,722 2,434 3,230 2,343
General and
administrative........ 1,044 1,385 1,177 2,281 1,280 1,654 1,360 1,438 1,325
------- ------- -------- -------- -------- -------- ------- -------- -------
Total operating
expenses.............. 6,615 7,926 10,049 11,138 9,366 10,027 9,095 11,111 10,042
------- ------- -------- -------- -------- -------- ------- -------- -------
Loss from operations.... (6,987) (7,449) (9,866) (13,463) (9,591) (10,334) (9,138) (10,176) (7,807)
Other income (expense),
net.................... 54 (1,719) (2,202) (2,696) (3,108) (614) 293 255 62
------- ------- -------- -------- -------- -------- ------- -------- -------
Net loss................ $(6,933) $(9,168) $(12,068) $(16,159) $(12,699) $(10,948) $(8,845) $ (9,921) $(7,745)
======= ======= ======== ======== ======== ======== ======= ======== =======
Our revenues increased significantly over the last three quarters primarily
as a result of increased unit sales of our SpotLight systems and expanding
customer base. Our revenues in the last quarter of 1998 decreased compared to
the previous quarter due to delays in receiving orders from a significant
customer. Our revenues in the second quarter of 1999 declined compared to the
previous quarter primarily due to delays in orders associated with the
transition from analog to CDMA systems.
Research and development expense has generally remained constant on a
quarterly basis but increased in the last quarter of 1999 and the first quarter
of 2000 due to expenses associated with costs of prototype systems and write
off of certain capital assets associated with research and development. Sales
and marketing expense has fluctuated with the number of personnel in sales,
marketing and customer support in 1999. General and administrative expense has
fluctuated with the number of personnel. The increase in the fourth quarter of
1998 was the result of the establishment of a bad debt reserve and expenses
associated with the cancellation of a public offering. As a result of our
reduction in force in the third quarter of 1999, general and administrative
expense declined.
25
Our limited operating history makes the prediction of future operating
results difficult. Our business prospects must be considered in light of the
risks and uncertainties often encountered by early-stage companies in the
wireless communications market. We may not be successful in addressing these
risks and uncertainties. We have experienced significant percentage growth in
revenues in recent periods; however, we do not believe that prior growth rates
are indicative of future growth rates. It is likely that in some future quarter
our operating results may fall below the expectations of securities analysts
and investors. In this event, the trading price of our common stock may fall
significantly.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of preferred stock and common stock and the issuance of debt instruments,
and to a lesser extent, capital leases arrangements and borrowings under
various lines of credit. Net proceeds from these transactions totaled $182.9
million as of March 31, 2000.
For the three months ended March 31, 2000 we used net cash in operating
activities of $4.7 million. Our operating activities included major uses of
cash to fund our net loss of $7.7 million, increased inventories of $1.7
million and decreasing deferred revenues by $1.2 million. We partially offset
cash uses with increases in accounts payable and accrued liabilities of
$3.8 million. For the twelve months ended December 31, 1999, we used net cash
in operating activities of $37.8 million. Our operating activities included
major uses of cash to fund our net loss of $42.4 million. We also used cash by
increasing accounts receivable by $5.8 million and reduced accounts payable and
accrued liabilities by $1.4 million. We partially offset cash uses by lowering
inventories by $3.8 million, increasing deferred revenues by $1.6 million. Our
net cash used in the fourth quarter 1999 amounted to $3.8 million. Our net cash
used in operating activities in 1998 amounted to $34.9 million.
Our net cash used for investing activities for the first three months ended
March 31, 2000 amounted to $790,000. Our net cash used in investing activities
in 1999 was $1.3 million. Our 1998 net cash used in investing activities was
$2.5 million.
Our net cash provided by financing activities for the three months ended
March 31, 2000 amounted to $75,000. This primarily was the result of purchases
of common stock of $279,000, by repaying $354,000 on capital lease obligations
and notes payable. Net cash provided by financing activities was $48.5 million
for year ended December 31, 1999. This primarily consisted of net proceeds from
the sale of Series E preferred stock of $82.5 million. In April 1999, we repaid
$29.0 million in Senior Secured Bridge Notes plus interest of $4.1 million. Our
1998 net cash from financing activities was $34.8 million consisting of $29.0
million from the sale of Senior Secured Bridge Notes at 13.75% interest and
$7.2 million from the sale of Series E preferred stock.
As of March 31, 2000, we had $14.5 million in cash and cash equivalents,
$10.0 million under a revolving line of credit with Imperial Bank and $3.0
million under a equipment lease arrangement with Transamerica, of which $1.3
million remained available. No amount is presently outstanding under the
Imperial Bank facility other than a $2.5 million standby letter of credit to
support our obligations under the lease for our Redmond, Washington facility.
The renewed revolving line of credit agreement has a maturity rate of one year
from the initial draw date with interest at the prime rate on the date of draw,
payable monthly and the principal amount payable at maturity. Borrowings under
the Transamerica equipment lease are secured by the equipment financed
thereunder. The Transamerica equipment lease terms vary from 24 to 36 months
with an effective interest rate of 12.26% per annum for domestic equipment
leases and 12.86% for foreign equipment leases, and interest is payable
monthly. We have several capital leases with terms ranging from 24 to 48
months. At March 31, 2000, our outstanding capital lease obligations were $4.9
million, accruing interest at rates ranging from 7.25% to 14.50%. Please see
note 5 to the financial statements for a more complete description of the
credit facilities. We anticipate an increase in our capital expenditures and
lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We expect to use approximately $2.8 million of
26
the net proceeds from this offering for capital expenditures primarily
associated with expanding our manufacturing facilities and acquiring additional
testing equipment. In addition, we plan to use approximately $22.6 million of
the net proceeds in 2000 to fund research and development activities.
We believe that current capital resources, together with the estimated net
proceeds from this offering, are adequate to fund our operations for at least
12 months. Thereafter, we may be required to raise additional capital which may
not be available to us on acceptable terms, if at all. Any inability to obtain
needed financing by us could have a material adverse effect on our business and
operating results.
Market Risk
We do not use derivative financial instruments. We generally place our
marketable security investments in high credit quality instruments, primarily
U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material; however, these investments are subject
to interest rate risk.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We do not anticipate
that the adoption of this new standard will have a material effect on our
earnings or our financial position, but we continue to evaluate the impact of
SFAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). This summarized certain areas of
the staff's views in applying generally accepted accounting principles as it
applies to revenue recognition. The Company believes that its revenue
recognition principles comply with SAB 101. The Company will continue to
evaluate interpretations of SAB 101.
27
BUSINESS
Overview
We provide smart antenna systems for the wireless communications industry.
We believe that our SpotLight systems enable wireless network operators to
increase overall network capacity, improve or maintain network quality, reduce
network operating costs and better manage their network infrastructure. As the
demand for wireless services has grown in recent years, we have developed
products based on our proprietary technologies that address the associated
network capacity problems faced by wireless network operators.
Our SpotLight systems can reduce the need for more costly infrastructure
upgrades and additional cell site deployments, allowing wireless network
operators to more cost-effectively keep pace with subscriber growth and
increased demand for digital services. These smart antenna systems utilize
proprietary hardware and software to enable a more efficient utilization of the
finite amount of radio frequency spectrum, or "wireless bandwidth." Our
technology is designed to be implemented in a variety of market segments in the
wireless communications industry and currently supports CDMA, GSM and analog
standards. Our customers include AirTouch Communications, Inc., ALLTEL, Bell
Atlantic Mobile, GTE Wireless Inc., IUSACELL, Southwestco and Telefonica
Servicios Moviles S.A.C. of Peru. As of March 31, 2000, we had sold an
aggregate of 149 SpotLight systems worldwide.
Industry Background
Growth in Wireless Usage
The demand for wireless communications services has grown significantly in
recent years. According to The Strategis Group, U.S. subscriber usage was
expected to increase from approximately 174 billion minutes of use in 1999 to
approximately 372 billion minutes of use by 2003, representing an expected
compound annual growth rate of 20.9%. This increase in usage has been driven by
an increased number of subscribers, lower prices and expanded availability of
existing services. In addition to these factors, the emergence of new data and
Internet-oriented wireless services is expected to contribute to the increase
in subscriber usage in the future.
Increased Subscribers. The number of wireless subscribers has increased
significantly in recent years. According to International Data Corporation, or
IDC, there were approximately 303 million wireless subscribers around the world
in 1998 and that number was expected to reach approximately 1.1 billion
subscribers in 2003, representing an expected compound annual growth rate of
28.9%. According to IDC, in 1998, there were approximately 64 million wireless
subscribers in the United States and that number was expected to grow to
approximately 118 million by 2003, representing an expected compound annual
growth rate of 12.9%.
Lower Price. The price of wireless services has decreased significantly in
recent years. According to data provided by The Strategis Group, the average
price per wireless minute in the United States was expected to decline from
$0.25 per minute in 1999 to $0.12 per minute in 2003. With multiple wireless
network operators competing in most U.S. markets, competitive pricing
strategies, such as discounting and fixed rate plans, have resulted in a
greater number of wireless subscribers, as well as a substantial increase in
subscriber usage. In addition, the greater supply of commercially available
wireless frequency due to increased government allocation of spectrum to
wireless network operators has resulted in increased competition among existing
and new wireless network operators, further reducing costs to subscribers.
Expanded Availability of Existing Services. Due to the high initial fixed
costs involved, early wireless deployments were limited to urban centers and
major traffic corridors. However, to meet increased demands for ubiquitous
wireless services, wireless network operators accelerated the buildout and
upgrade of their networks. This increased coverage has enabled these wireless
network operators to reach new subscribers and provide a higher level of
service to existing subscribers.
New Wireless Services. Consumer demand for "any time, anywhere" access to
the Internet and data services, such as email and instant messaging, has
created a demand for delivery of these services over a
28
wireless network. Devices with wireless access, such as mobile phones, palm
computers and laptop computers with wireless modems, continue to evolve,
providing applications and ease of use that increase wireless data usage.
Additionally, standard protocols such as Wireless Application Protocol, or WAP,
have emerged and are designed to create interoperability of wireless equipment
and Internet-based products. These protocols are expected to further drive
consumer demand for wireless access to the Internet and data services.
Strains on Wireless Network Capacity
Increased subscriber usage and the demand for ubiquitous wireless access
place a significant strain on wireless network operators given the fixed amount
of radio frequency spectrum that is available. Wireless spectrum is allocated
to individual wireless network operators in fixed amounts by governments in the
U.S. and foreign markets. Thus, the fundamental challenge for wireless network
operators is to increase capacity, while maintaining signal quality, within a
fixed amount of wireless bandwidth. Wireless network operators generally have
used two alternatives to address capacity problems: building additional cell
sites or deploying more efficient digital technologies.
Additional cell sites. Operators of wireless networks often address capacity
problems by building new cell sites. This alternative has three major
disadvantages. First, we believe the cost of constructing a new standard 800
MHz CDMA cell site, including land, building and equipment, can be
approximately $500,000. Second, building cell sites closer together increases
signal interference in the network, which can reduce capacity and call quality,
exacerbating the very problems that the additional cell sites were built to
resolve. Third, wireless network operators face significant community
resistance arising from environmental and zoning concerns and objections to the
appearance of additional cell site towers.
More efficient digital technologies. In addition to building more cell
sites, wireless network operators have deployed more spectrum-efficient digital
technologies such as CDMA, GSM and TDMA to increase capacity. These digital
technologies offer many improvements to wireless network operators and their
customers, including more cost-effective infrastructure, smaller phones with
improved battery life and value-added features, such as the capability to
support data services. According to IDC, 69.2% of subscribers worldwide were
using digital handsets in 1998 and this number was expected to increase to
96.8% by 2003. Despite the improvement offered by digital technologies,
wireless network operators continue to find that portions of their networks
still face capacity limitations. For instance, CDMA lacks the ability to
efficiently add incremental capacity in localized heavy traffic areas of a
network. Consequently, wireless network operators must either deploy new cells,
or dedicate more spectrum to CDMA in significant portions of their network to
resolve isolated capacity constraints. In GSM networks, the capacity is limited
by interference between cell sites within the network. This interference
prevents GSM network operators from adding additional capacity to the network.
The growing demand for wireless services, coupled with the high costs and
technical difficulties associated with increasing network capacity, create the
need for more cost-effective solutions. As wireless network operators seek to
provide ubiquitous wireless service and support increased subscriber usage,
they must address the fundamental challenge of achieving maximum capacity from
the finite spectrum they have been allocated.
The Metawave Solution
We provide smart antenna systems to wireless network operators. Our
SpotLight systems are a cost-effective solution to expanding network capacity
while improving or maintaining overall network performance. Our SpotLight
systems are compatible with CDMA, GSM and analog base station equipment. Our
smart antenna systems provide wireless network operators with the following
benefits:
Cost-Effective Capacity Expansion. Our SpotLight systems enable wireless
network operators to increase the capacity of their existing networks and
reduce the need to build and maintain costly new cell sites. Our SpotLight
systems can be deployed selectively within a network in either a single cell
site or multiple cell sites. Based on customer data, current versions of our
SpotLight 2000 system improved CDMA capacity in cell sites from 30% to 50%,
depending on network configuration. Additionally, in a recent field trial, our
SpotLight GSM
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system demonstrated that, when deployed in a network of cell sites, GSM network
capacity can be increased by 100% without increasing the number of GSM cell
sites. By applying our SpotLight solutions in these targeted capacity
constrained cell sites, overall network capacity can be correspondingly
increased.
Improved Network Performance. Our SpotLight systems allow wireless network
operators to increase capacity while maintaining or improving the level of
service and signal quality. Our SpotLight 2000 systems increase CDMA network
performance by efficiently distributing existing network resources to better
match subscriber usage. We believe our SpotLight GSM systems will provide
wireless network operators with better signal reception and reduced
interference thereby improving network performance.
Compatibility with Standards and Equipment. Our SpotLight systems are
designed to be compatible with most existing wireless standards and currently
installed cell site equipment thereby preserving the wireless network
operators' existing investment in equipment and technology. Our smart antenna
systems have been independently developed by us to be compatible with the
Motorola, Lucent and Nortel 800 MHz CDMA base stations, which we believe
represent substantially all of the 800 MHz CDMA base stations deployed in North
America. We believe our SpotLight GSM systems are also compatible with most 900
MHz GSM base stations deployed worldwide.
Strategy
Our objective is to provide smart antenna systems to the worldwide wireless
communications market. Key elements of our strategy include:
Deliver Solutions to Capacity Constrained Wireless Network Operators. We
will continue to focus on developing solutions to increase capacity for those
wireless network operators facing capacity constraints. To date, we have
developed SpotLight systems to address the capacity and system quality problems
facing 800 MHz CDMA and 900 MHz GSM wireless network operators. According to
IDC, as of 1998, U.S. wireless network operators at these frequencies serviced
more than 75% of wireless subscribers. As capacity issues emerge in wireless
networks using different frequencies, we intend to develop smart antenna
systems that address capacity problems in these wireless networks.
Further Penetrate Existing CDMA Customers. We believe that the 800 MHz CDMA
market will continue to represent a significant opportunity for us. Over the
last two years we have sold SpotLight 2000 systems to the four largest 800 MHz
CDMA wireless network operators in North America, as measured by subscriber
market share data provided by the Radio Communications Review. We intend to
leverage the performance and service of our existing system deployments to
expand our presence and penetration within these wireless network operators.
Target Additional Strategic Customers. With our products today, we are able
to target additional large multi-system 800 MHz CDMA and 900 MHz GSM wireless
network operators around the world that serve substantial concentrations of
customers and have the greatest market share in their respective markets. We
intend to target these markets by expanding our manufacturing, installation,
sales and service capabilities in the regions served by these wireless network
operators.
Leverage Technology Leadership To Expand Markets. We intend to use our
technology leadership and intellectual property to develop and provide new
capacity solutions to the existing and emerging wireless communications
markets. Our core technology can be used to address spectrum management issues
in many large wireless networks. Currently, the principal areas of our product
development are the following:
. Integrating our technology into equipment provided by wireless base
station manufacturers;
. Developing smart antenna products for use by wireless network operators
at 1800 MHz and 1900 MHz PCS spectrum;
. Exploring the development of products for the TDMA wireless standard; and
. Exploring the development of products for the broadband wireless market.
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Markets
In wireless communications networks, there are several wireless standards
that use different technologies to process calls and divide allocated spectrum.
These wireless standards fall into two broad categories, analog and digital.
Advanced Mobile Phone System, or AMPS, is the leading analog standard. Digital
standards are further subdivided into two general schemes, time division and
code division. Time Division Multiple Access, or TDMA, and Global Systems for
Mobile Communications, or GSM, are the leading time division standards. Code
Division Multiple Access, or CDMA, is the leading code division standard. We
have developed smart antenna systems that increase capacity for CDMA, GSM and
analog based networks.
The terms cellular and PCS are often used interchangeably by the popular
press when discussing wireless communications networks. However, within the
wireless industry the distinction between the two is important. Cellular
describes networks operating in the 800 MHz and 900 MHz frequency bands, using
both analog and digital standards. Analog, CDMA, GSM and TDMA are the most
widely deployed cellular standards across the globe. PCS typically describes
networks operating in the 1800 MHz and 1900 MHz frequency bands. CDMA, GSM and
TDMA the most widely deployed PCS standards.
CDMA Market. The CDMA wireless market consists of wireless network operators
at both cellular and PCS frequencies. We believe that approximately half of the
cellular networks in North America have adopted CDMA as their digital
technology. Wireless network operators are overlaying CDMA networks on top of
existing analog networks thereby allocating spectrum between CDMA and analog.
We also believe that CDMA is the most widely deployed PCS digital technology in
North America.
The CDMA Development Group, a trade association, estimated there were 50
million CDMA subscribers worldwide at year end 1999, accessing both the 800 MHz
and 1900 MHz networks. Roughly 90% of these are in North America and Asia.
Frost and Sullivan estimated there were 46,716 CDMA 800 MHz base stations in
operation in 1999, up from 26,200 in 1998. These base stations represent the
target market for our CDMA systems. Frost and Sullivan also estimated 38,082
CDMA PCS base stations were in operation in 1999, up from 20,730 in 1998.
GSM Market. The GSM market consists of wireless network operators at both
cellular and PCS frequencies. According to the GSM Association, GSM is the most
widely deployed digital standard worldwide and has been deployed in 142
countries, with more than 250 million subscribers, predominantly in Europe and
Asia, at year end 1999. According to Frost and Sullivan, there were 98,133 GSM
base stations in operation at 900 MHz in 1999, up from 46,515 in 1998. These
base stations represent the market for our GSM systems. Frost and Sullivan also
estimated there were 55,711 PCS base stations using GSM were in operation in
1999, up from 31,690 in the prior year.
TDMA Wireless Market. The TDMA market consists of wireless network operators
at both cellular and PCS frequencies. According to the Universal Wireless
Communication Consortium, there were an estimated 30 million TDMA wireless and
PCS subscribers worldwide as of September 30, 1999.
Third Generation Standards. Over the next several years, CDMA, GSM and TDMA
wireless network operators may begin to migrate their systems to third
generation, or 3G, standards. Although the specifications for 3G are not
complete, we believe that they will be based on CDMA technologies and that our
smart antenna systems will be applicable to the evolving 3G technologies. We
intend to develop 3G compatible products.
Broadband Fixed Wireless In fixed, broadband wireless networks, no
predominant standards currently exist. This market is often described under the
umbrella term, broadband wireless access, or BWA. The BWA market services both
mobile and fixed end users. Services range from high speed internet access, to
combined high capacity data and voice offerings.
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Metawave Products
We have developed spectrum management solutions, consisting of smart antenna
systems, applications software and engineering services, that enable wireless
network operators to increase overall network capacity, improve or maintain
network quality, reduce network operating costs and better manage their network
infrastructure.
SpotLight 2000 Platform. Our SpotLight smart antenna system was initially
designed for use in analog networks and was first shipped for commercial sale
in November 1997. The second generation SpotLight 2000 system was designed to
support both analog and CDMA wireless standards. Our SpotLight 2000 connects to
Motorola HDII, SC2400, SC4812 and SC9600 base stations, Lucent Series II base
stations, and Nortel Metrocell base stations.
