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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27707
AETHER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2186634
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
11460 CRONRIDGE DR. OWINGS MILLS, MD 21117
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (410) 654-6400
Securities registered Pursuant to Section 12(b) of the Act: NONE.
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
CONVERTIBLE SUBORDINATED NOTES DUE 2005
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 2001 was $731,662,637.
As of February 28, 2001, 40,455,828 shares of the Registrant's common
stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2001 Annual Meeting of the Registrant which will be
filed with the Commission within 120 days after the close of the fiscal year and
is incorporated by reference into Part III.
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AETHER SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
INDEX
PAGE
----
PART I
Business.................................................... 3
Item 1
Properties.................................................. 13
Item 2
Legal Proceedings........................................... 13
Item 3
Submission of Matters to a Vote of Security Holders......... 13
Item 4
PART II
Market for the Company's Common Equity and Related Security
Holder Matters.............................................. 14
Item 5
Selected Financial Data..................................... 14
Item 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7
Quantitative and Qualitative Disclosures About Market
Risk........................................................ 33
Item 7A
Financial Statements and Supplementary Data................. 33
Item 8
Change In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
Item 9
PART III
Directors and Executive Officers of the Registrant.......... 34
Item 10
Executive Compensation...................................... 34
Item 11
Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 12
Certain Relationships and Related Transactions.............. 34
Item 13
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 35
Item
14...
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO AETHER SYSTEMS, INC. ("AETHER" OR "COMPANY") OR
ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND BUSINESS." AETHER UNDERTAKES NO OBLIGATION TO UPDATE
OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
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PART I
OVERVIEW
We provide technologies that enable businesses to extend their data and
commercial transactions to wireless and mobile handheld devices. At the core of
Aether is a comprehensive family of software products, which we refer to as our
wireless technology foundation, upon which all types of wireless systems for
businesses can be built. Our wireless technology foundation includes wireless
integration, mobile data management and wireless infrastructure software
products. We add to this foundation individual technology components which
include our wireless data engineering and development services, wireless data
hosting, product fulfillment and customer support. These components can be used
separately or in various combinations to extend existing and future business
applications to any handheld device over any wireless network.
THE AETHER SOLUTION
We believe that businesses, seeking greater productivity and efficiencies,
increasingly seek to give their workforces mobile and wireless access to
internal e-mail, corporate applications and company data. Additionally, we
believe that many businesses look for a way to provide real-time data to their
customers using handheld devices. Remote access can be achieved either through
continuous real-time communications, or by periodically "synchronizing"
corporate data to a handheld device using a wired link. However, we believe
corporate information technology (IT) managers that explore wireless and mobile
data solutions often quickly become overwhelmed with the complexity of the
wireless world and its frequently incompatible and changing protocols for
carrier networks, devices and applications.
Aether provides a comprehensive approach to solving those complexities,
using our wireless technology foundation and other technology components. Our
wireless technology foundation, in whole or in part, can be licensed for
installation at a customer's premises or operated from (or "hosted") and
maintained at Aether's highly secure network operations center. With this
approach, businesses can quickly and cost-effectively deploy a wide range of
wireless applications, which improves their productivity and efficiency and
insulates them from the complexities inherent in wireless systems.
The wireless technology foundation gives businesses, systems integrators
and developers the ability to quickly create, deploy and manage wireless
solutions across multiple carrier networks and types of devices. Customers may
choose specific wireless products or services, or have Aether build and manage a
comprehensive wireless solution. In every case, Aether's flexibility to adapt to
a wide variety of systems protects businesses from "betting" on technologies in
a rapidly changing wireless environment.
THE AETHER STRATEGY
We believe our capabilities and experience have established us as an early
market leader in providing wireless data services and systems to businesses. Our
strategy is to extend our leadership position by using our engineering
expertise, our software products, our hosted solutions and our other resources
to move quickly into new opportunities. Our strategy includes the following key
elements:
Maximize licensing revenue from our mobile data and wireless software. Our
financial model is dependent in large part on licensing our family of wireless
integration, mobile data management and wireless infrastructure software
products. We seek to continue developing, marketing and licensing a
comprehensive array of software products to meet wireless data needs of our
business customers.
Win and retain contracts to develop and operate wireless data systems for
large businesses. Another key focus of our financial model is to create and
maintain recurring revenue from wireless system development, management, hosting
and support. Through our own sales force, and through external sales channels
with consulting firms and systems integrators, we continue to seek customer
contracts that will provide a continuous revenue stream over the contract
period.
Extend the industries and markets to which we provide wireless data systems
and services. Our strategy initially focused on developing services for the
financial services sector, whose participants we believe are
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among the earliest adopters of wireless data services. Through recent
acquisitions and investments, we have also moved into other industries and
markets in the U.S. and internationally, including:
- the mobile data management market, through our acquisition of Riverbed
Technologies, Inc.;
- the mobile and wireless transportation and logistics services market,
through our acquisitions of LocusOne Communications, Inc. and Motient
Corp.'s transportation business;
- the European wireless data market, through our acquisition of IFX Group
Limited and a related joint venture with Reuters Plc called Sila
Communications Limited, which provides wireless data services and systems
to European businesses;
- the wireless lead management market, through our acquisition of
NetSearch, LLC;
- the mobile government market, through our acquisitions of Cerulean
Technology, Inc. and SunPro, Inc.; and
- the wireless infrastructure software market serving wireless carriers,
businesses and Internet businesses, through our acquisition of RTS
Wireless, Inc.
We also seek to extend our services to new markets through engineering and
strategic consulting services to businesses that are exploring the
implementation of a wireless data system. This helps us to assess the types of
wireless services that are most in demand within a particular market. In
addition, our research and development division continuously evaluates new
technologies, applications and business opportunities that demonstrate
significant market potential.
Maintain and strengthen our strategic relationships with suppliers and
customers. A key to our ability to provide complete wireless data services to
our customers is our relationships with wireless network carriers and
manufacturers of wireless devices. These relationships take time to develop,
providing us with an advantage by getting our services to market before our
competitors. We intend to maintain and strengthen these relationships by
negotiating more cost-effective rate plans with existing wireless network
carriers, testing our wireless services with providers of next-generation,
high-speed wireless networks and working with manufacturers and industry forums
to guide development of new devices and applications.
Participate in non-core markets through investments and partnerships. We
make investments in a variety of businesses engaged in wireless and mobile
computing. These investments support the development of new technology that can
be used in combination with systems and products developed by Aether and create
relationships that support our efforts to develop and sell wireless data
products and services. Our strategic investments to date include the following:
- OmniSky. We formed OmniSky, Inc. in August 1999 with 3Com Corporation.
OmniSky's wireless service, for use on handheld devices, enables its
customers to access and navigate the Internet, send and receive e-mail
messages and securely conduct e-commerce transactions. OmniSky made its
service commercially available beginning in May 2000 and completed its
initial public offering in August 2000. We have invested $9.2 million in
OmniSky and have a 25.7% equity interest in OmniSky.
- Inciscent. On March 17, 2000, we acquired a 27.5% interest in Inciscent,
Inc. in the form of preferred stock for a purchase price of $9.9 million.
We formed Inciscent with Metrocall, Inc., PSINet, Inc., Hicks, Muse, Tate
& Furst, Inc. and other investors to develop wireless e-mail, Internet
access and other applications for the small office and home office market
segments.
- Sila. We hold a 60.0% equity interest in Sila, which we acquired in
exchange for $13.5 million in cash plus 100% of our equity interest in
IFX, a company we purchased in April 2000 for $85 million. Reuters holds
a 40.0% equity interest in Sila.
- MindSurf. MindSurf Networks is a company jointly owned by Aether and
Sylvan Learning Systems, Inc., to provide affordable mobile computing
hardware and software to link grade-school students, teachers and
parents. Aether and Sylvan each have committed to invest $32.9 million in
MindSurf. On October 30, 2000, MindSurf announced it had acquired
HiFusion, an education technology company
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offering age-specific information and communication tools for student, parent
and teacher communities. The acquisition gave MindSurf an established 75-person
sales force.
- Strategy.com. We invested $15 million in Strategy.com Incorporated, a
subsidiary of MicroStrategy Incorporated, to combine Aether's wireless
services with Strategy.com's customized content delivery services. In
January 2001, we invested an additional $10 million in Strategy.com.
- Other Investments. Since August 1999, we have also made investments in
16 other companies for the aggregate amount of approximately $115.4
million.
SERVICES AND PRODUCTS
We currently offer and are developing products and services in three
categories:
- Software Products for wireless integration, mobile data management and
wireless infrastructure;
- Hosted Services, including wireless integration, Internet and messaging
services and customized services specific to vertical market sectors
(financial services, transportation and logistics, mobile government,
healthcare); and
- Engineering Services to businesses seeking to develop wireless data
systems.
Software Products
Aether offers a complete set of software development tools and technologies
enabling businesses to rapidly build, deploy and manage internally-hosted mobile
and wireless solutions. Businesses use our software products to create their own
wireless and mobile data systems. We believe our products allow these businesses
to create systems at lower cost and more efficiently than if they developed the
systems entirely on their own.
The primary software products we currently license are the Scout family of
wireless integration and mobile data management software and development tools
and the Advantage(R) family of wireless infrastructure software products.
Our Scout software products allow remote and mobile workers to exchange
information with corporate databases and the Internet. Scout also gives
information technology managers tools to manage, deploy and connect their
corporate data with handheld devices. Scout products reside both on handheld
devices and on corporate computer servers. Mobile workers use Scout when they
electronically exchange, or synchronize, data between their handheld devices and
corporate databases.
The Scout family of products includes:
- ScoutSync(TM), which is mobile data exchange software that creates the
connection between a business's mobile workforce and the information
contained in corporate databases, mail systems and the Internet.
ScoutSync delivers a scalable, standards-based, wired/wireless,
platform-independent software solution, leveraging both wired and
wireless communications so the mobile workforce is working with the most
current information.
- ScoutIT(TM), which allows IT managers to remotely deploy, manage and
upgrade wireless devices and applications. Features of ScoutIT include
automated application, file and content distribution, profile grouping
and sub-grouping in any structure that is desired and back-up and restore
services through synchronization or direct wireless connection.
- ScoutWeb(TM), which extends business's web content to any
browser-equipped wireless device. By dynamically transcoding HTML content
for display on HTML-based or WML-based handheld devices, ScoutWeb
eliminates the need to re-create and maintain multiple copies of a web
site or an electronic commerce application. The software also allows
businesses to reduce overhead expenses and increase efficiency.
- ScoutBuilder(TM), which is a visual application development tool for the
Palm OS platform. From customer databases and inventory to stock market
tracking and project scheduling, ScoutBuilder helps
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organizations leverage the potential of mobile and wireless computing by
making developers more productive and efficient.
- ScoutExtend(TM), which is a series of mobile connectivity products that
gives business workforces instant access to the most widely used business
data sources.
We sell the Advantage family of wireless infrastructure software products
to providers of paging services and wireless personal communication systems and
to traditional and Internet businesses. These products include server and
gateway software for advanced messaging, wireless alerting, e-mail access, fax
and voice messaging, Wireless Application Protocol (WAP) access and a line of
WAP software development tools.
The Advantage family of products includes:
- Advantage Internet Messaging Gateway enables providers of paging services
and wireless personal communication systems to provide advanced messaging
services and interactive applications to their end users.
- Advantage Wireless Alert Server enables businesses, Internet service
providers and Internet companies to provide wireless alerting to their
employees or end users.
- Advantage E-Mail Access Server enables carriers or businesses to provide
their customers or employees with remote telephone access to their
e-mail.
- Advantage Telephony Messaging Gateway enables providers of paging
services and wireless personal communication systems to provide advanced
fax and voice messaging services to their end users.
- Advantage WAP Gateway gives users anytime, anywhere access to the
Internet, whether it's to access corporate information systems, perform
bank transactions, receive stock updates or news briefs or avail
themselves of other Internet-based services.
- Advantage WAP Application Server is a development environment that makes
it possible to deploy WAP applications quickly and efficiently.
- Advantage Chat Server provides wireless network operators and messaging
service providers with an application that brings the popular Internet
Chat feature to mobile consumers. The Advantage Chat Server delivers an
easy-to-use service that appeals specifically to teens and young adults,
the fastest-growing market segment for text messaging.
Hosted Services
Aether provides secure, state-of-the-art hosting facilities for businesses
that wish to outsource the operation and management of their wireless systems.
These facilities allow us to operate, store and maintain wireless data services
and systems on behalf of these customers. Our offerings include:
- general wireless Internet and messaging services; and
- customized services specific to vertical market sectors (financial
services, transportation and logistics, mobile government, healthcare).
We describe below the services we offer in each of these categories and the
resources we use to provide these services.
General Wireless and Internet Messaging Services. Our current hosted
wireless Internet and messaging services include:
- Blackberry(TM) by Aether(TM). Aether is one of the largest resellers
of Blackberry e-mail service over Research in Motion Limited (RIM)
wireless handheld devices. Customers sign airtime agreements for the
service, while Aether provides devices and customer support.
Blackberry by Aether is often sold with other applications.
- Wireless Enterprise ISP Service. Aether offers wireless access to the
Internet on PocketPC devices to business customers who wish to
wirelessly enable their workforces or customers. Service includes
flat-rate pricing for airtime, Aether Intelligent Messaging (AIM)(TM)
network security and transmission optimization and customer support
for provisioning of devices.
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- Wireless Web Adaptation and Delivery. We provide hosted website
adaptation and delivery services for businesses seeking to quickly
enable their Web-based content for handheld wireless devices.
- Wireless Lead Management is a technology and service that allows
businesses to quickly respond to inquiries from potential customers.
Using wireless devices, remote sales personnel can receive automatic
real-time alerts when prospective customers request information about
their products via the corporate Web site or other means. In the
automotive marketplace, for example, this service allows dealerships
to interact immediately with online car buyers.
Wireless Services to Vertical Market Sectors. The wireless services we
currently provide to vertical market sectors include:
- Aether Financial Services(TM). Our proprietary wireless financial
brokerage and mobile commerce technology allows financial
institutions to quickly offer wireless services on any handheld
device, including secure trading, real-time quotes, global
financial markets data and news and futures and commodities trading
and news. Services we offer or are developing include:
- Wireless Trading. Custom wireless trading systems for
brokerages, using client-server or browser-based applications
on any type of handheld device. Aether can develop a wireless
version of any financial institution's brokerage platform,
including combining the service with real-time quotes, alerts,
research and news from Reuters and other sources. Our
applications feature secure, hosted transaction and account
management capabilities. We serve or are developing services
for various financial brokerage institutions, including Charles
Schwab, Merrill Lynch, E*Trade and National Discount Brokers.
- MarketClip(TM). Aether's real-time wireless market information,
portfolio management and alerts service, available on Palm,
PocketPC and RIM devices and browser-enabled phones. We make
MarketClip available for licensing and re-branding by financial
institutions or other business customers.
- Aether Mobile Commerce(TM). We are also developing a
comprehensive mobile commerce offering for brokerage firms,
banks, credit card companies and other businesses that will
include hosted wireless banking and bill-payment services as
well as the ability to make time-sensitive purchases,
person-to-person payments and point-of-sale purchases.
- Transportation and Logistics. Our transportation and logistics
services keep businesses in the transportation, auto and
distribution industries connected to their mobile assets and in
control of their operations and revenue. Our Internet-enabled
solutions and tailored offerings include pick-up and delivery
automation, fleet and driver management, asset and freight tracking
and mobile Internet systems for the auto and truck industry.
Products and services include:
- E-Mobile(TM) Delivery is a wireless package-delivery automation
platform that integrates with existing host network systems and
allows businesses to track their products throughout the
delivery cycle. Fleet drivers use handheld devices to capture
critical information and make it immediately available over the
Internet.
- E-Fleet combines global-positioning satellite-based systems
with Aether's wireless Internet network to implement asset
management solutions for the auto, trucking and broader
transportation industry.
- E-Dispatch is a low cost, wireless, Internet-based software
application that can be used by dispatchers to receive,
dispatch, track, map and report job data.
- MobileMAX2(TM) combines land-based and satellite technology to
deliver vehicle information to a central location.
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- Aether Mobile Government(TM). We provide mobile computing products
for federal, state and local governments. We entered this market
through our acquisitions of Cerulean and SunPro by combining their
state and local government products with Aether products such as
ScoutSync, Blackberry by Aether and others. These government
products include:
- PacketCluster, which provides police, fire and rescue workers
with vital records and information.
- FireRMS, which provides record management for fire departments
and emergency medical services.
- Aether Healthcare(TM). Aether is developing wireless applications
for healthcare delivery, including two-way messaging, workforce
automation, disease state management, compliance tracking and data
collection. We are seeking to develop products useful across the
entire healthcare industry, including pharmaceuticals, physicians'
automation, hospitals and integrated delivery systems, medical
laboratories and home healthcare.
Resources for Wireless Hosted Services. We are able to provide complete
wireless hosted services by using our Aether Intelligent Messaging (AIM)
software platform, direct communications links to most of the major U.S.
wireless data carriers, a secure network operations center including
encryption technology, and product fulfillment and customer service
capabilities.
- Aether Intelligent Messaging (AIM). AIM is the core technology
behind most of our hosted wireless data services and a key
component of our wireless technology foundation. AIM optimizes the
transmission of data over multiple bandwidth-constrained wireless
networks. It also serves as an application development link between
data on a business's home system and handheld devices, by providing
tools that allow businesses to quickly build applications that can
operate on a wide variety of wireless data network and handheld
devices. We use AIM in providing services to our business customers
and sell and license AIM to customers who develop their own
systems.
AIM supports the most widely used wireless data networks in the
U.S., including CDPD, Motient and Cingular packet networks, as well
as circuit-switched network protocols, including GSM and CDMA, and
wireless local-area network standards. As a result, our customers'
end users can choose the devices they prefer, including Palm,
Windows CE and other personal organizers, notebook computers,
pagers and mobile phones.
AIM also optimizes data transmissions for wireless networks. Most
of today's wireless data networks operate at less than half the
speed of telephone dial-up connections, limiting the delivery of
useful data to only small amounts of text and few graphics. Data
feeds typically include large amounts of unnecessary data,
including message headers and routing information. Because wireless
carriers typically charge by the kilobyte of data transmitted,
extraneous data add unnecessary cost. By employing compression and
data-thinning techniques, AIM allows users to receive information
faster when they send queries from their devices--and they get more
useful information for the price. Our AIM software platform reduces
the number of data packets required in a typical wireless
transmission by as much as 66%. We ensure reliable message delivery
through measures that confirm data have arrived properly and resend
data if no acknowledgement has been received.
Over the next several years, wireless carriers and equipment
vendors are planning to build so-called third generation, or 3G,
networks, which promise to transmit data at much higher speeds and
offer more compatibility among devices. No matter how fast networks
become, the need for low-cost, secure and reliable data
transmission will continue. We have designed our AIM software
platform to grow with the capabilities of wireless networks. For
example, we are currently working with U.S. and European wireless
network carriers to make our technology platform compatible with
networks using General Packet Radio Services, known
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as GPRS, a new high-speed wireless network standard. We have
successfully completed GPRS testing of certain of our financial
applications.
- Carrier connectivity. We maintain relationships and direct data
connections with the leading wireless network carriers, including
AT&T Wireless Services, Inc., Verizon Wireless Inc., Cingular
Wireless and Motient. We have negotiated favorable airtime
agreements with these carriers, allowing us to offer our end users
flat-rate pricing no matter how much data is transmitted or where a
device is used.
- Network Operations Center. We operate a secure network operations
center at our headquarters in Owings Mills, Maryland and are
preparing to open a second such facility in Tempe, Arizona later
this year. We believe that these centers are vital components of
our wireless data service offerings and differentiate us from our
competitors. By outsourcing to us, our customers are relieved of
the technology and operations burden of managing a highly complex
wireless data system.
From our Owings Mills network operations center, we maintain
high-speed data transmission lines, both to our customers' data
sources and to the wireless data networks we use. The center is
equipped with Cisco networking equipment, Sun Sparc UNIX servers
and high-end clustered Compaq and Hewlett Packard NT servers. In
the event of a power failure, we maintain multiple Uninterruptible
Power Supply systems as well as diesel-powered generators that are
tested and serviced regularly. Our network operations center is
capable of meeting the security standards for services we developed
or are developing for our clients. Our primary center is staffed 24
hours a day, seven days a week. Our facility in Tempe will provide
expanded capacity when it is completed.
Corporate managers require rigorous security standards when
entrusting their data to third parties. Our network operations
center has numerous redundant elements and serves as a
high-security physical link between data feeds from our business
customers' and others' data systems and wireless carrier networks.
We "scramble" digital messages as they move along wireless networks
using the latest encryption technologies. This relieves
corporations from the burden of constructing similar facilities. We
believe our network operations center is capable of meeting the
security standards for services we developed or are developing for
our customers.
- Product fulfillment and customer support. We provide product
fulfillment and provisioning, customer service and billing for our
business customers at our customer service centers in Owings Mills,
Maryland; Vienna, Virginia; Tempe, Arizona; and Richmond, Virginia.
We maintain an inventory of mobile devices and wireless modems,
which we buy in bulk from manufacturers and resellers. For our
customers' end users, we have the ability to load and configure
tailored software on mobile devices, activate wireless modems and
perform quality assurance checks. We then pack, ship and track the
product until the user receives it. For end users who already own a
device, we can provide only the modem and software application. We
handle all repair and warranty issues for devices we provide to our
customers' end users.
