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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 000-31031
AIRSPAN NETWORKS INC.
(Exact name of registrant as specified in its charter)
Washington 75-2743995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13450 West Sunrise Boulevard 33323
Sunrise, FL (Zip Code)
(954) 851-1660
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 851 1660
----------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0003 par value
Indicate by a 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 22, 2002: $65,036,365.
Number of shares outstanding of the registrant's class of common stock as
of March 22, 2002: 35,131,432.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's definitive Proxy Statement for its 2002 Annual
Meeting of Shareholders are incorporated herein by reference into Part III.
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AIRSPAN NETWORKS INC.
FORM 10-K
For the Year Ended
December 31, 2001
TABLE OF CONTENTS
Item Page No.
- ------ ---------
PART I
1 Business .................................................................. 1
2 Properties ................................................................ 21
3 Legal Proceedings ......................................................... 21
4 Submission of Matters to a Vote of Security Holders ....................... 21
PART II
5 Market for Registrant's Common Equity and Related Stockholders Matters .... 22
6 Selected Financial Data ................................................... 23
7 Management's Discussion and Analysis of Financial Conditions and 24
Results of Operations .....................................................
7A Quantitative and Qualitative Disclosures about Market Risk ................ 33
8 Financial Statements and Supplementary Data ............................... 34
9 Changes in and Disagreements with Accountants on Accounting and 34
Financial Disclosure ......................................................
PART III
10 Directors and Executive Officers of the Registrant ........................ 35
11 Executive Compensation .................................................... 35
12 Security Ownership of Certain Beneficial Owners and Management ............ 35
13 Certain Relationships and Related Transactions ............................ 35
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ........... 35
SIGNATURES ........................................................................ 39
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Form 10-K are "forward-looking statements".
These statements involve known and unknown risks and uncertainties, such as our
plans, objectives, expectations and intentions, and other factors that may
cause our, or our industry's, actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the
forward-looking statements. These factors are listed under "Risk Factors" and
elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "expects", "anticipates", "intends", "may", "should", "plans",
"believes", "seeks", "estimates" or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we do not guarantee future results, levels of
activity, performance or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these
forward-looking statements.
PART I
Item 1. BUSINESS
Business Overview
We are a global supplier of broadband Fixed Wireless Access ("FWA")
equipment that allows communications service providers (often referred to as
"local exchange carriers," or simply telephone companies) to cost effectively
deliver integrated high-speed data and voice services using radio frequencies
rather than wires. We call this transmission method "Wireless DSL". The market
for our systems is a subset of the fixed wireless systems market. Our systems
are based on a digital wireless technique known as Direct Sequence -- Code
Division Multiple Access, or DS-CDMA, which provides wide area coverage,
security and resistance to fading. Our systems can be deployed rapidly and cost
effectively, providing an attractive alternative or complement to traditional
copper wire, cable, or fiber-optic communications access networks. Our products
also include software tools that optimize geographic coverage of our systems
and provide ongoing network management. To facilitate the deployment and
operation of our systems, we also offer network installation, training and
support services. During 1996, we began shipping our products -- these were
among the first fixed point-to-multipoint wireless systems to be commercially
deployed. Our systems have been installed by more than 60 network operators in
approximately 40 countries and are being tested by numerous other service
providers.
We were originally organized in 1994 as a unit within DSC Communications
Corporation, a telecommunications equipment manufacturer. DSC began developing
fixed wireless access systems in 1992. In January 1998 we created a new
corporation that purchased the Airspan unit from DSC for $25 million, $15
million of which was due in the form of debt payable over three years beginning
February 1, 2001 and the balance through the issuance of 10 million shares of
preferred stock. When Alcatel acquired DSC in 1998, we redeemed the preferred
stock held by DSC for a cash payment of $10 million. In the first half of 2001,
we extinguished the debt owed to DSC by a payment of $9.3 million, which gave
rise to an extraordinary gain of $9.25 million. During February 1999 we moved
to our own premises in Uxbridge, U.K. Although our primary operations,
manufacturing and product development centers remain in Uxbridge, U.K., on
November 7, 2000, we relocated our corporate headquarters to Sunrise, Florida.
Our telephone number there is (954) 851-1660. Further contact details and the
location of all Airspan's worldwide offices may be found at www.airspan.com.