We have analyzed data from numerous CDMA networks and have found that the
distribution of traffic within a network and even within a cell varies
considerably. Thus, wireless network operators are faced with the challenge of
allocating spectrum resources to uneven and varied subscriber traffic. CDMA
lacks the ability to efficiently add incremental capacity in localized areas.
Consequently, to resolve isolated capacity constraints, wireless network
operators must either deploy new cells or dedicate more spectrum to CDMA in
significant portions of their network.
Cells are most often divided into three sectors. Because of imbalanced
traffic, one sector is often utilized to its maximum capacity, while the
neighboring sectors have unused or excess capacity. When a sector's capacity is
fully utilized, new calls cannot be originated within the sector without
negatively affecting network performance despite call servicing capability
remaining unused in adjacent sectors. In addition, subscriber calls cannot be
transferred into the overloaded sector when moving from an adjacent cell or
sector. This results in either calls being blocked or calls being terminated.
Our proprietary SpotLight 2000 system balances the traffic load within a
cell, reducing the problem of having one sector overloaded while the other
sectors are underutilized. As traffic varies throughout the day, our SpotLight
System can accommodate these variations and balance the traffic accordingly.
This load balancing increases network efficiency and capacity.
Load Balancing Through Sector Synthesis
Load Balancing Through Sector Synthesis
Graphical depiction with 2 cell sites demonstrating the load balancing
capability of the SpotLight 2000 CDMA system through sector synthesis.
Language under the cell site graphic on the left states:
Before SpotLight 2000
Peak traffic loading strains capacity in one sector, while capacity remains
idle in others.
Language under the cell site graphic on the right states:
After SpotLight 2000
Load balancing by reorienting and resizing sectors increases cell site
capacity.
As illustrated above, our SpotLight 2000 system addresses traffic loading by
controlling the transmission and reception of CDMA radio signals by base
stations through a process called sector synthesis. Our SpotLight 2000 system
adapts the sector coverage of the base stations' CDMA radios to the local
traffic patterns around
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cell sites. The system's phased-array antenna makes it possible to dynamically
adjust sector antenna patterns through a software-driven process. As a result,
wireless network operators can optimize their CDMA networks with increased
flexibility and precision, thereby enhancing network capacity and performance
in response to changing traffic patterns taking into account local terrain and
variable radio frequency conditions.
The SpotLight 2000 system can be deployed in three different configurations
depending on customer network requirements. The CDMA-only configuration uses
our SpotLight system to support only the CDMA interface. This is the baseline
SpotLight system for customers who are interested in improving the capacity of
their CDMA system without changing their analog network. The second available
configuration is CDMA with Analog Pass Through, or CDMA/APT. This system
provides capacity benefits to the CDMA interface while "passing" the analog
signals through our SpotLight system without changing the analog network. The
CDMA/APT system allows the service provider to support both CDMA and analog
networks with a single antenna and set of power amplifiers. The third system
configuration is the dual mode system which provides capacity improvements to
both the CDMA and analog wireless standards, configuring and optimizing each
wireless standard separately, while using only a single set of antennas.
Each of the three configurations described above can be deployed in three-
sector cell sites or can be used to increase the sectorization of a CDMA cell
site from three sectors to four, five or six sectors. In cell sites where more
than a single sector is heavily loaded, the wireless network operator may use
the SpotLight 2000 system to increase the sectorization of the cell site and
gain additional capacity over the original three-sector cell site. The
SpotLight system enables wireless network operators to use our software-
controlled antenna patterns to reduce handoff overhead and optimization
problems normally associated with four, five or six sector deployments. At the
same time, the SpotLight system provides an efficient way to increase the
sectorization of the cell site without having to add additional antennas,
cables, duplexers, filters or power amplifiers.
Our SpotLight 2000 system can be administered and monitored locally or
remotely through our Windows-based software application called SiteSculptor.
SiteSculptor allows real time monitoring of system performance through
graphical displays. Further, we offer networked access to our SpotLight 2000
system with our SiteNet network application. SiteNet utilizes our SiteSculptor
software package to provide a means for remote SpotLight configuration and
centralized collection of performance statistics in analog and CDMA networks.
SpotLight for GSM. Our SpotLight GSM system is designed to increase GSM
network capacity by reducing cell site and network interference levels using a
beam-switching technology. Currently the capacity of dense urban GSM networks
is limited by interference between cell sites within the network. This
interference prevents wireless network operators from adding additional
capacity to the network.
Our SpotLight system segments the normal three sector coverage area into
twelve narrow beam patterns. Our SpotLight GSM system tracks the location of
each subscriber within the sector coverage area and then assigns a single
narrow beam to them. As the subscriber moves through the sector coverage area,
our SpotLight GSM system continues to track the position of the subscriber and
switches the correct narrow beam to them. As illustrated below, the
interference received by and transmitted from the host cell site can be
significantly reduced, allowing the wireless network operator to increase
capacity while maintaining signal quality.
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Interference Reduction Through Switched Beam Technology
Graphical depiction with two cell sites demonstrating the switched beam
capability of the SpotLight GSM system.
Language under the cell site on the left states:
Before SpotLight GSM
Conventional sectors cause interference to be received by and transmitted for
the cell site over a large area
Language under the cell site on the right states:
After SpotLight 2000
Narrow beams reduce the interference received by and transmitted from the cell
site
Our SpotLight GSM system is designed to be compatible with most existing 900
MHz GSM base station equipment. We intend to develop systems to be compatible
with 1800 MHz base station equipment. Our SpotLight GSM system can be
configured to support one, two or three sectors within the cell site, allowing
the wireless network operator to use our SpotLight GSM system to reduce
interference only in the capacity limited sectors. Based on a recent field
trial, our SpotLight GSM system, when deployed in a network of cell sites, can
increase GSM network capacity by up to 100% without increasing the number of
cell sites. To date, we have not completed any commercial sales of our
SpotLight GSM system.
Core Technology
We believe that one of our key competitive advantages is our investment and
expertise in the core technologies that enable efficient spectrum management of
wireless networks. Spectrum management encompasses a number of technical
components, including advanced antenna concepts, radiowave propagation models,
network performance monitoring tools, wireless standards knowledge and
communications systems hardware implementations. These core competencies, when
applied in combination, allow wireless network operators to optimize capacity,
coverage and quality across their networks. We have developed, and continue to
expand upon, the following fundamental technical elements:
Phased-Array Antenna Systems. We have developed phased-array antenna systems
that provide compact beam-forming within a single structure. The antenna
systems make use of uniform linear or cylindrical arrays with a combination of
both ground-based and tower-based feed networks. We have designed antennas to
synthesize multiple narrow fixed-beams, which can be used to track individual
users within a cell site. In addition, we have developed beam-forming
techniques to allow the coverage area of a cell site to be customized. The
phased-array antenna technology can be scaled to a variety of gains and to span
a broad range of frequencies. The basic implementations are wireless standard
independent, and can therefore be applied to many wireless environments,
including cellular, PCS, enhanced specialized mobile radio, two-way paging,
multi-channel multipoint distribution service, or MMDS, other broadband
wireless markets, and emerging satellite-based wireless services. We continue
to develop and focus on improving the functionality and quality of our antenna
systems as well as reducing the costs and time associated with manufacturing
and deploying our antennas in the field.
Multibeam Hardware Architectures. We have developed cost-effective hardware
implementations of the complex circuitry necessary to support the operation of
multibeam systems on high-traffic cell sites. The hardware architecture can be
organized into several key subsystems: beam switching matrices, ultra-linear
amplification, beam-forming feed structures, array calibration circuitry and
performance measuring receivers.
34
Our beam-switching technology allows us to effectively switch the call from
beam to beam within a cell while maintaining call quality. It is adaptable to
GSM, TDMA and analog wireless standards, where rapid beam switching is
required. Additionally, we have developed proprietary hardware techniques to
dynamically adjust CDMA sector patterns and maintain call quality by
calibrating phased-array antenna configurations. To monitor the radio
environment and adjust the sector coverage patterns for both our CDMA and GSM
systems, we have developed scanning receivers designed to accurately operate
over various channel bandwidths. Our spatial technology allows the simultaneous
operation of multiple wireless standards, currently CDMA/analog, through the
same physical antenna structure, while maintaining independent optimization of
the performance for each wireless standard.
Real Time Network Control Algorithms. We have developed algorithms to
control beam switching hardware in real world radio environments. These
algorithms make real time decisions about which beams best serve each user, how
often to update beam selections and how to mitigate interference from other
users on the same or adjacent channels. In addition, we have developed
expertise in the optimization of wireless network performance for CDMA, GSM and
analog wireless standards. This expertise allows network control algorithms to
be customized based on the specific wireless standard and network deployment
scenario. We have also developed internal software tools for performance
modeling wireless networks, allowing us to further customize systems for
wireless network operators based on their specific needs.
Adaptive Beam-Forming Techniques. We design and build antenna systems with a
broad range of standard and custom beam types and shapes using adaptive beam-
forming technology. Adaptive beam-forming systems can monitor traffic loading
and interference levels and then respond by implementing changes designed to
equalize traffic loads and reduce interference. With respect to CDMA, our
system makes use of phased-array antennas to create custom sector antenna
patterns through a software-driven process known as sector synthesis.
Applications Software. We develop applications software that allow wireless
network operators to analyze network performance and make appropriate
modifications to manage their spectrum more efficiently. We have designed the
SiteSculptor application software to allow users of our SpotLight system to
quickly and easily simulate antenna patterns and implement those patterns
through software configuration of our SpotLight systems. The antenna pattern
editor allows the wireless network operator to load per-sector traffic data
into our SpotLight system for analysis. SiteSculptor analyzes the data and
provides the operator with suggested sectorization patterns. SiteSculptor also
allows the user to modify the antenna pattern as required, view a simulation of
the pattern, and then load the pattern directly into our SpotLight system.
Research and Development
Our success depends on a number of factors, which include our ability to
identify and respond to emerging technological trends in our target markets,
develop and maintain competitive systems, enhance our existing systems by
adding features and functionality that differentiate them from those of our
direct and indirect competitors and bring systems to market on a timely basis
and at competitive prices. As a result, we have made, and we intend to continue
to make, significant investments in research and product development. Our
research and development expenses amounted to $6.4 million in the three months
ended March 31, 2000. Our research and development expenses were $22.8 million
in 1999, and $18.5 million in 1998. As of March 31, 2000, we had 146 employees
engaged in research and product development, 106 of whom are engineers, and we
continue to recruit additional skilled personnel to enhance our research and
development department.
Our development efforts in the near term will be focused on using our
technology to develop capacity solutions to the existing and emerging wireless
communications markets. Our core technology can be used to address spectrum
management issues in many large wireless networks. Principal areas of focus
include the following: integrating our technology into wireless base station
equipment; developing smart antenna systems for use by wireless network
operators at 1800 MHz and 1900 MHz PCS spectrum; exploring the development of
systems for TDMA wireless standard technology; and exploring the development of
systems for the broadband wireless market.
35
Customers
Our customers are wireless network operators worldwide who face network
capacity constraints. As of March 31, 2000, we had sold 149 SpotLight systems.
These sales have been to customers located in the United States, Mexico, Russia
and Paraguay.
We have master supply agreements with five of the six largest 800 MHz CDMA
wireless network operators in North America, as measured by subscriber market
share. These customers are AirTouch, ALLTEL, Bell Atlantic, GTE, and IUSACELL.
We have also sold systems to Millicom-St. Petersburg Telecom and Millicom-
Telefonica Celular. The wireless operations of three of our customers--
AirTouch, Bell Atlantic and GTE--are expected to be consolidated into one
entity in 2000. On July 28, 1998, Bell Atlantic and GTE announced a merger
which is still awaiting final FCC approval. On April 4, 2000, Bell Atlantic and
Vodaphone AirTouch plc, the parent company of AirTouch, completed the
combination of their U.S. wireless properties into an entity called Verizon
Wireless. Bell Atlantic owns 47.2% of IUSACELL. Finally, Southwestco has
entered into an agreement with ALLTEL for the sale of its FCC licenses and
assets in Arizona, New Mexico and Texas.
We completed a field trial of our SpotLight GSM system with Shanghai Telecom
in the fourth quarter of 1999 and we have entered into a conditional sales
agreement with Telefonica Peru, under which the purchase of two SpotLight 2000
systems is subject to the achievement of certain performance criteria.
During the quarter ended March 31, 2000, sales to IUSACELL and AirTouch
accounted for 56.5% and 29.1% of revenues, respectively. During the twelve
months ended December 31, 1999, sales to ALLTEL, IUSACELL and Southwestco
accounted for 44.8%, 26.0% and 20.9% of revenues, respectively. Sales to these
customers are expected to continue to account for a significant amount of our
revenues in 2000. During the twelve months ended December 31, 1998, sales to
Millicom-St. Petersburg Telecom, Millicom-Telefonica Celular, ALLTEL and GTE
accounted for 13.4%, 10.1%, 61.8% and 13.4% of revenues, respectively.
International sales of our systems accounted for 56.5% of revenues for the
three months ended March 31, 2000 and 26.0% and 23.5% of revenues for the
fiscal years ended December 31, 1999 and 1998, respectively. We expect sales to
foreign customers, such as IUSACELL and others to continue to account for a
significant proportion of our revenues in fiscal year 2000.
The terms of our master supply agreements with our customers specify pricing
terms, delivery terms, ordering lead times, invoicing terms and warranty and
extended maintenance terms and procedures. In addition, pursuant to the
agreements, we are generally obligated to indemnify our customers for certain
third party claims and other losses. The agreements generally run for between
one and two years and are generally terminable by either party at any time in
their discretion.
As of December 31, 1999, our backlog of orders was approximately $12.8
million, compared to backlog of $2.6 million as of December 31, 1998. We only
include in backlog customer commitments which are scheduled to be shipped in
the next six months. System orders in our current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty. Accordingly, although useful for internal
scheduling of production resources, backlog as of any particular date may not
be a reliable measure of sales for any future period.
Sales, Marketing and Customer Support
We sell our smart antenna systems in the United States through a direct
sales force supported by systems engineers. Our international sales and
marketing efforts are conducted through distributors, our direct sales force
and agents. Sales personnel are assigned on a customer account basis and are
responsible for generating system sales, providing system and customer support
and soliciting customer feedback for system development. In addition, sales
personnel receive support from our marketing communications organization which
is responsible for the branding and marketing of our products and services.
Our sales and marketing efforts are primarily focused on establishing and
developing long-term relationships with potential customers. A relationship
with a new customer typically begins with a field trial or
36
conditional sale in a particular market of a customer. These are designed to
satisfy performance conditions prior to the completion of the sale. We
generally only have one field trial or conditional sale per customer and the
results of the field trial or conditional performance period must be approved
at the senior level of our customers' management. Consequently, the sales
process associated with the initial purchase of our systems is typically
complex and lengthy, lasting in some cases up to 18 months. However, once the
system successfully meets the applicable performance criteria, we typically
negotiate and enter into corporate-wide master supply agreements. After this
agreement is in place, purchasing decisions are generally made on a market-by-
market basis pursuant to purchase orders placed under the master supply
agreement which are not subject to the satisfaction of performance criteria.
Consequently, the sales cycle for subsequent purchases by individual markets or
regions is generally much shorter.
Our customer support organization performs network design, system
installation, network optimization, training, consulting and repair and
maintenance services to support our SpotLight systems. Recent improvements to
our pre-shipment integration and testing processes at our manufacturing
facility in Redmond, Washington, combined with the integration of experienced
subcontractors into our installation teams, has significantly reduced
installation times for our systems.
Our customer services organization also offers services to optimize the
network following the installation of a SpotLight system. These services
utilize our expertise in radio frequency network design, knowledge of
individual network configurations and knowledge of our SpotLight system
capabilities.
We generally warranty our systems for 12 months. Warranty support and
extended maintenance services for our CDMA/analog systems are performed at our
headquarters in Redmond, Washington and will be performed for GSM systems at
our offices in Taipei, Taiwan.
Manufacturing
We rely to a substantial extent on outside suppliers to manufacture many of
the components and subassemblies used in our SpotLight systems. Our
manufacturing operations at our Redmond, Washington facility consist primarily
of supplier and commodity management and the assembling and testing of finished
systems from the components and subassemblies purchased from these outside
suppliers. We monitor quality at each stage of the production process,
including the selection of component suppliers, the assembly of finished goods
and final testing, packaging and shipping. We have been certified as ISO 9001
compliant since September 1998. We expect to begin manufacturing the SpotLight
GSM systems in Taipei, Taiwan beginning in late fiscal year 2000.
We rely on detailed sales forecasts to determine our production requirements
and manage our inventory. Our assembly and testing processes have been designed
to facilitate configuration of our systems tailored to the specific needs of
our customers. We have programs focusing on material cost reduction and supply
base management designed to reduce costs and reduce inventory exposures.
Certain parts and components used in our smart antenna systems, including
linear power amplifiers supplied by Powerwave Technologies, Inc. and integrated
duplexer low noise amplifiers and filters supplied by Filtronic Comtek Ltd.,
are presently only available from a single source. We have a supply agreement
with Powerwave Technologies, Inc. pursuant to which they have agreed to supply
all linear power amplifiers ordered by us. Certain other parts and components
are available from a limited number of sources. For a more detailed discussion
of the risks associated with having a limited source of suppliers see the risk
factor titled "Our reliance on a limited number of suppliers and the long lead
time of our systems could impair our ability to manufacture and deliver our
systems on a timely basis."
Competition
The market for spectrum management solutions is part of the broader market
for wireless infrastructure equipment which is dominated by a number of large
companies including Lucent, Motorola, Ericsson, Nortel,
37
Nokia, Siemens, Alcatel and others. Our smart antenna systems compete with
other solutions to expand network capacity. These alternative solutions include
other smart antenna systems, additional base stations for capacity, deploying
efficient digital technologies and various enhancements to digital
technologies.
Other smart antenna systems are offered by various competitors. Alcatel,
Hazeltine, E-Systems, Boeing and Raytheon have offered smart antenna systems
for analog networks. Adaptive Telecom has offered a CDMA smart antenna product
that is integrated into a CDMA base station in cooperation with the base
station manufacturer. Arraycomm has offered a smart antenna product that is
integrated into a Personal Handyphone System standard base station in Japan.
Ericsson has announced a GSM smart antenna system called GSM Capacity Booster
that includes an Ericsson base station as well as the smart antenna system.
Nortel has offered a smart antenna equipped GSM base station in the past. Most
of the large wireless infrastructure equipment providers, including Lucent,
Motorola, Nortel, Ericsson, Nokia, Siemens, Alcatel, Samsung and NEC have large
development organizations and have either announced their intention to examine
smart antenna technologies, or have the core technology competence to do so for
the CDMA, GSM, TDMA and 3G standards. If base station manufacturers
successfully develop and integrate smart antenna solutions into their product
offerings, it may materially and adversely affect our business.
The addition of more cell sites often will provide more capacity to wireless
networks and therefore is a substitute for our systems and, therefore, the cost
of base station equipment contained in these cell sites has decreased in recent
years and affects our ability to compete effectively. Other related costs for
new cell sites including real estate, towers, and building construction
generally have not declined. Base stations are sold by wireless infrastructure
equipment manufacturers such as the companies listed above.
Efficient digital technologies and enhancements to these technologies will
provide more capacity to wireless networks and, therefore, are substitutes for
our systems. These digital technologies include existing technologies, such as
CDMA, GSM and TDMA, as well as emerging 3G standards, such as CDMA 2000 and
WCDMA. There are enhancements to the existing CDMA and GSM standards, commonly
referred to as 2.5G standards, which provide additional capacity. There are
also various enhancements, such as improved voice coding for CDMA and various
frequency hopping techniques for GSM, which are designed to increase the
capacity of these standards. These digital technologies and various
enhancements are also offered by the large wireless infrastructure equipment
providers listed above. We believe that our smart antenna technology can be
compatible with these digital technologies and their various enhancements. Our
technology, and its ability to enhance capacity, is additive to the capacity
enhancement provided by these digital technologies. Customers, however, may
delay or cancel deployment of our smart antenna systems while they deploy these
more efficient digital technologies and other enhancements which would harm our
business.
We believe the principal competitive factors in the spectrum management
solutions market include:
. expertise in the core technologies needed for radio frequency
communication systems;
. system performance, features and reliability;
. price and performance characteristics;
. timeliness of new system introductions;
. customer service and support;
. established customer relationships; and
. size of installed customer base.