We train our customer service representatives to handle inquiries
about our services, device features and wireless communications.
Our customer service personnel are available seven days a week from
8:00 a.m. until 11:00 p.m. Eastern time. We currently employ
approximately 30 customer service representatives.
We can handle customer billing for our business customers' end user
fees, device and modem purchases, securities exchange and market
fees and other charges. Our billing system can support increases in
our customers' end user base.
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Engineering services to businesses seeking to develop wireless data systems
We provide engineering services to complement our software products and
hosting services and on a stand alone basis. We also take on engineering
assignments that might allow us to embrace technological advances or expand into
new industry sectors or services. Through our work with Merrill Lynch and
Multex.com, Inc., for example, we are developing next-generation wireless
trading and financial information services for financial professionals. We
generally charge our clients for engineering time on an hourly basis or a
per-project flat fee.
Our engineering staff includes wireless systems engineers, software
engineers who specialize in developing applications for handheld devices and
engineers who specialize in systems integration and testing. We have steadily
built our engineering ranks from ten in 1998, to approximately 500 in March
2001. Many of our engineers come from engineering departments at some of the
largest companies, including International Business Machines Corporation,
Westinghouse Electric Corporation and UPS/Roadnet. Seventy-six of our engineers,
including our chief technology officer, comprise our research and development
division. This group evaluates emerging technologies and business opportunities
and plays a key role in determining which projects to pursue.
SALES AND MARKETING
As of March 2001, we have over 200 sales and marketing professionals sales.
Our sales and marketing staff specialize in market sectors, but also sell across
the entire product and service line. Our direct sales team covers all regions of
the U.S. and has offices in London, Hamburg and Munich. In addition to having a
vertical market focus, our salespeople focus on companies that make up the
Fortune 1000 list of top-performing companies by revenue. We are also targeting
the Big Five consulting firms to provide wireless systems for their clients. Our
business development personnel and senior executives also assist in developing
potential customer relationships and selling and promoting our services.
In addition to our sales and marketing staff we advertise in a variety of
media. During 2000, we focused our marketing spending on increasing awareness of
the Aether brand name and promoting awareness of our products and services, and
lead generation in the transportation, healthcare and financial services
vertical markets and for our general wireless and Internet messaging products
and services such as Blackberry by Aether and merchant notification. We intend
to spend an estimated $25 million on marketing and advertising activities in
2001.
EUROPEAN OPERATIONS THROUGH SILA
We address the needs of business customers abroad through Sila, our joint
venture with Reuters in which we hold a 60.0% equity interest. Sila currently
targets major corporations in Europe who seek to extend their applications to
handheld devices, as well as wireless carriers seeking to outsource wireless
data services. Sila, headquartered in London, plans to expand its efforts to
Asia, Africa and the Middle East. Sila currently has data center facilities in
London, Frankfurt, Madrid and Copenhagen and is planning to construct additional
facilities in Geneva and Stockholm later in 2001.
Sila provides wireless system design development, integration, hosting and
end user support. Sila provides services to wireless carriers through its
Carrier Loyalty Services program, targeted to help carriers attract and retain
high-value subscribers. Sila's family of wireless data technologies, which it
calls its Wireless Extension Platform, supports a range of possible entry points
into mobile applications. A customer may begin, for example, by obtaining a
rapid mobile presence through wireless adaptation of its website, then upgrade
over time to a full-featured production system. Sila's platform supports a broad
range of applications and data feeds, running over a wide variety of devices and
networks. The Sila platform supports browser-based protocols such as WAP and
HTML, as well as Aether Intelligent Messaging for personal digital assistant
(PDA) devices, Short Messaging Service (SMS) for phones and Subscriber Identity
Module (SIM) applications for secure browser-based application delivery.
Sila's commercial and engineering teams are grouped in vertical business
segments, with each comprising industry specialists in Financial Services,
Healthcare and Media and Entertainment.
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We received our 60.0% interest in Sila in exchange for $13.5 million in
cash plus 100% of the equity interests of IFX, a company we purchased in April
2000 for $85 million. Reuters holds 40.0% of the equity interests of Sila, which
it received in exchange for approximately $20.8 million in cash plus
contribution of all of its rights to Futures Pager Limited, a European paging
company. Under a marketing and strategic agreement with Sila and Reuters, we
have agreed to give Sila sales leads and to assist its sale of our products. The
agreement also gives Sila the right to a non-exclusive license to use our
technology and requires Sila to give us an opportunity to sell its products. For
as long as we continue to own a greater than 50% equity interest in Sila, we
have the right to appoint four directors to its seven-director board. David S.
Oros, chairman of Sila, and J. Carter Beese, Jr., a director of Sila, also serve
as directors of Aether and Mr. Oros is the chairman and chief executive officer
of Aether.
STRATEGIC RELATIONSHIPS
A key to our ability to provide complete wireless data services to our
customers is our relationships with third parties. These relationships take time
to develop, and having already formed them provides us with an advantage in
getting our services to market before our competitors. We maintain the strategic
relationships described below.
Wireless Network Carriers
We believe our relationships with wireless network carriers are mutually
beneficial. We believe we are among the largest buyers of wireless data network
capacity for many of the carriers we use. As a result, we are able to negotiate
favorable rates. Typically, we have one-year contracts to buy data network
capacity either for an agreed amount of kilobytes at a flat fee or on a
cents-per-kilobyte basis. We have contracts with Verizon Wireless, AT&T
Wireless, Cingular Wireless, Metrocall and Motient. As a result, we can give our
customers a wide variety of wireless carrier choices.
Hardware and Software Vendors
Our services increase the usefulness of wireless handheld devices, and we
believe our services will increase sales of these devices. Mobile device
manufacturers have therefore assisted us in various projects we have undertaken.
In February, 2001, we announced a strategic partnership with Symbol
Technologies, Inc., to offer Aether's wireless data systems and services with
Symbol handheld devices. In April 2000, we announced a multi-tiered business and
marketing agreement with RIM, a manufacturer of wireless devices and software,
to promote each other's wireless solutions. In 1999, we signed an agreement with
OmniSky to supply us with Novatel Wireless, Inc. wireless modems. We worked
closely with 3Com, an early Aether investor, on the development of our wireless
applications for Palm devices. We participate in industry development groups
dedicated to bringing new applications to wireless data, such as the Palm
developers group, the WAP Forum and the Windows CE developers forum.
Other Strategic Relationships
We work to develop new products and services through strategic
relationships with a variety of companies. For example, we recently formed a
strategic relationship with Computer Associates International, Inc. to securely
extend business e-commerce infrastructure to mobile devices.
COMPETITION
The market for our services is becoming increasingly competitive. We
believe we offer the broadest range of services to businesses necessary to
enable the development, offering and ongoing support of wireless data
communication systems for their employees or customers. The widespread adoption
of industry standards may make it easier for new market entrants to offer some
or all of the services we offer and may make it easier for existing competitors
to introduce some or all of the services they do not now provide, or improve the
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quality of their services. We expect that we will compete primarily on the basis
of the functionality, breadth, quality and price of our services. Our current
and potential competitors include:
- wireless systems integrators, including IBM, Science Applications
International Corporation, Wireless Telecom, Inc. and Razorfish, Inc.;
- wireless infrastructure software companies, including Openwave Systems,
TeleCommunication Systems, Inc. and Comverse Technology, Inc.
- wireless data services providers, such as 724 Solutions Inc., Everypath,
Inc., OracleMobile, Inc., w-Technologies Inc., Brience, Inc., Mobileum,
Inc., Wireless Knowledge, Inc., GoAmerica, Inc. and i3 Mobile, Inc.
- wireless network carriers, such as Verizon Wireless, AT&T Wireless,
Cingular Wireless, Sprint PCS Group, Nextel Communications, Inc. and
Metricom, Inc.
- mobile data management software providers, including, AvantGo, Inc.,
Extended Systems, Inc. and Puma Technology, Inc.
Some of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do.
Additionally, many of these companies have greater name recognition and more
established relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can.
Notwithstanding the increasing competitiveness of our market, we believe
that our potential competitors face substantial barriers to market entry.
Development of wireless data systems comparable to those we have already
developed is time consuming and costly. Moreover, we believe the engineering
talent necessary to develop such systems is scarce.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of patent, copyright, trademark, service mark,
trade secret laws and contractual restrictions to establish and protect
proprietary rights in our services. We have applied for various patents and
trademarks. All of our patent applications are pending and the only trademark
currently granted is for Advantage(R). There can be no assurances that our
applications will be granted or, if granted, that holders of other patents or
trademarks will not claim that the patents or trademarks infringe their patents
or trademarks.
The steps we have taken to protect our intellectual property may not prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies. The laws of certain foreign
countries may not protect our services or intellectual property rights to the
same extent as do the laws of the U.S. We also rely on certain technologies that
we license from third parties, including data feeds and related software from
Reuters Select Feed Plus and Bridge Information Services and encoding technology
from Certicom Corp. In addition, our Scout software suite relies on a license of
Prism software by Spyglass, Inc. (which was acquired by OpenTV Corp. in 2000).
These third-party technology licenses may not continue to be available to us on
commercially attractive terms. The loss of the ability to use such technology
could require us to obtain the rights to use substitute technology, which could
be more expensive or offer lower quality or performance, and therefore have a
material adverse effect on our business, financial condition or results of
operations.
Third parties could claim infringement by us with respect to current or
future services or products we offer. We expect that participants in our markets
will be increasingly subject to infringement claims as the number of services
and competitors in our industry segment grows.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime and some of our
hardware suppliers are subject to regulation by the Federal Communications
Commission. Changes in
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FCC regulations could affect the availability of wireless coverage these
carriers are willing or able to sell to us. We could also be adversely affected
by developments in regulations that govern or may in the future govern the
Internet, the allocation of radio frequencies or the placement of cellular
towers. Regulations of the SEC governing online trading could reduce the level
of online trading or the demand for wireless financial information. Also,
changes in these regulations could create uncertainty in the marketplace that
could reduce demand for our services or increase the cost of doing business as a
result of costs of litigation or increased service delivery cost or could in
some other manner have a material adverse effect on our business, financial
condition or results of operations.
We currently do not collect sales or other taxes with respect to the sale
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states in which we
have offices and are required by law to do so. Some jurisdictions have sought to
impose sales or other tax obligations on companies that engage in online
commerce within their jurisdictions. A successful assertion by one or more
jurisdictions that we should collect sales or other taxes on our products and
services, or remit payment of sales or other taxes for prior periods, could have
a material adverse effect on our business, financial condition or results of
operations.
Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.
EMPLOYEES
As of December 31, 2000, we and our wholly-owned subsidiaries had a total
of approximately 1,375 employees, excluding employees of Sila, and of these
employees over 480 were engineers. As of December 31, 2000, Sila had a total of
171 employees. None of our employees is covered by a collective bargaining
agreement. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
Our principal offices are located in Owings Mills, Maryland in a 91,208
square foot facility under a lease expiring in January 2005 with no renewal
option. We also lease an aggregate of approximately 466,000 square feet for our
offices in Larkspur, California; San Jose, California; San Rafael, California;
Boca Raton, Florida; Bethesda, Maryland; New York, New York; Long Island, New
York; Bethpage, New York; Reston, Virginia; Richmond, Virginia; Vienna,
Virginia; Tempe, Arizona; Scottsdale, Arizona; Marlborough, Massachusetts;
Chicago, Illinois; Yakima, Washington; Zillah, Washington; Olmsted, Ohio;
Durham, North Carolina; and Monterey, Mexico. Of the approximately 466,000
leased square feet, approximately 121,000 square feet are utilized for our
vertical markets segment, approximately 279,000 square feet are utilized for our
software products segment and approximately 67,000 square feet are utilized for
corporate and other purposes. Our wireless services segment is included in our
principal office space in Owings Mills. Sila has offices located throughout
Europe and in Singapore.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. However, we
may from time to time become a party to legal proceedings arising in the
ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration
during the fiscal quarter ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "AETH" since our initial public offering on October 20, 1999. Prior to
that time, there was no public market for the common stock. The following table
sets forth, for the periods indicated, the high and low prices per share of the
common stock as reported on the Nasdaq National Market.
2000 1999
------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31.................................................... $345 $73 n/a n/a
June 30..................................................... $216 $62 n/a n/a
September 30................................................ $203 3/4 $99 3/4 n/a n/a
December 31................................................. $122 1/2 $28 1/2 $89 3/8 $41 1/8
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The number of record holders of the Company's common stock as of December
31, 2000 was 94. The Company believes that in excess of 5,000 beneficial owners
hold such shares of common stock in depository or nominee form.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock nor,
when we were organized as a limited liability company, did we make any
distributions to our members. We currently intend to retain earnings, if any, to
support the development of our business and do not anticipate paying cash
dividends in the foreseeable future. Payment of future dividends, if any, will
be at the discretion of our board of directors after taking into account factors
such as our financial condition, operating results and current and anticipated
cash needs.
UNREGISTERED SECURITIES ISSUED IN THE FOURTH QUARTER
On December 22, 2000, in connection with our acquisition of RTS Wireless,
we issued 1,259,752 shares of our common stock. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The table that follows presents portions of our consolidated financial
statements and is not complete. You should read the following selected
consolidated financial data together with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1998, 1999, and 2000, and the consolidated balance sheet data as of
December 31, 1999 and 2000 are derived from our consolidated financial
statements, which are included as exhibits to this report on Form 10-K beginning
on page F-1. The consolidated statement of operations data for the years ended
December 31, 1996 and 1997 and the consolidated balance sheet data as of
December 31, 1996, 1997 and 1998 is derived from audited financial statements
that do not appear in this annual report on Form 10-K. The historical results
presented below are not necessarily indicative of the results to be expected for
any future fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7. The pro forma net loss per share
information for the historical periods presented gives effect to our conversion
from a limited liability company to a corporation immediately prior to our
initial public offering.
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YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Subscriber revenue........................ $ -- $ 161 $ 549 $ 3,732 $ 31,160
Engineering services revenue.............. 1,355 1,625 963 2,594 9,444
Software and related services revenue..... -- -- -- -- 17,550
------- ------- ------- -------- ---------
Total revenue..................... 1,355 1,786 1,512 6,326 58,154
Cost of subscriber revenue................ -- 447 797 2,110 18,412
Cost of engineering services revenue...... 1,007 846 304 1,366 5,693
Cost of software and related services
revenue................................ -- -- -- -- 5,911
------- ------- ------- -------- ---------
Total cost of revenue............. 1,007 1,293 1,101 3,476 30,016
------- ------- ------- -------- ---------
Gross profit...................... 348 493 411 2,850 28,138
Operating expenses:
Research and development.................. 161 734 1,267 2,614 30,189
General and administrative................ 395 1,505 2,773 5,891 52,937
Selling and marketing..................... 333 840 2,095 54,151
In process research and development....... -- -- -- -- 7,860
Depreciation and amortization............. 45 189 265 1,089 238,074
Option and warrant expense................ -- 40 33 19,198 14,345
------- ------- ------- -------- ---------
Total operating expenses.......... 601 2,801 5,178 30,887 397,556
------- ------- ------- -------- ---------
Operating loss.............................. (253) (2,308) (4,767) (28,037) (369,418)
Interest income (expense), net.............. 8 (295) 74 (229) 42,351
Equity in losses of investments............. (172) (144) -- (2,425) (47,886)
Minority interest........................... -- -- -- -- 10,692
------- ------- ------- -------- ---------
Loss before income taxes.................... $ (417) $(2,747) $(4,693) $(30,691) $(364,261)
Income tax benefit.......................... -- -- -- -- 1,561
------- ------- ------- -------- ---------
Net loss.................................... $ (417) $(2,747) $(4,693) $(30,691) $(362,700)
======= ======= ======= ======== =========
Net loss per share -- basic and diluted..... $ (9.99)
=========
Weighted average shares used in computing
net loss per share -- basic and diluted... 36,310
=========
Pro forma net loss per share -- basic and
diluted................................... $ (0.04) $ (0.22) $ (0.29) $ (1.45)
======= ======= ======= ========
Pro forma weighted average shares used in
computing net loss per share -- basic and
diluted................................... 10,555 12,656 15,916 21,207
======= ======= ======= ========
1996 1997 1998 1999 2000
------ ----- ------ -------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents (including
restricted cash).......................... $ 51 $ 132 $1,755 $ 78,542 $ 872,747
Working capital (deficit).................... 181 (323) 7,519 83,128 819,624
Total assets................................. 1,269 822 8,765 102,534 2,677,375
Total debt................................... -- 150 -- -- 334,942
Members' capital............................. 1,101 74 8,030 -- --
Stockholders' equity......................... -- -- -- 98,342 2,167,698
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following description of our financial condition and
results of operations in conjunction with our Consolidated Financial Statements
and Notes thereto and other financial data appearing elsewhere in this Form
10-K.
OVERVIEW
Aether Systems, Inc. was originally formed as Aeros, L.L.C. in January
1996. We changed our name to Aether Technologies International, L.L.C. effective
August 1996 and to Aether Systems L.L.C. effective September 1999. Immediately
prior to the completion of our initial public offering of common stock on
October 26, 1999, the limited liability company was converted into a Delaware
corporation and our name was changed to Aether Systems, Inc.
Development of our business. From our inception until March 1997, we
primarily provided wireless engineering services, including the development of
wireless software applications for customers. In March 1997, we began offering
services that provide the users of wireless handheld devices access to real-time
financial information. During 1997, we made a strategic decision to focus a
significant portion of our engineering resources on the development of these and
other wireless data services and systems, including our Aether Intelligent
Messaging (AIM) package of wireless messaging software and software development
tools.
In 1998 and 1999, we continued to develop financial information
services -- as well as financial transaction services -- internally and through
our acquisition of Mobeo, Inc. In 1999, we also completed our initial public
offering and began to expand our service offerings to areas other than financial
information and transactions.
In 2000, we continued our expansion into other vertical markets, including:
the transportation and logistics vertical market through our acquisitions of
LocusOne and Motient's retail transportation business unit, the mobile
government vertical market through the acquisitions of Cerulean and SunPro; and
the healthcare vertical market through investments and our own service
offerings. We broadened our software offerings through our purchase of Riverbed
and RTS Wireless. Also in 2000, we moved into the European marketplace with our
acquisition of IFX, and the related formation of Sila. We entered the general
wireless and Internet messaging services market through strategic relationships
with RIM and others and through our own service offerings.
We began to report our financial results by segment as of the first quarter
of 2000. Our current segments are vertical markets, software products, wireless
services and European operations. During 2000, our reportable segments have
changed -- and we expect them to continue to change -- as our operating
structure, business and the market in which we operate evolve. Each of our
segments has distinct management teams. In 1998 and 1999, all of our revenue was
generated from what is now reported as our vertical market segment.
FACTORS AFFECTING COMPARABILITY
Our results of operations in 1999 and 2000, have been affected by
acquisitions, investments and the formation of Sila. In addition, a combination
of factors have resulted in operating losses that we expect will continue for
some time. The factors identified below have had a significant impact on our
operations and should be considered in comparing our results of operations in
2000 to those in 1999 and in comparing our results of operations in 1999 to
those in 1998.
Acquisitions
We have acquired companies to expand our product offerings and geographic
markets and to acquire additional engineering resources to develop products.
From September 1999 through December 31, 2000, we have acquired 10 businesses
(or parts of businesses) for an aggregate consideration (not including
contingent
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payments that had not yet been earned) of $367.4 million and equity of $1.284
billion, consisting of 6,259,445 shares of our common stock and 1,093,785
replacement options. These acquisitions included the following:
- During 1999, we acquired Mobeo for a purchase price and related
expenses of $11.5 million in cash and 46,105 options valued at
$374,000.
- In early 2000, we acquired LocusOne, NetSearch, and IFX for purchase
prices aggregating approximately $160.6 million.
- On March 6, 2000, we acquired Riverbed for 4,537,281 shares of our
common stock and 862,480 options with an aggregate value of $1.136
billion. In connection with our acquisition of Riverbed, we incurred
costs totaling approximately $16.9 million.
- In September 2000, we acquired Cerulean, SunPro and Sinope for
purchase prices and related expenses aggregating approximately $93.4
million and 462,412 shares of our common stock and 94,952 options with
an aggregate value of $69.9 million.
- On November 30, 2000, we acquired Motient's retail transportation
business unit for $49.2 million in cash and related expenses plus an
additional sum of up to $22.5 million depending on whether certain
revenue and other incentive targets are met in 2001.
- On December 22, 2000, we acquired RTS for a purchase price of $34.2
million in cash and related expenses plus 1,259,752 shares of our
common stock and 90,248 options with an aggregate value of $78.0
million.
Our acquisitions increase our operating revenues and expenses from the date
of acquisition. In the discussion of results below, we quantify the effects of
acquisitions on our revenues and expenses. Acquisitions also increase
depreciation and amortization significantly as we amortize the value of
acquisition intangibles. Amortization related to acquisition intangibles was
$556,000 in 1999 and $230.4 million in 2000. Finally, acquisitions affect
non-cash compensation when we issue options to employees at the time of an
acquisition. The related costs were $430,000 in 1999 and $10.4 million in 2000.
We discuss below under "Investments" charges we may need to take in the future
to write down the carrying values of our acquisitions.