We believe we will be competitive with respect to many of these factors;
however most of our existing and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases, greater
financial, technical, sales, marketing and other resources, and more
established customer relationships. To be competitive we must invest
significant resources to address these competitive factors and
38
achieve customer satisfaction. If we fail to do so our smart antenna systems
will not compete favorably with our competitors which will materially and
adversely affect our business.
Intellectual Property
We rely on patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We
currently have 19 issued U.S. patents, 5 allowed U.S. patents and 32 pending
U.S. patent applications. In addition, we are seeking patent protection for our
inventions in foreign countries. The patent positions of companies in the
worldwide wireless communications industry are generally uncertain and involve
complex legal and factual questions. We cannot be certain that patents will be
issued with respect to pending or future patent applications or that our
patents will be upheld as valid or will be sufficient to prevent the
development of competitive products. While we believe that our patents will
make it more difficult for competitors to develop and market similar products,
our patents may be invalidated, circumvented or challenged. Our patent rights
may fail to provide us with competitive advantages.
We have received two registered federal copyrights for our software and four
more copyright applications are pending. The source code for our proprietary
software is also protected as a trade secret. In addition, we enter into
confidentiality agreements with our employees, customers, vendors and strategic
partners, and control access to, and the distribution of our software,
documentation and other confidential and proprietary information. Our primary
trademarks are registered with the U.S. Patent and Trademark Office and certain
other foreign jurisdictions. We have applied for trademark protection for a
number of other marks which are pending in the United States and in foreign
countries.
Despite these efforts, it may be possible for unauthorized third parties to
copy certain portions of our intellectual property contained in our systems,
design around our patents, or to reverse-engineer or otherwise obtain and use
our proprietary information. In addition, the laws of some countries do not
protect our proprietary rights to the same extent as the laws of the United
States. Accordingly, we may not be able to protect our proprietary rights
against unauthorized third-party copying or use, which could significantly harm
our business. We may have to pursue litigation in the future to enforce our
proprietary rights or to defend against claims of infringement. These claims,
regardless of their merits, may require us to enter into license arrangements
or may result in protracted and costly litigation.
In addition, we cannot be certain that others will not develop substantially
equivalent or superceding proprietary technology, or that equivalent products
will not be marketed in competition with our smart antenna systems, thereby
substantially reducing the value of our proprietary rights.
Patents and patent applications relating to products used in the wireless
communications industry are numerous. Current and potential competitors and
other third parties may have been issued or in the future may be issued
patents, or may obtain additional proprietary rights relating to products used
or proposed to be used by us. We may not be aware of all patents or patent
applications that may materially affect our ability to make, use or sell any
current or future products. From time to time, third parties have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the spectrum
management market grows and the functionality of products overlaps. Third
parties may assert infringement claims against us in the future, and such
assertions could result in costly litigation, the diversion of management and
engineering resources and require us to obtain a license to intellectual
property rights of such parties. There can be no assurance that these licenses
would be available on terms acceptable to us, if at all. Any failure to obtain
a license from any third party asserting claims in the future or defense of any
third party lawsuit could materially and adversely affect our business and
operating results.
Government Regulation
Our smart antenna systems must obtain regulatory approval to be used. In the
United States, our systems must be certified by the Federal Communications
Commission before sales to customers may commence. Smart
39
antenna systems must be certified by the FCC to ensure that they will not cause
wireless base stations to exceed the prescribed technical standards. In
addition, these systems are required to comply with electrical safety standards
to ensure that the base station operators will be in compliance with relevant
Occupational Safety and Health Administration's regulations.
Other countries have similar regulations that must be complied with before
our systems can be used. Foreign countries' regulatory programs are generally
similar to those in the United States. In most jurisdictions, smart antenna
systems must be of a type approved for use with cellular base stations under
national standards specific to each country. Smart antennas are also required
to demonstrate compliance with electrical safety standards that may be national
or international in scope. These governmental approval processes frequently
involve substantial delay, which could result in the cancellation, postponement
or rescheduling of systems by our customers. Any event like this in turn may
adversely affect our ability to sell systems to these customers. Because of the
expenses associated with government approvals of our systems in some countries,
we only plan to seek product approval in those countries once we have a
customer who intends to purchase our systems. This practice may take several
months and may deter customers or contribute to delays in receiving or filling
orders.
In addition, our customers' operations are subject to extensive government
regulations. To the extent that our customers are delayed in deploying their
wireless networks as a result of existing or new standards or regulations, we
could experience delays in orders. These delays could materially and adversely
affect on our business and operating results.
We are also subject to U.S. government export controls. Our sales and
distributorship agreements require that the export or resale of our systems to
end users located in other countries must be in compliance with U.S. export
controls.
Employees
As of March 31, 2000, we had 272 employees, of which, 146 were primarily
engaged in research, development and product management, 33 in manufacturing,
59 in sales, marketing and customer support and 34 in general and
administration. We have no collective bargaining agreement with our employees
and we have never experienced a work stoppage. We believe that our employee
relations are good.
Facilities
We are headquartered in Redmond, Washington, where we lease an aggregate of
approximately 96,000 square feet, housing our principal administrative, sales
and marketing, customer support and manufacturing facilities. Our lease for
this facility expires on May 31, 2005 and we have an option to renew this lease
for two additional five year terms. We sublease approximately 13,000 square
feet of this space. We have a three-year lease for sales, service and
manufacturing facilities totaling approximately 6,500 square feet in Taipei,
Taiwan and a five-year lease for a sales and engineering support office in
Dallas, Texas. We also have representative offices in Sao Paulo, Brazil and
Shanghai, China that are subject to short-term leases.
Legal Proceedings
We may become involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this prospectus, we are not
involved in any pending material legal proceedings.
40
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of March 31, 2000 are
as follows:
Name Age Position
---- --- --------
Douglas O. Reudink.............. 60 Chairman of the Board and Chief
Technical Officer
Robert H. Hunsberger............ 53 President, Chief Executive Officer and
Director
Stuart W. Fuhlendorf............ 37 Senior Vice President and Chief
Financial Officer
Victor K. Liang................. 48 Senior Vice President, GSM Products
Group
Ray K. Butler................... 41 Vice President, International Operations
Martin J. Feuerstein............ 37 Vice President, Product Development
Richard P. Henderson............ 38 Vice President, Sales and Marketing
Andrew Merrill.................. 40 Vice President, Customer Operations
John R. Schaller................ 56 Controller and Treasurer
Bandel L. Carano(1)............. 38 Director
Bruce C. Edwards................ 46 Director
David R. Hathaway(1)............ 55 Director
Scot B. Jarvis(1)(2)............ 39 Director
Jennifer Gill Roberts(2)........ 37 Director
David A. Twyver(2).............. 53 Director
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Douglas O. Reudink, a co-founder, has served as our chief technical officer
since our inception and as chairman of the board of directors since April 1997.
From 1991 to 1995, Dr. Reudink served as director of wireless planning at US
WEST NewVector Group, Inc., a wireless telecommunications company. From 1986 to
1991, he served as the director of Laboratories of the High Technology Center
at The Boeing Company, an aerospace company. Prior to 1986, Dr. Reudink served
20 years at the Bell Laboratories division of AT&T Corporation, a
telecommunications company, in various research and management positions.
Dr. Reudink holds a B.S. from Linfield College and a Ph.D. from Oregon State
University.
Robert H. Hunsberger has served as our president and chief executive officer
since July 1997. From 1995 to July 1997, Mr. Hunsberger served as senior vice
president and general manager of Siemens Business Communications Systems, Inc.,
a telecommunications company and a wholly owned subsidiary of Siemens. From
1981 to 1995, Mr. Hunsberger held various executive positions at Nortel, a
telecommunications company, including vice president of sales and marketing of
its wireless networks division from 1993 to 1995 and vice president of market
development of its wireless networks division and vice president of cellular
systems from 1991 to 1993. Mr. Hunsberger holds a B.S. from the University of
Virginia and an M.B.A. from Arizona State University.
Stuart W. Fuhlendorf has served as our senior vice president and chief
financial officer since March 2000. From 1992 to March 2000, Mr. Fuhlendorf
served as chief financial officer of EFTC Corporation, formerly Electronic Fab
Technology Corporation, an electronic component manufacturing company. Mr.
Fuhlendorf holds a B.A. from the University of Northern Colorado and an M.B.A.
from the University of San Diego.
41
Victor K. Liang has served as our senior vice president, GSM products group
since July 1998 and general manager of Metawave Communications Taiwan Ltd., a
subsidiary since October 1998. From 1989 until March 1998, Mr. Liang held
various senior executive positions with Siemens and its subsidiaries, most
recently serving as managing director of two Siemens' joint ventures in China,
Siemens Shanghai Mobile Communications and Siemens Shanghai Communication
Terminals. From 1995 to 1998, Mr. Liang served as vice president of wireless
products group at Siemens Stromberg-Carlson. From 1994 to 1995, he served as
Senior Director at Siemens A.G., Munich, Germany and from 1989 through 1994 he
served as vice president product development of Siemens Telecommunications Ltd.
in Taiwan. Mr. Liang holds a B.S. from Chiao Tung University in Taiwan and a
degree in Business Administration from Cheng Chih University.
Ray K. Butler has served as our vice president of international operations
since August 1999, vice president of engineering from December 1997 to August
1999 and director of systems engineering and architecture from January 1997 to
December 1997. From 1985 to January 1997, Mr. Butler held various management
positions at the Bell Laboratories division of AT&T (which division became part
of Lucent in 1996), most recently serving as technical manager of the cell site
HW systems engineering group. Mr. Butler holds a B.S. from Brigham Young
University and an M.S. from Polytechnic University.
Martin J. Feuerstein has served as our vice president of product development
since August 1998 and director of research from March 1997 to July 1998. From
1995 to March 1997, Dr. Feuerstein served as technical manager at Lucent. From
1992 to 1995, he served as a senior member technical staff at US WEST. Mr.
Feuerstein holds a B.E. from Vanderbilt University, an M.S. from Northwestern
University and a Ph.D. from Virginia Polytechnic Institute.
Richard P. Henderson has served as our vice president of sales and marketing
since December 1997. From 1984 to 1997, Mr. Henderson held various sales and
marketing positions at Nortel, most recently serving as vice president of
marketing operations from 1996 to 1997 and sales account director from 1992 to
1995. Mr. Henderson holds a B.S. from Texas A&M University and an M.B.A. from
the University of Dallas.
Andrew Merrill has served as our vice president of customer operations since
August 1999. From 1984 to August 1999, Mr. Merrill worked at Motorola, Inc., an
electronics company, in several positions, most recently serving as engineering
manager from 1994 to 1999, program manager from 1992 to 1994 and international
cellular infrastructure manufacturing manager from 1984 to 1992. Mr. Merrill
studied communications electronics and nuclear power in the U.S. Navy.
John Schaller has served as our corporate controller and treasurer since
June 1998 and October 1999, respectively. From October 1997 to June 1998, he
served as the chief financial officer of Superconducting Core Technologies,
Inc., a telecommunications equipment company. From May 1996 to October 1997, he
served as vice president and chief financial officer of AirNet Communication
Corp., a telecommunications company. From June 1978 to April 1996, he served in
various senior financial positions, including chief financial officer of a
Motorola-Nortel wireless communications joint venture and director of finance
and administration for the wireless networks division of Nortel. Mr. Schaller
holds a B.S. from Philadelphia College of Textiles and Science and an M.B.A.
from University of Texas.
Bandel L. Carano has served as one of our directors since 1995. Mr. Carano
has been a general partner of Oak Investment Partners, a venture capital firm,
since 1987. Mr. Carano serves as a member of the Investment advisory board of
the Stanford University Engineering Venture Fund. Mr. Carano also serves as a
member of the board of directors of Netopia, Inc., a telecommunications
equipment provider, Polycom, Inc., a telecommunications equipment provider and
PulsePoint Communications, an information systems company, as well as several
private companies. Mr. Carano holds a B.S. and an M.S. from Stanford
University.
Bruce C. Edwards has served as one of our directors since May 1998. Mr.
Edwards has served as president, chief executive officer and a director of
Powerwave Technologies, Inc., a telecommunications equipment company, since
February 1996. Mr. Edwards was executive vice president, chief financial
officer and a director of AST Research, Inc., a personal computer company, from
1994 to December 1995 and senior
42
vice president of finance and chief financial officer of AST from 1988 to 1994.
Mr. Edwards also serves as a director of HMT Technology Corporation, a computer
equipment company. Mr. Edwards holds a B.S. from Rider University and an M.B.A.
from the New York Institute of Technology.
David R. Hathaway has served as one of our directors since 1995. Mr.
Hathaway has been a general partner of the venture capital firms Venrock
Associates and Venrock Associates II, L.P. since 1980 and 1995, respectively.
Mr. Hathaway serves as a director of several private companies. Mr. Hathaway
holds a B.A. from Yale University.
Scot B. Jarvis has served as one of our directors since February 1998. Mr.
Jarvis is a co-founder and managing member of Cedar Grove Partners, LLC, a
privately owned investment company. From 1994 to 1997, Mr. Jarvis was co-
founder and executive vice president of NEXTLINK Communications, Inc., a
wireless service operator. Mr. Jarvis serves as a director of Wireless
Facilities, Inc., a wireless telecommunications company, Point.com, Inc., an
internet services company, Leap Wireless International, Inc., a wireless
communications company and Cricket Communications, Inc. a wireless
communications company. Mr. Jarvis holds a B.A. from the University of
Washington.
Jennifer Gill Roberts has served as one of our directors since 1995. Ms.
Roberts has been a general partner of Sevin Rosen Funds, a venture capital
firm, since 1994. Ms. Roberts serves as a director of several private
companies. Ms. Roberts holds a B.S. and an M.B.A. from Stanford University and
an M.S. from the University of Texas.
David A. Twyver has served as one of our directors since May 1998. He is
currently chief executive officer of Ensemble Communications Inc, a wireless
communications equipment company. From 1996 to 1997, Mr. Twyver served as chief
executive officer of Teledesic Corporation, a satellite telecommunications
company. From 1974 to 1996, Mr. Twyver served in several management positions
at Nortel, most recently serving as president of the wireless networks group
from 1993 to 1996. Mr. Twyver serves as a director of several private
companies. Mr. Twyver holds a B.S. from the University of Saskatchewan.
Board Composition
Our bylaws currently provide for a board of directors consisting of nine
members. All directors hold office until the next annual meeting of our
stockholders and until their successors have been duly elected and qualified.
Our officers are appointed annually and serve at the discretion of the board of
directors.
Committees of the Board of Directors
The members of the audit committee are Scot Jarvis, Jennifer Gill Roberts
and David Twyver. The audit committee reviews the results and scope of the
audit and other services provided by our independent auditors.
The members of the compensation committee are Bandel Carano, David Hathaway
and Scot Jarvis. The compensation committee reviews and approves the
compensation and benefits for our executive officers, administers our stock
purchase and stock option plans and makes recommendations to the board of
directors regarding such matters.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and the grant of stock options, directors are not
compensated for their services as directors, except for Bruce Edwards, Scot
Jarvis and David Twyver who each receive $1,000 for each board meeting attended
and $500 for each committee meeting attended. Directors who are our employees
are eligible to participate in the 1995 Stock Option Plan, the 1998 Stock
Option Plan, the 2000 Stock Option Plan and the 2000 Employee Stock Purchase
Plan. Directors who are not our employees are eligible to participate in the
1998 Amended and Restated Directors' Stock Option Plan. See "Stock Plans."
43
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee has at any time been an officer or
employee of ours or any subsidiary of ours. See "Certain Relationships and
Related Transactions" for a description of certain transactions and
relationships between us and Bandel Carano, Bruce Edwards, David Hathaway,
Jennifer Gill Roberts and Scot Jarvis and entities affiliated with them.
Executive Compensation
The following table sets forth information concerning compensation awarded
to, earned by or paid to our chief executive officer and our four other most
highly compensated executive officers whose total cash compensation exceeded
$100,000 during the year ended December 31, 1999 (collectively, our "Named
Executive Officers").
Summary Compensation Table
Annual
Compensation Long-Term Compensation
------------------ ---------------------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus (1) Options Compensation (2)
- --------------------------- -------- --------- ---------- ----------------
Robert H. Hunsberger, President
and Chief Executive Officer... $270,766 $12,150 66,666 $ 912
Richard P. Henderson, Vice
President of Sales
and Marketing................. 159,539 80,686 10,000 262
Victor K. Liang, Senior Vice
President, GSM
Products Group................ 190,263 4,309 86,666 567
Douglas O. Reudink, Chairman
and Chief Technology Officer.. 175,488 7,875 33,333 2,364
Martin J. Feuerstein, Vice
President of
Product Development........... 139,604 21,075 30,000 251
- --------
(1) Bonus represents the amount earned by the employee in 1999 and includes
commissions.
(2) Consists of life insurance premiums paid by us.
The following table sets forth information for each of our Named Executive
Officers concerning stock options granted to them during the fiscal year ended
December 31, 1999.
Option Grants in Fiscal Year 1999
Potential Realizable
Value at Assumed
Number of Percentage of Potential Realizable Annual Rates of Stock
Shares Total Options Value at Midrange of Price Appreciation for
Underlying Granted to Exercise Assumed Initial Option Term(5)
Options Employees Price per Expiration Offering Price ----------------------
Name Granted(1) in 1999(2) Share(3) Date(4) of $12.00 5% 10%
- ---- ---------- ------------- --------- ---------- -------------------- ---------- -----------
Robert H. Hunsberger.... 66,666 4.8% $6.75 6/22/09 $349,997 $ 853,107 $ 624,978
Richard P. Henderson.... 10,000 0.7% 6.75 6/22/09 52,500 127,967 243,749
Victor K. Liang......... 26,666 1.9% 6.75 6/22/09 139,997 341,238 649,981
60,000 4.2% 6.75 5/19/09 315,000 767,804 1,462,494
Douglas O. Reudink...... 33,333 2.4% 6.75 6/22/09 174,998 426,554 812,489
Martin J. Feuerstein.... 10,000 0.7% 6.75 5/19/09 52,500 127,967 243,749
20,000 1.4% 6.75 6/22/09 105,000 255,935 487,498
- --------
(1) Each of the above options was granted pursuant to our 1998 Stock Option
Plan.
(2) In the last fiscal year, we granted options to employees to purchase an
aggregate of 1,386,736 shares.
44
(3) In determining the fair market value of our common stock, our board of
directors considered factors such as our financial condition and business
prospects, our operating results, the absence of a market for our common
stock and the risks normally associated with companies comparable to us.
(4) Options granted on June 22, 1999 and expiring on June 22, 2009 vest 50%
upon the effectiveness of this offering and the remaining 50% vests one
year from the effective date of this offering. Those options granted on
May 19, 1999 vest 25% one year from date of grant and the remaining 75%
vest monthly over three years.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices.
These figures are based on an assumed public offering price of $12.00 per
share.
Option Grants in the First Quarter of 2000
The following table provides certain information concerning the number and
value of options granted to our Named Executive Officers and Stuart W.
Fuhlendorf in the first quarter of 2000.
Number of Potential Realizable
Shares Exercise Value at Midrange of
Underlying Price Assumed Initial
Options Per Offering Price
Name Granted(1) Share(2) of $12.00
- ---- ---------- -------- --------------------
Robert H. Hunsberger................... 166,666 $ 6.00 $999,996
Richard P. Henderson................... 10,000 6.00 60,000
Victor K. Liang........................ -- -- --
Douglas O. Reudink..................... -- -- --
Martin J. Feuerstein................... 13,333 6.00 80,000
Stuart W. Fuhlendorf................... 310,000 12.00 0
- --------
(1) Each of the above options was granted pursuant to our 1998 Stock Option
Plan.
(2) In determining the fair market value of our common stock, our board of
directors considered factors such as our financial condition and business
prospects, our operating results, the absence of a market for our common
stock and the risks normally associated with companies comparable to us.
Option Exercises in Last Fiscal Year and Year-End Option Values
There were no option exercises by our Named Executive Officers in 1999. The
following table provides information concerning the number and value of
unexercised options held by each of our Named Executive Officers as of December
31, 1999.
Number of Securities Value of Unexercised
Underlying In-the-Money Options
Unexercised Options at at
December 31, 1999(1) December 31, 1999(2)
------------------------ ---------------------
Name Vested Unvested Vested Unvested
- ---- ----------- ------------ ---------- ----------
Robert H. Hunsberger.............. 356,500 304,166 $4,012,875 $2,979,125
Richard P. Henderson.............. 55,554 61,112 499,992 512,508
Victor K. Liang................... 46,040 240,626 399,221 55,780
Douglas O. Reudink................ -- 33,333 -- 175,000
Martin J. Feuerstein.............. 35,110 61,556 221,620 255,560
- --------
(1) Certain options granted under the 1998 Stock Option Plan and the 1995 Stock
Option Plan may be exercised immediately upon grant and prior to full
vesting, subject to the optionee's entering into a
45
restricted stock purchase agreement with us with respect to any unvested
shares. The unvested shares are subject to a right of first refusal in
favor of Metawave which lapses over time.
(2) Based on an assumed initial public offering price of $12.00 per share,
minus the exercise price, multiplied by the number of shares underlying
the option.
Severance Arrangements
We have entered into severance arrangements with Douglas O. Reudink, chief
technical officer, Robert H. Hunsberger, president and chief executive
officer, Stuart W. Fuhlendorf, senior vice president and chief financial
officer, Richard P. Henderson, vice president of sales and marketing, Victor
K. Liang, senior vice president, GSM products group, and Andrew Merrill, vice
president of customer operations.
On July 7, 1995, in connection with the Series A preferred stock financing,
we entered into an agreement with Dr. Reudink which provides that if we were
to terminate his employment without cause after July 7, 1996, we would be
obligated to make a lump-sum payment to Dr. Reudink equal to six months of his
then-current base salary and to provide benefits for six months following
termination. In connection with this agreement, Dr. Reudink entered into a
one-year non-competition agreement effective upon the termination of his
employment with us.
On June 27, 1997, in connection with the employment of Mr. Hunsberger, we
entered into an arrangement with Mr. Hunsberger which provides that if we were
to terminate his employment without cause, we would be obligated to make a
lump-sum payment to Mr. Hunsberger equal to twelve months of his then-current
base salary and provide benefits for twelve months following termination.
On October 29, 1997, in connection with the employment of Mr. Henderson, we
entered into an arrangement with Mr. Henderson which provides that if we were
to terminate his employment without cause, we would be obligated to make a
lump-sum payment to Mr. Henderson equal to six months of his then-current base
salary.
On July 23, 1998, in connection with the employment of Mr. Liang, we
entered into an arrangement with Mr. Liang that provides that if we were to
terminate his employment without cause within the first two years of his
employment, we would be obligated to make a lump-sum payment to Mr. Liang
equal to six months of his then-current base salary.
On July 12, 1999, in connection with the employment of Mr. Merrill, we
entered into an agreement with Mr. Merrill that provides that if we were to
terminate his employment without cause, we would be obligated to pay Mr.
Merrill six months of his then-current base salary.
On March 10, 2000, in connection with the employment of Mr. Fuhlendorf, we
entered into an agreement with Mr. Fuhlendorf that provides that if we were to
terminate his employment without cause, we would be obligated to make a lump
sum payment to Mr. Fuhlendorf equal to six months of his then-current base
salary.
Stock Plans
2000 Stock Plan. Our 2000 stock option plan provides for the grant of
incentive stock options to employees, including employee directors, and of
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 2000 stock plan are to attract and retain
the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. The 2000
plan was originally adopted by our board of directors in February 2000 and
will be approved by our stockholders prior to completion of this offering. The
2000 plan provides for this issuance of options and rights to purchase up to
1,333,333 shares of our common stock, plus an automatic annual increase on the
first day of each of our fiscal years beginning in 2001 through 2009 equal to
the lesser of 2,000,000 shares, 5% of our outstanding common stock on the last
day of the immediately preceding fiscal
46
year, or a lesser number of shares as our board of directors determines. Unless
terminated earlier by the board of directors, the 2000 plan will terminate ten
years following its effective date.
The 2000 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options and stock purchase rights granted under the 2000 plan,
including the number of shares subject to the award, the exercise or purchase
price, and the vesting and/or exercisability of the award and any other
conditions to which the award is subject. No employee may receive awards for
more than 1,333,333 shares under the 2000 plan in any fiscal year. Incentive
stock options granted under the 2000 plan must have an exercise price of at
least 100% of the fair market value of the common stock on the date of grant.
The plan does not impose restrictions on the exercise or purchase price
applicable to nonstatutory stock options and stock purchase rights, although we
expect that nonstatutory stock options and stock purchase rights granted to our
Chief Executive Officer and our four other most highly compensated officers
will generally equal at least 100% of the grant date fair market value. Payment
of the exercise or purchase price may be made in cash or any other
consideration allowed by the administrator.
With respect to options granted under the 2000 plan, the administrator
determines the term of options, which may not exceed 10 years. Generally, an
option is nontransferable other than by will or the laws of descent and
distribution, and may be exercised during the lifetime of the optionee only by
such optionee. In certain circumstances, the administrator has the discretion
to grant nonstatutory stock options with limited transferability rights. Stock
options are generally subject to vesting, meaning that the optionee earns the
right to exercise the option over a specified period of time only if he or she
continues to provide services to Metawave over that period. Shares of stock
issued pursuant to stock purchase rights granted under the 2000 plan are
generally subject to a repurchase right exercisable by Metawave upon the
termination of the holder's employment or consulting relationship with us for
any reason (which lapses in accordance with the terms of the stock purchase
right determined by the administrator at the time of grant). In addition, the
2000 stock plan provides that options to purchase vested shares will terminate,
and we will have the right to repurchase vested shares issued under the plan,
if we terminate a participant's employment or consulting relationship with us
for cause.
If we are acquired, we would expect that options and stock purchase rights
outstanding under the 2000 plan at the time of the transaction would be assumed
or replaced with substitute options by our acquiror. If our acquiror did not
assume or replace outstanding awards, then the vesting of these awards would
accelerate so that the holder of an outstanding award would be able to exercise
and retain the number of shares that he or she would have vested in had he or
she continued working for us for another 12 months (if the holder had been
employed by us for less than 2 years at the time of the acquisition) or for
another 24 months (if the holder had been employed for us for 2 years or more
at the time of the acquisition) from the acquisition date. In addition, if our
acquiror assumed or replaced outstanding awards at the time of the acquisition
and a plan participant holding assumed or replaced awards experienced an
involuntary termination of his or her employment or consulting relationship
within six months following the transaction, then the vesting of outstanding
options or stock held by any such person who is not a Section 16 reporting
person at the time of the acquisition would accelerate as to 12 or 24 months
(depending upon the duration of the person's service relationship with us and
our acquiror as described above), and as to all the shares underlying an award
held by a person who is a Section 16 reporting officer at the time of the
acquisition. Outstanding awards, the number of shares remaining available for
issuance under the 2000 plan, the maximum number of shares subject to awards
that may be granted to an employee during a year and the fixed number in the
plan's evergreen formula will adjust in the event of a stock split, stock
dividend or other similar change in our capital stock. The administrator has
the authority to amend or terminate the 2000 plan, but no action may be taken
that impairs the rights of any holder of an outstanding option or stock
purchase right without the holder's consent. In addition, we must obtain
stockholder approval of amendments to the plan as required by applicable law.
1995 and 1998 Stock Option Plans. In addition to our 2000 stock plan, we
have two prior employee stock plans, our Third Amended and Restated 1995 Stock
Option Plan and our 1998 Stock Option Plan. These
47
plans provide for the grant of incentive stock options to employees, including
employee directors, and the grant of nonstatutory stock options to employees,
consultants and directors.
Our 1995 stock plan was originally adopted by our board of directors in
August 1995 and approved by our stockholders in January 1996. It has been
amended several times since its adoption such that there are currently
2,766,666 shares of common stock reserved for issuance under this plan. As of
March 31, 2000, options to purchase 1,794,284 shares of common stock at a
weighted average exercise price of $4.69 were outstanding, 919,023 shares with
a weighted average purchase price of $0.49 have been issued upon exercise of
options and 53,359 shares remain available for issuance under our 1995 plan.
Unless terminated earlier, the 1995 plan will terminate in August 2005.
Our 1998 stock option plan was originally adopted by our board of directors
in May 1998 and approved by our stockholders in September 1998. An aggregate of
1,763,369 shares of common stock has been reserved for issuance under the 1998
plan. As of March 31, 2000, options to purchase 1,562,005 shares of common
stock at a weighted average exercise price of $8.33 were outstanding, 3,482
shares with a weighted average exercise price of $6.66 have been issued upon
exercise of options and 197,882 shares remain available for future grant.
Unless terminated earlier, this plan will terminate in May 2008.
The terms of awards issued under our 1995 and 1998 plans are generally the
same as those that may be issued under our 2000 stock plan, except with respect
to the following features. Neither the 1995 plan nor the 1998 plan provides for
the issuance of stock purchase rights to employees and consultants. The 1998
plan provides that, as of our first stockholders meeting following the third
calendar year after the year in which this offering takes place, the maximum
number of shares that may be granted to any individual employee during a fiscal
year is 566,666 shares. The 1995 plan does not impose an annual limitation on
the number of shares of stock subject to options that may be granted to any
individual employee during a fiscal year. Under both plans, generally an option
is nontransferable other than by will or the laws or descent or distribution.
In addition, the 1995 Stock Option Plan does not provide for forfeiture of
vested options or stock upon a termination of the holder's service relationship
with us for cause.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by the board of directors in February 2000 and will be submitted for
approval by our stockholders prior to completion of this offering. A total of
233,333 shares of common stock has been reserved for issuance under the 2000
purchase plan, none of which have been issued as of the date of this offering.
The number of shares reserved for issuance under the 2000 purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001 through 2010 equal to the lesser of 266,666 shares, 1%
of our outstanding common stock on the last day of the immediately preceding
fiscal year or a lesser number of shares as the board of directors determines.
The 2000 purchase plan becomes effective upon the date of this offering. Unless
terminated earlier by the board of directors, this plan will terminate in
February 2020.
The 2000 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on April 30, 2002; the initial
purchase period is expected to begin on the date of this offering and end on
October 31, 2000, with subsequent purchase periods ending on April 30, 2001,
October 31, 2001 and April 30, 2002. The 2000 purchase plan will be
administered by the board of directors or by a committee appointed by the
board. Our employees (including officers and employee directors), or of any
majority-owned subsidiary designated by the board, are eligible to participate
in the 2000 purchase plan if they are employed by us or a designated subsidiary
for at least 20 hours per week and more than five months per year. The 2000
purchase plan permits eligible employees to purchase common stock through
payroll deductions at a rate of not more than 15% of an employee's
compensation. The purchase price is equal to the lower of 85% of the fair
market value of the common stock at the beginning of each offering
48
period or at the end of each purchase period, subject to certain adjustments as
provided in the plan. Employees may end their participation in the 2000
purchase plan at any time during an offering period, and participation ends
automatically on termination of employment. No employee may purchase more than
1,333 shares of common stock under the 2000 Purchase Plan in any one purchase
period.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
purchase plan will be assumed or an equivalent right substituted by our
acquiror. If our acquiror did not agree to assume or substitute stock purchase
rights, any offering period and purchase period then in progress would be
shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Outstanding awards, shares remaining available for
issuance under the plan, the fixed number in the plan's evergreen formula, and
the maximum number of shares that may be purchased during a six-month purchase
period will each adjust in the event of a stock split, stock dividend or other
similar change in our capital stock. Our board of directors has the power to
amend or terminate the 2000 purchase plan and to change or terminate offering
periods as long as such action does not adversely affect any outstanding rights
to purchase stock thereunder. However, the board of directors may amend or
terminate the 2000 purchase plan or an offering period even if it would
adversely affect outstanding options in order to avoid our incurring adverse
accounting charges.
Amended and Restated 1998 Directors' Stock Option Plan. The 1998 directors'
stock option was adopted by the board of directors in February 1998 and
approved by our stockholders in April 1998. It was amended in February 2000 by
our board of directors to increase the total number of shares of common stock
reserved for issuance under the plan to 466,666 shares. This amendment will be
submitted to our stockholders for approval prior to the date of this offering.
As of March 31, 2000, options to purchase 133,334 shares of common stock with a
weighted average exercise price of $6.50 were outstanding and 16,666 shares had
been purchased upon exercise of options issued under the plan with a weighted
average price of $7.50 and 316,666 shares remain available for future grant.
The directors' plan provides for the grant of nonstatutory stock options to
our nonemployee directors. Prior to the date of this offering, option grants
made under the 1998 directors' plan were made on a discretionary basis by our
board of directors. Following this offering, the plan provides for automatic
formula grants to our nonemployee directors. The directors' plan is designed to
work after the date of this offering automatically without administration;
however, to the extent administration is necessary, it will be performed by our
board of directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which a director has a personal
interest. Unless terminated earlier, the directors' plan will terminate in
February 2008.
The directors' plan provides that each person who becomes a nonemployee
director after the completion of this offering will be granted a nonstatutory
stock option to purchase 16,666 shares of common stock on the date on which
such individual first becomes a member of our board of directors. In addition,
on the date of each annual stockholders meeting, each nonemployee director who
will continue serving on the board following the meeting and who has been a
director of Metawave for at least six months prior to the meeting date will be
granted an option to purchase 6,666 shares of common stock.
All options granted under the directors' plan will have a term of ten years
and an exercise price equal to the fair market value of on the date of grant
and will be transferable only to members of a directors' immediate family and
to trusts and other entities for the benefit their family members. Options
granted under the directors' plan to new nonemployee directors following this
offering will vest as to 25% of the shares underlying the option on the first
anniversary of the date of the option grant and as to 1/48th of the shares each
month after the first anniversary so that these options will be fully vested on
the fourth anniversary of the grant date. Options granted to our nonemployee
directors at the time of each annual stockholders meeting following this
offering will vest as to 1/36th of the shares underlying the option so that
these options will be fully vested on the third anniversary of the grant date.
If Metawave determines that a director has engaged in fraud, embezzlement or
similar acts against us, or if a director has disclosed information that is
confidential to Metawave or engaged in
49
any conduct constituting unfair competition against us, we have the right to
suspend or terminate that director's right to exercise an option under the
directors' plan.
If we are acquired by another corporation, we would expect each option
outstanding under our 1998 directors' plan to be assumed or replaced with
equivalent options by our acquiror. If our acquiror did not assume or replace
outstanding options, then the vesting of outstanding awards would accelerate so
that nonemployee directors holding options would be able to exercise and retain
the number of shares that he or she would have vested in had he or she
continued serving as a member of our board of directors for us for another 12
months (if the director had been a member of our board us for less than 2 years
at the time of the acquisition) or for another 24 months (if he or she had been
a member of our board for 2 years or more at the time of the acquisition)
following the acquisition date. Outstanding awards, the number of shares
remaining available for grant under the plan, and the number of shares subject
to the automatic director grants described above will each adjust in the event
of a stock split, stock dividend or other similar change in our capital stock.
Our board of directors may amend or terminate the directors' plan as long as
such action does not adversely affect any outstanding option. We will obtain
stockholder approval for any amendment to the plan to the extent required by
applicable law.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by the Delaware General Corporation Law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of such individual's fiduciary duties as a director
except for liability for:
. any breach of the director's duty of loyalty to us or to our
stockholders,
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
. unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
. any transaction from which a director derives an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our other employees and agents to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of an indemnified party. Our bylaws
also permit us to advance expenses incurred by an indemnified party in
connection with the defense of any action or proceeding arising out of such
party's status or service as a director, officer, employee or other agent of
Metawave upon an undertaking by such party to repay such advances if it is
ultimately determined that such party is not entitled to indemnification. This
advancement of expenses is subject to authorization by the board of directors
in the case of non-executive officers, employees and agents.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us, among other things, to
indemnify the director or officer against expenses, including attorney's fees,
judgments, fines and settlements paid by the individual in connection with any
action, suit or proceeding arising out of his or her status or service as one
of our directors or officers other than liabilities arising from willful
misconduct or conduct that is knowingly fraudulent or deliberately dishonest
and to advance expenses incurred by such individual in connection with any
proceeding against such individual with respect to which such individual may be
entitled to indemnification by us. We believe that our certificate of
incorporation and bylaw provisions and indemnification agreements are necessary
to attract and retain qualified persons as directors and officers. We also
maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any of our directors, officers, employees or agents where
indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
50
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Sales of Equity Securities
Certain stock option grants to our directors and executive officers are
described herein under the caption "Management--Executive Compensation."
Since July 1995, we have issued, in private placement transactions, shares
of preferred stock as follows:
. an aggregate of 5,500,000 shares of Series A preferred stock at $1.00 per
share in July 1995,
. an aggregate of 2,711,113 shares of Series B preferred stock at $3.375
per share in May 1996,
. an aggregate of 2,491,880 shares of Series C preferred stock at $6.16 per
share in October and November 1996,
. an aggregate of 2,397,727 shares of Series D preferred stock at $8.00 per
share in August 1997, and
. an aggregate of 18,276,151 shares of Series E preferred stock at $5.00
per share in December 1998, January, April and June 1999.
Upon completion of this offering, each share of Series A and Series B
preferred stock will convert into 0.66667 shares of our common stock, each
share of Series C preferred stock will convert into 0.87190 shares of our
common stock, each share of Series D preferred stock will convert into 0.96096
shares of our common stock and each share of Series E preferred stock will
convert into 0.95238 shares of our common stock.
Listed below are those directors, executive officers and five percent
stockholders who have made equity investments in Metawave during the last
three fiscal years. We believe that the shares issued in these transactions
were sold at the then fair market value and that the terms of these
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
Series A Series B Series C Series D Series E
Common Preferred Preferred Preferred Preferred Preferred
Investor(1) Stock Stock(2) Stock(2) Stock(2) Stock(2) Stock(2)
- ----------- ------- --------- --------- --------- --------- ---------
Entities affiliated with
Venrock Associates(3).. -- 1,222,222 592,592 283,086 175,654 589,164
Entities affiliated with
Oak Investment
Partners(4)............ -- 1,222,222 592,592 283,086 175,654 5,351,064
Entities affiliated with
The Sevin Rosen
Funds(5)............... -- 1,218,888 583,704 283,086 175,654 589,164
Entities affiliated with
MeriTech Capital
Partners L.P........... -- -- -- -- -- 4,761,900
General Motors
Investment Management
Corporation............ -- -- -- -- -- 3,333,330
Entities associated with
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated........... -- -- -- -- -- 2,380,950
Douglas O. Reudink...... 906,153 -- -- -- -- --
Jennifer Gill
Roberts(5)............. -- 3,333 4,986 -- -- --
- --------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
(2) Shown on an as-converted basis.
(3) David R. Hathaway, a director, is a general partner of Venrock Associates.
(4) Bandel L. Carano, a director, is a general partner of Oak Investment
Partners.
(5) Jennifer Gill Roberts, a director, is a general partner of the Sevin Rosen
Funds. In addition to the equity investment made by entities affiliated
with Sevin Rosen Funds, (i) Ms. Roberts purchased shares of Series A and
Series B preferred stock for her own account which convert to 3,333 and
4,986 shares of common stock, respectively, and (ii) Steven L. Domenik, a
general partner of Sevin Rosen, purchased shares of Series B
preferred stock for his own account which convert to 3,950 shares of
common stock.
51
On April 3, 1998, Dr. Reudink sold 20,513 shares of common stock at a price
of $9.75 per share to Cedar Grove Investment L.L.C., a limited liability
corporation which is managed by Mr. Scot Jarvis, one of our directors. On April
17, 1998, Dr. Reudink sold 13,333 shares of common stock at a price of $9.75
per share to Spinnaker Offshore Founders Fund, an entity affiliated with Bowman
Capital Management and related entities which are holders of Series D preferred
stock.