Investments
We have made investments through Aether Capital, L.L.C., our wholly-owned
subsidiary, to promote the development of new technologies that are compatible
with the services we offer or that we may wish to integrate into our services.
Since August 1999, we have invested $154.2 million in 20 companies. These
investments include:
- In August 1999, we formed a new company called OpenSky, which was renamed
OmniSky in October 1999. We have invested a total of $9.2 million in
OmniSky. We formed OmniSky with 3Com to pursue opportunities in the
emerging consumer and business mass markets for wireless e-mail, Internet
access and other electronic transactions applications. As of December 31,
2000, we owned approximately 25.7% of OmniSky after completion of
OmniSky's initial public offering. We account for our investment in
OmniSky under the equity method of accounting.
- In March 2000, we acquired a 27.5% interest in Inciscent in the form of
preferred stock for a purchase price of $9.9 million. We formed Inciscent
with Metrocall, PSINet, and Hicks, Muse, Tate & Furst and other investors
to develop wireless e-mail, Internet access and other applications for
the small office and home office markets. We account for our investment
in Inciscent under the equity method of accounting.
- In July 2000, we entered into a non-binding Agreement with Sylvan to
establish Mindsurf, a new company focused on educational services. We
have committed to acquire a 47% interest in Mindsurf for $32.9 million in
cash. Sylvan has also committed to acquire a 47% interest for $32.9
million in cash while the remaining 6% will be owned by other minority
investors. As of December 31, 2000, we have funded $4.7 million of our
commitment to Mindsurf. We account for our investment in Mindsurf under
the equity method of accounting.
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- In July 2000, we acquired a 23% interest in Veristar for $5.6 million in
cash. Veristar enables access to accounts and content through Internet
and wireless technology. We account for investment in Veristar under the
equity method of accounting.
We also have invested $51.5 million in five publicly-traded companies
including $17 million in Metrocall, $10 million in DataCritical Corporation, and
$20 million in Novatel. We account for these five investments at fair value
based on quoted market prices. As of December 31, 2000, the carrying value of
these investments was $54.0 million. Net unrealized holding gains and losses are
excluded from income and recorded as a separate component of stockholders'
equity. Subsequent to year-end, the market values of these investments have
decreased significantly.
Finally, we have also invested $73.3 million in eleven private companies
including $15.0 million in Strategy.com, $11.0 million in ePhones, $14.9 million
in Parkstone Medical Information Systems, Inc., and $10.0 million in Juniper
Financial Corp. In January 2001, we invested an additional $10.0 million in
Strategy.com. We account for these investments at cost unless circumstances
indicate the carrying amount of the investment may not be recoverable.
At the time of our acquisitions and investments, market valuations and the
availability of capital for such companies were at historically high levels.
Since the end of 2000, stock prices and market valuations in our industry and
similar industries have fallen substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures. The
market valuations of those publicly traded companies in which we have invested,
and of other companies similar to those we have acquired or invested in, have
declined substantially since December 31, 2000.
We are currently evaluating the recent decline in the valuation of our
acquisitions and investments to determine if the decline is other than
temporary. We believe that if market valuations of similar companies remain at
their current levels or decline further, it is likely that we will determine the
market decline to be other than temporary and record an impairment charge to
reduce the carrying value of the goodwill and intangibles related to our
acquisitions and our investments to fair value. Although we cannot determine the
amount of any charge we may decide is necessary until we complete our
evaluation, any such charge is likely to be substantial.
Formation of Sila
On May 4, 2000, we formed Sila with Reuters to extend our operations to the
European market. We contributed our IFX subsidiary (which we purchased for $85.0
million shortly before forming Sila), plus $13.5 million in cash to acquire a
60.0% interest in Sila. Reuters contributed cash of approximately $20.8 million
and Futures Pager Limited, a European paging company, for the remaining 40.0%
interest. The results of Sila are consolidated in our financial statements.
Factors producing operating losses
Since our inception, we have invested significant capital to build our
customer service and network operations center. Additionally, we have incurred
significant operating costs to develop our software platforms and other software
applications, and to grow our business. As a result, we have incurred operating
losses since our inception. Part of our strategy is to continue to invest in
business development, research and development, and marketing and advertising.
In addition, our past acquisitions will continue to result in option and warrant
expense and significant amortization of intangible assets, as will any
acquisitions we make in the future. Accordingly, we expect to continue to incur
operating losses for the foreseeable future.
OPERATING REVENUES AND EXPENSES
We describe below the components of our operating revenues and expenses.
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Subscriber revenue and expenses
We derive recurring revenue from subscribers in the vertical markets,
wireless services, software products and European operations segments.
Subscriber revenue may consist of:
- a one-time non-refundable activation fee, which we recognize ratably
over the expected life of the customer relationship;
- monthly per-subscriber service fees, which we recognize as services
are provided;
- monthly per-subscriber exchange fees for access to financial
information from the securities exchanges and markets, which we
recognize as services are provided; and
- monthly fees for providing access to our network operations center,
which we recognize as services are provided.
We also generate revenue by providing our subscribers the option to
purchase wireless handheld devices from us at or near cost, which we bill either
up front or over the initial term of the contract. For certain of our products,
our subscribers' monthly fee includes the use of a wireless handheld device.
Contracts with our wireless data subscribers are generally for a one-year period
and include a termination penalty if cancelled by the subscriber before the
one-year period expires. These contracts are generally renewable at the option
of the subscriber for additional one-year periods or otherwise continue on a
monthly basis until cancelled by the subscriber.
Cost of subscriber revenue consists primarily of airtime costs, financial
data costs, wireless handheld device costs and securities exchange and market
fees. Our airtime costs are determined by agreements we have with several
wireless carriers. Typically, we have one-year contracts to buy data network
capacity either for an agreed amount of kilobytes at a flat fee or on a
cents-per-kilobyte basis.
The subscription products we offer fall into three distinct categories:
- Enterprise ASP/ISP services. These services wirelessly connect
critical functions of a business to end users within the business or
to third parties such as customers. Through our Enterprise ASP/ ISP
services, we provide a full wireless solution to the end user,
including product development, fulfillment, network hosting, customer
service and carrier connections between the business and wireless
carriers. For this type of product, we typically receive revenue from
the sale of hardware and a monthly recurring fee for the full range of
services between $40 and $70 per month per subscriber.
- Premium information and commerce services. These services provide the
end user with information critical to their business, such as market
information or sales inquiries. Premium information products are
packaged with fulfillment, customer service and carrier connections
between the business and wireless carriers. For this type of product,
we typically receive revenues such as activation fees and a monthly
recurring fee for the full range of services between $70 and $200 per
month per subscriber.
- Network hosting services. These services connect businesses and
wireless carriers. Hosting services may be charged per subscriber or
on a usage basis. Average revenue per subscriber typically ranges
between $5 and $25 per month.
The nature of revenue and costs for these product categories is similar,
regardless of the segment in which we offer them. Accordingly, we believe it is
valuable to analyze our subscribers on the basis of these product categories.
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The following table sets forth the number of subscribers for each of our
product types as of December 31, 1998, 1999, and 2000.
AS OF DECEMBER 31,
---------------------
1998 1999 2000
---- ----- ------
Enterprise ASP/ISP services............................... -- 277 26,702
Premium information & commerce services................... 656 4,288 20,122
Network hosting services.................................. -- -- 449
--- ----- ------
Total subscribers................................. 656 4,565 47,273
=== ===== ======
A substantial portion of the growth in subscribers over this period is
attributable to service offerings obtained through recent acquisitions and the
remainder is due to the attraction of new subscribers to our services and the
introduction of new services.
Engineering services revenue and expenses
Revenue from wireless engineering services consists of amounts billed to
our customers for engineering time on an hourly basis or fixed fees on a per
project basis. This revenue is recognized as the work is performed. Cost of
engineering services revenue consists of cash compensation and related costs for
engineers and other project-related costs.
Software and related services revenue and expenses
We derive revenue from the licensing of software products, including the
AIM platform, the ScoutWare software suite, the e-Mobile software suite, the
PacketCluster software suite, the FireRMS software suite and the Advantage
software suite. Cost of software and related services revenue consists of costs
of licensing, including royalty payments and personnel costs.
Research and development expenses
Research and development expenses consist primarily of cash compensation
and related costs for engineers engaged in research and development activities
and, to a lesser extent, costs of materials relating to these activities. We
expense research and development costs as we incur them.
General and administrative and selling and marketing expenses
General and administrative expenses consist primarily of cash compensation
and related costs for general corporate and business development personnel,
along with rent and other costs. Selling and marketing expenses consist
primarily of advertising and promotions, sales and marketing personnel, travel
and entertainment and other costs.
Depreciation and amortization expenses
Depreciation and amortization expenses consist primarily of the
amortization of intangible assets obtained in connection with our acquisitions.
Depreciation and amortization expenses also include depreciation expenses
arising from equipment purchased for our network operations centers and other
property and
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equipment purchases.
Option and warrant expenses
Option and warrant expense consists of expenses recorded to account for the
difference, on the date of grant, between the fair market value and the exercise
price of stock options issued to employees, and the fair value of equity-based
awards to non-employees. We commonly issue options and/or warrants at prices
below market value in connection with our acquisitions. Given our numerous
acquisitions since our inception, we expect to continue to have substantial
option and warrant expense.
Interest income (expense), net
Interest income (expense), net consists primarily of interest income from
cash equivalents and short term investments, interest expense and realized gains
(losses) on sale of our investments.
Equity in losses of investments
Equity in losses of investments consists of our proportionate share of the
net losses of OmniSky, Inciscent, MindSurf and VeriStar Corporation, which are
recorded under the equity method of accounting.
Minority interest
Minority interest consists wholly of Reuters' ownership interest in Sila.
Income tax benefit
Income tax benefit consists of a foreign deferred tax benefit associated
with the losses generated by Sila.
COMPARISON OF RESULTS FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Subscriber revenue. Subscriber revenue increased to $31.2 million for the
year ended December 31, 2000, from $3.7 million for the year ended December 31,
1999, and from $549,000 for the year ended December 31, 1998. Approximately
$21.3 million of the increase in 2000 was due to continued sales of product and
service offerings obtained in connection with acquisitions. Additionally, $6.2
million of the increase in subscriber revenue resulted from the increased number
of subscribers that signed on to our existing and new product and service
offerings such as wireless messaging and online trading products. Our subscriber
product and service offerings fell primarily into our Enterprise ASP/ISP
services and premium information and commerce services subscriber categories.
The increase in 1999 from 1998 was primarily due to the sale of product and
service offerings obtained in connection with our acquisition of Mobeo which
contributed $2.4 million of subscriber revenue in 1999.
Cost of subscriber revenue. Cost of subscriber revenue increased to $18.4
million for the year ended December 31, 2000, from $2.1 million for the year
ended December 31, 1999, and from $797,000 for the year ended December 31, 1998.
We generally expect the cost of subscriber revenue to increase proportionately
with any increase in subscriber revenue. Approximately $11.1 million of the
increase for 2000 was from product and service offerings obtained in connection
with our acquisitions and subsequent growth of those acquisitions. An additional
$5.2 million of the growth in 2000 was from an increase in subscribers resulting
from new offerings such as wireless messaging and online trading products
primarily in our Enterprise ASP/ ISP services and premium information and
commerce services. The increase in 1999 from 1998 was primarily due to product
and service offerings obtained in connection with our acquisition of Mobeo which
accounted for $859,000 of cost of subscriber revenue in 1999.
Engineering services revenue. Engineering services revenue increased to
$9.4 million for the year ended December 31, 2000, from $2.6 million for the
year ended December 31, 1999, and from $1.0 million for the year ended December
31, 1998. The increase between 2000 and 1999 was primarily due to our
engineering services contracts with OmniSky, Merrill Lynch, Response Services,
LLC and Inciscent. We recognized
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$6.9 million under these contracts for the year ended December 31, 2000. The
increase between 1999 and 1998 was primarily due to our engineering services
contracts with OmniSky and Response Services. We recognized $2.6 million under
these contracts for the year ended December 31, 1999.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $5.7 million for the year ended December 31, 2000, from $1.4
million for the year ended December 31, 1999, and from $304,000 for the year
ended December 31, 1998. The increase between 2000 and 1999 was primarily due to
the cost of our engineering services contracts with OmniSky, Merrill Lynch,
Response Services and Inciscent. We recognized costs of $4.1 million under these
contracts for the year ended December 31, 2000. The increase between 1999 and
1998 was primarily due to the cost of our engineering services contracts with
OmniSky and Response Services. We recognized costs of $1.3 million under these
contracts for the year ended December 31, 1999.
Software and related services revenue. Software and related services
revenue was $17.6 million for the year ended December 31, 2000. We did not have
any software and related services revenue for the years ended December 31, 1999
or 1998. Approximately $17.0 million of software and related services revenue in
2000 was generated from the sale of licenses and services of the ScoutWare
software platform, e-Mobile Delivery platform, PacketCluster software suite,
FireRMS software suite and the Advantage software suite all of which were
obtained in conjunction with acquisitions and their subsequent growth occurring
in 2000. The remaining software and related services revenue was generated
primarily from our licensing of AIM.
Cost of software and related services revenue. Cost of software and
related services revenue was $5.9 million for the year ended December 31, 2000,
relating to royalty fees for third-party intellectual property used in the
software that we sell and personnel costs. We did not have any costs of software
and related services revenue for the years ended December 31, 1999 or 1998.
Research and development expenses. Research and development expenses,
including in-process research and development related to acquisitions, increased
to $38.0 million for the year ended December 31, 2000, from $2.6 million for the
year ended December 31, 1999, and from $1.3 million for the year ended December
31, 1998. The increase in 2000 from 1999 was primarily due to the hiring of
additional engineers and consultants for increased research and development
activities associated with the development of our software products, mobile
computing platforms and wireless data services. In addition, we incurred charges
of $7.9 million for in-process research and development in connection with our
acquisitions of Riverbed, Cerulean, RTS Wireless, and IFX in 2000. The increase
in 1999 from 1998 was primarily due to the hiring of additional engineers for
increased research and development activities associated with the development of
our software products and wireless data services. We expect research and
development expenses to continue to increase as we expand our product offerings.
General and administrative expenses. General and administrative expenses
increased to $52.9 million for the year ended December 31, 2000, from $5.9
million for the year ended December 31, 1999, and from $2.8 million for the year
ended December 31, 1998. The increase in 2000 was primarily due to additional
personnel and consultants performing general corporate activities, additional
facilities and our acquisitions since the prior year. The increased scope of our
business has required additional personnel and other expenses, such as
consulting and facilities, in all areas including: customer service, network
operations, project management, legal and accounting. The increase in 1999 from
1998 was primarily due to the addition of personnel performing general corporate
functions. We anticipate continued increases in our general and administrative
expenses as we expand our operations.
Selling and marketing expenses. Selling and marketing expenses increased
to $54.2 million for the year ended December 31, 2000, from $2.1 million for the
year ended December 31, 1999, and from $840,000 for the year ended December 31,
1998. The increase in 2000 was primarily due to an increase in advertising and
promotion costs, which increased from $933,000 to $23.1 million for the years
ended December 31, 1999 and 2000, respectively, including a nationwide broadcast
and print branding campaign, as well as increases in the number of sales and
marketing personnel primarily obtained through acquisitions. The increase in
1999 was primarily due to an increase in the number of sales and marketing
personnel. We expect selling and marketing
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expenses to continue at an increased level as we incur additional expenses
focused on generating leads and sales opportunities.
Depreciation and amortization. Depreciation and amortization increased to
$238.1 million for the year ended December 31, 2000, from $1.1 million for the
year ended December 31, 1999, and from $265,000 for the year ended December 31,
1998. This increase in 2000 was primarily due to the amortization of intangibles
and goodwill relating to the acquisition of Riverbed, which accounted for $186.2
million of the expense in 2000, while $44.2 million related to our other
acquisitions. The increase in 1999 was primarily due to amortization of goodwill
and other intangibles related to the Mobeo acquisition. We expect this expense
to increase in 2001 as a result of a full year of amortization on several of our
acquisitions made late in 2000.
Option and warrant expense. Option and warrant expense decreased to $14.3
million for the year ended December 31, 2000, from $19.2 million for the year
ended December 31, 1999 and increased from $33,000 for the year ended December
31, 1998. The decrease between 2000 and 1999 was due to our general policy
subsequent to our initial public offering of granting shares to employees at
their fair value, partially offset by options granted in connection with
acquisitions at exercise prices less than fair value on the date of grant. The
increase between 1999 and 1998 was due to expenses associated with options
granted to the selling stockholders of Mobeo for consulting and employee
services. The increase was also due to an increase in the number of options that
vested during the period in connection with our initial public offering with
exercise prices less than the fair value on the date of grant resulting in an
expense of $17.9 million in 1999. In January 2001, we canceled 2.5 million
options granted to its employees and issued approximately 756,000 shares of
restricted stock to a number of employees holding options with exercise prices
higher than our then-current market value. We expect to record $26.6 million of
expense over the vesting period of the restricted stock grants.
Interest income, net. Net interest income increased to $42.4 million for
the year ended December 31, 2000, from an expense of $229,000 for the year ended
December 31, 1999. Interest income was $74,000 for the year ended December 31,
1998. The increase between 2000 and 1999 was primarily due to an increase in
interest earned on cash and cash equivalents following the completion of our
secondary offering on March 17, 2000. The decrease between 1999 and 1998
primarily relates to interest and related expense of a loan that funded the
purchase price of Mobeo, partially offset by interest earned on the proceeds
from our initial public offering.
Equity in losses of investments. Equity in losses of investments was $47.9
million for the year ended December 31, 2000, and $2.4 million for the year
ended December 31, 1999, and there was no equity in losses of investments for
the year ended December 31, 1998. The increase related to our proportionate
share of losses from OmniSky, Inciscent, MindSurf, and VeriStar, which are all
accounted for under the equity method of accounting. We expect to continue to
record equity losses in investments as these companies continue to develop their
operations.
Income tax benefit. Income tax benefit was $1.6 million for the year ended
December 31, 2000. There was no income tax benefit for the year ended December
31, 1999 or 1998. This increase was due to a foreign deferred tax benefit
associated with the losses generated by Sila.
Minority interest. Minority interest was $10.7 million for the year ended
December 31, 2000, relating to Reuters' proportional share of losses in Sila,
which is consolidated into our financial statements. We expect that Sila will
continue to incur losses as it develops its operations. There was no minority
interest for the years ended December 31, 1999 and 1998.
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SEGMENT RESULTS
VERTICAL SOFTWARE WIRELESS EUROPEAN CORPORATE AND
MARKETS PRODUCTS SERVICES OPERATIONS OTHER TOTAL
-------- ---------- -------- ---------- ------------- ----------
Year ended December 31, 1999
Revenue.................... $ 6,326 $ -- $ -- $ -- $ -- $ 6,326
Gross profit............... $ 2,850 $ -- $ -- $ -- $ -- $ 2,850
Total assets............... $102,534 $ -- $ -- $ -- $ -- $ 102,534
Year ended December 31, 2000
Revenue.................... $ 31,100 $ 7,938 $5,633 $ 13,483 $ -- $ 58,154
Gross profit............... $ 13,837 $ 4,997 $2,984 $ 6,320 $ -- $ 28,138
Total assets............... $294,683 $1,083,996 $ -- $178,001 $1,120,695 $2,677,375
The type of revenue we earn in each of our segments varies from segment to
segment.
Vertical markets segment. In 1999 and 1998, all of our revenue was from
operations that are now included in our vertical markets segment. As we operate
in a wide variety of vertical markets, our vertical markets segment can have
subscriber revenue, engineering services revenue and software and related
services revenue depending on the needs of the customer. Revenue in the vertical
markets segment increased from $6.3 million in 1999 to $31.1 million in 2000 and
gross profit in that segment increased from $2.8 million in 1999 to $13.8
million in 2000. The increase in this segment was primarily the result of sales
of product and service offerings obtained in connection with acquisitions and
their subsequent growth which contributed $22.0 million and $12.8 million to
revenue and gross profits, respectively. The remaining growth related to
increases in subscribers to existing services in the amount of $9.1 million and
$1.0 million to revenue and gross profit, respectively.
Software products segment. The software products segment typically has
software products maintenance and related services revenue. The sales of
software application and product offerings obtained in connection with the
acquisitions of Riverbed and RTS contributed approximately $7.5 million of the
revenues and $4.6 million of the gross profits to the software products segment
in 2000. The remaining portion of our software revenues and gross profits relate
to the sale of our AIM software package.
Wireless services segment. Our wireless services segment can derive
revenue from subscribers and from engineering services related to setting up and
servicing these subscribers. All of the increase in revenue and gross profit in
the wireless services segment was a result of new product and service offerings,
including our Blackberry by Aether and wireless Enterprise ISP services.
European operations segment. Our European operations segment consists of
Sila and generates revenue from subscribers, engineering services and from the
sale of software and related services. Sila was formed in May 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private and public placements of our equity securities. Through December 31,
2000, we have raised aggregate net proceeds of approximately $1.5 billion
including the issuance of $310.5 million of 6% convertible subordinated notes.
As of December 31, 2000, we had approximately $875.4 million in cash and
short-term investments (including restricted cash of $16.4 million) and working
capital of approximately $819.6 million.
Net cash used in operating activities was $63.8 million, $12.1 million and
$4.4 million for the years ended December 31, 2000, 1999 and 1998, respectively.