On April 28, 1998, we issued an aggregate principal amount of $29.0 million
13.75% Senior Secured Bridge Notes due April 28, 2000 to certain institutional
investors, including Powerwave Technologies, Inc. of which Bruce Edwards, one
of our directors, is president and chief executive officer. In addition, we
issued warrants to purchase an aggregate of 537,500 shares of our Series D
preferred stock at a purchase price of $0.01 per share. The number of shares of
Series D preferred stock issuable upon exercise of these warrants was adjusted
in December 1998 in connection with our sale of Series E preferred stock. On
April 28, 1999 all outstanding principal and accrued interest on these notes
were repaid in full. On April 26, 1999 all of the warrants issued in connection
with these notes were exercised and 620,702 shares of Series D preferred stock
were issued. Powerwave purchased $2,500,000 in aggregate principal amount of
the 13.75% Senior Secured Bridge Notes and was issued a warrant to purchase up
to an aggregate of 46,336 shares of Series D preferred stock at an exercise
price of $0.01 per share which was exercised in full in April 1999 for 53,509
shares of Series D preferred stock as a result of certain adjustments.
Powerwave Technologies, Inc. is currently our sole supplier of linear power
amplifiers, a component in our smart antenna systems. From January 1, 2000 to
March 31, 2000 and from January 1, 1999 to December 31, 1999, we purchased a
total of $2.8 million and $6.1 million, respectively of linear power amplifiers
and related components from Powerwave. Pursuant to a manufacturing agreement,
Powerwave will manufacture and sell to us 100% of our requirements for linear
power amplifiers that Powerwave manufactures.
52
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding beneficial
ownership of our common stock as of March 31, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock, and as adjusted to
reflect the sale of common stock offered by this prospectus, as to:
. each person, or group of affiliated or associated persons, who owns
beneficially more than 5% of the outstanding shares of our common stock,
. each of our directors,
. each of our Named Executive Officers, and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each stockholder is: c/o Metawave
Communications Corporation, 10735 Willows Road NE, P.O. Box 97069, Redmond, WA
98073-9769.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after March
31, 2000 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. The percent
of beneficial ownership for each stockholder is based on 30,594,478 shares of
common stock outstanding prior to this offering, on an as converted basis, plus
an additional 6,250,000 shares of common stock outstanding after this offering.
Unless otherwise indicated in the footnotes below, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
Percent of Shares
Outstanding
Shares -----------------
Beneficially Prior to After
Name and Address Owned Offering Offering
- ---------------- ------------ -------- --------
Oak Investment Partners(1)................... 7,705,730 25.2% 20.9%
525 University Avenue, Suite 1300
Palo Alto, CA 94301-1902
Venrock Associates(2)........................ 2,937,823 9.7 8.0
30 Rockefeller Plaza
New York, NY 10112-0184
The Sevin Rosen Funds(3)..................... 2,931,602 9.6 8.0
550 Lytton Avenue, Suite 200
Palo Alto, CA 94301-1542
MeriTech Capital Partners(4)................. 4,761,899 15.6 12.9
428 University Avenue, 2nd Floor
Palo Alto, CA 94301
General Motors Investment Management
Corporation................................. 3,333,330 10.9 9.0
767 Fifth Avenue(5)
New York, New York 10153
Merrill Lynch, Pierce, Fenner & Smith
Incorporated(6)............................. 2,380,948 7.8 6.5
World Financial Center, South Tower
New York, New York 10080-6123
Douglas O. Reudink(7)........................ 922,818 3.0 2.5
Robert H. Hunsberger(8)...................... 600,000 2.0 1.7
Victor K. Liang(9)........................... 66,480 * *
Richard Henderson(10)........................ 106,666 * *
Martin J. Feuerstein(11)..................... 48,777 * *
Bandel L. Carano(1).......................... 7,705,730 25.2 20.9
Jennifer Gill Roberts(12).................... 2,944,010 9.6 8.0
David R. Hathaway(2)......................... 2,937,823 9.7 8.0
Scot B. Jarvis(13)........................... 61,484 * *
Bruce C. Edwards(14)......................... 16,666 * *
David A. Twyver(15).......................... 16,666 * *
All directors and executive officers as a
group (15 persons)(16)...................... 16,428,243 51.9 43.4
- --------
* Represents less than 1% ownership.
Footnotes continued on following page.
53
(1) Includes 2,876,710 shares held by Oak Investment Partners VI, L.P.,
4,671,424 shares held by Oak Investment Partners VIII, L.P., 67,120
shares held by Oak VI Affiliates Fund, L.P. and 90,476 shares held by
Oak VIII Affiliates Fund, L.P. Bandel L. Carano, one of our directors,
is a Managing Member of Oak Associates VI, L.L.C., a general partner of
Oak Investment Partners VI, L.P., a General Partner of Oak VI Affiliates
and a general partner of Oak VI Affiliates Fund, and as such may be
deemed to share voting and investment power with respect to such shares.
Mr. Carano disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest in such shares.
(2) Includes 1,715,298 shares held by Venrock Associates and 1,222,531
shares held by Venrock Associates II, L.P. David R. Hathaway, a
director, is a general partner of Venrock Associates and Venrock
Associates II, L.P., and as such, may be deemed to share voting and
investment power with respect to such shares. Mr. Hathaway disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest in such shares.
(3) Includes 10,146 shares held by Sevin Rosen Bayless Management Co.,
1,998,944 shares held by Sevin Rosen Fund IV L.P., 884,694 shares held
by Sevin Rosen Fund V L.P., 37,822 shares held by Sevin Rosen V
Affiliates Fund L.P.
(4) Includes 4,685,709 shares held by MeriTech Capital Partners and 76,190
shares held by MeriTech Capital Affiliates, L.P.
(5) Includes 3,333,330 shares held by Chase Manhattan Bank, as trustee for
First Plaza Group Trust, General Motors Investment Management
Corporation.
(6) Includes 952,380 shares held by ML IBK Positions, Inc, 599,999 shares
held by Merrill Lynch KECALP L.P. 1997, 657,142 shares held by Merrill
Lynch KECALP L.P. 1999, 114,285 shares held by Merrill Lynch KECALP
International L.P. 1997 and 57,142 shares held by Merrill Lynch KECALP
International L.P. 1999.
(7) Includes 16,666 shares issuable upon the exercise of immediately
exercisable options held by Dr. Reudink within 60 days of March 31,
2000, all of which are subject to our right of repurchase that lapses
over time and includes 16,666 shares held in trust for Matthew Reudink,
Dr. Reudink's son.
(8) Includes 642,592 shares issuable upon the exercise of immediately
exercisable options held by Mr. Hunsberger within 60 days of March 31,
2000, 633,333 shares of which are subject to our right of repurchase
that lapses over time.
(9) Includes 75,966 shares issuable upon the exercise of immediately
exercisable options held by Mr. Liang within 60 days of March 31, 2000,
54,172 shares of which are subject to our right of repurchase that
lapses over time.
(10) Includes 112,222 shares issuable upon the exercise of immediately
exercisable options held by Mr. Henderson within 60 days of March 31,
2000, 107,222 shares of which are subject to our right of repurchase
that lapses over time.
(11) Includes 53,936 shares issuable upon the exercise of immediately
exercisable options held by Mr. Feuerstein within 60 days of March 31,
2000, 40,642 shares of which are subject to our right of repurchase that
lapses over time.
(12) Includes the shares referenced in footnote (3) and 8,272 shares held by
Ms. Roberts. Jennifer Gill Roberts, one of our directors, is a general
partner of Sevin Rosen Fund IV L.P., Sevin Rosen Fund V L.P. and Sevin
Rosen V Affiliates Fund L.P., and as such, may be deemed to share voting
and investment power with respect to such shares. Ms. Roberts disclaims
beneficial ownership of the shares referenced in footnote (3), except to
the extent of her pecuniary interest in such shares.
(13) Includes 70,512 shares owned by Cedar Grove Investments, LLC and Cedar
Grove Partners LLC, 7,986 shares of which are subject to our right of
repurchase that lapses over time. Mr. Jarvis, a managing member of each
Cedar Grove entity, disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interest in such shares.
(14) Includes 16,666 shares issuable upon the exercise of immediately
exercisable options held by Mr. Edwards within 60 days of March 31,
2000.
(15) Includes 16,666 shares issuable upon the exercise of immediately
exercisable options held by Mr. Twyver within 60 days of March 31, 2000.
(16) Includes shares referred to in footnotes (7)-(15) and 102,000 shares
issuable upon exercise of outstanding options exercisable within 60 days
of March 31, 2000 held by other officers.
54
DESCRIPTION OF SECURITIES
Following the closing of this offering, our authorized capital stock will
consist of 150,000,000 shares of common stock, $0.0001 par value, and
10,000,000 shares of preferred stock, $0.0001 par value. As of March 31, 2000,
there were 2,621,571 shares of common stock outstanding that were held of
record by approximately 136 stockholders. There will be 36,844,478 shares of
common stock outstanding (assuming no exercise of outstanding options after
March 31, 2000) after giving effect to this offering and conversion of all
outstanding preferred shares.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of Metawave, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of preferred stock, if
any, then outstanding. The common stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions available to the common stock.
Preferred Stock
Upon the closing of this offering, the board of directors is authorized to
issue up to 10,000,000 shares of preferred stock in one or more series and to
determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without any further vote or action by
the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of Metawave without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of common stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the common stock. As of the closing of
this offering, no shares of preferred stock will be outstanding and we
currently have no plans to issue any shares of preferred stock.
Warrants
As of March 31, 2000, we had warrants outstanding to purchase an aggregate
of 20,833 shares of common stock, 65,416 shares of Series A preferred stock,
convertible into 43,610 shares of common stock, 19,999 shares of Series B
preferred stock, convertible into 13,332 shares of common stock, 34,090 shares
of Series C preferred stock, convertible into 29,723 shares of common stock and
4,375 shares of Series D preferred stock, convertible into 4,205 shares of
common stock.
In connection with a equipment lease line entered into with Transamerica
Business Credit Corporation in May 1999, we issued a warrant to purchase up to
an aggregate of 20,833 shares of common stock at an exercise price of $6.75 per
share. The warrant expires on May 19, 2004.
In connection with an equipment lease line entered into in December 1995, we
issued a warrant to purchase up to an aggregate of 48,750 shares of Series A
preferred stock to Comdisco, Inc. at an exercise price of $2.1875 per share,
convertible into 32,500 shares of common stock. The warrant expires on December
13, 2002. In connection with a second equipment lease line entered into in
April 1996, we issued a warrant to purchase up to an aggregate of 16,666 shares
of Series A preferred stock to Comdisco at an exercise price of $2.1875 per
share, convertible into 11,110 shares of common stock. The warrant expires on
April 9, 2003. In connection with a third equipment lease line entered into in
August 1996, we issued a warrant to purchase up to an aggregate of 19,999
shares of Series B preferred stock to Comdisco at an exercise price of
55
$4.7675 per share, convertible into 13,332 shares of common stock. The warrant
and the extension expire on the later of August 20, 2003 or three years
following the effective date of this offering. In connection with a fourth
equipment lease line entered into in June 1997, we issued a warrant to purchase
up to an aggregate of 34,090 shares of Series C preferred stock to Comdisco at
an exercise price of $6.16 per share convertible into 29,723 shares of common
stock. The warrant expires on the later of June 9, 2004 or 18 months following
the effective date of this offering.
In connection with an equipment lease line entered into with Insight
Investments Corporation in April 1998, we issued a warrant to purchase up to an
aggregate of 4,375 shares of Series D preferred stock at an exercise price of
$8.00 per share, convertible into 4,205 shares of common stock. The warrant
expires on the closing of this offering.
Registration Rights of Certain Holders
The holders of 28,924,774 shares of common stock or certain of their
transferees are entitled to rights with respect to the registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between us and the holders of registrable securities. Subject to
certain limitations in the agreement, certain holders of the registrable
securities may require, on two occasions at any time after six months from the
effective date of this offering, that we use our best efforts to register the
registrable securities for public resale, provided that the proposed aggregate
offering price is at least $7,500,000. No shares of common stock are being
registered on behalf of these holders in this offering. Furthermore, in the
event we elect to register any of our common stock for purposes of effecting
any public offering, the holders of registrable securities are entitled to
include their shares of common stock in the registration. A holder's right to
include shares in an underwritten registration is subject to the ability of the
underwriters to limit the number of shares included in the underwritten public
offering. Subject to certain conditions, all fees, costs and expenses of such
registrations must be borne by us and all selling expenses, including
underwriting discounts, selling commissions and stock transfer taxes, relating
to registrable securities must be borne by the holders of the securities being
registered. In addition, we have agreed to indemnify the holders of
registration rights against liabilities under the Securities Act.
Anti-Takeover Provisions of Delaware and Washington Law and Charter Documents
We are subject to the provisions of Section 203 of the Delaware General
Corporate Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless, with certain exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of Metawave without further action by the
stockholders.
The laws of the State of Washington, where our principal executive offices
are located, impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, or the WBCA, prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation, an "acquiring
person", for a period of five years after such acquisition, unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a merger
or consolidation with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, termination of 5% or more of the
employees of the target corporation as a result of the acquiring person's
acquisition of 10% or more of the shares or allowing the acquiring person to
receive disproportionate benefit as a stockholder. After the five-year period,
a
56
significant business transaction may take place as long as it complies with
certain fair price provisions of the statute. A target corporation includes a
foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act,
. the corporation's principal executive office is located in Washington,
and
. any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of record
by Washington residents, (c) 1,000 or more of its stockholders of record
are Washington residents, (d) a majority of the corporation's employees
are Washington residents or more than 1,000 Washington residents are
employees of the corporation, or (e) a majority of the corporation's
tangible assets are located in Washington or the corporation has more
than $50.0 million of tangible assets located in Washington.
A corporation may not "opt out" of this statute and, therefore, we
anticipate this statute will apply to us. Depending upon whether we meet the
definition of a target corporation, Chapter 23B.19 of the WBCA may have the
effect of delaying, deferring or preventing a change in control of Metawave.
In addition, upon completion of this offering, certain provisions of our
charter documents, including a provision eliminating the ability of
stockholders to take actions by written consent, may have the effect of
delaying or preventing changes in control or management of Metawave, which
could have an adverse effect on the market price of our common stock. Our stock
option and purchase plans generally provide that upon a change in control or
similar event optionees are entitled to accelerated vesting credit equal to
either twelve months or twenty-four months of additional vesting beyond that
otherwise scheduled, based on whether he or she has been employed by Metawave
less than two years, or two years or more, respectively, as of the date of such
event unless in connection with the change in control or similar event,
outstanding options are assumed or substituted for equivalent options of a
successor corporation. The board of directors has authority to issue up to
10,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The rights of the holders of
the common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of Metawave. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance of such preferred stock could have a material adverse effect on
the market value of the common stock. We have no present plan to issue shares
of preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C. and their number is (206) 674-3030.
Listing
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "MTWV."
57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 36,844,478 shares
of common stock, assuming no exercise of options after March 31, 2000. Of these
shares, the 6,250,000 shares sold in this offering will be eligible for resale
in transactions on the Nasdaq National Market without restriction pursuant to
exemptions under the Securities Act unless purchased by our "affiliates" as
that term is defined in Rule 144 of the Securities Act.
The remaining 30,594,478 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144 and may
not be sold publicly unless they are registered under the Securities Act or are
sold pursuant to Rule 144 or another exemption from registration. All of our
directors and executive officers and certain other stockholders, holding in the
aggregate 16,428,243 of the shares of common stock outstanding prior to this
offering, are contractually obligated not to sell or otherwise dispose of any
shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated or us. The number of shares of common stock available for
sale in the public market is further limited by restrictions under the
Securities Act.
Because of the restrictions noted above, on the date of this prospectus and
until 180 days after the date of this prospectus, assuming no release of the
lockup period by us or by Merrill Lynch, Pierce, Fenner & Smith Incorporated,
480,475 shares in addition to the 6,250,000 shares offered hereby will be
eligible for sale in the public market. Beginning 90 days after the effective
date of this offering, approximately 401,745 restricted shares will be eligible
for sale in the public market. Beginning 180 days after the effective date of
this offering, approximately 29,722,829 restricted shares, will be eligible for
sale in the public market, subject in some cases to certain volume limitations.
Upon the expiration of one-year minimum holding periods, an additional
10,571 shares will be eligible for sale.
Days after Date Shares Eligible
of this Prospectus for Sale Comment
-------------------- --------------- -----------------------------------------
Upon effectiveness.. 6,250,000 Shares sold in offering
Upon effectiveness.. 480,475 Freely tradable shares salable under Rule
144(k) that are not subject to the lockup
91 days............. 401,745 Shares salable under Rules 701 and 144
and not subject to the lockup
181 days............ 29,722,829 Lockup released; shares salable under
Rules 144 and 701
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, including persons who may be deemed our "affiliates", would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the number of shares of common stock then
outstanding or the average weekly trading volume of the common stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us. In
addition, a person who is not deemed to have been an affiliate of us at any
time during the 90 days preceding a sale, and who has beneficially owned for at
least two years the shares proposed to be sold, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. During the lockup period,
we intend to file a registration statement under the Securities Act to register
shares to be issued pursuant to our employee benefit plans. As a result, any
options exercised under the 1995 stock option plan, the 1998 stock option plan,
the 2000 stock option plan, the 2000 director option plan, the 2000 employee
stock purchase plan or any other benefit plan after the effectiveness of such
registration statement will also be freely tradable in the public market,
except that shares
58
held by affiliates will still be subject to the volume limitation, manner of
sale, notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of March 31, 2000, there were outstanding options
for the purchase of 3,489,623 shares of our common stock under our employee
benefit plans.
Prior to this offering, there has been no public market for our securities.
No prediction can be made as to the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of our common
stock in the public market after the lapse of the restrictions described above
could adversely affect the prevailing market price and our ability to raise
equity capital in the future at a time and price which we deem appropriate. In
addition, after this offering, the holders of the registrable securities will
be entitled to certain demand and piggyback rights with respect to registration
of their shares under the Securities Act. Registration of those shares under
the Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by our
affiliates) immediately upon the effectiveness of such registration. If such
holders, by exercising their demand registration rights, cause a larger number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for our common stock. If we were to
include in a registration initiated by us, any registrable securities pursuant
to the exercise of piggyback registration rights, such sales may have an
adverse effect on our ability to raise needed capital.
59
UNDERWRITING
General
We intend to offer our common stock through a number of underwriters.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney and
U.S. Bancorp Piper Jaffray are acting as representatives of the underwriters
named below. Subject to the terms and conditions described in a purchase
agreement among us and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from our company, the number of shares of common stock set forth
opposite its name below.
Number of
Underwriter Shares
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Salomon Smith Barney...............................................
U.S. Bancorp Piper Jaffray Inc.....................................
Total............................................................
====
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated. The closings for the sales of shares to be purchased by the
underwriters are conditioned on one another.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.
Commissions and Discounts
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to certain
dealers at a price less a concession not in excess of $ per share of common
stock. The underwriters may allow, and such dealers may reallow, a discount not
in excess of $ per share of common stock to certain other dealers. After
the initial public offering, the public offering price, concession and discount
may change.
The following table shows the per share and total public offering price, the
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. The information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment option.
Without With
Per Share Option Option
--------- ------- ------
Public offering price............................... $ $ $
Underwriting discount............................... $ $ $
Proceeds, before expenses, to Metawave.............. $ $ $
The expenses of the offering, not including the underwriting discount, are
estimated at $1,000,000 and are payable by Metawave.
60
Over-allotment Option
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of
937,500 additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise such option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number set forth next to such
underwriters name in the above table bears to the total number of shares of
common stock offered hereby, and we will be obligated, pursuant to the option,
to sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of common stock offered hereby. If
purchased, the underwriters will offer such additional shares on the same terms
as those on which the 6,250,000 shares are being offered.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 7% of the shares offered by this prospectus for
sale to some of our employees, distributors, suppliers, business associates and
related persons. If these persons purchase reserved shares, this will reduce
the number of shares available for sale to the general public. Any reserved
shares that are not orally confirmed for purchase within one day of the pricing
of this offering will be offered by the underwriters to the general public on
the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We, our executive officers and directors and most of our existing
stockholders have agreed not to directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into
or exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the
agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file any registration
statement under the Securities Act relating to any shares of our common
stock (other than shares sold in this offering or hereafter acquired in
the public market), or
. enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our common stock whether any such swap or transaction is to be settled
by delivery of our common stock or other securities, in cash or
otherwise,
without the prior written consent of Merrill Lynch Pierce, Fenner & Smith
Incorporated on behalf of the underwriters for a period of 180 days after the
date of the prospectus. See "Shares Eligible for Future Sale."