The principal use of cash in each of these periods was to fund our losses from
operations.
Net cash used in investing activities was $512.2 million, $12.6 million and
$6.5 million for the years ended December 31, 2000, 1999 and 1998 respectively.
For the twelve months ended December 31, 2000, we used $48.3 million for the
purchase of property and equipment, $158.4 million for investments in 20
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companies and $303.7 million to acquire LocusOne, NetSearch, Cerulean, SunPro,
Sinope, Motient's retail transportation unit, RTS Wireless, IFX and for the
related formation of Sila, and Sila's subsequent acquisitions. Cash used by
investing activities for the year ended December 31, 1999 was primarily for the
purchase of property and equipment and the acquisition of Mobeo partially offset
by the sale of short-term investments. For the year ended December 31, 1998 cash
used in investing activities was for the purchase of property and equipment and
purchase of short-term investments.
Net cash provided by financing activities was $1.354 billion, $101.4
million and $12.5 million for the years ended December 31, 2000, 1999 and 1998.
For the year ended December 31, 2000, cash provided by financing activities was
primarily attributable to proceeds received from our secondary offering of
common stock and convertible subordinated notes. For the year ended December 31,
1999 cash provided by financing activities was primarily attributable to
proceeds received from our initial public offering and the issuance of notes
payable. For the year ended December 31, 1998, cash provided by financing
activities was primarily attributable to cash proceeds from the sale of
membership interests.
While not a measure under generally accepted accounting principles, EBITDA
is a standard measure of financial performance in our industry. EBITDA means
earnings before interest, taxes, depreciation and amortization and option and
warrant expense. EBITDA should not be considered in isolation or as an
alternative to net income (loss), income (loss) from operations, cash flows from
operating activities, or any other measure of performance under generally
accepted accounting principles. Cash expenditures for various long-term assets,
interest expense and income taxes have been, and will be, incurred which are not
reflected in the EBITDA presentations. EBITDA losses in 2000 increased from
$10.4 million in the first quarter, to $24.9 million in the second quarter,
$28.9 million in the third quarter and $44.9 million in the fourth quarter. The
increases from quarter to quarter were due to increases in operating expenses as
a result of acquisitions and our continued growth.
We expect to continue to use cash to fund operations as we continue to
develop our products and markets. The time at which our operating revenues will
exceed operating expenses, if ever, depends on a wide variety of factors
including general business trends, development of our markets, the progress of
and changes in our research and development activities and the effect of
potential future acquisitions. Given our current cash resources and our ability
to control some of the factors that will affect when operating revenues may
exceed operating expenses, we believe we have substantial flexibility to
continue operations and still have funds available for our operating and capital
requirements for at least the next twelve months.
For fiscal year 2001, we expect to have the following expenditures:
- We are committed to purchase 87,050 RIM handheld devices. Depending on
the mix of products ordered, we estimate the cost will be between $27.8
and $40.0 million.
- Through 2001, we will spend $18.6 million for debt service on our
convertible subordinated notes.
- We may be required to pay $23.0 million for purchase earn-outs related to
certain acquisition related activities.
- In accordance with our agreement with MindSurf, we have committed to
invest an additional $28.2 million in MindSurf in 2001.
- In January 2001, we invested an additional $10.0 million in Strategy.com.
- We are committed to provide additional funding of up to $9.6 million to
Sila in 2001.
In addition to the specific expenditures identified above, we expect to
continue to invest cash on other capital expenditures, including acquisitions
and other strategic opportunities, additional leasehold improvements, network
operations centers and associated furniture and equipment.
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FACTORS AFFECTING OPERATING RESULTS
Our results of operations are affected by a variety of factors, including
those described below.
We have historically incurred losses and these losses may increase in the
future. We reported net losses of $4.7 million, $30.7 million and $362.7
million for the years ended December 31, 1998, 1999, and 2000, respectively. Our
amortization of intangible assets has grown significantly as a result of recent
acquisitions. In addition, we expect to continue to incur significant sales and
marketing, systems development and administrative expenses. Therefore, we will
need to generate significant revenue to become profitable and sustain
profitability on a quarterly or annual basis. We expect to continue to incur
significant losses for the foreseeable future. As a result, we may not be able
to achieve profitability on a quarterly or annual basis.
We may not be able to recover the full value of goodwill recorded on some
of our acquisitions and investments. During 1999 and 2000, we recorded
approximately $1.7 billion in goodwill and other intangibles related to our
acquisitions and made investments in other companies of approximately $154.2
million. Consideration for some of our acquisitions was partially or fully
funded through the issuance of shares of our common stock at a time when our
stock price was at historically high prices. Most of the companies we acquired
or invested in were start-up or newly formed entities. Most of these companies
were privately held and their fair values are highly subjective and not readily
determinable. At December 31, 2000, the market value of the public companies in
which we have invested exceeded our cost of acquiring those investments. Our
policy is to review the value of all our acquisitions and investments for
impairment whenever events or circumstances indicate that the carrying amount
may not be recoverable.
At the time of our acquisitions and investments, market valuations and the
availability of capital for such companies were at historically high levels.
Since the end of 2000, stock prices and market valuations in our industry and
similar industries have fallen substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures. The
market valuations of those publicly traded companies in which we have invested
and of other companies similar to those we have acquired or invested in have
declined substantially since December 31, 2000.
We are currently evaluating the recent decline in the valuation of our
acquisitions and investments to determine if the decline is other than
temporary. We believe that if market valuations of similar companies remain at
their current levels or decline further, it is likely that we will determine the
market decline to be other than temporary and record an impairment charge to
reduce the carrying value of the goodwill and intangibles related to our
acquisitions and our investments to fair value. Although we cannot determine the
amount of any charge we may decide is necessary until we complete our
evaluation, any such charge is likely to be substantial.
Our future results are uncertain because our historical revenue was derived
from services other than those we expect to be the focus of our business in the
future. We only have a limited history selling our current services, by which
you can evaluate our business, financial condition and operating results.
Although we commenced operations in January 1996, until March 1997, all of our
revenue came from engineering services and not from monthly service
subscriptions or software licensing which we now provide and which will be our
focus in the future. In addition, our monthly service subscriptions have come
primarily from subscriptions to our financial data, wireless internet and
messaging and online trading services. Our strategy includes development of
other services in other industries. Because of this change in focus and our
recent acquisitions, you should not rely on our past performance to evaluate our
future performance.
There is no established market for our services; we may not be able to sell
enough of our services to become profitable. The markets for wireless data and
transaction services are still emerging. Continued growth in demand for, and
acceptance of, these services remains uncertain. Current barriers to market
acceptance of these services include cost, reliability, functionality and ease
of use. We cannot be certain that these barriers will be overcome. We are
currently developing services for some of our business customers pursuant to
preliminary agreements, and expect to develop other Aether products. We cannot
assure you that these parties will enter into contracts for our services or that
products developed for future sale will result in
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revenue. Our competitors may develop alternative wireless data communications
systems that gain broader market acceptance than our systems. If the market for
our services does not grow, or grows more slowly than we currently anticipate,
we may not be able to attract customers for our services and our revenues would
be adversely affected.
Our customers include technology companies that may be experiencing
shortages in capital. This could result in reduced sales to these companies and
difficulty in collecting outstanding receivables. During 1999 and 2000, a
portion of our revenues came from newly formed technology-based companies,
including companies in which we have made investments. Revenues from companies
in which we have investments, including OmniSky, Inciscent, MindSurf, ePhones,
and ParkStone, were approximately $2.2 million and $10.5 million for the years
ended December 31, 1999 and 2000, respectively. Accounts receivable from these
companies at December 31, 1999 and 2000 were $612,000 and $4.9 million,
respectively. All of our investments were made in participation with other
unrelated investors at the same per share price as the other investors. Our
investment policy generally limits our investments to companies that have
completed at least two rounds of financing and generally requires that an
unrelated investor lead the round of financing that we participate in.
Newly formed technology-based companies have a limited operating history
and many have reported significant losses since inception. They are subject to
many of the risks and uncertainties that we are, including rapid changes in
technology, no established markets for their products, and intense competition,
among others. In addition, many of these companies may require significant
infusions of capital to continue operations. The availability of such capital
has been curtailed and some of these companies may not be able to raise
sufficient funds to continue to operate, which could limit our ability to
generate further revenues from such companies as well as to collect their
outstanding receivables.
Our recent acquisitions, investments and strategic alliances may not
deliver the value we paid or will pay for them. Excessive expenses may result if
we do not successfully integrate them, or if the costs and management resources
we expend in connection with the integrations exceed our expectations. We
expect that our recent acquisitions, investments and strategic alliances and any
acquisitions, investments or strategic alliances we may pursue in the future
will have a continuing, significant impact on our business, financial condition
and operating results. The value of the companies that we acquired or invested
in may be less than the amount we paid and our financial results may be
adversely affected if:
- we fail to assimilate the acquired assets with our pre-existing business;
- we lose key employees of these companies or of Aether as a result of the
acquisitions;
- our management's attention is diverted by other business concerns; or
- we assume unanticipated liabilities related to the acquired assets.
In addition, the companies we have acquired or invested in or may acquire
or invest in are subject to each of the business risks we describe in this
section, and if they incur any of these risks the businesses may not be as
valuable as the amount we paid. Further, we cannot guarantee that we will
realize the benefits or strategic objectives we were seeking to obtain by
acquiring or investing in these companies.
We may have to take actions that are disruptive to our business strategy to
avoid registration under the Investment Company Act of 1940. As part of our
business strategy, we own minority and majority equity interests in a number of
ventures. While we believe we are not currently an investment company, our
ownership of these securities could potentially subject us to registration under
the Investment Company Act of 1940, which, absent an applicable exclusion or
exemption, requires registration for companies that are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities. If
we were required to register as an investment company, we would not be able to
continue operating our business in accordance with our business plan.
Accordingly, we intend to take all necessary steps to avoid being deemed an
investment company. These necessary steps might disrupt our business strategy of
forming joint ventures with strategic partners and making equity investments in
companies with whom we have a strategic relationship to develop new technology
or extend the reach of existing products and services. A company may
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be deemed to be an investment company if it owns investment securities with a
value exceeding 40% of its total assets excluding cash items and government
securities as defined in the Investment Company Act, subject to certain
exclusions and exemptions. Any acquisition or disposition of assets, or
fluctuations in the value of our assets may require us to take steps to avoid
registration under the Investment Company Act. In particular, a write down of
the value of our acquisitions such as those that may occur as a result of the
recent market downturn, could increase the percentage of our total assets
accounted for by investment securities. The steps required to avoid registration
could include buying, refraining from buying, selling or refraining from selling
securities in circumstances where we would not take these actions except to
avoid registration under the Investment Company Act. For example, we may have to
retain majority or controlling interests in our joint ventures after their
initial public offerings, which would require us to expend significant amounts
of capital that we might otherwise use to expand our products and services in
other market segments. Moreover, we may incur tax liabilities if we are required
to sell assets. We may also be unable to purchase additional investment
securities that may be important to our business strategy. We have applied to
the SEC for an exemptive order declaring that we are not an investment company
and are not required to register under the Investment Company Act. We may not
ultimately be successful in receiving such an order.
We may not achieve profitability if we are unable to maintain, improve and
develop the wireless data services we offer. We believe that our future
business prospects depend in part on our ability to maintain and improve our
current services and to develop new ones on a timely basis. Our services will
have to achieve market acceptance, maintain technological competitiveness and
meet an expanding range of customer requirements. As a result of the
complexities inherent in our service offerings, major new wireless data services
and service enhancements require long development and testing periods. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new services and service enhancements.
Additionally, our new services and service enhancements may not achieve market
acceptance. If we cannot effectively develop and improve services we may not be
able to recover our fixed costs or otherwise become profitable.
If we do not respond effectively and on a timely basis to rapid
technological change, our services may become obsolete and we may lose
sales. The wireless and data communications industries are characterized by
rapidly changing technologies, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. Our
services are integrated with wireless handheld devices and the computer systems
of our corporate customers. Our services must also be compatible with the data
networks of wireless carriers. We must respond to technological changes
affecting both our customers and suppliers. We may not be successful in
developing and marketing, on a timely and cost-effective basis, new services
that respond to technological changes, evolving industry standards or changing
customer requirements. Our ability to grow and achieve profitability will
depend, in part, on our ability to accomplish all of the following in a timely
and cost-effective manner:
- effectively use and integrate new wireless and data technologies;
- continue to develop our technical expertise;
- enhance our wireless data, engineering and system design services;
- develop applications for new wireless networks; and
- influence and respond to emerging industry standards and other changes.
We depend upon wireless networks owned and controlled by others. If we do
not have continued access to sufficient capacity on reliable networks, we may be
unable to deliver services and our sales could decrease. Our ability to grow and
achieve profitability partly depends on our ability to buy sufficient capacity
on the networks of wireless carriers such as Verizon Wireless, Bell South
Corporation, Motient and AT&T Wireless and on the reliability and security of
their systems. All of our services are delivered using airtime purchased from
third parties. We depend on these companies to provide uninterrupted and "bug
free" service and would not be able to satisfy our customers' needs if they
failed to provide the required capacity or needed level of service. In addition,
our expenses would increase and our profitability could be materially adversely
affected if
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wireless carriers were to increase the prices of their services. Our existing
agreements with the wireless carriers generally have one-year terms. Some of
these wireless carriers are, or could become, our competitors and if they
compete with us they may refuse to provide us with their services.
Our failure to develop recognition for the Aether brand could prevent us
from achieving a profitable level of sales. Our expenses related to sales and
marketing activities were $840,000, $2.1 million and $54.2 million for the years
ended December 31, 1998, 1999 and 2000 respectively. We intend to increase the
market presence of our brand over time and continue to focus on generating leads
and sales opportunities, which will require us to continue our increased
spending on sales and marketing. We have applied for, but have not received,
federal trademark registrations for the names "Aether(TM)," and "Aether
Systems(TM)" and as well as names of key products. We may not be able to use
these names effectively or at all if we fail to obtain such registrations due to
conflicting marks or otherwise. As a result of our recent acquisitions, we
expect to market our acquired products and services under their existing brands.
We may lose existing customers or fail to attract new customers if these brands
are not well received by our customers, if our marketing efforts are not
productive, if we are otherwise unsuccessful in increasing our brand awareness
or if our competition has greater brand recognition.
We depend on third parties for the marketing and sales of some of our
services. If the marketing efforts of these third parties are not effective, we
may not achieve a profitable level of sales. We rely substantially on the
efforts of others to market and sell some of our wireless data communications
services, in particular the online trading services. We also expect to rely on
the marketing efforts of our strategic relationship partners for products under
development in our other market segments such as healthcare and wireless
commerce. We cannot control whether or how these third parties who sell and
market our services will perform their obligations to market our services. If
these third parties fail to market our services or their efforts fail to result
in new customers, we may be unable to attract new customers and our revenue
could be adversely affected.
We may fail to support our anticipated growth in operations, which could
reduce demand for our services and materially adversely affect our revenue. Our
business strategy is based on the assumption that the number of subscribers to
our services, the amount of information they want to receive and the number of
services we offer will all increase. We must continue to develop and expand our
systems and operations to accommodate this growth. The expansion and adaptation
of our customer service and network operations centers require substantial
financial, operational and management resources. We may be unable to expand our
operations for one or more of the following reasons:
- we may not be able to locate or hire at reasonable compensation rates
qualified engineers and other employees necessary to expand our capacity;
- we may not be able to expand our billing and other related support
systems; and
- we may not be able to obtain sufficient additional capacity from wireless
carriers.
Due to the limited deployment of our services to date, the ability of our
systems and operations to connect and manage a substantially larger number of
customers while maintaining superior performance is unknown. Any failure on our
part to develop and maintain our wireless data services as we experience rapid
growth could significantly reduce demand for our services and materially
adversely affect our revenue.
We depend on recruiting and retaining key management and technical
personnel with wireless data and software experience. We may not be able to
develop new products or support existing products if we cannot hire or retain
qualified employees. Because of the technical nature of our products and the
dynamic market in which we compete, our performance depends on attracting and
retaining key employees. Competition for qualified personnel in the wireless
data and software industries is intense and finding qualified personnel with
experience in both industries is even more difficult. We believe there are only
a limited number of individuals with the requisite skills in the field of
wireless data communication, and it is becoming increasingly difficult to hire
and retain these persons. Competitors and others have in the past attempted, and
may in the future attempt, to recruit our employees. Each of our engineers has
entered into a non-competition agreement with us for a period of ten months
after they leave Aether. These agreements will not prevent our engineers from
leaving or working for competitors relatively soon after they leave us.
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We currently maintain a key person life insurance policy for David S. Oros,
our chairman and chief executive officer. We do not maintain insurance policies
for any of our other executive officers.
We may not have adequately protected our intellectual property rights,
which could allow competitors to develop similar products using similar
technology, thus reducing our sales and revenue. We have attempted to protect
our technology, including the technology we have obtained or will obtain in our
acquisitions, through patent, trademark and copyright protection, as well as
through trade secret laws and non-competition and non-disclosure agreements with
all employees. Patents may infringe on valid patents held by third parties, or
patents held by third parties may limit the scope of any patents we receive. In
particular, the patent we acquired in our acquisition of Riverbed covers a
technology that is similar to other patented technologies. In addition, we have
applied for but have as yet no international patent protection in this
technology. If we are not adequately protected, other companies with sufficient
engineering expertise could develop competing products based on our intellectual
property and reduce our sales and revenue.
We may be sued by third parties for infringement of their intellectual
property rights and incur costs of defense and possibly royalties or lose the
right to use technology important to providing our services. The
telecommunications and software industries are characterized by the existence of
a large number of patents and frequent litigation based on allegations of patent
infringement or other violations of intellectual property rights. As the number
of participants in our market increases, the possibility of an intellectual
property claim against us could increase. Intellectual property claims, with or
without merit, could be time-consuming and expensive to litigate or settle,
could require us to enter into costly royalty arrangements, could divert
management attention from administering our business and could hinder us from
conducting our business.
We may be subject to liability for transmitting information, and our
insurance coverage may be inadequate to protect us from this liability. We may
be subject to claims relating to information transmitted over systems we develop
or operate. These claims could take the form of lawsuits for defamation,
negligence, copyright or trademark infringement or other actions based on the
nature and content of the materials. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that may be imposed.
Disruption of our services due to accidental or intentional security
breaches may harm our reputation, potentially causing a loss of sales and an
increase in our expenses. A significant barrier to the growth of wireless data
services or transactions on the Internet or by other electronic means has been
the need for secure transmission of confidential information. Our systems could
be disrupted by unauthorized access, computer viruses and other accidental or
intentional actions. We may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by such breaches. If
a third party were able to misappropriate our users' personal or proprietary
information or credit card information, we could be subject to claims,
litigation or other potential liabilities that could materially adversely impact
our revenue and may result in the loss of customers.
Any type of systems failure could reduce sales, increase costs or result in
claims of liability. Our existing wireless data services are dependent on
real-time, continuous feeds from Reuters Selectfeed Plus and others. The ability
of our subscribers to make securities trades, receive sales leads and receive
critical business information requires timely and uninterrupted connections with
our wireless network carriers. Any disruption from our satellite feeds or backup
landline feeds could result in delays in our subscribers' ability to receive
information or execute trades. We cannot be sure that our systems will operate
appropriately if we experience a hardware or software failure or if there is an
earthquake, fire or other natural disaster, a power or telecommunications
failure, intentional disruptions of service by third parties, an act of God or
an act of war. A failure in our systems could cause delays in transmitting data,
and as a result we may lose customers or face litigation that could involve
material costs and distract management from operating our business.
Our ability to sell new and existing services at a profit could be impaired
by competitors. Intense competition could develop in the market for services we
offer. We developed our software using standard industry development tools. Many
of our agreements with wireless carriers, wireless handheld device manufacturers
and data providers are non-exclusive. Our competitors could develop and use the
same
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31
products and services in competition with us. With time and capital, it would be
possible for competitors to replicate our services. Our potential competitors
could include wireless network carriers such as Verizon Wireless and AT&T
Wireless, software developers such as Microsoft Corporation, 724 Solutions and
Openwave Systems and systems integrators such as IBM. Many of our potential
competitors have significantly greater resources than we do. Furthermore,
competitors may develop a different approach to marketing the services we
provide in which subscribers may not be required to pay for the information
provided by our services. Competition could reduce our market share or force us
to lower prices to unprofitable levels.
We may lose the opportunity to pursue desirable projects to Inciscent,
OmniSky, Sila and MindSurf and other companies in which we hold equity
interests, because some of our directors and executive officers serve on the
boards of directors of these companies. David S. Oros, our chairman and chief
executive officer, and some of our other executive officers and directors have
been appointed to the boards of directors of companies in which we hold an
equity interest, including OmniSky, Sila, MindSurf and Inciscent. These other
companies may develop products that compete with our own products. Mr. Oros and
the other directors and executive officers may learn of business opportunities
that are appropriate for the boards on which they serve and Mr. Oros and these
other individuals may not be required to make those opportunities available to
us. If OmniSky, Sila, Inciscent, MindSurf or any other joint ventures we may
enter into pursue opportunities that we would have an interest in pursuing, our
business may fail to grow or our existing business may suffer. Mr. Oros and
these other directors and executive officers may also have other conflicts of
interest with Aether because of their positions with OmniSky, Sila, Inciscent
and MindSurf and OmniSky's, Sila's, Inciscent's and MindSurf's contractual
relationships with Aether.
An interruption in the supply of products and services that we obtain from
third parties could cause a decline in sales of our services, and products we
purchase to avoid shortages may become obsolete before we can use them. In
designing, developing and supporting our wireless data services, we rely on
wireless carriers, wireless handheld device manufacturers, content providers and
software providers. These suppliers may experience difficulty in supplying us
products or services sufficient to meet our needs or they may terminate or fail
to renew contracts for supplying us these products or services on terms we find
acceptable. Any significant interruption in the supply of any of these products
or services could cause a decline in sales of our services unless and until we
are able to replace the functionality provided by these products and services.
RIM is our primary provider of pager devices. Novatel and Sierra Wireless, Inc.
are our only suppliers of wireless modems, which are an integral hardware
component of our services. It can be difficult to obtain these wireless modems
and their parts. Although we have purchased a large supply of these modems, they
may become obsolete before we are able to use them. We also depend on third
parties to deliver and support reliable products, enhance their current
products, develop new products on a timely and cost-effective basis and respond
to emerging industry standards and other technological changes. In addition, we
rely on the ability of our content providers -- including Reuters, the New York
Stock Exchange, Inc., the Chicago Board of Trade, the Nasdaq Stock Market, Inc.
and the Options Price Reporting Authority -- to continue to provide us with
uninterrupted access to the news and financial information we provide to our
customers. The failure of third parties to meet these criteria, or their refusal
or failure to deliver the information for whatever reason, could materially harm
our business.
Our sales cycle is long, and our stock price could decline if sales are
delayed or cancelled. Quarterly fluctuations in our operating performance are
exacerbated by the length of time between our first contact with a business
customer and the first revenue from sales of services to that customer or end
users. Because our services represent a significant investment for our business
customers, we spend a substantial amount of time educating them regarding the
use and benefits of our services and they, in turn, spend a substantial amount
of time performing internal reviews and obtaining capital expenditure approvals
before purchasing our services. As much as a year may elapse between the time we
approach a business customer and the time we begin to deliver services to a
customer or end user. Any delay in sales of our services could cause our
quarterly operating results to vary significantly from projected results, which
could cause our stock price to decline. In addition, we may spend a significant
amount of time and money on a potential customer that ultimately does not
purchase our services.
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Our sales of financial data and trading services could decrease if there is
a decline in securities trading. We earn a substantial portion of our revenue
from services that provide financial information and wireless trading
capability. If there is a prolonged decline in the overall level of securities
trading, or online trading in particular, our operating results may decline. A
prolonged decline in securities trading may result from:
- loss of confidence in the reliability or security of online trading
systems;
- government regulation of the securities industry or online trading; or
- a prolonged downturn or volatility in the stock market.
Our software may contain defects or errors, and our sales could go down if
this injures our reputation or delays shipments of our software. Our software
products and platforms are complex and must meet the stringent technical
requirements of our customers. We must develop our services quickly to keep pace
with the rapidly changing software and telecommunications markets. Software as
complex as ours is likely to contain undetected errors or defects, especially
when first introduced or when new versions are released. Our software may not be
free from errors or defects after delivery to customers has begun, which could
result in the rejection of our software or services, damage to our reputation,
lost revenue, diverted development resources and increased service and warranty
costs.
New laws and regulations that impact our industry could increase our costs
or reduce our opportunities to earn revenue. We are not currently subject to
direct regulation by the Federal Communications Commission or any other
governmental agency, other than regulations applicable to businesses in general.
However, in the future, we may become subject to regulation by the FCC or
another regulatory agency. In addition, the wireless carriers who supply us
airtime and certain of our hardware suppliers are subject to regulation by the
FCC and regulations that affect them could increase our costs or reduce our
ability to continue selling and supporting our services.
We conduct operations in a number of countries through Sila and other
subsidiaries and are subject to risks of international operations. We currently
operate outside the U.S. through Sila and other subsidiaries, which have
operations throughout Europe and Asia. We expect that Sila's management will
independently perform the day-to-day operations of our joint venture and will
not be within our day-to-day control. Any failure by Sila and other subsidiaries
to successfully implement or maintain services could result in negative
publicity and have an unfavorable impact on our ability to expand our products
and services to Europe and Asia. We face various risks in expanding outside the
U.S., including:
- difficulty and cost of monitoring our international operations;
- cultural differences in the conduct of business;
- unexpected changes in regulatory requirements, including U.S. export
restrictions on encryption technologies; and
- recessionary or inflationary environments in foreign economies,
particularly in Asian countries and in the financial services sector.
We cannot ensure that our international operations will contribute
positively to our business, financial condition or result of operations. Our
failure to manage international growth could result in higher operating costs
than anticipated or could delay or preclude altogether our ability to generate
revenues in international markets. In addition, our expanding operations outside
the U.S. are, in some instances, conducted in currencies other than the U.S.
dollar and fluctuations in the value of foreign currencies relative to the U.S.
dollar could cause currency exchange losses. We cannot predict the effect of
exchange rate fluctuations on our future operating results.
Debt service obligations may adversely affect our cash flow. As a result
of the $310.5 million of 6% convertible subordinated notes due 2005 currently
outstanding, we have a substantial amount of indebtedness, primarily consisting
of the notes. As a result of this indebtedness, we are obligated to make
principal and interest payments. There is a possibility that we may be unable to
generate cash sufficient to pay the principal of, interest on and other amounts
due in respect of our indebtedness when due. We may also obtain
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additional long-term debt and working capital lines of credit to meet future
financing needs. We cannot assure you that additional financing arrangements
will be available on commercially reasonable terms or at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk related to our cash and cash
equivalents and short-term investments. Substantially all of our excess funds
are invested in cash equivalents with maturities of less than ninety days. Our
investment policy calls for investment in short-term low risk instruments. At
December 31, 2000, we had $873 million invested in money market, commercial
paper and certificates of deposit. A rise in interest rates would have an
adverse impact on the fair value of fixed rate securities. If interest rates
fall, floating rate securities may generate less interest income. Because of the
short-term nature of our cash equivalents, we do not believe that we are exposed
to significant interest rate risks on these instruments.
At December 31, 2000, we have $2.6 million in investments with maturities
that range from less than one year to ten years. While these instruments expose
us to some risks, we do not believe that the amount of these investments is
significant.
We are exposed to interest rate risk on our fixed rate subordinated
convertible notes payable. The fair value of this fixed rate debt is sensitive
to changes in interest rates. If market rates decline, the required payments
will exceed those based on current market rates. Under our current policy, we do
not use interest rate derivative instruments to manage our risk of interest rate
fluctuations. We do not believe such risk is material to our results of
operations.
Since the acquisition of IFX and the related formation of Sila and the
commencement of U.S. sales to foreign countries, we have been exposed to foreign
currency exchange risk. All sales from the U.S. to foreign countries have been
denominated in U.S. dollars. Since the revenue and expenses of Sila generally
are denominated in local currencies, exchange rate fluctuations between such
local currencies and the U.S. dollar will subject us to currency translation
risk with respect to the reported results of Sila as well as risks sometimes
associated with international operations. The countries in which Sila has
operations have traditionally had relatively stable currencies. We do not hedge
our foreign currency exposure. We do not believe that our exposure to foreign
currency rate fluctuations is material at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The financial statement and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14(a)(1) and (2),
and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders under the caption
"Directors and Executive Officers" which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 2000, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders under the caption
"Executive Compensation" which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended
December 31, 2000, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended December 31, 2000, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's
Proxy Statement for the 2001 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended December 31, 2000, and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
PAGE
----
Independent Auditors' Report................................ F-1
Report of Other Independent Auditors........................ F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Operations and Other
Comprehensive Loss for the years ended December 31, 1998,
1999, and 2000............................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999, and 2000............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999, and 2000......................... F-6
Notes to Consolidated Financial Statements.................. F-8
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules required by this item are
submitted on page S-1 of this Report.
PAGE
----
Schedule II -- Valuation and Qualifying Accounts............ S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
(a)(3) EXHIBITS
The exhibit index is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 2000.
(c) EXHIBITS
The exhibits required by this Item are listed in the Index of Exhibits.
(d) FINANCIAL STATEMENTS SCHEDULES
The financial statement schedules required by this Item are listed under
Item 14(a)(2).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on March
31, 2001.
AETHER SYSTEMS, INC.
By: /s/ DAVID S. OROS
------------------------------------
DAVID S. OROS
Chairman and Chief Executive Officer
------------------------
POWER OF ATTORNEY
Each person whose signature appears below under the heading "Signature"
constitutes and appoints David S. Oros and David C. Reymann as his or her true
and lawful attorneys-in-fact each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities to sign any or all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully for all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitutes, each acting alone, may lawfully do or cause to be done by virtue
hereof.
------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID S. OROS Chairman, President and March 31, 2001
- ------------------------------------------------ Chief Executive Officer
DAVID S. OROS
/s/ DAVID C. REYMANN Chief Financial Officer March 31, 2001
- ------------------------------------------------ (Principal Financial and
DAVID C. REYMANN Accounting Officer)
/s/ J. CARTER BEESE, JR. Director March 31, 2001
- ------------------------------------------------
J. CARTER BEESE, JR.
/s/ FRANK A. BONSAL, JR. Director March 31, 2001
- ------------------------------------------------
FRANK A. BONSAL, JR.
/s/ MARK D. EIN Director March 31, 2001
- ------------------------------------------------
MARK D. EIN
/s/ RAHUL C. PRAKASH Director March 31, 2001
- ------------------------------------------------
RAHUL C. PRAKASH
/s/ JANICE M. ROBERTS Director March 31, 2001
- ------------------------------------------------
JANICE M. ROBERTS
/s/ DR. RAJENDRA SINGH Director March 31, 2001
- ------------------------------------------------
DR. RAJENDRA SINGH
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37
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE P. STAMAS Director March 31, 2001
- ------------------------------------------------
GEORGE P. STAMAS
/s/ ROBIN T. VASAN Director March 31, 2001
- ------------------------------------------------
ROBIN T. VASAN
/s/ DEVIN N. WENIG Director March 31, 2001
- ------------------------------------------------
DEVIN N. WENIG
/s/ THOMAS E. WHEELER Director March 31, 2001
- ------------------------------------------------
THOMAS E. WHEELER
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EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
- ------- ------------------------
2.1 Agreement of Merger, dated October 18, 1999, between Aether
Systems LLC, and Aether Systems, Inc. (1)
2.2 Stock Purchase Agreement by and among Aether Technologies,
International, L.L.C., Mobeo, Inc. and Peter Kibler, Winston
Barrett and Edward Spear dated August 19, 1999. (1)
2.3 Stock Purchase Agreement by and among Aether Systems, Inc.,
LocusOne Communications, Inc. and the stockholders named
therein dated January 25, 2000. (2)
2.4 Agreement and Plan of Merger dated February 9, 2000 by and
among Aether Systems, Inc., RT Acquisition, Inc. and
Riverbed Technologies, Inc. (3)
2.5 LLC Interest Purchase Agreement made effective as of April
18, 2000 by and among Aether Systems, Inc., Net Search LLC
and the members of Net Search, LLC and Augustine N. Esposito
(4)
2.6 Share Purchase Agreement relating to IFX Group Limited (4)
2.7 Agreement and Plan of Merger by and among Aether Systems,
Inc. and Cerulean Technology, Inc. (5)
3.1 Amended and Restated Certificate of Incorporation of Aether
Systems, Inc. (as amended) (4)
3.2 Bylaws of Aether Systems, Inc. (1)
4.1 Specimen Certificate for Aether Systems Common Stock. (1)
4.2 Form of Indenture for Convertible Debt (3)
10.1 Amended and Restated License, Marketing and Distribution
Agreement between Reuters America, Inc. and Aether
Technologies International, L.L.C. dated August 11, 1998.
(1)
10.2 Contract Between Morgan Stanley Dean Witter Online Direct,
Inc. and Aether Technologies International, L.L.C. dated
August 5, 1999. (1)
10.3 Options Price Reporting Authority Vendor Agreement between
Aether Technologies and the American Stock Exchange, Inc.
dated June 3, 1997. (1)
10.4 Agreement between Aether Technologies International, L.L.C.
and New York Stock Exchange dated July 19, 1999. (1)
10.5 Vendor Agreement by and between Aether Technologies
International, L.L.C. and the Nasdaq Stock Market, Inc.
dated October 4, 1996. (1)
10.6 Dow Jones Indexes Enterprise Distribution Agreement dated
April 23, 1999. (1)
10.7 Employment Agreement between Aether Technologies
International, L.L.C. and David Oros dated July 7, 1999. (1)
10.8 Employment Agreement between Aether Technologies
International, L.L.C. and David Reymann dated May 18, 1999.
(1)
10.9 Series A Preferred Stock Purchase Agreement dated August 9,
1999. (1)
10.10 Investors' Rights Agreement by and among AirWeb Corporation
and each of the holders of the Series A Preferred Stock
listed in Schedule A and Patrick McVeigh, Barak Berkowitz,
Michael Bolbec and Andrew Simms dated August 9, 1999. (1)
10.11 Right of First Refusal and Co-Sale Agreement by and among
AirWeb Corporation, Inc., and those holders of the Common
Stock identified in Schedule A and B dated August 9, 1999.
(1)
10.12 Voting Agreement by and among the holders of Common Stock
set forth in Schedule A and Purchase of the Series A
Preferred Stock dated August 9, 1999. (1)
10.13 Aether-OmniSky Side Letter regarding development and resale
services dated August 9, 1999. (1)
10.14 Software License Agreement by and between Aether
Technologies International, L.L.C. and AirWeb Corporation
dated August 9, 1999. (1)
10.15 AirWeb Corporation Warrant to Purchase 3,000,000 Shares of
Series A Preferred Stock dated August 9, 1999. (1)
10.16 Strategic License Agreement between Aether Technologies
International, L.L.C. and Riverbed Technologies, Inc. dated
June 15, 1999. (1)
10.17 Consulting Agreement between Aether Technologies, L.L.C. and
Orbcomm Global, L.P. dated October 26, 1998. (1)
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EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
- ------- ------------------------
10.18 Credit Agreement dated September 28, 1999 among Merrill
Lynch & Co. and the leaders named therein. (1)
10.19 Aether Systems, Inc. 1999 Equity Incentive Plan effective as
of October 1, 1999 (1)
10.20 Aether Systems, Inc. Senior Bonus Plan effective as of
September 29, 1999 (1)
10.21 Aether Systems, Inc. Acquisitions Incentive Plan effective
as of December 15, 2000 (6)
10.22 Amended and Restated Registration Rights Agreement dated
March 3, 2000 (1)
10.23 Form of Subscription Agreement between Aether Systems, Inc.
and National Discount Brokers (1)
10.24 Series B Preferred Stock Purchase Agreement dated January
18, 2000 (3)
10.25 Master Agreement between Aether Systems, Inc. and Charles
Schwab & Co., Inc., dated December 23, 1999 (3)
10.26 Inciscent, Inc. Series A Stock Purchase Agreement (3)
10.27 Agreement between National Discount Brokers Corporation and
Aether Systems, Inc., dated November 4, 1999 (3)
10.28 Development Agreement between Response Services, LLC and
Aether Systems, Inc. dated January 12, 2000 (3)
10.29 Shareholders Agreement dated May 5, 2000 relating to Sila
Communications Limited (4)
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of Aether Systems
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young
- ---------------
(1) Incorporated by reference to the Registration Statement (File No. 333-85697)
on Form S-1 filed with the Commission on October 20, 1999, as amended.
(2) Incorporated by reference to the Form 8-K filed with the Commission on
February 15, 2000.
(3) Incorporated by reference to the Registration Statement (File No. 333-30852)
or Form S-1 filed with the Commission on February 22, 2000, as amended.
(4) Incorporated by reference to the Form 10-Q filed with the Commission on
August 14, 2000.
(5) Incorporated by reference to the Registration Statement (File No. 333-44566)
on Form S-1 filed with the Commission on September 27, 2000, as amended.
(6) Incorporated by reference to the Registration Statement (File No. 333-52222)
on Form S-8 filed with the Commission on December 20, 2000.
39
40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Aether Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Aether
Systems, Inc. and subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of operations and other comprehensive loss,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Sila Communications Limited,
a majority-owned subsidiary, which statements reflect total assets constituting
6.7% and total revenues constituting 21.7% of the related consolidated totals in
2000. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion insofar as it relates to the amounts included
for Sila Communications Limited, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Aether Systems, Inc. and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
McLean, Virginia
February 5, 2001
F-1
41
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors
Sila Communications Limited
We have audited the consolidated balance sheet of Sila Communications Limited as
of December 31, 2000 and the related consolidated statements of operations,
shareholders' equity and cash flows for the period from May 5, 2000 (inception)
to December 31, 2000 (not separately included herein). 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 audit.
We conducted our audit in accordance with United Kingdom auditing standards and
United States generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sila
Communications Limited at December 31, 2000 and the consolidated results of its
operations and its consolidated cash flows for the period from May 5, 2000
(inception) to December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
[ERNST & YOUNG LLP LOGO]
London, England
February 2, 2001
except for Note 16 -- Subsequent Events
as to which the date is March 30, 2001
F-2
42
AETHER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
1999 2000
-------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 78,542 $ 856,391
Restricted cash........................................... -- 16,356
Short-term investments.................................... 2,092 2,648
Trade accounts receivable, net of allowance for doubtful
accounts of $56 and $5,695 at December 31, 1999 and
2000, respectively..................................... 1,003 30,263
Inventory, net of allowance for obsolescence of $115 and
$137 at December 31, 1999 and 2000, respectively....... 688 19,130
Prepaid expenses and other current assets................. 4,995 17,081
-------- ----------
Total current assets.............................. 87,320 941,869
Property and equipment, net................................. 2,796 53,223
Investments................................................. 75 182,444
Intangibles, net............................................ 12,209 1,478,485
Other assets, net........................................... 134 21,354
-------- ----------
$102,534 $2,677,375
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,426 $ 9,747
Accrued expenses.......................................... 1,620 37,168
Accrued employee compensation and benefits................ 971 12,566
Acquisitions payable...................................... -- 29,781
Deferred revenue.......................................... 175 14,170
Accrued interest payable.................................. -- 5,072
Current portion of notes payable.......................... -- 13,741
-------- ----------
Total current liabilities......................... 4,192 122,245
Convertible subordinated notes payable and other notes
payable, less current portion............................. -- 321,201
Deferred tax liability...................................... -- 10,694
Minority interest in net assets of a subsidiary............. -- 55,537
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; 0 shares issued and outstanding at December
31, 1999 and 2000...................................... -- --
Common stock, $0.01 par value; 75,000,000 and
1,000,000,000 shares authorized; 27,154,398 and
40,415,722 shares issued and outstanding at December
31, 1999 and 2000, respectively........................ 271 404
Additional paid-in capital................................ 120,892 2,552,016
Accumulated deficit....................................... (22,614) (385,314)
Notes receivable from stockholder......................... (137) --
Foreign currency translation adjustment................... -- (113)
Unrealized gain (loss) on investments available for
sale................................................... (70) 705
-------- ----------
Total stockholders' equity........................ 98,342 2,167,698
-------- ----------
Commitments and contingencies...............................
$102,534 $2,677,375
======== ==========
See accompanying notes to consolidated financial statements.
F-3
43
AETHER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- -------- ---------
Subscriber revenue.......................................... $ 549 $ 3,732 $ 31,160
Engineering services revenue................................ 963 2,594 9,444
Software and related services revenue....................... -- -- 17,550
------- -------- ---------
Total revenue..................................... 1,512 6,326 58,154
Cost of subscriber revenue.................................. 797 2,110 18,412
Cost of engineering services revenue........................ 304 1,366 5,693
Cost of software and related services revenue............... -- -- 5,911
------- -------- ---------
Total cost of revenue............................. 1,101 3,476 30,016
------- -------- ---------
Gross profit...................................... 411 2,850 28,138
------- -------- ---------
Operating expenses:
Research and development (exclusive of option and warrant
expense)............................................... 1,267 2,614 30,189
General and administrative (exclusive of option and
warrant expense)....................................... 2,773 5,891 52,937
Selling and marketing (exclusive of option and warrant
expense)............................................... 840 2,095 54,151
In-process research and development related to
acquisitions........................................... -- -- 7,860
Depreciation and amortization............................. 265 1,089 238,074
Option and warrant expense:
Research and development............................... -- 150 6,233
General and administrative............................. 33 18,005 6,246
Selling and marketing.................................. -- 1,043 1,866
------- -------- ---------
5,178 30,887 397,556
------- -------- ---------
Operating loss.................................... (4,767) (28,037) (369,418)
Other income (expense):
Interest income (expense), net......................... 74 (229) 42,351
Equity in losses of investments........................ -- (2,425) (47,886)
Minority interest...................................... -- -- 10,692
------- -------- ---------
Loss before income taxes.......................... $(4,693) $(30,691) $(364,261)
Income tax benefit.......................................... -- -- 1,561
------- -------- ---------
Net loss.................................................... $(4,693) $(30,691) $(362,700)
Other comprehensive loss:
Unrealized holding gain (loss) on investments available
for sale............................................. (58) (12) 775
Foreign currency translation adjustment................ -- -- (113)
------- -------- ---------
Comprehensive loss.......................................... $(4,751) $(30,703) $(362,038)
======= ======== =========
Net loss per share-basic and diluted........................ $ (9.99)
=========
Weighted average shares outstanding--basic and
diluted.............................................. 36,310
=========
Pro forma statement of operations data (unaudited):
Loss before income taxes, as reported.................. $(4,693) $(30,691)
Pro forma income tax provision (benefit)............... -- --
------- --------
Pro forma net loss..................................... $(4,693) $(30,691)
======= ========
Pro forma net loss per share-basic and diluted......... $ (0.29) $ (1.45)
======= ========
Pro forma weighted average shares outstanding-basic and
diluted.............................................. 15,916 21,207
======= ========
See accompanying notes to consolidated financial statements.