Quotation on the Nasdaq National Market
We have applied to have our common stock listed on the Nasdaq National
Market, subject to notice of issuance, under the symbol "MTWV."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us and the representatives and the lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are:
. the valuation multiples of publicly traded comparisons that the
representatives and the lead managers believe to be comparable to us,
. our financial information,
61
. the history of, and the prospects for, our company and the industry in
which we compete,
. an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues,
. the present state of our development and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
Other Relationships
ML IBK Positions, Inc. and other investment funds which are associated with
Merrill Lynch, Pierce, Fenner & Smith Incorporated purchased an aggregate of
2,380,948 shares of our Series E preferred stock. Merrill Lynch, Pierce, Fenner
& Smith Incorporated has in the past provided and may in the future provide,
investment banking services for which they have received, and may receive,
customary fees.
Price Stabilization and Short Positions
Until the distribution of our common stock is completed, rules of the
Commission may limit the ability of the underwriters to bid for and purchase
our common stock. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of our common
stock. Stock transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our common stock.
The underwriters may create a short position in our common stock in
connection with the offering. This means that if they sell more shares of our
common stock than are set forth on the cover page of this prospectus, the
underwriters may reduce that short position by purchasing our common stock in
the open market. The underwriters may also elect to reduce any short position
by exercising all or part of the over-allotment option described above.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the underwriters
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
Electronic Distribution of Prospectus
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the Website maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch Website relating to this offering is not a part of this
prospectus.
62
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by our counsel, Venture Law Group, a Professional Corporation, Kirkland,
Washington. Certain legal matters will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, a Professional Corporation, Palo Alto,
California.
EXPERTS
The financial statements and schedule of Metawave Communications Corporation
as of December 31, 1997, 1998 and 1999 and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports, given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act. This prospectus, which is a
part of the registration statement, does not contain all of the information set
forth in the registration statement, including items contained in the exhibits
to the registration statement. For further information about our company and
the common stock being offered by this prospectus, you should see the
registration statement and the exhibits, financial statements and notes filed
with the registration statement. Copies of the registration statement,
including exhibits, financial statements and notes, may be inspected without
charge at the SEC principal office in Washington, D.C. or obtained at
prescribed rates from the public reference room of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information regarding the
public reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
companies that file electronically with the SEC. We have filed the registration
statement, including the exhibits and schedules, electronically with the SEC
via the SEC EDGAR system.
63
METAWAVE COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Consolidated Balance Sheets........................................... F-3
Consolidated Statements of Operations................................. F-4
Consolidated Statements of Stockholders' Deficit...................... F-5
Consolidated Statements of Cash Flows................................. F-6
Notes to Consolidated Financial Statements............................ F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Metawave Communications Corporation
We have audited the accompanying consolidated balance sheets of Metawave
Communications Corporation as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Metawave
Communications Corporation at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Seattle, Washington
February 11, 2000, except paragraph 10 of Note 6 and Note 14,
as to which the date is .
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the two for three stock split described in Note 14 to the financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
March 27, 2000
F-2
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Pro Forma
Stockholders'
December 31, Equity at
------------------- March 31, March 31,
1998 1999 2000 2000
-------- --------- ----------- -------------
(Unaudited) (Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents..... $ 10,763 $ 20,165 $ 14,497
Accounts receivable, less
allowances of $908 in 1999
and March 31, 2000 ($693 in
1998)........................ 4,329 10,127 9,548
Inventories................... 7,929 4,149 5,861
Debt issuance costs, net of
amortization of $6,491 in
1999 and March 31, 2000
($4,170 in 1998)............. 2,321 -- --
Prepaid expenses and other
assets....................... 621 613 552
-------- --------- ---------
Total current assets........ 25,963 35,054 30,458
Property and equipment, net..... 6,355 5,701 5,775
Other noncurrent assets......... 192 191 185
-------- --------- ---------
Total assets................ $ 32,510 $ 40,946 $ 36,418
======== ========= =========
LIABILITIES AND STOCKHOLDERS'
DEFICIT
- -----------------------------
Current liabilities:
Accounts payable.............. $ 5,412 $ 3,758 $ 6,897
Accrued liabilities........... 2,334 2,493 2,908
Accrued compensation.......... 1,461 1,511 1,802
Senior secured notes.......... 31,704 -- --
Current portion of notes
payable...................... 134 75 3
Current portion of capital
lease obligations............ 1,908 2,692 2,510
Deferred revenues............. 145 1,766 517
-------- --------- ---------
Total current liabilities... 43,098 12,295 14,637
Capital lease obligations, less
current portion................ 4,326 2,479 2,380
Notes payable, less current
portion........................ 87 8 8
Other long-term liabilities..... -- 16 16
Commitments:
Convertible and redeemable
preferred stock, issued and
outstanding shares--14,029,088,
32,027,203 and 32,027,203 in
1998, 1999 and March 31, 2000,
respectively at liquidation
value (none pro forma)......... 56,472 143,945 143,945
Convertible and redeemable
preferred stock warrants....... 5,123 157 157
Stockholders' equity (deficit):
Preferred stock, $.0001 par
value:
Authorized shares--
37,000,000, of which
32,027,203 have been
designated as convertible and
redeemable at December 31,
1999 and March 31, 2000......
Common stock, $.0001 par
value:
Authorized shares--
50,000,000; issued and
outstanding shares--
2,112,229, 2,390,910 and
2,621,571 in 1998, 1999 and
March 31, 2000, respectively
and 30,594,478 pro forma..... 2,179 3,573 6,384 $ 150,486
Deferred stock compensation... (554) (906) (2,676) (2,676)
Accumulated other
comprehensive income ........ 6 19 (48) (48)
Accumulated deficit........... (78,227) (120,640) (128,385) (128,385)
-------- --------- --------- ---------
Total stockholders' equity
(deficit).................. (76,596) (117,954) (124,725) $ 19,377
-------- --------- --------- =========
Total liabilities and
stockholders' equity....... $ 32,510 $ 40,946 $ 36,418
======== ========= =========
See accompanying notes.
F-3
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(unaudited)
Revenues................ $ 1,450 $ 15,991 $ 22,596 $ 6,834 $ 9,329
Cost of revenues........ 1,728 18,028 22,236 7,059 7,094
--------- --------- --------- --------- ---------
Gross profit (loss)..... (278) (2,037) 360 (225) 2,235
Operating expenses:
Research and
development.......... 13,083 18,495 22,787 5,392 6,374
Sales and marketing... 5,383 11,346 11,080 2,694 2,343
General and
administrative....... 3,762 5,887 5,732 1,280 1,325
--------- --------- --------- --------- ---------
Total operating
expenses........... 22,228 35,728 39,599 9,366 10,042
--------- --------- --------- --------- ---------
Operating loss.......... (22,506) (37,765) (39,239) (9,591) (7,807)
Other income, net....... 851 790 1,165 129 216
Interest expense........ (449) (7,353) (4,339) (3,237) (154)
--------- --------- --------- --------- ---------
Other income
(expense), net..... 402 (6,563) (3,174) (3,108) 62
--------- --------- --------- --------- ---------
Net loss................ $ (22,104) $ (44,328) $ (42,413) $ (12,699) $ (7,745)
========= ========= ========= ========= =========
Basic and diluted net
loss per share......... $ (12.18) $ (21.88) $ (18.98) $ (6.00) $ (3.04)
========= ========= ========= ========= =========
Shares used in
computation of basic
and diluted net loss
per share.............. 1,815,000 2,025,741 2,234,798 2,117,631 2,549,089
========= ========= ========= ========= =========
See accompanying notes.
F-4
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1997, 1998 and 1999
(in thousands, except share data)
Accumulated
Common Stock Deferred Other Total
----------------- Stock Comprehensive Accumulated Stockholders'
Shares Amount Compensation Income Deficit Deficit
--------- ------ ------------ ------------- ----------- -------------
Balance at January 1,
1997................... 1,767,335 $ 10 $ 0 $ 0 $ (11,795) $ (11,785)
Exercise of stock
options............... 188,061 77 -- -- -- 77
Deferred stock
compensation.......... -- 1,881 (1,881) -- -- --
Stock compensation
expense............... -- -- 676 -- -- 676
Net loss for the year
ended December 31,
1997.................. -- -- -- -- (22,104) (22,104)
--------- ------ ------- ---- --------- ---------
Balance at December 31,
1997................... 1,955,396 1,968 (1,205) 0 (33,899) (33,136)
Repurchased restricted
stock................. (92,266) (5) -- -- -- (5)
Exercise of stock
options............... 241,766 106 -- -- -- 106
Issuance and exercise
of common stock
warrants.............. 7,333 110 -- -- -- 110
Stock compensation
expense............... -- -- 651 -- -- 651
Comprehensive income
(loss):
Foreign exchange
translation gain...... -- -- -- 6 -- 6
Net loss for the year
ended December 31,
1998.................. -- -- -- -- (44,328) (44,328)
---------
Comprehensive loss..... (44,322)
--------- ------ ------- ---- --------- ---------
Balance at December 31,
1998................... 2,112,229 2,179 (554) 6 (78,227) (76,596)
Exercise of stock
options............... 278,681 137 -- -- -- 137
Issuance of common
stock warrants........ -- 88 -- -- -- 88
Deferred stock
compensation.......... -- 1,169 (1,169) -- -- --
Stock compensation
expense............... -- -- 817 -- -- 817
Comprehensive income
(loss):
Foreign exchange
translation gain...... -- -- -- 13 -- 13
Net loss for the year
ended December 31,
1999.................. -- -- -- -- (42,413) (42,413)
---------
Comprehensive loss..... (42,400)
--------- ------ ------- ---- --------- ---------
Balance at December 31,
1999................... 2,390,910 $3,573 $ (906) $ 19 $(120,640) $(117,954)
Exercise of stock
options (unaudited)... 230,661 279 -- -- -- 279
Deferred stock
compensation
(unaudited)........... -- 2,532 (2,532) -- -- --
Stock compensation
expense (unaudited)... -- -- 762 -- -- 762
Comprehensive income
(loss):
Foreign exchange
translation gain
(unaudited)........... -- -- -- (67) -- (67)
Net loss for three
months ended March 31,
2000 (unaudited)...... -- -- -- -- (7,745) (7,745)
---------
Comprehensive loss..... (7,812)
--------- ------ ------- ---- --------- ---------
Balance at March 31,
2000................... 2,621,571 $6,384 $(2,676) $(48) $(128,385) $(124,725)
========= ====== ======= ==== ========= =========
See accompanying notes.
F-5
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months
Year Ended December 31, Ended March 31,
------------------------------ ------------------
1997 1998 1999 1999 2000
--------- --------- -------- -------- --------
(unaudited)
Operating activities
Net loss................... $(22,104) $(44,328) $(42,413) $(12,699) $ (7,745)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization expense.... 1,841 2,623 3,035 771 718
Loss (gain) on disposal
of assets............... -- 8 208 85 --
Stock compensation
expense................. 676 651 817 -- 762
Reserve for loss on
assets.................. 425 -- -- -- --
Accrued interest expense
on senior notes......... -- 2,704 -- 1,065 --
Debt financing
amortization............ -- 2,673 2,321 1,965 --
Noncash warrant expense.... -- 110 88 -- --
Changes in operating
assets and liabilities:
Decrease (increase) in
accounts receivable... (1,323) (2,885) (5,798) (3,747) 580
Decrease (increase) in
inventories........... (4,080) (3,849) 3,780 4,431 (1,713)
Decrease (increase) in
other assets.......... (34) (502) 8 (35) 67
Increase (decrease) in
accounts payable,
accrued liabilities,
and other
liabilities........... 926 7,915 (1,441) (1,910) 3,844
Increase in other long-
term liabilities...... -- (5) -- -- --
Increase (decrease) in
deferred revenues..... 114 30 1,621 206 (1,249)
--------- --------- -------- -------- --------
Net cash provided by (used
in) operating activities.. (23,559) (34,855) (37,774) (9,868) (4,736)
Investing activities
Proceeds on sale of
assets.................... -- 78 -- -- --
Purchases of equipment..... (621) (2,593) (1,317) (994) (790)
--------- --------- -------- -------- --------
Net cash provided by (used
in) investing activities.. (621) (2,515) (1,317) (994) (790)
Financing activities
Proceeds from issuance of
preferred stock........... 19,182 7,190 82,507 5,810 --
Proceeds from issuance of
common stock.............. 77 101 138 7 279
Proceeds from notes
payable................... -- 29,000 -- 2,000 --
Payments on notes payable.. (115) (182) (31,841) (86) (72)
Principal payments on
capital lease
obligations............... (722) (1,317) (2,319) (2,725) (282)
--------- --------- -------- -------- --------
Net cash provided by
financing activities...... 18,422 34,792 48,485 5,006 (75)
--------- --------- -------- -------- --------
Net increase (decrease)in
cash...................... (5,758) (2,578) 9,394 (5,856) (5,601)
Effect of exchange rate
changes on cash........... -- 7 8 (35) (67)
Cash and cash equivalents
at beginning of period.... 19,092 13,334 10,763 10,763 20,165
--------- --------- -------- -------- --------
Cash and cash equivalents
at end of period.......... $ 13,334 $ 10,763 $ 20,165 4,872 14,497
========= ========= ======== ======== ========
Noncash transactions and
supplemental disclosures
Capital lease obligations
incurred to purchase
assets.................... $ 2,665 $ 3,104 $ 1,256 -- 426
Inventories reclassified to
property and equipment.... -- 171 -- -- --
Interest paid.............. 450 596 1,653 1,270 116
Non cash conversion of
warrants to preferred
stock..................... -- -- 620 -- --
Deferred stock
compensation.............. 1,881 -- 1,169 -- 2,532
See accompanying notes.
F-6
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
Metawave Communications Corporation (the "Company") designs, develops,
manufactures and markets smart antenna systems for the wireless communications
industry. The Company believes that its spectrum management solutions,
consisting of smart antenna systems, applications software and engineering
services, enable wireless network operators to increase overall network
capacity, improve or maintain network quality and reduce network operating
costs and better manage network infrastructure. Using its proprietary
technologies, the Company has developed systems that address the capacity,
coverage and call quality problems faced by wireless network operators.
On September 2, 1998, the Company formed Metawave International
Communications Corporation ("MICC"), a wholly owned Delaware subsidiary. On
October 5,1998, the Company formed a Hong Kong subsidiary, Metawave
Communications (Asia) Limited, which is now owned by Metawave Communications
(Cayman Islands). On December 7, 1998, the Company formed Metawave
Communications (Cayman Islands), a wholly owned subsidiary of MICC. On April 2,
1999 Metawave Communications (Cayman Islands) formed a Taiwan subsidiary,
Metawave Communications Taiwan Co. Ltd.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
In 1998, the Company adopted a 52 week fiscal year ending on the Sunday
closest to December 31, 1999. The 1999 fiscal year ends on January 2, 2000,
with each of the fiscal quarters representing a 13-week period. For convenience
of presentation, all fiscal periods in these financial statements are treated
as ending on a calendar month end.
Liquidity
The Company experienced net losses of $44,328,000 and $42,413,000 for the
years ended December 31, 1998 and 1999, respectively. These losses are the
result of intense product development efforts and the costs associated with the
development of the Company's manufacturing and sales operations. Management
believes that the Company will experience substantial losses in 2000, even if
commercial sales of the Company's systems continue to grow. Management believes
that existing cash, unused credit facilities, and revenues from system sales,
will be sufficient to fund operations through 2000. Any substantial inability
to achieve the current business plan could have a material adverse impact on
the Company's financial position, liquidity or results of operations and may
require the Company to reduce expenditures to enable it to continue operations
through December 2000.
Unaudited Interim Financial Information
The financial information as of March 31, 2000 and for the three months
ended March 31, 2000 and 1999 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that Metawave considers
necessary for a fair presentation of the financial position at those dates and
of the operations and cash flows for the periods then ended. Operating results
for the three months ended March 31, 2000 are not necessarily indicative of
results that may be expected for the entire year.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to
F-7
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
U.S. dollars at the exchange rate in effect on the balance sheet date. Revenues
and expenses are translated at the average rates of exchange prevailing during
the year. The translation adjustment resulting from this process is shown
within accumulated other comprehensive income (loss) as a component of
stockholders' equity. Gains and losses on foreign currency transactions are
included in the consolidated statement of operations as incurred. To date,
gains and losses on foreign currency transactions have not been significant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Accordingly, actual results may differ from those
estimates. The Company has used estimates in determining certain provisions,
including the allowance for doubtful accounts receivable, inventory reserves,
useful lives for property and equipment, and warranty accruals.
Revenue Recognition
The Company generates revenues through the sales of smart antenna systems
and related installation and optimization services. System revenues are
recognized when title to the system and risk of loss has been transferred to
the customer and all customer acceptance conditions, if any, have been
satisfied, and when collection is probable.
Service revenues, generally for installation and optimization, are
recognized when the services have been performed and all customer acceptance
conditions, if any, have been satisfied. Revenues from maintenance contracts
are deferred and recognized ratably over the term of the agreement (which is
typically one year). Any billings in excess of revenues are classified as
deferred revenues and related systems are recorded as inventory.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents and trade receivables.
The carrying value of financial instruments approximates market value.
The Company's customers are primarily wireless network operators in the
United States and certain international markets. As such, the Company's primary
market is made up of a limited number of customers operating within the same
industry, thereby subjecting the Company to business risks associated with
potential downturns of the industry. Export sales represented 26.0% of revenues
in the year ended December 31, 1999, 23.5% in 1998 and none in 1997. During
1998, one customer, Alltel Communications Inc., represented 88% of the
Company's trade accounts receivable. In 1999, two customers, AirTouch
Communications Inc. and Grupo Iusacell S.A. de C.V., represented 28% and 53% of
the Company's trade accounts receivable, respectively.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves, which to date have not been material, for potential credit losses,
and such losses have been within management's expectations.
Net Loss per Share
Basic net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options
and redeemable convertible preferred stock, in the weighted average number of
common shares outstanding as if
F-8
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
such shares were converted to common stock at the time of issuance. Common
stock equivalents, including stock options and warrants, are excluded from the
computation as their effect is anti-dilutive. For the periods presented, there
is no difference between the basic and diluted net loss per share.
Pro forma loss per share (unaudited) is computed by dividing net loss by the
weighted average number of shares of common stock outstanding and the weighted
average number of shares of convertible and redeemable preferred stock
outstanding as if such shares were converted to common stock at the time of
issuance.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The Company
invests with various high-quality institutions and, in accordance with Company
policy, limits the amount of credit exposure to any one institution.
The Company accounts for its marketable securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All
marketable securities are classified as available-for-sale and are carried at
fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. As of December 31, 1998 and 1999
all marketable securities were cash equivalents and unrealized holdings gains
and losses were not significant.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of purchased parts, subassemblies and finished goods.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the related assets for financial statement
purposes over estimated useful lives of two to seven years. Leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful life.
Warranty
The Company generally provides a 12 month warranty, which may vary depending
upon specific contractual terms, on all systems and records a related provision
for estimated warranty costs at the date of sale.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising expense of
$535,000, $692,000 and $1,387,000 was recorded for the years ended December 31,
1997, 1998 and 1999, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for its employee stock options
F-9
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
rather than the alternative fair value accounting allowed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). APB No. 25 provides that the compensation expense relative to
the Company's employee stock options is measured based on the intrinsic value
of the stock option. SFAS No. 123 requires companies that continue to follow
APB No. 25 to provide a pro forma disclosure of the impact of applying the fair
value method of SFAS No. 123 (refer to Note 6). The Company recognizes
compensation expense for options and warrants granted to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
Consensus 96-18.
Other Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. The other comprehensive income
(loss) which the Company currently reports is foreign currency translation
adjustments.
Business Segments
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information about operating segments in annual financial statements. The
Company operates in one segment as a provider of certain wireless
telecommunication equipment. SFAS No. 131 also establishes standards for
related disclosures about systems and services, geographic areas and major
customers. Information related to segment disclosures is contained in Notes 13
and 14.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. The Company does not
anticipate that the adoption of this new standard will have a material effect
on earnings or the financial position of the Company, but continues to evaluate
the impact of SFAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). This summarized certain areas of
the staff's views in applying generally accepted accounting principles as it
applies to revenue recognition. The Company believes that its revenue
recognition principles comply with SAB 101. The Company will continue to
evaluate interpretations of SAB 101.