F-4
44
AETHER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
NOTES FOREIGN
ADDITIONAL RECEIVABLE CURRENCY UNREALIZED
PREFERRED COMMON PAID-IN ACCUMULATED FROM TRANSLATION GAIN (LOSS) ON
STOCK STOCK CAPITAL DEFICIT STOCKHOLDER ADJUSTMENT INVESTMENTS
--------- ------ ---------- ----------- ----------- ----------- --------------
Balance at December 31, 1997....... $-- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of member units........... -- -- -- -- -- -- --
Issuance of warrants in June
1998............................. -- -- -- -- -- -- --
Exercise of warrants in August
1998............................. -- -- -- -- -- -- --
Conversion of note payable and
issuance of member units in
August 1998...................... -- -- -- -- -- -- --
Unit option and warrant expense.... -- -- -- -- -- -- --
Unrealized loss on investments
available for sale............... -- -- -- -- -- --
Note receivable from member........ -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
-- ---- ---------- --------- ----- ----- ----
Balance at December 31, 1998....... -- -- -- -- -- --
Issuance of replacement options in
Mobeo acquisition................ -- -- -- -- -- -- --
Exercise of unit options and
warrants......................... -- -- -- -- -- -- --
Option and warrant expense......... -- -- -- -- -- -- --
Net loss -- pre merger............. -- -- -- -- -- -- --
Merger of Aether Technologies
International, L.L.C. into Aether
Systems, Inc. in October 1999.... -- 200 2,714 -- (137) -- (58)
Net proceeds of initial public
offering......................... -- 69 101,045 -- -- -- --
Unrealized loss on investments
available for sale............... -- -- -- -- -- -- (12)
Option and warrant expense......... -- -- 16,875 -- -- -- --
Exercise of stock options.......... -- 2 258 -- -- -- --
Net loss -- post merger............ -- -- -- (22,614) -- -- --
-- ---- ---------- --------- ----- ----- ----
Balance at December 31, 1999....... $-- $271 $ 120,892 $ (22,614) $(137) -- $(70)
-- ---- ---------- --------- ----- ----- ----
Repayment on note receivable from
stockholder...................... -- -- -- -- 137 -- --
Gain on sales of stock by equity
method investee.................. -- -- 73,349 -- -- -- --
Proceeds from secondary offering... -- 54 1,056,872 -- -- -- --
Issuance of stock and replacement
options in Riverbed
acquisition...................... -- 45 1,136,038 -- -- -- --
Issuance of stock and replacement
options in Cerulean
acquisition...................... -- 5 69,944 -- -- -- --
Issuance of stock and replacement
options in RTS acquisition....... -- 13 77,941 -- -- -- --
Exercise of options and warrants... -- 16 2,635 -- -- -- --
Option and warrant expense......... -- -- 14,345 -- -- -- --
Unrealized gain on investments
available for sale............... -- -- -- -- -- -- 775
Foreign currency translation....... -- -- -- -- -- (113) --
Net loss........................... -- -- -- $(362,700) -- -- --
-- ---- ---------- --------- ----- ----- ----
Balance at December 31, 2000....... $-- $404 $2,552,016 $(385,314) $ -- $(113) $705
== ==== ========== ========= ===== ===== ====
MEMBERS'
CAPITAL TOTAL
-------- ----------
Balance at December 31, 1997....... $ 74 $ 74
Issuance of member units........... 12,499 12,499
Issuance of warrants in June
1998............................. 50 50
Exercise of warrants in August
1998............................. -- --
Conversion of note payable and
issuance of member units in
August 1998...................... 252 252
Unit option and warrant expense.... 32 32
Unrealized loss on investments
available for sale............... (58) (58)
Note receivable from member........ (127) (127)
Net loss........................... (4,693) (4,693)
------ ----------
Balance at December 31, 1998....... 8,029 8,029
Issuance of replacement options in
Mobeo acquisition................ 374 374
Exercise of unit options and
warrants......................... 70 70
Option and warrant expense......... 2,323 2,323
Net loss -- pre merger............. (8,077) (8,077)
Merger of Aether Technologies
International, L.L.C. into Aether
Systems, Inc. in October 1999.... (2,719) --
Net proceeds of initial public
offering......................... 101,114
Unrealized loss on investments
available for sale............... -- (12)
Option and warrant expense......... -- 16,875
Exercise of stock options.......... -- 260
Net loss -- post merger............ -- (22,614)
------ ----------
Balance at December 31, 1999....... $ -- $ 98,342
------ ----------
Repayment on note receivable from
stockholder...................... -- 137
Gain on sales of stock by equity
method investee.................. -- 73,349
Proceeds from secondary offering... -- 1,056,926
Issuance of stock and replacement
options in Riverbed
acquisition...................... -- 1,136,083
Issuance of stock and replacement
options in Cerulean
acquisition...................... -- 69,949
Issuance of stock and replacement
options in RTS acquisition....... -- 77,954
Exercise of options and warrants... -- 2,651
Option and warrant expense......... -- 14,345
Unrealized gain on investments
available for sale............... -- 775
Foreign currency translation....... -- (113)
Net loss........................... -- (362,700)
------ ----------
Balance at December 31, 2000....... $ -- $2,167,698
====== ==========
See accompanying notes to consolidated financial statements.
F-5
45
AETHER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
---------- -------- ---------
Cash flows from operating activities:
Net loss.................................................. $ (4,693) $(30,691) $(362,700)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 265 1,089 238,074
Provision (recovery) for doubtful accounts.............. 157 (59) 1,391
Provision (recovery) for inventory obsolescence......... 170 (54) 83
Equity in losses of investments......................... -- 2,425 47,886
Issuance of warrants.................................... 50 -- --
Option and warrant expense.............................. 33 19,198 14,345
Minority interest....................................... -- -- (10,692)
Income tax benefit...................................... -- -- (1,561)
In process research and development related to
acquisitions......................................... -- -- 7,860
Changes in assets and liabilities, net of acquired
assets and liabilities:
Increase in trade accounts receivable................ (153) (1,732) (17,177)
Increase in inventory................................ (313) (491) (10,019)
Increase in prepaid expenses and other assets........ (36) (3,616) (9,186)
Increase (decrease) in accounts payable.............. 83 (377) (3,479)
Increase in accrued expenses, accrued employee
compensation and benefits, interest payable and
acquisitions payable............................... 217 2,052 36,180
Increase (decrease) in deferred revenue.............. (163) 176 5,156
-------- -------- ---------
Net cash used by operating activities.............. (4,383) (12,080) (63,839)
-------- -------- ---------
Cash flows used by investing activities:
Sales and maturities of short-term investments............ 1,295 12,640 7,731
Purchases of short-term investments....................... (7,535) (8,722) (5,618)
Acquisitions, net of cash acquired........................ -- (11,548) (303,741)
Purchases of property and equipment....................... (228) (2,447) (48,346)
Investments............................................... -- (2,500) (158,412)
Increase in other intangible assets....................... -- -- (1,800)
Increase in other assets.................................. -- -- (2,053)
-------- -------- ---------
Net cash used in investing activities.............. (6,468) (12,577) (512,239)
-------- -------- ---------
Cash flows provided by financing activities:
Issuance of member units.................................. 12,501 -- --
Proceeds from issuance of common stock.................... -- 101,114 1,056,926
Proceeds from issuance of convertible debt................ -- -- 300,294
Proceeds from note payable/credit facility................ 500 14,830 --
Repayments on notes payable/credit facility............... (400) (14,830) --
Repayment (issuance) of notes receivable from
stockholder............................................. (127) -- 137
Increase in restricted cash............................... -- -- (26,899)
Contributions from minority shareholder of a subsidiary... -- -- 20,818
Exercise of options and warrants.......................... -- 330 2,651
-------- -------- ---------
Net cash provided by financing activities.......... 12,474 101,444 1,353,927
-------- -------- ---------
Net increase in cash and cash equivalents.......... 1,623 76,787 777,849
Cash and cash equivalents, at beginning of period........... 132 1,755 78,542
-------- -------- ---------
Cash and cash equivalents, at end of period................. $ 1,755 $ 78,542 $ 856,391
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 20 $ 1,027 $ 9,327
======== ======== =========
Supplemental disclosure of non-cash investing and financing activities:
In 1998, a member converted a $250 promissory note payable into membership
units.
In 1998, 1999 and 2000, the Company incurred unrealized holding gains (losses)
associated with its investments available for sale totaling $(58), $(12) and
$775, respectively. These amounts have been reported as reductions in
members' capital and stockholders' equity.
In September 1999, the Company issued 18,442 unit options (46,105 shares) valued
at $374 as part of the cost to acquire Mobeo, Inc. This amount has been reported
as an increase in members' capital.
F-6
46
In October 1999, approximately $1,100 of trade receivables owed to the Company
by OmniSky, Corp. were settled against amounts due in connection with the
purchase of 20,000 modems from OmniSky, Corp.
In January 2000, approximately $600 of trade receivables owed to the Company by
OmniSky, Corp. were offset by the Company's additional investment made in
OmniSky, Corp.
In March 2000, the Company acquired Riverbed Technologies, Inc. for 4,537,281
shares of the Company's common stock and converted existing options held by
Riverbed employees into options to acquire 862,480 shares of the Company's
common stock. The value of the common stock and replacement options of
$1,136,083 has been allocated to the fair value of the assets purchased and
liabilities assumed with a corresponding increase in stockholders' equity.
In connection with the acquisition of IFX and the related formation of Sila and
the acquisitions made by Sila, the Company established a deferred tax liability
of $12,255. Such amount was offset by an equal increase in goodwill.
In September 2000, the Company acquired Cerulean for cash of $75,000, 462,412
shares of the Company's common stock and converted existing options held by
Cerulean employees into options to acquire 94,275 shares of the Company's common
stock. The value of the common stock and vested replacement options of $69,949
has been allocated to the fair value of the assets purchased and the liabilities
assumed with a corresponding increase in stockholders' equity.
In December 2000, the Company acquired RTS Wireless for cash of $34,000,
1,259,752 shares of the Company's common stock and converted existing options
held by RTS employees into options to acquire 90,248 shares of the Company's
common stock. The value of the common stock and vested replacement options of
$77,954 has been allocated to the fair value of the assets purchased and
liabilities assumed with a corresponding increase in stockholders' equity.
In connection with the acquisitions of Cerulean, Sinope, RTS and Motient, the
Company has accrued $29,800 as of December 31, 2000 for the remaining portion of
the purchase price. Such amount has been allocated to the fair value of the
assets purchased and the liabilities assumed.
The Company recorded a gain through stockholders' equity of $73,349 from the
sale of stock by OmniSky, Inc. to third parties at per share amounts in excess
of the book value per share.
See accompanying notes to consolidated financial statements.
F-7
47
AETHER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Aether Systems, Inc. and its subsidiaries (the "Company") provide
technologies that enable businesses to extend their data and commercial
transactions to wireless and mobile handheld devices. From its inception until
March 1997, the Company primarily provided wireless engineering services,
including the development of wireless software applications for customers. In
March 1997, the Company began offering services that provide the users of
wireless handheld devices access to real-time financial information. During
1997, the Company made a strategic decision to focus a significant portion of
its engineering resources on the development of these and other wireless data
services and systems, including the Aether Intelligent Messaging ("AIM") package
of wireless messaging software and software development tools.
In 1998 and 1999, the Company continued to develop financial information
services -- as well as financial transaction services -- internally and through
the acquisition of Mobeo, Inc. ("Mobeo"). In 1999, the Company also completed
its initial initial public offering and began to expand its service offerings to
areas other than financial information and transactions.
In 2000, the Company continued its expansion into other vertical markets,
including: the transportation and logistics vertical market through the
acquisitions of LocusOne Communications, Inc. ("LocusOne") and Motient
Corporation's ("Motient") retail transportation business unit, the mobile
government vertical market through the acquisitions of Cerulean Technology, Inc.
("Cerulean") and SunPro, Inc. ("SunPro"); and the healthcare vertical market
through investments and the Company's own service offerings. The Company
broadened its software offerings through the purchase of Riverbed Technologies,
Inc. ("Riverbed") and RTS Wireless, Inc. ("RTS"). Also in 2000, the Company
moved into the European marketplace with the acquisition of IFX Group Plc
("IFX") and the related formation of Sila Communications Limited ("Sila"). The
Company entered the general wireless and Internet messaging services market
through strategic relationships with Research in Motion Limited ("RIM") and
others and through the Company's own service offerings.
The Company operates in a highly competitive environment subject to rapid
technological change and emergence of new technology. Although management
believes its services are transferable to emerging technologies, rapid changes
in technology could have an adverse financial impact on the Company.
The Company expects to expand its operations through continued capital
investment in new systems and services and through strategic acquisitions. The
Company has a limited operating history and has incurred net losses since its
inception. The Company expects to continue to incur significant sales and
marketing, systems development and administrative expenses. The Company may
require additional capital in the future to meet its operating and capital
needs.
(2) MERGER AND INITIAL PUBLIC OFFERING
The Company is the successor to the business formerly conducted by Aether
Systems, L.L.C. ("Aether") (previously Aether Technologies International,
L.L.C.), which was formed in January 1996. Effective October 26, 1999, in
connection with the Company's initial public offering of common stock, Aether
merged with and into Aether Systems, Inc. The Company is the surviving company
in the merger, and the Company and its stockholders own all of the assets and
rights and is subject to all of the obligations and liabilities of Aether.
Immediately prior to the merger, each member contributed its membership units in
Aether Systems, L.L.C. to Aether Systems, Inc., a newly formed Delaware
corporation, in exchange for two and one-half shares of common stock of Aether
Systems, Inc. Effective with the merger, the Company converted to a Subchapter C
Corporation under the Internal Revenue Code of 1986, as amended.
On October 26, 1999, the Company completed its initial public offering,
which involved the sale of 6,900,000 shares of common stock at $16.00 per share,
including 900,000 shares from the exercise of the
F-8
48
underwriters' over-allotment option. Net proceeds to the Company after deducting
underwriting discounts, commissions and other expenses of the offering were
approximately $101.1 million.
(3) SECONDARY PUBLIC OFFERINGS
On March 17, 2000, the Company completed a secondary offering for the sale
of 5,411,949 shares of common stock, including the sale of 825,000 shares from
the exercise of the underwriters' over-allotment option, at $205.00 per share.
The net proceeds after deduction of underwriting discounts and offering expenses
were approximately $1.06 billion. Concurrently with this offering, the Company
completed an offering for the sale of an aggregate $310.5 million of 6%
convertible subordinated notes (the "Notes") due in 2005, including $40.5
million in principal amounts from the exercise of the underwriters'
over-allotment. The net proceeds after deduction of underwriting discounts and
offering expenses were approximately $300.6 million. The underwriting discounts
and expenses of the Notes offering of $9.8 million have been included in other
assets as deferred financing fees. The Notes are convertible, at the option of
the holder, at any time prior to maturity, into shares of common stock of Aether
at a conversion price of $243.95 per share, which is equal to a conversion rate
of 4.0992 shares per $1,000 principal amount of notes, subject to adjustment.
On September 27, 2000, certain of the Company's stockholders sold 5,000,000
shares of common stock, in an underwritten offering at $105.00 per share. No new
shares were issued in the offering and, as such, the Company received no
proceeds from the sale.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Aether
Systems, Inc. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(b) Revenue Recognition
The Company derives subscriber revenue from the provision of real-time
access to business information integrated into existing wireless communication
platforms. Subscriber revenue consists of fixed charges for usage recognized as
the service is provided, charges for equipment generally recognized on delivery
and one-time non-refundable activation fees recognized ratably over the expected
life of the customer relationship. For certain of the Company's products, the
subscribers' monthly fee includes the use of a wireless handheld device. Revenue
for such devices is recognized as the related service is provided. Direct
activation costs are expensed as incurred. Certain of the Company's customers
are billed in advance with revenue deferred and recognized on a monthly basis
over the term of the agreement. Also included in subscriber revenue are market
exchange fees for access to financial information from the securities exchanges
and markets, which are recognized as the service is provided. The Company also
recognizes fees for managing data through its network operations center. Such
fees are recognized ratably over the contract period.
Engineering services revenue is derived from the provision of wireless
integration consulting under time-and-materials and fixed-fee contracts. Revenue
on time-and-materials contracts is recognized as services are performed. Revenue
on fixed-fee contracts is recognized on the percentage-of-completion method
based on costs incurred in relation to total estimated costs. Anticipated
contract losses are recognized as soon as they become known and estimable.
Software and related services revenues are generated from licensing
software and providing services, including maintenance and technical support,
training and consulting. Software revenue consists of fees for licenses of the
Company's software products. The Company recognizes the revenue when the license
agreement is signed, the license fee is fixed and determinable, delivery of the
software has occurred, and collectibility of the fees is considered probable.
Revenue from software licensing and related wireless engineering consulting
services for which the software requires significant customization and
modification is recognized using the percentage of completion method in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
based on the hours incurred in relation to the total estimated
F-9
49
hours. Service revenues consists of maintenance and technical support, which
consists of unspecified when-and-if available product updates and customer
telephone support services and are recognized ratably over the term of the
service period. Other service revenues are recognized as the related services
are provided. In situations where the Company hosts the software and the
customer has the option to take possession of the software at any time during
the hosting period without significant penalty and it is feasible for the
customer to either run the software on its own hardware or contract with another
party unrelated to the Company to host the software, the software element is
accounted for in accordance with SOP 97-2.
Included in revenues for the years ended December 31, 1999 and 2000 is
revenue from the sale of hardware of $115,000 and $6.6 million, respectively.
Hardware revenue for the year ended December 31, 1998 was not significant.
(c) Cost of Revenues
Cost of subscriber revenue consists primarily of airtime costs, financial
data costs, wireless handheld device costs, and securities and market exchange
fees. The cost of wireless handheld devices is recognized on delivery when sold.
When the subscribers' monthly fee includes the use of a wireless handheld
device, the Company depreciates the cost of the device over its expected useful
life. Cost of engineering services revenue consists of cash compensation and
related costs for engineering personnel and materials. The cost of software
license revenue consists primarily of third party royalties. The cost of
maintenance, consulting and support revenue consists primarily of
personnel-related costs.
(d) Cash and Cash Equivalents
Cash equivalents include all highly liquid investments purchased with
original maturities of three months or less. Cash and cash equivalents consisted
of the following:
DECEMBER 31, DECEMBER 31,
1999 2000
---------------- ----------------
Cash.................................................. $ 5,732 $ 37,581
Money market accounts................................. $68,831 $767,876
Commercial paper...................................... $ 3,979 $ 40,934
Certificates of deposit............................... $ -- $ 10,000
------- --------
Total....................................... $78,542 $856,391
======= ========
(e) Restricted Cash
Restricted cash consists of cash held by the Company for which use of the
funds is restricted. These restrictions have arisen primarily as a result of
acquisitions during the year. The restrictions will be released at various times
over the next year.
(f) Short-Term Investments
Short-term investments consist of highly liquid investments with original
maturities greater than three months and less than one year and those
longer-term investments that the Company expects to liquidate within twelve
months. The Company has classified its short-term investments as "available for
sale" and carries such investments at fair value. Unrealized gains (losses) are
excluded from earnings (loss) and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of
these investments are determined on a specific identification basis. As of
December 31, 1999 and 2000, short-term available-for-sale investments consisted
mainly of U.S. treasury securities and corporate debt securities.
(g) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, short-term investments, accounts receivable, accounts payable,
accrued expenses and notes payable (excluding the
F-10
50
convertible subordinated notes), approximate their fair values due to the
relatively short duration of the instruments.
The fair value of the convertible subordinated notes at December 31, 2000
was $177.6 million based on its quoted market price.
(h) Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents and trade receivables.
The Company invests cash not immediately needed for operations in money
market securities of various financial institutions, commercial paper and
certificates of deposit. The money market securities represent underlying
investments in commercial paper issued by financial institutions and other
companies with high credit ratings and securities issued by or backed by the
U.S. Government. The amounts invested in some cases exceed the F.D.I.C. limits.
The Company has not experienced any losses in its cash and cash equivalents and
believes it is not exposed to any significant credit risk on these amounts.
During 1999 and 2000, a portion of the Company's revenues came from newly
formed technology-based companies, including companies in which the Company has
made investments. Revenues from companies in which the Company has investments
in, including OmniSky Corp. ("OmniSky"), Inciscent, Inc. ("Inciscent"), MindSurf
Networks ("MindSurf"), ePhones, Inc. ("ePhones"), and ParkStone Medical
Information Systems, Inc. ("ParkStone"), were approximately $0, $2.2 million and
$10.5 million for the years ended December 31, 1998, 1999 and 2000,
respectively. Accounts receivable from these companies at December 31, 1999 and
2000 were $612,000 and $4.9 million, respectively. All of the Company's
investments were made in participation with other unrelated investors at the
same per share price as the other investors. The Company's investment policy
generally limits its investments to companies that have completed at least two
rounds of financing and generally requires that an unrelated investor lead the
round of financing that the Company participates in.