2. Inventories
December 31,
------------- March 31,
1998 1999 2000
------ ------ -----------
(unaudited)
(in thousands)
Purchased parts.................................. $4,922 $2,251 $3,371
Subassemblies.................................... 2,332 1,144 1,452
Finished goods................................... 675 754 1,038
------ ------ ------
$7,929 $4,149 $5,861
====== ====== ======
F-10
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Inventories--(continued)
Purchased parts include purchased components and partially assembled units.
Subassemblies primarily represent components that are assembled and ready for
final configuration pending the detailed requirements for the specific
customer. Finished goods are units representing projects-in-process at customer
locations.
3. Property and Equipment
December 31,
---------------- March 31,
1998 1999 2000
------- ------- -----------
(unaudited)
(in thousands)
Equipment................................... $ 9,384 $10,100 $10,884
Furniture and fixtures...................... 869 976 982
Leasehold improvements...................... 920 910 912
------- ------- -------
11,173 11,986 12,778
Accumulated depreciation and amortization... (4,818) (6,285) (7,003)
------- ------- -------
$ 6,355 $ 5,701 $ 5,775
======= ======= =======
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of $9,591,000 and $8,920,000 as of December
31, 1998 and 1999, respectively. Accumulated amortization on the leased assets
was $3,357,000 and $3,749,000 as of December 31, 1998 and 1999, respectively.
4. Notes Payable
December 31,
------------ March 31,
1998 1999 2000
------- ---- -----------
(unaudited)
(in thousands)
Senior Secured Notes, repaid in April 1999........... $31,704 $-- $--
Note payable to U.S. Bank with monthly payments of
$217, maturing in July 2000, bearing interest at
11%................................................. 4 -- --
Note payable to Comdisco, with monthly payments of
$12,126, maturing in February 2000, bearing interest
at 8%, with a residual payment of $50,000 due
February 28, 2000, secured by the underlying
equipment........................................... 202 72 --
Notes payable to Chrysler Financial with monthly
payments aggregating $347, bearing interest at 10%.. 15 11 11
------- ---- ----
31,925 83 11
Less current portion................................. 31,838 75 3
------- ---- ----
Long term portion.................................... $ 87 $ 8 $ 8
======= ==== ====
Senior Secured Notes
On April 28, 1998, the Company issued $29.0 million aggregate principal
amount of Senior Secured Notes ("Senior Notes"), with a maturity date of April
28, 2000. The Senior Notes accrue interest at 13.75%, payable semiannually at
the option of the Company in either additional Senior Notes or cash. In October
1998, the Company issued additional Senior Notes of approximately $2.7 million
in connection with the related accrued interest.
F-11
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Notes Payable--(continued)
In connection with the Senior Notes, the noteholders received warrants to
purchase 537,500 shares of Series D Preferred Stock at $.01 per share. The
Company recorded debt issuance fees of approximately $4.3 million related to
the estimated fair value of these warrants. The debt issuance fees were
amortized over the period during which the Senior Notes were outstanding.
On December 21, 1998, the Company issued an additional 83,202 warrants at
$0.01 per share to the Senior Noteholders in connection with certain
antidilution provisions. The fair value of these additional warrants was
estimated to be approximately $671,000 which has been amortized over the
remaining term of the Senior Notes.
In April 1999, the Company retired all of the principal and accrued interest
on the Senior Notes aggregating $33,124,570. In addition, the warrants issued
in connection with the Senior Notes were exercised by the noteholders for an
aggregate 620,702 shares of Series D Preferred Stock. Amortization of debt
issuance costs, which has been included in interest expense, aggregated
$4,170,000 in 1998 and $2,321,000 in 1999.
Line of Credit Agreement
The Company has a credit facility with a commercial bank. The facility
provides for a revolving credit line of $7.5 million to support working capital
with a $3.0 million sublimit for issuance of trade-related commercial and
standby letters of credit, and expires on March 14, 2000. Outstanding balances
on the credit line bear interest at the bank's prime rate (8.5% as of December
31, 1998 and 1999), and are secured by the Company's accounts receivable. At
December 31, 1998 and 1999, $2.5 million was outstanding related to the
issuance of a standby letter of credit. The Company is required to comply with
certain covenants set forth in the line of credit agreement. The Company is
currently in compliance with these covenants.
On March 23, 2000, the Company signed a commitment letter renewing and
increasing the line of credit to $10 million with Imperial Bank. The renewed
revolving line of credit agreement has a maturity date of one year from the
initial draw date with interest at the prime rate on the date of draw, payable
monthly and principal payable at maturity. As of March 31, 2000, the Company
had no outstanding balance on this credit facility.
5. Convertible and Redeemable Preferred Stock
In July 1995, the Company issued 5,500,000 shares of Series A Preferred
Stock ("Series A") through a private offering. Proceeds from the financing
amounted to $5,500,000, or $1.00 per share.
In May 1996, the Company issued 2,711,113 shares of Series B Preferred Stock
("Series B") through a private offering. Proceeds from the financing amounted
to $9,150,006. An additional 29,630 shares of Series B were issued in November
1996 with proceeds of $100,002, or $3.375 per share.
In October and November 1996, the Company issued 2,491,880 shares of Series
C Preferred Stock ("Series C") through a private offering. Proceeds from the
financing amounted to $15,349,980, or $6.16 per share.
In August 1997, the Company issued 2,397,727 shares of Series D Preferred
Stock ("Series D") through a private offering. Proceeds from the financing
amounted to $19,181,816, or $8.00 per share.
In December 1998, the Company issued 898,738 shares of Series E Preferred
Stock ("Series E") through a private offering. Proceeds from the initial round
of Series E financing amounted to $7,189,904, or $8.00.
F-12
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Convertible and Redeemable Preferred Stock--(continued)
In January 1999, the Company issued 726,264 additional shares of Series E at
$8.00 per share with gross proceeds of $5,810,112. In April and June 1999, the
Company issued 15,676,153 additional shares of Series E at $5.00 per share with
gross proceeds of $78,380,765. In connection with the issuance of the Series E
at $5.00 per share in April, the existing Series E shareholders were issued
974,996 additional Series E shares adjusting the price per share from $8.00 to
$5.00.
Holders of Series A, B, C, D and E have preferential rights to dividends
($.08, $.27, $.49, $.64 and $.40 per share per annum, respectively) when and if
declared by the Board of Directors. Dividends are not cumulative until January
1, 2002. The holders are entitled to the number of votes equal to the number of
shares of common stock into which the preferred stock could be converted. Every
three shares of Series A and B is convertible into two shares of common stock
at the option of the holder. In July 1999, in accordance with certain
adjustment provisions of the Amended and Restated Certificate of Incorporation,
the Series C, D, and E conversion rate to common stock was amended to 1.30786,
1.44144 and 1.42857, respectively. The conversion rate of the Series A, B, C, D
and E Preferred Stock is subject to adjustment in the event the Company issues
shares of capital stock at a price per share below the original purchase price
for each Series, subject to certain exceptions. In addition, the conversion
rate is automatically adjusted in the event of a stock split, stock dividend,
recapitalization or similar event. As a result of the two for three reverse
stock split detailed in Note 14, the Series A, B, C, D and E conversion rates
to common stock were adjusted to 0.66667, 0.66667, 0.87190, 0.96096, and
0.95238, respectively. Each share of preferred stock automatically converts to
common stock upon the vote or written consent of the holders of the majority of
the shares of Series A, B, C, D and E originally issued or upon the closing of
an initial public offering of the Company's common stock at a price of $10 per
share from which the aggregate proceeds are not less than $40 million. The
conversion rates are subject to adjustment, pursuant to certain antidilution
provisions as provided by the Company's Amended and Restated Certificate of
Incorporation.
In the event of liquidation, the holders of Series A, B, C, D and E have
preferential rights to liquidation payments of $1.00, $3.375, $6.16, $8.00 and
$5.00 per share, respectively, plus any declared but unpaid dividends. The
preferred stock has redemption rights for a six-month period beginning on
December 31, 2002 upon the election of at least 50% of the holders. The
redemption price is equal to the original purchase price plus any declared but
unpaid dividends.
Convertible and Redeemable Preferred Stock Warrants
In connection with certain leasing agreements, the Company has issued
warrants providing for the purchase of 48,750 shares and 16,666 shares of
Series A at an exercise price of $2.1875 per share, subject to adjustment as
provided in the Warrant Agreements. The Warrant Agreements expire after seven
years or 18 months to three years from the effective date of an initial public
offering, whichever comes later. During 1996, the Company entered into an
additional lease line to the Master Lease Agreement. The new lease included the
issuance of a warrant to purchase 19,999 shares of Series B with an exercise
price of $4.77. During 1997, the Company entered into an additional lease line
to this Master Lease Agreement. The new lease included the issuance of a
warrant to purchase 34,090 shares of Series C with an exercise price of $6.16.
The value of the warrants was recorded as additional debt issuance cost and is
being amortized using the interest method over the term of the related Master
Lease Agreement. The warrants were valued using the Black-Scholes valuation
model based upon the exercise prices described above, a risk free rate of 4.5%-
6.0%, a dividend yield rate of 0%, volatility of .6 and an expected life of 2-5
years. In connection with lease agreements entered into 1998, the Company
issued warrants to purchase 4,375 shares of Series D Preferred Stock with an
exercise price of $8.00.
F-13
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity
Initial Public Offering
In February 2000, the Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
the Company to offer up to 12,000,000 shares of common stock to the public. In
February 2000, the Board of Directors authorized an increase in the
capitalization of the Company to 160,000,000 authorized shares with 150,000,000
shares of common stock, par value $.001 per share and 10,000,000 shares
designated as preferred stock, par value $.001 per share upon the effective
date of the Company's public offering. If the offering is consummated under
terms presently anticipated, all outstanding shares of redeemable convertible
preferred stock will convert into 27,972,908 shares of common stock. Unaudited
pro forma stockholders' equity reflects the assumed conversion of the
redeemable convertible preferred stock outstanding at December 31, 1999 into
common stock.
Stock Repurchases
On January 10, 1998, the Company repurchased 91,850 shares of common stock
from one of its founders for $501 pursuant to the terms of a stock repurchase
agreement with the founder. In addition, the Company caused one of its founders
to surrender 66,666 shares of common stock in 1996 for no consideration.
In December 1998, the Company also repurchased 416 shares from one of its
employees for $5,000.
Stock Option Plans
The Company's 1995 Stock Option Plan (the "1995 Plan") provides for the
granting of incentive stock options and nonqualified stock options to
employees, officers, directors and consultants. Options under the 1995 Plan
have been granted at fair market value on the date of grant and expire ten
years after the date of the grant. Options granted under the 1995 Plan
generally become exercisable at the rate of 25% of the total number of shares
subject to the option after the first anniversary following the date of grant,
with 2.083% vesting monthly thereafter, with all shares becoming fully vested
on the fourth anniversary date of the date of grant. The Company has reserved
2,766,666 shares of common stock for issuance under the 1995 Plan.
In May 1998, the Board of Directors approved the 1998 Stock Option Plan (the
"1998 Plan"). Options granted under the 1998 Plan generally vest on the same
terms as the 1995 Plan and are exercisable for a period of ten years. On the
first trading day of each of the five calendar years beginning in 1999 and
ending in 2003, the number of shares reserved for issuance under the 1998 Plan
automatically increase by an amount equal to three percent of the Company's
outstanding common stock, up to a maximum of 666,666 shares in any calendar
year, or such lower amount as approved by the Board of Directors. The Company
initially reserved 566,666 shares under the 1998 Plan, and was increased to
1,763,369 shares in April 1999 by the Board of Directors.
In June 1999, the Board of Directors approved the adoption of the Employee
Option Incentive Program (the "Incentive Program") under the 1998 Plan. Options
granted under the Incentive Program vest five years from the date of grant,
however, vesting shall accelerate for 50% of such options upon the effective
date of an initial public offering ("IPO") of the Company's shares, and the
remaining 50% of the options shall vest upon the twelve-month anniversary of
the effective date of the IPO. Options under the Incentive Program were granted
at estimated fair value on the date of grant and expire ten years after the
date of the grant. The Board of Directors issued 336,666 shares under this
program.
In February 2000, the Board approved the 2000 Employee Stock Purchase Plan
(ESSP), subject to shareholder approval. The Company will implement the ESSP
upon the effective date of the Registration Statement on Form S-1 for the
initial public offering and continue until April 30, 2020. The ESSP, subject to
F-14
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
certain limitations, permits eligible employees of the Company to purchase
common stock through payroll deductions of up to 15% of their compensation. The
Company has authorized the issuance of up to 233,333 shares of common stock
under the ESSP, plus an automatic annual increase, to be added on the first day
of the fiscal year beginning in 2001, equal to the lesser of 266,666 shares, 1%
of the common stock outstanding on the last day of the preceding fiscal year,
or a lesser number of shares as determined by the Board of Directors.
The 1998 Directors' Stock Option Plan (Directors' Plan) was adopted by the
Board of Directors in February 1998 and approved by the stockholders on April
20, 1998. A total of 200,000 shares of common stock have been reserved for
issuance under the Directors' Plan. The Directors' Plan provides for
discretionary grants of nonstatutory stock options to nonemployee directors of
the Company. Following the effectiveness of an initial public offering of the
Company's common stock, the Plan provides automatic formula based grants to the
nonemployee directors. In February 2000, the Board of Directors amended the
Directors' Plan, subject to shareholders approval. The amended plan becomes
effective upon the effectiveness of the initial public offering. An automatic
grant is made to each non-employee director who joins the Board after the
closing of the initial public offering for an option to purchase 16,666 shares
of common stock. Additionally, at each annual shareholder meeting, each non-
employee director is granted an additional option to purchase 6,666 shares of
common stock provided that the director continues serving on the Board and has
served as a director six months prior to grant date. The amended Directors'
Plan increases the issuance of options under the plan to 466,666. Initial
options granted under the directors' plan to new nonemployee directors
following the IPO will vest as to 25% of the shares underlying the option on
the first anniversary of the date of the option grant and as to 1/48th of the
shares each month after the first anniversary so that these options will be
fully vested on the fourth anniversary of the grant date. Options granted to
our nonemployee directors at the time of each annual stockholders meeting
following this offering will vest as to 1/36th of the shares underlying the
option so that these options will be fully vested on the third anniversary of
the grant date. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the estimated fair value of a share of the
Company's common stock on the date of grant of the option. Options granted
under the Directors' Plan have a term of ten years.
Deferred stock compensation is calculated as the difference between the
exercise price and the deemed fair value of the Company's common stock at the
date of grant. The deferred stock compensation is amortized over the vesting
period of the related options. In 1997 and 1999, deferred stock compensation of
$1,881,282 and $1,168,848 was recorded for options granted under the various
stock option plans. Amortized stock compensation of $676,000, $651,000 and
$817,000 was recorded during each of the years ended December 31, 1997, 1998
and 1999, respectively.
In January, February and March 2000, the Company granted 928,825 additional
stock options for common stock. In connection with these grants, the Company
has recorded approximately, $2,532,000 of additional deferred stock
compensation in the first quarter of year 2000. In addition, the Company issued
230,661 shares in connection with stock option exercises.
F-15
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
Had the stock compensation expense for the Company's stock option plan been
determined based on the estimated fair value using the minimum value option
pricing model at the date of grant, the Company's net loss would have been
increased to these pro forma amounts (in thousands):
1997 1998 1999
-------- -------- --------
Net loss:
As reported.................................. $(22,104) $(44,328) $(42,413)
Pro forma.................................... (22,109) (44,728) (43,231)
Basic and diluted net loss per share:
As reported.................................. (12.18) (21.88) (18.98)
Pro forma.................................... (12.18) (22.08) (12.82)
The fair value for these options was estimated at the date of grant using
minimum value option pricing models that take into account: (1) the estimated
fair value of the common stock at the grant date, (2) the exercise prices, (3)
a one-year expected life beyond the vest date, (4) no dividends, and (5) a
risk-free interest rate of between 5.42% and 6.43% during 1996 through 1999
over the expected life of the options. Compensation expense recognized in
providing pro forma disclosures may not be representative of the effects on pro
forma net income for future years because the amounts above include only the
amortization for the fair value of 1997, 1998 and 1999 grants.
A summary of the Company's stock option activity and related information
follows:
December 31, 1997 December 31, 1998 December 31, 1999 March 31, 2000
-------------------- -------------------- -------------------- --------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
--------- --------- --------- --------- --------- --------- --------- ---------
Outstanding at beginning
of period.............. 1,295,236 $ .36 2,099,196 $1.19 2,531,996 $4.59 2,885,294 $ 5.25
Granted at deemed fair
value................ 447,988 2.93 1,478,547 13.02 914,820 6.96 398,766 12.00
Granted at above
deemed fair value.... -- -- -- -- 16,666 6.75 --
Granted at below
deemed fair value.... 906,190 1.02 -- -- 455,250 4.61 530,059 6.09
Canceled.............. (362,157) .44 (803,981) 12.56 (754,757) 6.53 (93,835) 6.84
Exercised............. (188,061) .41 (241,766) .44 (278,681) .50 (230,661) 1.22
--------- --------- --------- ---------
Outstanding at end of
period................. 2,099,196 1.19 2,531,996 4.56 2,885,294 5.25 3,489,623 6.38
========= ========= ========= =========
Exercisable at end of
period................. 1,426,668 1.46 2,213,954 5.13 2,837,236 5.33 3,047,099 6.39
========= ========= ========= =========
Weighted-average fair
value of options
granted during the
period:
Granted at value.... 2.93 12.84 3.59 6.18
Granted at below
value.............. 2.84 -- 4.50 7.33
F-16
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
The following information is provided for options outstanding and
exercisable at December 31, 1999:
Outstanding Exercisable
----------------------------------------- -------------------------
Average
Weighted- Remaining Weighted-
Range of Average Contractual Average
Exercise Number of Exercise Life Number of Exercise
Price Options Price (Years) Options Price
- ------------- --------- --------- ----------- --------- ---------
$0.15 - 0.53 228,411 $0.26 6.12 214,441 $0.24
0.93 - 1.80 777,695 0.96 7.48 743,606 0.96
3.00 - 5.04 561,950 4.23 9.02 561,950 4.23
5.25 - 6.75 655,174 6.62 8.96 655,174 6.62
7.50 - 12.00 662,064 11.54 8.06 662,065 11.54
--------- ---------
2,885,294 5.25 8.47 2,837,236 5.33
========= =========
Stock options available for future grants under the Company's stock option
plans total 1,136,232 and 567,907 as of December 31, 1999 and March 31, 2000,
respectively.
Common Stock Warrants
During 1999, the Company entered into an additional leasing agreement. The
new lease included the issuance of a warrant to purchase 20,833 shares of
common stock with an exercise price of $6.75. The value of the warrants,
determined using the Black-Scholes valuation model, was recorded as additional
interest expense over the term of the lease agreement.
Common Shares Reserved for Future Issuance
The Company has reserved shares of common stock as follows:
December 31,
1999
------------
Stock options outstanding..................................... 2,885,294
Stock option available for future grant....................... 1,136,232
----------
4,021,526
Conversion of:
Series A Preferred Stock.................................... 3,666,664
Series B Preferred Stock.................................... 1,827,157
Series C Preferred Stock.................................... 2,172,677
Series D Preferred Stock.................................... 2,900,577
Series E Preferred Stock.................................... 17,405,832
----------
27,972,907
Convertible redeemable preferred stock warrants............... 90,870
Common stock warrants......................................... 20,833
----------
32,106,136
==========
F-17
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
As of December 31, 1999, the Company had federal net operating loss
carryforwards (NOL) of approximately $108.4 million and research and
development tax credit carryforwards of approximately $1.9 million. The federal
net operating loss carryforwards will begin to expire in the year 2009 if not
utilized. As a result of changes in ownership coincident with the recent equity
financing, the utilization of a portion of the net operating loss carryforward
will be limited, pursuant to Section 382 of the Internal Revenue Code of 1986,
as amended. Approximately $83.1 million of the NOL is limited to approximately
$4.0 million per year. The remaining NOL is not subject to limitation as of
December 31, 1999.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. Significant components of
the Company's deferred tax assets are as follows:
December 31,
------------------
1998 1999
-------- --------
(in thousands)
Deferred tax liabilities:
Prepaid assets........................................ $ 47 $ 57
Deferred tax assets:
Net operating loss carryforwards.................... 22,664 36,880
Research and development tax credit carryforwards... -- 1,872
Accrued compensation................................ 380 335
Fixed assets........................................ 90 175
Accrued expenses and reserves....................... 1,146 2,195
Deferred revenues................................... -- 564
Stock compensation.................................. 80 82
-------- --------
Total deferred tax assets............................. 24,360 42,103
-------- --------
24,313 42,046
Less valuation reserve................................ (24,313) (42,046)
-------- --------
Net deferred taxes.................................... $ -- $ --
======== ========
8. Commitments
The Company leases its facilities under noncancelable operating lease
agreements that expire on various dates through 2005. The Company leases
certain equipment under noncancelable capital leases that expire on various
dates through 2002.
In June 1998, the Company moved into a new building. The lease on this
building expires on May 31, 2005. The Company, at its option, may extend the
term of this lease for two successive periods of five years each. The option
must be elected 12 months prior to the expiration of the initial lease term. In
connection with this arrangement, the Company has issued letters of credit to
the landlord aggregating $2.5 million.
F-18
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments--(continued)
Following is a summary of future minimum payments under capital leases and
operating leases, including the principal facility, that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 1999
(in thousands):
Capital Operating
Leases Leases
------- ---------
2000..................................................... $3,015 $ 2,001
2001..................................................... 2,238 2,089
2002..................................................... 620 1,969
2003..................................................... -- 2,108
2004 and thereafter...................................... -- 2,867
------ -------
5,873 $11,034
=======
Less interest............................................ 702
------
5,171
Less current portion..................................... 2,692
------
$2,479
======
Rental expense for operating leases was $667,939, $1,304,007 and $2,041,328
for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company entered into agreements with certain leasing companies to
provide up to $3.0 million in 1997, $3.5 million in December 31, 1998 and $3.0
million at December 31, 1999 of financing to allow the Company to lease
additional equipment. Pursuant to these agreements, equipment leases would
generally have a term of three years and an implicit interest rate of 7.25% in
1997, 14.5% at December 31, 1998 and 12.25% at December 31, 1999. The leases
are secured by the underlying equipment. In connection with these lease
agreements, warrants were issued to purchase preferred stock (see Note 5).
9. Net Loss Per Share
Basic and diluted loss per share is calculated using the average number of
shares of common stock outstanding. The effect of stock options, warrants and
convertible and redeemable preferred stock have not been included in the
calculation of diluted net loss per share as their effect is antidilutive. Pro
forma basic and diluted loss per share is computed on the basis of the average
number of shares of common stock outstanding plus the effect of convertible
preferred shares as if such shares were converted to common stock at the time
of issuance as follows:
Three Months
Year ended December 31, Ended March 31,
---------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- -------
(unaudited)
(in thousands, except per share data)
Net loss (A)................. $(22,104) $(44,328) $(42,413) $(12,699) $(7,745)
======== ======== ======== ======== =======
Weighted average outstanding:
Common stock (B)........... 1,815 2,026 2,235 2,118 2,549
Convertible and redeemable
preferred stock........... 7,773 8,804 20,140 9,670 21,352
-------- -------- -------- -------- -------
Pro forma weighted average
shares outstanding (C) ..... 9,588 10,830 22,375 11,788 23,901
======== ======== ======== ======== =======
Basic and diluted net loss
per share (A/B)............. $ (12.18) $ (21.88) $ (18.98) $ (6.00) $ (3.04)
======== ======== ======== ======== =======
Pro forma net loss per share
(A/C)....................... $ (2.31) $ (4.09) $ (1.90) $ (1.08) $ (0.32)
======== ======== ======== ======== =======
F-19
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Retirement Plans
The Company has a salary deferral 401(k) plan for its employees. The plan
allows employees to contribute a percentage of their pretax earnings annually,
subject to limitations imposed by the Internal Revenue Service. The plan also
allows the Company to make a matching contribution, subject to certain
limitations. To date, the Company has made no contributions to the plan.
11. Related-Party Transactions
In October 1997, the Board authorized a secured loan of $162,500 and an
unsecured loan of $75,000 to the Company's former Chief Financial Officer
("CFO"). Both loans bear interest at 5.5%. The secured loan was payable in full
on October 28, 2002, or earlier, based upon certain events specified in the
agreement. Under the original terms of the unsecured loan, $50,000 of the
principal amount of the loan was to be forgiven over a three-year period
provided that the CFO remained employed with the Company, with the remaining
balance of $25,000 plus interest due on the earlier of October 22, 2000 or the
date on which his employment terminated. In accordance with the loan agreement,
a total of $16,665 was forgiven in 1998 and was expensed as compensation.
The CFO resigned from the Company in January 1999. The Board authorized an
extension of due dates on the secured loan of $162,500 and the unsecured loan
and accrued interest balance of $62,460 to the earlier of January 30, 2000, or
190 days after an IPO of the Company. The Board authorized an amendment to the
Security Agreement securing the obligations of the former CFO under the secured
and unsecured promissory notes that provide for an acceleration of the notes
based upon certain events specified in the Agreement. These notes were repaid
in full in February 2000.
Powerwave Technologies, Inc. ("Powerwave"), whose chief executive officer is
a director of the Company, is the Company's sole supplier of linear power
amplifiers, a component in the Company's systems. Pursuant to a manufacturing
agreement with Powerwave (which agreement was approved by a majority of the
Company's disinterested directors), Powerwave will manufacture and sell to the
Company 100% of the Company's requirements for linear power amplifiers that
Powerwave manufactures. The initial term of the agreement is 18 months with an
automatic 18-month extension, unless either party otherwise terminates the
agreement. The Company's purchases from Powerwave totaled $2,203,217,
$8,047,401 and $6,427,026 in 1997, 1998, and 1999, respectively.
In December 1997, the Company determined that it would discontinue the
Company's Network Services division. In March 1998, the Company sold the assets
of this division for an aggregate purchase price of $78,000 to Advanced
Wireless Engineering ("AWE"), a company that was majority-owned by an
individual who at that time was the Company's Vice President, Network Services.
This individual resigned from the Company in March 1998 to run AWE on a full-
time basis.
12. Revenues and Operations
In December 1997, the Company determined that it would discontinue the
Network Services division. Accordingly, the carrying value of these fixed
assets were adjusted to net realizable value, thereby resulting in an
impairment loss of $200,000, which is included in other expenses in the
accompanying 1997 Statement of Operations. These assets were sold in March
1998. Included in revenues for the year ended December 31, 1997 and 1998 were
revenues of $1,450,000 and $200,000 respectively, relating to the Network
Services division and the cost of revenues were $1,728,000 and $242,000,
respectively.
In June 1998, in connection with certain patent licenses, the Company paid
$250,000 in cash and issued 7,333 common stock warrants for an aggregate amount
of $360,000. The common stock warrants had an
F-20
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Revenues and Operations--(continued)
exercise price of $.015 per share and were immediately exercised. The value of
these warrants, using the Black-Scholes valuation model, of $110,000 and cash
of $250,000 was recorded as research and development expense in 1998.
Revenues from customers representing more than 10% of annual sales in each
year were as follows:
Three Months Ended
Year Ended December 31, March 31,
----------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- --------- ---------
(unaudited)
AirTouch Communications,
Inc......................... 27.0% -- -- -- 29.1%
Alltel Communications Inc. .. -- 61.8% 44.8% 91.5% --
Cox Communications Inc. ..... 63.0% -- -- -- --
GTE Wireless................. -- 13.4% -- -- --
Grupo Iusacell S.A. de
C.V. ....................... -- -- 26.0% -- 56.5%
OJSC St. Petersburg Telecom.. -- 13.4% -- -- --
Southwestco Wireless......... -- -- 20.9% -- --
Telefonica Servicios Moviles
S.A. ....................... -- 10.1% -- -- --
13. International Operations
Metawave sells its smart antenna systems and services throughout the world,
and operates in a single industry segment. While certain expenses for sales and
marketing activities are incurred in various geographical regions,
substantially all of Metawave's assets are located and the majority of its
operating expenses are incurred at its corporate headquarters. Revenue
information by geographic region is the only segment information presented as
follows:
Year Ended December Three Months Ended
31, March 31,
---------------------- -------------------
1997 1998 1999 1999 2000
------ ------- ------- --------- ---------
(unaudited)
(in thousands)
United States................... $1,450 $12,233 $16,717 $ 6,834 $ 4,054
Paraguay........................ -- 1,615 -- -- --
Russia.......................... -- 2,143 -- -- --
Mexico.......................... -- -- 5,879 -- 5,275
------ ------- ------- --------- ---------
Total........................... $1,450 $15,991 $22,596 $ 6,834 $ 9,329
====== ======= ======= ========= =========
14. Subsequent Event
Reverse Stock Split
On March 27, 2000 the Board of Directors authorized a two for three reverse
stock split of Metawave's common stock that will be effective immediately
before the effective date of the initial public offering discussed in Note 6.
Also, as a result of the split the conversion rate of each series of preferred
stock was adjusted to reflect the split. All share and per share data and all
conversion rate disclosures in the accompanying financial statements have been
retroactively adjusted to reflect this split.
F-21
Stylized Metawave Logo
Text on top: Customers & Deployments
Map of the world depicting customer deployments by commercial sales and field
trials
Bullet points:
* Commercial Sale
* Field Trial
Graphic of radio frequency spectrum
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
6,250,000 Shares
[LOGO OF METAWAVE COMMUNICATIONS CORPORATION]
Common Stock
--------------------
PROSPECTUS
--------------------
Merrill Lynch & Co.
Salomon Smith Barney
U.S. Bancorp Piper Jaffray
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market Listing
Fee.
Amount
To Be Paid
----------
SEC Registration Fee............................................. $ 24,668
NASD Filing Fee.................................................. 9,125
Nasdaq National Market Listing Fee............................... 1,000
Printing Fees and Expenses....................................... 200,000
Legal Fees and Expenses.......................................... 300,000
Accounting Fees and Expenses..................................... 200,000
Blue Sky Fees and Expenses....................................... 5,000
Transfer Agent and Registrar Fees................................ 10,000
Miscellaneous.................................................... 250,207
----------
Total.......................................................... $1,000,000
==========
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article IX of
Metawave's certificate of incorporation and sections 6.1 and 6.2 of Article VI
of Metawave's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Metawave has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Metawave, among other things, to indemnify its directors against
certain liabilities that may arise by reason of their status or service as
directors (other than liabilities arising from willful misconduct of culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors'
insurance if available on reasonable terms. The underwriting agreement (Exhibit
1.1 hereto) also provides for cross indemnification among Metawave and the
underwriters with respect to certain matters, including matters arising under
the Securities Act of 1933.
Item 15. Recent Sales of Unregistered Securities
(a) Since January 1, 1997, we have issued and sold (without payment of any
selling commission to any person except as noted below) the following
unregistered securities (as adjusted to reflect the automatic conversion of our
outstanding preferred stock into common stock upon completion of this
offering):
(1) In August 1997, we issued and sold shares of Series D preferred
stock convertible into an aggregate of 2,304,120 shares of common stock to
22 investors for an aggregate purchase price of $19,181,865.
(2) In December 1998 and April and June 1999, we issued and sold shares
of Series E Preferred Stock convertible into an aggregate of 17,405,832
shares of common stock to 25 investors for an aggregate purchase price of
$91,380,781. We paid an aggregate of $1,650,322 in commissions in
connection with the sale of Series E preferred stock.
II-1
(3) We issued to an equipment lease provider in June 1997, a warrant to
purchase shares of Series C preferred stock convertible into 29,722 shares
of common stock for an aggregate purchase price of $209,994.
(4) In April 1998, we issued an aggregate principal amount of $29.0
million 13.75% Senior Secured Bridge Notes due April 28, 2000 to certain
institutional investors. In connection with the issuance of such notes, we
issued warrants to purchase shares of Series D preferred stock convertible
into 596,470 shares of common stock for an aggregate purchase price of
$5,375. We paid an aggregate of $1,450,000 in commissions in connection
with the issuance of the Senior Secured Bridge Notes.
(5) In May 1998, we issued to an equipment lease provider a warrant to
purchase shares of Series D preferred stock convertible into 4,204 shares
of common stock for an aggregate purchase price of $35,000.
(6) In June 1998, in connection with certain patent licenses, we issued
the licensor a warrant to purchase 7,333 shares of common stock for an
aggregate purchase price of $110. Such licensor subsequently exercised the
warrant and purchased 7,333 shares of common stock for an aggregate
purchase price of $110.
(7) In May 1999, we issued to an equipment lease provider a warrant to
purchase 20,833 shares of common stock for an aggregate purchase price of
$140,625.
(8) As of March 31, 2000, an aggregate of 939,169 shares of common stock
had been issued upon exercise of options under our stock option plans.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1) through 15(a)(7) were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intentions
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 where
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about the
Registrant. The issuances described in Items 15(a)(8) were deemed to be exempt
from registration under the Securities Act in reliance upon Rule 701
promulgated thereunder in that they were offered and sold either pursuant to
written compensatory benefit plans or pursuant to a written contract relating
to compensation, as provided by Rule 701. In addition, such issuances were
deemed to be exempt from registration under Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
3.3* Sixth Amended and Restated Certificate of Incorporation of the
Registrant, to be effected prior to the effective date of the
offering.
3.4* Seventh Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement.
II-2
10.2* 1995 Stock Option Plan, as amended.
10.3* 1998 Stock Option Plan, as amended.
10.4* 2000 Employee Stock Purchase Plan.
10.5* 1998 Amended and Restated Directors' Stock Option Plan.
10.6* Series E Preferred Stock Purchase Agreement dated April 28, 1999.
10.7* Fifth Amended and Restated Investors Rights Agreement dated April
28, 1999 by and among the Registrant and certain holders of the
Registrant's capital stock.
10.8+* Lease for Willow Creek Corporate Center dated September 29, 1997 by
and between the Registrant and Carr America Realty Corporation.
10.9+* Purchase Agreement dated March 4, 1998 by and between the Registrant
and ALLTEL Supply Inc.
10.10+* Loan Agreement dated October 14, 1997 by and between Registrant and
Imperial Bank, and amendments thereto.
10.11+* Manufacturing Agreement between the Registrant and Powerwave
Technologies, Inc. dated as of September 3, 1998.
10.12+* Purchase Agreement between the Registrant and GTE Wireless
Incorporated dated as of September 8, 1998.
10.13+* Technical Cooperation Agreement between the Registrant and Shanghai
Telecom dated as of December 17, 1998.
10.14+* Purchase Agreement between the Registrant and Southwestco Wireless,
L.P. dated as of February 24, 1999.
10.15+* Value Added Reseller Agreement between the Registrant and CommVerge
Solutions (Asia), Inc. dated as of December 4, 1999.
10.16+* Distribution Agreement between the Registrant and SeeNode Co., Ltd.
dated as of February 10, 2000.
10.17+* Purchase Agreement between the Registrant and AirTouch Support
Services, Inc. dated as of January 1, 2000.
10.18+* Purchase Agreement between the Registrant and Grupo IUSACELL S.A.,
de C.V. dated as of December 17, 1999.
10.19+* Purchase Agreement between the Registrant and Cellco, L.P., dba Bell
Atlantic dated as of December 20, 1999.
10.20* Employment Agreement with Mr. Douglas O. Reudink dated July 7, 1995.
10.21* Employment Agreement with Mr. Robert H. Hunsberger dated July 27,
1997.
10.22+* Employment Agreement with Mr. Andy Merrill dated July 12, 1999.
10.23* Employment Agreement with Mr. Richard Henderson dated October 29,
1997.
10.24* Employment Agreement with Mr. Victor K. Liang dated July 23, 1998.
10.25+* Employment Agreement with Mr. Stuart Fuhlendorf dated March 10,
2000.
10.26* 2000 Stock Plan.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
II-3
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-5).
27.1* Financial Data Schedule.
99.1* Report of Ernst & Young LLP, Independent Auditors on Financial
Statement Schedule.
99.2* Financial Statement Schedule.
- --------
* Previously filed.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.406.
(b) Financial Statement Schedules
The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts (see Exhibit 99.2).
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment No. 3 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Redmond, State of Washington, on April 10, 2000.
METAWAVE COMMUNICATIONS CORPORATION
/s/ Robert H. Hunsberger
By: _________________________________
Robert H. Hunsberger
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert H. Hunsberger President, Chief Executive April 10, 2000
_________________________________ Officer and Director (Principal
Robert H. Hunsberger Executive Officer)
/s/ Stuart W. Fuhlendorf Senior Vice President and Chief April 10, 2000
_________________________________ Financial Officer (Principal
Stuart W. Fuhlendorf Financial and Accounting
Officer)
/s/ Douglas O. Reudink Chief Technical Officer and April 10, 2000
_________________________________ Chairman of the Board of
Douglas O. Reudink Directors
/s/ Bandel L. Carano Director April 10, 2000
_________________________________
Bandel L. Carano
/s/ Bruce C. Edwards Director April 10, 2000
_________________________________
Bruce C. Edwards
/s/ David R. Hathaway Director April 10, 2000
_________________________________
David R. Hathaway
/s/ Scot B. Jarvis Director April 10, 2000
_________________________________
Scot B. Jarvis
/s/ Jennifer Gill Roberts Director April 10, 2000
_________________________________
Jennifer Gill Roberts
/s/ David A. Twyver Director April 10, 2000
_________________________________
David A. Twyver
II-5
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
3.3* Sixth Amended and Restated Certificate of Incorporation of the
Registrant, to be effected prior to the effective date of the
offering.
3.4* Seventh Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Option Plan, as amended.
10.3* 1998 Stock Option Plan, as amended.
10.4* 2000 Employee Stock Purchase Plan.
10.5* 1998 Amended and Restated Directors' Stock Option Plan.
10.6* Series E Preferred Stock Purchase Agreement dated April 28, 1999.
10.7* Fifth Amended and Restated Investors Rights Agreement dated April
28, 1999 by and among the Registrant and certain holders of the
Registrant's capital stock.
10.8+* Lease for Willow Creek Corporate Center dated September 29, 1997 by
and between the Registrant and Carr America Realty Corporation.
10.9+* Purchase Agreement dated March 4, 1998 by and between the Registrant
and ALLTEL Supply Inc.
10.10+* Loan Agreement dated October 14, 1997 by and between Registrant and
Imperial Bank, and amendments thereto.
10.11+* Manufacturing Agreement between the Registrant and Powerwave
Technologies, Inc. dated as of September 3, 1998.
10.12+* Purchase Agreement between the Registrant and GTE Wireless
Incorporated dated as of September 8, 1998.
10.13+* Technical Cooperation Agreement between the Registrant and Shanghai
Telecom dated as of December 17, 1998.
10.14+* Purchase Agreement between the Registrant and Southwestco Wireless,
L.P. dated as of February 24, 1999.
10.15+* Value Added Reseller Agreement between the Registrant and CommVerge
Solutions (Asia), Inc. dated as of December 4, 1999.
10.16+* Distribution Agreement between the Registrant and SeeNode Co., Ltd.
dated as of February 10, 2000.
10.17+* Purchase Agreement between the Registrant and AirTouch Support
Services, Inc. dated as of January 1, 2000.
10.18+* Purchase Agreement between the Registrant and Grupo IUSACELL S.A.,
de C.V. dated as of December 17, 1999.
Exhibit
No. Description
------- -----------
10.19+* Purchase Agreement between the Registrant and Cellco, L.P., dba Bell
Atlantic dated as of December 20, 1999.
10.20* Employment Agreement with Mr. Douglas O. Reudink dated July 7, 1995.
10.21* Employment Agreement with Mr. Robert H. Hunsberger dated July 27,
1997.
10.22+* Employment Agreement with Mr. Andy Merrill dated July 12, 1999.
10.23* Employment Agreement with Mr. Richard Henderson dated October 29,
1997.
10.24* Employment Agreement with Mr. Victor K. Liang dated July 23, 1998.
10.25+* Employment Agreement with Mr. Stuart Fuhlendorf dated March 10,
2000.
10.26* 2000 Stock Plan.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-4).
27.1* Financial Data Schedule.
99.1* Report of Ernst & Young LLP, Independent Auditors on Financial
Statement Schedule.
99.2* Financial Statement Schedule.
- --------
* Previously filed.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.406.