Trade accounts receivable from these and other companies subject the
Company to the potential for credit risk. The Company extends credit to these
and other customers on an unsecured basis in the normal course of business.
These customers have a limited operating history and have reported significant
losses since inception. They are subject to many of the risks and uncertainties
that the Company is, including rapid changes in technology, no established
markets for their products, and intense competition, among others. In addition,
many of these companies will require significant infusions of capital to
continue operations. The availability of such capital has been curtailed and
some of these companies may not be able to raise sufficient funds to continue to
operate, which could limit our ability to generate further revenues from these
companies as well as to collect the outstanding receivables.
The Company's policy is to perform an analysis of the recoverability of its
trade accounts receivable at the end of each reporting period and to establish
allowances for those accounts considered uncollectible. If market conditions for
these companies continue to deteriorate, the Company may be required to record
additional allowances for doubtful accounts in the future.
(i) Inventory
Inventory, net of allowance for obsolete and slow-moving inventory,
consists of finished goods such as handheld and laptop computers, pagers,
wireless modems, and accessories and is stated at the lower of cost or market.
Cost is determined using a standard cost method, which approximates the
first-in, first-out method. The Company's inventory is subject to rapid
technological changes that could have an adverse impact on its realization in
future periods. In addition, there are a limited number of suppliers of the
Company's inventory.
F-11
51
(j) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from three to ten years. The costs of leasehold improvements are
capitalized and amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset.
(k) Investments
The Company accounts for those investments in which the Company exercises
significant influence or has an ownership interest greater than twenty percent
under the equity method. For equity method investments, the Company records its
proportionate share of the investee's net income or loss. Generally, the Company
accounts for its investments in which the Company has an ownership interest less
than twenty percent under the cost method for its private investments.
Investments in marketable equity securities, if not considered equity method
investments, are considered available-for-sale securities.
Investments carried at cost are written down if circumstances indicate the
carrying amount of the investment may not be recoverable. Investments available
for sale are carried at fair value based on quoted market prices. Net unrealized
holding gains and losses are excluded from income and are reported as a separate
component of stockholders' equity. Realized gains and losses are included in
income.
(l) Intangibles and Recovery of Long-Lived Assets
Cost in excess of the fair value of tangible and identifiable intangible
net assets acquired is amortized on a straight-line basis over three to seven
years. Identifiable intangible net assets consist of completed technology,
assembled workforce, trademarks, and acquired subscribers. Identifiable
intangible net assets are amortized on a straight-line basis over two to seven
years.
The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company recognizes an impairment when the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset. The measurement of the impairment losses to be recognized is based upon
the difference between the fair value and the carrying amount of the assets.
(m) Stock Options and Warrants
The Company accounts for equity-based employee compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, and
complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based upon the difference, if any, on the date
of grant, between the fair value of the Company's stock and the exercise price.
All equity-based awards to non-employees are accounted for at their fair value
in accordance with SFAS No. 123.
(n) Pro Forma Income (Loss) Data (Unaudited) and Net Income (Loss) Per Share
The accompanying unaudited pro forma statement of operations information
has been prepared as if the Company were treated as a Subchapter C Corporation
for Federal and state income tax purposes from January 1, 1998. The Company has
provided no income taxes on a pro forma basis due to the losses incurred in all
periods.
The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss)
per share is computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted average number
of common and dilutive common equivalent shares outstanding during the
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52
period. Pro forma basic and diluted net loss per share (unaudited) has been
calculated assuming that the capital structure established at the date of the
initial public offering was in effect during the periods presented. As the
Company has had a net loss in each of the periods presented, pro forma and
historical basic and diluted net loss per share are the same.
(o) Research and Development
Research and development costs are expensed as incurred.
(p) Advertising Expense
Advertising costs are expensed as incurred. Production costs for
advertising are expensed the first time the related advertisement takes place.
Advertising expense was approximately $504,000, $933,000 and $23.1 million for
the years ended December 31, 1998, 1999 and 2000, respectively.
(q) Income Taxes
The Company recognizes income taxes using the asset and liability method,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a tax rate change on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
Prior to October 26, 1999, Aether had elected limited liability status and,
as such, was not directly subject to Federal and state income taxes. Rather, the
members were responsible for income taxes on their proportionate share of
taxable income and entitled to their proportionate share of tax deductions and
tax credits.
(r) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used in accounting for, among other things, long-term contracts, allowances
for uncollectible receivables, inventory obsolescence, recoverability of
long-lived assets and investments, depreciation and amortization, employee
benefits, taxes and contingencies. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.
(s) Other Comprehensive Loss
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which established standards for reporting and displaying
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes changes in equity of a business during a period
from transactions and other events and circumstances from non-owner sources.
Other comprehensive income refers to revenue, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income, but excluded from net income.
For the years ended December 31, 1998, 1999 and 2000, other comprehensive
income (loss) consists of unrealized gains (losses) on investments available for
sale and foreign currency translation gains (losses).
F-13
53
(t) Foreign Currency Translation
For operations outside the U.S. that prepare financial statements in
currencies other than the U.S. dollar, results of operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at end-of-period exchange rates. Translation
adjustments are included as a separate component of accumulated other
comprehensive income (loss) in stockholders' equity.
(u) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated.
(v) Recent Accounting Pronouncements
In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137 and
further amended by SFAS No. 138, established accounting and reporting standards
for derivative financial instruments and associated hedging activities as well
as hedging activities in general. The Company will adopt SFAS No. 133 on January
1, 2001, the Company does not expect this adoption of SFAS No. 133, as amended,
to have a material affect on its consolidated results of operation or its
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 provides guidance on necessary disclosures relating
to revenue recognition policies in addition to outlining the criteria that must
be met in order to recognize revenue. The Company adopted SAB 101 in the fourth
quarter of 2000 and it did not have a material effect on its consolidated
results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for the following
issues: (1) the definition of employee for purposes of applying Opinion 25, (2)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(3) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (4) the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation was
effective July 1, 2000. The Company adopted FIN 44 on July 1, 2000.
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54
(5) ACQUISITIONS
The Company has made the following acquisitions.
NAME BUSINESS ACQUISITION DATE
---- -------- ----------------
Mobeo, Inc. Wireless Financial Data Services August 19, 1999
LocusOne Communications, Inc. Transportation and Logistics February 3, 2000
Riverbed Technologies, Inc. Wireless Software Applications March 6, 2000
IFX Group Plc Financial Services April 6, 2000
NetSearch, LLC Merchant Notification Services April 20, 2000
Cerulean Technology, Inc. Mobile Government Software Applications September 14, 2000
SunPro, Inc. Mobile Government Software Applications September 18, 2000
Sinope, Inc. Engineering Services September 25, 2000
Portion of Motient Corp. Retail transportation business November 30, 2000
RTS Wireless, Inc. Wireless Carrier Gateway Software December 22, 2000
Total
PURCHASE PRICE
-------------------------------------------------
CASH
(INCLUDING
RELATED
NAME EXPENSES) EQUITY ISSUED
---- ---------- -------------
Mobeo, Inc. $11.5 million $374,000,consisting of 46,105
options
LocusOne Communications, Inc. $40.2 million --
Riverbed Technologies, Inc. $16.9 million $1.136 billion, consisting of
4,537,281 shares of common stock
and 862,480 options
IFX Group Plc $85.0 million --
NetSearch, LLC $35.4 million --
Cerulean Technology, Inc. $79.8 million $69.9 million, consisting of
462,412 shares of common stock
and 94,952 options
SunPro, Inc. $10.8 million --
Sinope, Inc. $2.8 million --
Portion of Motient Corp. $49.2 million --
RTS Wireless, Inc. $34.2 million $78.0 million, consisting of
1,259,752 shares of common stock
and 90,248 options
-------------- ---------------
Total $365.8 million $1.284 billion, consisting of
============== =============== 6,259,445 shares
of common stock
and 1,093,785
options.
In connection with the acquisition of the retail transportation business of
Motient Corp., the Company agreed to pay up to an additional $22.5 million if
certain revenue and other incentive targets are met in 2001.
On May 5, 2000, the Company, in conjunction with Reuters PLC, formed Sila
Communications ("Sila"). The Company contributed IFX Group Plc and $13.5 million
in cash for a 60% interest in Sila, while Reuters contributed cash of
approximately $20.8 million and a paging company for the remaining 40% interest.
During 2000, Sila acquired four companies for an aggregate purchase price of
$21.4 million. Sila is consolidated in the accompanying consolidated financial
statements.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair value as of the acquisition date. The
preliminary allocation of the total purchase price for these acquisitions is
summarized as follows:
1999 2000
-------- -----------
(AMOUNTS IN THOUSANDS)
Current assets.............................................. $ 391 $ 27,628
Property and equipment...................................... 372 8,196
Current liabilities......................................... (1,606) (36,781)
Deferred tax liability...................................... -- (12,255)
In-process research and development......................... -- 7,860
Identifiable intangibles.................................... 6,600 175,725
Goodwill.................................................... 6,165 1,516,819
Minority interest........................................... -- (45,411)
------- ----------
Total consideration............................... $11,922 $1,641,781
======= ==========
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55
For certain of the 2000 acquisitions, the Company is in the process of
completing a full valuation of the assets and liabilities acquired. Therefore,
the purchase price allocation will be finalized upon completion of these
valuations. The identifiable intangibles are being amortized between two and
seven years and the goodwill is being amortized between three and seven years.
The following summary, prepared on a pro forma basis, presents the results
of the Company's operations (unaudited) as if the acquisitions had been
completed as of January 1, 1999:
(UNAUDITED)
-------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.............................................. $ 81,269 $ 107,811
Net loss............................................. $ (380,600) $ (506,480)
Net loss per share -- basic and diluted.............. $ (13.86) $ (13.13)
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisitions had taken
place as of January 1, 1999, nor is it a projection of the Company's results of
operations for any future period.
Intangible assets consists of the following (amounts in thousands):
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 1999 2000
------------ ------------ ------------
Goodwill........................................ 3 - 7 Years $ 6,165 $1,522,984
Completed technology............................ 3 - 7 Years -- 127,770
Assembled workforce............................. 2 - 4 Years 200 29,968
Trademarks...................................... 5 - 7 Years -- 8,590
Acquired subscribers............................ 3 - 7 Years 6,400 15,997
Other non-acquisition intangibles............... 3 - 5 Years -- 4,159
------- ----------
12,765 1,709,468
Less accumulated amortization................... (556) (230,983)
------- ----------
$12,209 $1,478,485
======= ==========
During 1999 and 2000, the Company recorded approximately $1.7 billion in
goodwill and other intangibles related to its acquisitions. Consideration for
some of the Company's acquisitions was partially or fully funded through the
issuance of shares of the Company's common stock at a time when its stock price
was at historically high prices. Most of the companies the Company acquired are
start-up or newly formed entities. Most of these companies were privately-held
and their fair values are highly subjective and not readily determinable. The
Company's policy is to review the value of these acquisitions for impairment
whenever events or circumstances indicate that the carrying amount may not be
recoverable.
At the time of these acquisitions, market valuations and the availability
of capital for such companies were at historically high levels. Since the end of
2000, stock prices and market valuations in the Company's industry and similar
industries have fallen substantially in response to a variety of factors,
including a general downturn in the economy, a curtailment in the availability
of capital and a general reduction in technology expenditures. The market
valuations of companies similar to those the Company has acquired have declined
substantially since December 31, 2000.
The Company is currently evaluating the recent decline in the valuation of
its acquisitions to determine if the decline is other than temporary. The
Company believes that if market valuations of similar companies remain at their
current levels or decline further, it will likely determine the market decline
to be other than temporary and record an impairment charge to reduce the
carrying value of the goodwill and intangibles related to these acquisitions to
fair value.
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56
(6) INVESTMENTS
(a) OmniSky Corp.
On August 9, 1999, the Company entered into a venture with 3Com Corporation
(3Com), forming a new company called OpenSky, which was later renamed OmniSky.
OmniSky was formed to develop wireless Internet access, e-mail and electronic
commerce services that address opportunities in the emerging consumer and
business mass markets. The Company contributed a perpetual, non-exclusive,
non-assignable, worldwide license to certain proprietary software in exchange
for a 26% equity interest in OmniSky in the form of 7,000,000 shares of Series A
Preferred Stock and an option to purchase an additional
3,000,000 shares of Series A Preferred Stock for an additional $2.5 million.
Upon exercising the option, the Company would increase its ownership in OmniSky
to 33% on a fully diluted basis. On November 9, 1999, the Company exercised its
option to acquire these additional shares. The chief executive officer of the
Company serves as a member of OmniSky's board of directors. The Company provides
various services to OmniSky under letters of agreement.
The Company accounts for its investment in OmniSky under the equity method
of accounting. The Company recorded approximately $2.4 million and $41.1 million
in expenses for the years ended December 31, 1999 and 2000, respectively to
reflect its proportionate share of the losses in OmniSky based upon preliminary
unaudited financial information provided by OmniSky. For the years ended
December 31, 1999 and 2000, the Company generated $2.2 million and $5.9 million
in revenue, respectively, from products or services provided to OmniSky. In
addition, the Company had $612,000 and $1.6 million in accounts receivable at
December 31, 1999 and 2000, respectively, due from OmniSky.
On January 18, 2000, the Company entered into a Series B Preferred Stock
Purchase Agreement, whereby the Company purchased 1,439,809 shares of Series B
preferred stock of OmniSky for an aggregate purchase price of approximately $6.7
million, consisting of cash of approximately $6.1 million and the forgiveness of
approximately $600,000 of indebtedness owed to the Company by OmniSky for
engineering services. The investment was made to maintain the Company's 33%
ownership in OmniSky. The Company's per share price was the same as the other
Series B Preferred Stock investors.
In May 2000, News Corporation, PSINet Inc., and several other investors,
invested a total of $89.4 million in OmniSky. As a result of this transaction,
the Company's ownership in OmniSky decreased to approximately 27% on a fully
diluted basis. In September 2000, OmniSky completed its initial public offering,
which reduced the Company's ownership in OmniSky to approximately 25.7% on a
fully diluted basis. During the year ended December 31, 2000, the Company
recognized a gain in stockholders' equity of approximately $73.3 million
resulting from sales by OmniSky of its equity to third party investors, and to
the public.
In October 1999, the Company agreed to purchase 25,000 Minstrel V modems
from OmniSky for $230 per modem. OmniSky had an exclusive buying arrangement
with Novatel for Minstrel V modems. In 1999, the Company purchased 20,000 of the
25,000 modems for cash of $3.5 million and cancellation of $1.1 million of trade
receivables owed to the Company by OmniSky. In July 2000, the Company received
$1.84 million from OmniSky pursuant to an agreement for OmniSky to repurchase
8,000 modems, reducing the Company's purchase commitment from 25,000 to 17,000.
As of December 31, 2000, the Company has received 6,580 modems, or approximately
$1.51 million of modems, and 4,588 units are included in inventory at December
31, 2000. Although there can be no assurance, the Company believes that it will
be able to use the remaining modems pursuant to this agreement in the normal
course of operations.
(b) Inciscent
On February 8, 2000, the Company entered into a joint venture agreement
with Metrocall, Inc. ("Metrocall"), PSINet, Inc. and Hicks, Muse, Tate and
Furst, Inc. to form a new joint venture called Inciscent. Inciscent was formed
to develop wireless e-mail, Internet access and other applications for the small
and medium-sized businesses and home office customers. The Company acquired a
27.5% percent interest in Inciscent in the form of 4,950,000 shares of Series A
Preferred Stock for $9.9 million, or $2.00 per share, and
F-17
57
has the right to appoint two of the seven members of the Board of Directors of
Inciscent. As part of the Inciscent joint venture, the Company also acquired
7,766,769 shares of Metrocall common stock at $2.19 per share, or an 8.7%
interest, for $17.0 million. The Company obtained the right to appoint one of
the thirteen members of Metrocall, Inc.'s board of directors.
The Company accounts for its investment in Inciscent under the equity
method of accounting. The Company has recorded approximately $2.7 million in
expenses for the year ended December 31, 2000, to reflect its proportionate
share of the losses in Inciscent based upon preliminary unaudited financial
information provided by Inciscent. For the year ended December 31, 2000, the
Company generated $1.7 million in revenue from products or services provided to
Inciscent. In addition, the Company has $636,000 in accounts receivable due from
Inciscent at December 31, 2000.
(c) VeriStar
On July 12, 2000, the Company entered into a stock purchase agreement with
VeriStar Corporation (VeriStar). The Company acquired a 23.3% interest in
VeriStar in the form of 3,250,649 shares of Series B Preferred Stock for
approximately $5.6 million in cash, or $1.73 per share, and has the right to
appoint one of the six members of the board of directors. VeriStar enables
access to accounts and content through the Internet and wireless technology. The
Company accounts for its investment in VeriStar under the equity method of
accounting. The Company has recorded approximately $303,000 in expenses for the
year ended December 31, 2000, to reflect its proportionate share of the losses
of VeriStar based upon preliminary unaudited financial information provided by
VeriStar.
(d) MindSurf
On July 17, 2000, the Company entered into a non-binding Alliance Agreement
with Sylvan Learning Systems, Inc (Sylvan) to establish a new company focused on
educational services. The Company committed to acquire a 47.0% interest in this
new company for $32.9 million in cash. Sylvan also intends to contribute $32.9
million for a 47.0% interest while other minority investors are expected to own
the remaining 6%. As of December 31, 2000, the Company has contributed $4.7
million in cash to this joint venture. The Company has recorded approximately
$3.8 million in expenses for the year ended December 31, 2000 to reflect its
proportionate share of the losses of MindSurf based upon preliminary unaudited
financial information provided by MindSurf. For the year ended December 31,
2000, the Company generated $494,000 in revenue from products or services
provided to MindSurf. In addition, the Company has $512,000 in accounts
receivable at December 31, 2000 due from MindSurf, which includes amounts
related to reimbursement of marketing expenses.
(e) Other Investments
The Company has also invested $51.5 million in five publicly-traded
companies including $17 million in Metrocall, Inc. ("Metrocall"), $10 million in
Data Critical Corp. ("Data Critical"), and $20 million in Novatel Wireless, Inc.
("Novatel"). The Company accounts for these investments at fair value based on
quoted market prices. As of December 31, 2000, the carrying value of these
investments was $54.0 million. Net unrealized gains and losses are excluded from
income and recorded as a separate component of stockholders' equity. Subsequent
to year-end, the market values of these investments have decreased
significantly.
The Company has also invested $73.3 million in eleven private companies
including $15.0 million in Strategy.com, Inc. ("Strategy.com"), $11.0 million in
ePhones, $14.9 million in Parkstone, and $10.0 million in Juniper Financial
Corp. ("Juniper"). In January 2001, the Company invested an additional $10.0
million in Strategy.com. The Company accounts for these investments at cost
unless circumstances indicate the carrying amount of the investment may not be
recoverable. For the year ended December 31, 2000, the Company generated $2.4
million in revenue from products or services provided to these investees. In
addition, the Company has $2.2 million in accounts receivable at December 31,
2000 due from these investees.
F-18
58
Included in this accounts receivable is $436,000 relating to shared marketing
expenses for which the Company recognized no revenue.
Most of the companies that the Company has invested in are start-up or
newly formed entities. Most of these companies are privately held and their fair
values are highly subjective and not readily determinable. At December 31, 2000,
the market value of the public companies in which the Company has invested
exceeded the cost of acquiring those investments. The Company's policy is to
review the value of all its investments for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable.
At the time of these investments, market valuations and the availability of
capital for such companies were at historically high levels. Since the end of
2000, stock prices and market valuations in the Company's industry and similar
industries have fallen substantially in response to a variety of factors,
including a general downturn in the economy, a curtailment in the availability
of capital and a general reduction in technology expenditures. The market
valuations of those publicly traded companies in which we have invested and of
other companies similar to those the Company has invested in have declined
substantially since December 31, 2000.
The Company is currently evaluating the recent decline in the valuation of
its investments to determine if the decline is other than temporary. The Company
believes that if market valuations of similar companies remain at their current
levels or decline further, it is likely that the Company will determine the
market decline to be other than temporary and record an impairment charge to
reduce the carrying value of the investments to their respective fair values.
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
ESTIMATED -----------------
USEFUL LIVES 1999 2000
------------- ------- -------
Furniture and fixtures............................. 7 Years $ 593 $ 2,500
Computer and equipment............................. 3 - 10 Years 2,113 27,192
Software........................................... 3 Years 175 25,096
Leasehold improvements............................. Term of Lease 947 5,582
------- -------
3,828 60,370
Less depreciation and amortization................. (1,032) (7,147)
------- -------
$ 2,796 $53,223
======= =======
(8) NOTES PAYABLE TO MEMBERS
In June 1998, the Company borrowed $250,000 from one of its members,
Pyramid Ventures, Inc. ("Pyramid") under a convertible promissory note. The note
was unsecured, bore interest at 8 percent per annum, and was convertible into
membership units at the option of the member. In August 1998, the member elected
to convert the note and accrued interest of $2,467 into 57,180 membership units
(142,950 shares) in accordance with its terms.
In June 1998, the Company borrowed $250,000 from another one of its
members, Telcom Ventures, under a similar convertible promissory note. The
Company paid all principal and accrued interest in August 1998.
In connection with the convertible promissory notes, the Company granted
warrants to purchase 5,656 member units (14,140 shares) at an exercise price of
$0.01 per unit to Pyramid and Telcom Ventures (note 12). The estimated value of
the warrants on the grant date of $50,000 was recognized in interest expense in
1998. Pyramid exercised its warrants to purchase 5,656 member units (14,140
shares) in August 1998. In August 1999, Telcom Ventures exercised its warrants
to purchase 5,656 member units (14,140 shares).
F-19
59
All outstanding membership units were subsequently exchanged for common
stock in connection with the Company's initial public offering, effective
October 26, 1999 (Note 2).
(9) DEBT
Notes payable at December 31, 2000 consists of $310.5 million of 6%
convertible subordinated notes (the "Notes") due in 2005. The Notes are
convertible, at the option of the holder, at any time prior to maturity into
shares of common stock of Aether at a conversion price of $243.95 per share,
which is equal to a conversion rate of 4.0992 shares per $1,000 principal amount
of notes, subject to adjustment.
Also included in notes payable are amounts placed in escrow to cover all
remaining obligations in connection with the acquisition of LocusOne
Communications, Inc. on February 3, 2000. This non-interest bearing note became
due and payable on December 31, 2000. On January 2, 2001, the Company paid this
obligation in full in the amount of $13.6 million.
Also included in notes payable at December 31, 2000 is $10.3 million of
notes payable to certain former shareholders of Synamic Limited. Synamic Limited
was acquired by Sila Communications Limited, a majority owned subsidiary of the
Company, in August 2000. The note is payable between August 15, 2002 and August
15, 2003 at the former shareholders' discretion and bears interest at a rate of
6.15% through April 15, 2001, at which time the rate will be adjusted to
then-current rates.
The aggregate maturities of debt for each of the five years subsequent to
December 31, 2000 are as follows (amounts in thousands):
2001........................................................ $ 13,741
2002........................................................ 10,643
2003........................................................ 25
2004........................................................ 17
2005........................................................ 310,516
Thereafter.................................................. --
--------
$334,942
========
(10) INCOME TAXES
Effective October 26, 1999, in connection with the Company's initial public
offering of common stock, Aether merged with and into Aether Systems, Inc. and
the merged entity became a Subchapter C Corporation under the Internal Revenue
Code of 1986.
The Company has provided no income taxes due to the losses incurred in all
periods.
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60
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000, are
presented below (amounts in thousands):
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
Deferred tax assets:
Net operating loss carryforwards................. $10,177 $ 149,989
Depreciation and amortization.................... 54 --
Allowance for doubtful accounts.................. -- 2,196
Accrued compensation............................. -- 2,951
Reserves and other............................... -- 432
Tax credit carryforwards......................... -- 2,291
------- ---------
Gross deferred tax assets.......................... $10,231 $ 157,859
Valuation allowance for deferred tax assets........ (7,692) (105,593)
------- ---------
Net deferred tax assets............................ 2,539 52,266
------- ---------
Deferred tax liabilities:
Allowance for doubtful accounts.................. 18 --
Depreciation and amortization.................... -- 2,408
Investments...................................... -- 9,121
Intangibles...................................... 2,521 51,431
------- ---------
Net deferred tax liabilities....................... 2,539 62,960
------- ---------
Deferred income tax liability, net................. $ -- $ 10,694
======= =========
The income tax benefit for 2000 consists of a foreign deferred tax benefit
associated with the losses generated by Sila.
The net change in the valuation allowance for deferred tax assets was an
increase of $7.7 million in 1999 and $97.9 million in 2000. The increase in 2000
consists of an increase of $43.8 million related to continuing operations, an
increase of $54.1 million related to amounts booked directly to stockholders'
equity, and an increase of $23.8 million relating to pre-acquisition net
operating loss carryforwards of companies acquired during 2000 for which any
future benefit will be recorded to goodwill.
As of December 31, 2000, the Company had Federal and State net operating
loss carryforwards of approximately $392.8 million that expire between 2012 and
2020.
In addressing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent on the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
(11) PENSION PLANS
The Company has two defined contribution plans under Section 401(k) of the
Internal Revenue Code that provide for voluntary employee contributions of 1 to
15 percent of compensation for substantially all employees. The Company
contributed $4,000 and approximately $636,000 to the plans for the years ended
December 31, 1999 and 2000, respectively. The Company made no contributions to
the plans for the year ended December 31, 1998.
(12) STOCK OPTIONS AND WARRANTS
(a) Options
In 1996, the Company adopted a Unit Option Plan. In September 1999, the
Company adopted the 1999 Equity Incentive Plan (the "Plan") to replace the Unit
Option Plan. Under the 1999 Equity Incentive Plan,
F-21
61
the Company has the ability to grant options to acquire up to 20% of the
outstanding shares of common stock to its employees, directors, and service
providers. Options under the Plan generally expire after ten years and normally
vest over a period of up to four years. Options are generally granted at an
exercise price equal to the fair value on the grant date. Effective December 15,
2000, the Company adopted the Acquisitions Incentive Plan (the "2000 Plan") to
provide options or direct grants to employees and other service providers of the
Company and its related companies with respect to the Company's common stock.
The Company has the ability to grant options to acquire up to an additional 5%
of the outstanding shares of common stock under the 2000 Plan. All employees
(except directors and officers of the Company and any eligible affiliates) are
eligible for the awards under the 2000 Plan. Options are generally granted at an
exercise price equal to the fair value on the grant date.
In January 2001, the Company's employees were offered the right to exchange
existing options for shares of restricted stock. 567 employees agreed to have
their options canceled in exchange for approximately 756,000 shares of
restricted stock. The Company expects to record $26.6 million of expense over
the next five years associated with the issuance of the restricted stock.
In June 1999, the Company entered into an employment agreement with its
Chief Executive Officer ("Executive"). As part of this agreement, the Executive
was granted 350,000 unit options (875,000 shares) at an exercise price of $4.00
per unit ($1.60 per share) and the right to grant an additional 50,000 unit
options (125,000 shares) at an exercise price of $4.00 per unit ($1.60 per
share) to other key executives. These options expire in June 2009. In September
1999, the Company granted the Executive an additional 70,000 unit options
(175,000 shares) at an exercise price of $10.00 per unit ($4.00 per share).
These options expire in September 2009. Both grants of options became fully
vested in October 1999, as a result of the completion of the Company's initial
public offering. In October 1999, the Company recorded option and warrant
expense of $16.5 million, which is equal to the difference between the fair
value of the shares of Aether System Inc.'s common stock and the exercise price
measured at the date of the initial public offering, times the number of
options.
The Company recorded total option and warrant expense of $32,000, $19.2
million and $14.3 million in 1998, 1999 and 2000, respectively. The Company
expects to record an additional $35.0 million in option and warrant expense
through 2003 for the difference between the exercise price and the fair market
value of the units or stock at the date of grant.
The Company applies APB 25 and related interpretations in accounting for
our unit option plan. Had compensation cost been recognized consistent with the
fair value method prescribed by SFAS No. 123, the Company's net loss would have
increased by $41,000, $4.2 million and $53.2 million for 1998, 1999, and 2000,
respectively.
The per share weighted-average value of options granted by the Company
during 1998, 1999 and 2000 was $0.55, $9.21 and $113.35, respectively, on the
date of grant using the Black-Scholes option-pricing model. These amounts were
calculated using an expected option life of three years and volatility of zero
for options granted in 1998. In 1999 and 2000, an expected option life of four
years and volatility of 70 percent was used for option grants. In addition, the
calculations assumed a risk-free interest rate of 4.55 percent to 5.51 percent
in 1998, 4.60 percent to 6.11 percent in 1999 and 5.08 percent to 6.38 percent
in 2000. A summary of the stock option and warrant activity, as adjusted for the
exchange of unit options and warrants for stock options, is as follows:
F-22
62
1998 1999 2000
----------------------------- ------------------------------ -----------------------------
WEIGHTED- WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
OF SHARES (PER SHARE) OF SHARES (PER SHARE) OF SHARES (PER SHARE)
-------------- ------------ --------------- ------------ -------------- ------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Outstanding at beginning
of year................. 1,000 $0.40 1,545 $0.85 3,933 $ 4.36
Options and warrants
granted................. 604 $1.54 2,763 $6.19 4,982 $91.69
Options and warrants
exercised............... -- -- (365) $0.54 (1,612) $ 3.01
Options and warrants
canceled................ (59) $0.40 (10) $1.49 (346) $56.40
----- ----- ----- ----- ------ ------
Outstanding at end of
year.................... 1,545 $0.85 3,933 $4.48 6,957 $64.61
===== ===== ===== ===== ====== ======
Options and warrants
exercisable at
year-end................ 991 $0.50 2,451 $2.13 1,435 $ 4.38
===== ===== ===== ===== ====== ======
The following table summarizes information about stock options and warrants
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
NUMBER AT WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER AT WEIGHTED-AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE PRICE DECEMBER 31, EXERCISE PRICE
EXERCISE PRICES 2000 CONTRACTUAL LIFE (PER SHARE) 2000 (PER SHARE)
- ----------------- ------------ ----------------- ---------------- ------------ ----------------
(IN (IN YEARS) (IN
THOUSANDS) THOUSANDS)
$ 0.237--$ 4.800 2,376 8.05 $ 2.11 1,294 $ 1.94
$ 5.378--$ 32.05 566 8.65 $ 19.04 59 $ 11.59
$ 33.412--$ 67.130 390 8.96 $ 46.33 80 $ 39.85
$ 67.375--$106.813 2,101 8.56 $ 84.29 1 $ 73.46
$108.938--$152.063 906 9.36 $135.27 1 $140.38
$152.281--$315.000 618 9.40 $187.65 0 $ 0.00
(b) Warrants Issued to Members
The Company granted warrants to purchase an aggregate 11,312 member units
(28,280 shares) at an exercise price of $0.01 per unit to Telcom Ventures and
Pyramid, as consideration for obtaining short-term loans (note 8).
(c) 3COM Warrants
In connection with the sale of membership units to 3Com, the Company
granted a conditional warrant to 3Com to purchase 357,466 member units (893,665
shares) at an exercise price of $0.01 per unit. 3Com vests in the warrants upon
performance of certain services and achievement of specific criteria. As of
December 31, 2000, warrants to purchase 300,000 member units (750,000 shares)
had not been earned by 3Com. As of December 31, 2000, the Company believes that
it is not yet probable that 3Com will attain the specified milestones relating
to the remaining 300,000 warrants (750,000 shares) and, accordingly, no expense
relating to these warrants has been recorded. If and when it becomes probable
that 3Com will attain the specified milestones necessary for the warrants to
vest, the Company will begin to record an expense reflecting the fair value of
the warrants. The Company would initially estimate the amount of the expense at
the time of the determination that achievement is probable, based in part on the
market price of the common stock at that time. At the time of the actual
vesting, the fair value of the warrant would be remeasured and, if different
from the value used in initially estimating the expense, the difference would be
reflected as an additional charge or credit at that time.
F-23
63
(13) OTHER RELATED PARTY TRANSACTIONS
(a) Consulting Agreements with Stockholders
The Company derived approximately 39 percent of its revenue for 1998 from
consulting services arrangements with two of its stockholders. The Company had
no trade accounts receivable due from these stockholders as of December 31,
1998.
(b) Notes Receivable from Stockholder
As of December 31, 1999, the Company had amounts due from a stockholder
under short-term promissory notes of approximately $137,000. The Company
classified the notes as a reduction of stockholders' equity in the accompanying
consolidated statements of stockholders' equity. The notes were callable by the
Company at any time and bore interest at a rate of 7.5 percent per annum. The
notes and accrued interest were repaid in February 2000.
(c) Related Party Revenue and Receivables
In the ordinary course of business, the Company has entered into sales
arrangements with entities in which the Company has equity interests. For the
years ended December 31, 1998, 1999 and 2000, the Company had sales to these
related parties aggregating approximately $0, $2.2 million and $10.5 million,
respectively. As of December 31, 1999 and 2000, the Company had accounts
receivable from these related entities aggregating approximately $612,000 and
$4.9 million, respectively.
(d) Related Party Expenses
In 2000, the Company received services from stockholders and other related
entities, such as benefits coordinators, investment banking firms, and a
financial information company. These companies are considered related parties
due to the fact that they are significant stockholders or entities related to
significant stockholders of the Company. For the year ended December 31, 2000,
the Company incurred costs of approximately $5.7 million from these related
entities related to these services received. In 1998, the Company purchased
approximately $560,000 of equipment and inventory from a stockholder.
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2000 2000 2000 2000 2000
------------- ------------- ------------- ------------- -------------
Revenue....................... $ 5,401 $ 10,755 $ 16,222 $ 25,775 $ 58,154
Gross profit.................. 2,377 5,128 8,262 12,372 28,138
Net loss...................... (33,271) (89,914) (107,261) (132,254) (362,700)
Net loss per common share --
basic and diluted........... (1.13) (2.36) (2.80) (3.37) (9.99)
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1999 1999 1999 1999
------------- ------------- ------------- ------------- -------------
Revenue....................... $ 340 $ 447 $ 1,491 $ 4,048 $ 6,326
Gross profit.................. 59 77 708 2,006 2,850
Net loss...................... (1,402) (2,918) (2,850) (23,522) (30,691)
Pro forma net loss per common
share -- basic and
diluted..................... (0.07) (0.15) (0.14) (0.94) (1.45)
During the fourth quarter of 2000, the Company reclassified certain
expenses for the year ended December 31, 2000 in order to conform the expense
classifications of certain acquired companies to that of the Company. The table
below shows quarterly information as if these changes had been made January 1,
2000
F-24
64
(amounts in thousands). This reclassification of operating expenses does not
have an effect on the operating loss or net loss reported in the respective
quarters on Form 10-Q.
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED YEAR ENDED
MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000 DECEMBER 31, 2000
-------------- ------------- ------------------ ----------------- -----------------
Research and
Development........ $ 2,031 $ 5,014 $ 7,337 $15,807 $ 30,189
General and
Administrative..... 4,931 8,507 18,823 20,676 52,937
Selling and
Marketing.......... 5,812 16,543 11,007 20,789 54,151
------- ------- ------- ------- --------
Total...... $12,774 $30,064 $37,167 $57,272 $137,277
======= ======= ======= ======= ========
(15) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at December 31, 2000, cannot be ascertained. While these matters could
affect the operating results of any one quarter when resolved in future periods,
management believes that any ultimate monetary liability or financial impact to
the Company beyond that provided for at December 31, 2000 would not be material
to the Company's financial position.
Purchase Commitments
a) On April 11, 2000, the Company entered into a marketing agreement with
Research in Motion Limited (RIM). This agreement includes a commitment to
purchase a significant amount of inventory. Under the agreement, the Company
committed to the following terms:
- Purchase up to 140,000 RIM handheld devices over the following three
years. The total commitment is dependent upon certain conditions being
met over the period of the agreement.
- Payments to RIM totaling $900,000 over 15 months as compensation for RIM
providing technology for the Company to build the RIM BlackBerry service
infrastructure in the Company's network operations center.
- Two annual maintenance payments of $375,000 each relating to annual
maintenance services to be provided by RIM in relation to the RIM
BlackBerry service
In 2001, the Company is committed to purchase 87,050 RIM handheld devices.
Depending on the mix of products ordered, the cost of these purchases will be
between $27.8 million and $40.0 million.
b) The Company is committed to take delivery of 10,420 Novatel wireless
modems. These modems have already been paid for and we believe that we will be
able to use them in the ordinary course of business.
c) In connection with the acquisition of Motient's retail transportation
segment, the Company signed airtime purchase commitments with Motient in the
amount of $15 million over three years.
F-25
65
Leases
The Company is obligated under noncancelable operating leases for office
space that expire at various dates through 2010. Future minimum lease payments
under noncancelable operating leases are approximately as follows: (in
thousands)
YEAR ENDING DECEMBER 31,
------------------------
2001........................................................ $13,001
2002........................................................ 14,053
2003........................................................ 13,770
2004........................................................ 12,873
2005........................................................ 10,498
Thereafter.................................................. 52,081
--------
Total minimum lease payments...................... $116,276
========
Rent expense under operating leases was approximately $91,000, $282,000 and
$4.5 million for the years ended December 31, 1998, 1999 and 2000, respectively.
Letters of Credit
During the normal course of operations, the Company has also entered into
various letter of credit agreements. As of December 31, 2000, the Company had
outstanding $8.7 million in letters of credit which expire at various times over
the following five years.
Acquisitions and Investments
The Company is committed to make or has made the following payments in 2001
relating to its acquisitions and investments:
(a) Strategy.com -- the Company invested an additional $10 million in
January 2001 to purchase additional shares in Strategy.com.
(b) Motient -- In connection with the acquisition of Motient's retail
transportation business, the Company is committed to pay up to an
additional $22.5 million if certain revenue and other incentive targets are
met in 2001.
(c) Sila Communications -- The Company has committed to provide
additional funding of up to $9.6 million in 2001 to its majority-owned
subsidiary, Sila Communications, Limited.
(d) MindSurf -- The Company is committed to provide additional funding
of $28.2 million to MindSurf.
(16) SEGMENT INFORMATION
The Company's operating segments include Vertical Markets, Software
Products, Wireless Services, and European Operations. Each of these segments has
distinct management teams. The Vertical Markets segment provides wireless data
services software and engineering services to develop applications for the
financial services, health care, mobile government, transportation and
logistics, m-commerce, and merchant notification services industries. The
Software Products segment develops, licenses and supports software products to
extend the accessibility of applications and information from corporate networks
and databases to handheld devices. The Wireless Services segment develops and
provides wireless data services through our Enterprise ISP, BlackBerry(TM) by
Aether(TM) and AirLoom(TM) offerings. Sila is the Company's European joint
venture with Reuters and has the majority of its customers in the European
financial services industry. Corporate and Other consists mainly of corporate
assets and SG&A expenses.
The Company began to report its financial results by segment as of the
first quarter of 2000. During 2000, the Company's reportable segments have
changed -- and the Company expects them to continue to
F-26
66
change -- as its operating structure, business and the market in which it
operates evolve. Each of the Company's segments has distinct management teams.
In 1998 and 1999, all of the Company's revenue was generated from what is now
reported as the vertical market segment.
Segment detail is summarized as follows:
VERTICAL SOFTWARE WIRELESS EUROPEAN CORPORATE AND
MARKETS PRODUCTS SERVICES OPERATIONS OTHER TOTAL
-------- ---------- -------- ---------- ------------- ----------
Year ended December 31, 1999
Revenue.................... $ 6,326 $ -- $ -- $ -- $ -- $ 6,326
Gross profit............... $ 2,850 $ -- $ -- $ -- $ -- $ 2,850
Total assets............... $102,534 $ -- $ -- $ -- $ -- $ 102,534
Year ended December 31, 2000
Revenue.................... $ 31,100 $ 7,938 $5,633 $ 13,483 $ -- $ 58,154
Gross profit............... $ 13,837 $ 4,997 $2,984 $ 6,320 $ -- $ 28,138
Total assets............... $294,683 $1,083,996 $ -- $178,001 $1,120,695 $2,677,375
The Company derives revenue primarily from the U.S. and Europe. Information
regarding our revenues in different geographic regions is as follows (in
thousands):
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------
1999 2000
------- ----------
Revenue:
U.S....................................................... $ 6,326 $ 43,766
Aggregate Foreign......................................... -- 14,388
------- ----------
$ 6,326 $ 58,154
======= ==========
Long Lived Assets...........................................
U.S....................................................... $15,214 $1,566,741
Aggregate Foreign......................................... -- 168,765
------- ----------
$15,214 $1,735,506
======= ==========
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67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Aether Systems, Inc.:
Under date of February 5, 2001, we reported on the consolidated balance
sheets of Aether Systems, Inc. and subsidiary as of December 31, 1999 and 2000,
and the related consolidated statements of operations and other comprehensive
loss, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000, which are included in this Annual
Report on Form 10-K. We did not audit the consolidated financial statements of
Sila Communications Limited, a majority-owned subsidiary, which statements
reflect total assets constituting 6.7% and total revenues constituting 21.7% of
the related consolidated totals in 2000. Those statements were audited by other
auditors, whose report has been furnished to us, and our opinion insofar as it
relates to the amounts included for Sila Communications Limited is based solely
on the report of the other auditors. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this consolidated financial statement schedule based
on our audits.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
McLean, Virginia
February 5, 2001
S-1
68
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
BALANCE AT ACQUIRED CHARGED TO COSTS BALANCE AT
DESCRIPTION BEGINNING OF YEAR BALANCES AND EXPENSES DEDUCTIONS END OF YEAR
----------- ----------------- ---------- ---------------- ---------- -----------
1998
Allowance for doubtful
accounts................ $ -- $ -- $ 157,061 $ -- $ 157,061
Allowance for inventory
obsolescence............ -- -- 169,630 -- 169,630
1999
Allowance for doubtful
accounts................ 157,061 -- (59,530) 41,160 56,371
Allowance for inventory
obsolescence............ 169,630 -- (54,477) -- 115,153
2000
Allowance for doubtful
accounts................ 56,371 4,477,686 1,390,929 230,471 5,694,515
Allowance for inventory
obsolescence............ 115,153 45,122 82,571 105,654 137,192
S-2