Industry Overview
The Global Need for Bundled Delivery of Data and Voice Services
While the growth in Internet usage slowed in most developed countries in
2001, the global requirement for bandwidth to permit reliable high-speed access
to the Internet and to transmit large amounts of information remains and is
growing rapidly. End-users worldwide are demanding bundled service delivery
that includes reliable high-speed packet data for Internet access together with
high-quality voice telephony. Even in countries where communications systems
are unreliable or not yet widely deployed, businesses and consumers
increasingly require Internet access plus fax and modem capabilities, in
addition to traditional voice services.
Global Deregulation and Increased Competition
Worldwide deregulation of the telecommunications industry has created the
opportunity for new competitors (Competitive Local Exchange Carriers -- CLECs
- -- and Internet Service Providers -- ISPs) to provide local access connections
that historically were offered by a single incumbent provider (the Incumbent
Local Exchange Carriers -- ILECs). Most countries have joined the U.S. and the
U.K. in promoting competition for communications services. Operators are
increasingly striving to differentiate their service offerings on the basis of
their range of services, quality and reliability, customer service,
provisioning and pricing.
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The Need for Reliable Cost-Effective and Rapid Network Deployments
CLECs have expanded their focus beyond large business customers to serving
small and medium-sized businesses (or SMEs) and high-end residential,
small-office/home-office (or SoHo) customers as well as providing services
outside of the major urban areas. To serve these markets, CLECs require more
cost-effective network deployment solutions to compensate for lower average
customer spending on communications services and larger coverage area
requirements. Wireless DSL can provide these solutions.
Many countries have existing networks that are unable to provide reliable
data, voice and fax services while many others lack the network infrastructure
to make basic telephone services broadly available. Both ILECs and CLECs in
these markets need cost-effective, rapidly deployable alternatives to
traditional copper based networks. Their time-to-market and ability to offer
bundled data and voice services with attractive pricing are key success
factors. Wireless DSL can meet these needs as well.
The Access Network Bottleneck
While the communications transport network and Internet backbone are
capable of delivering data at extremely high speeds, data can only be delivered
to the end user as fast as the end-user's connection to the network will
permit. Traditional access connections that use copper wires are inadequate to
address the rapidly expanding bandwidth requirements. As a result, traffic
coming off the transport and backbone networks becomes bottlenecked as it tries
to pass through the access networks. To address this bottleneck, a number of
alternative solutions have emerged.
o Digital Subscriber Line. Digital subscriber line, or DSL, technology
improves the data transmission rate of existing copper networks. DSL
transmission rates and service availability, however, are limited by
both the quality of the available copper and the maximum transmission
distance (5 kilometers from the subscriber to the service provider's
network equipment) of wired DSL technology. These limitations restrict
the use of DSL in all countries.
o Cable Modems. Two-way cable modems using coaxial cable enable data
services to be delivered over a network originally designed to provide
television service to residential subscribers. Coaxial cable has
greater transmission capacity than copper wires, but is often costly
to upgrade for two-way data services. The data rate available to each
subscriber on a cable link decreases as the number of subscribers
using the link increases. Additionally, because office buildings are
generally not wired for cable service, it is not a viable alternative
for many business users worldwide.
o Fiber Optics. Fiber optics provide the highest data transmission rate
of any access solution, but fiber networks are the most costly to
deploy. As a result, fiber is typically used only to solve the
bandwidth needs of the largest businesses that can pay the associated
higher costs.
o Satellite. Satellite communications can enable two-way access
services. These solutions today typically require a subscriber to use
broadcast satellite technology for high-speed transmissions from the
network service provider to the subscriber, but use slower wire-based
connections to transmit data from the subscriber to the network
service provider. The data rate available to each subscriber in a
service area decreases as usage increases. As a result, because they
are not simple or cost effective to implement, satellite solutions are
not widely deployed worldwide.
o Fixed Wireless Access. Fixed wireless access systems enable high-speed
access to data and telephone networks without requiring a cabled
connection, such as copper wire or fiber, between the subscriber and
the base station. A fixed wireless system can be more rapidly and
cheaply deployed than wire or cable. To provide high quality service,
it is necessary to plan the deployment of radio equipment to maximize
coverage and availability, and the technology employed must resist
fading. In addition, fixed wireless services work best in those
regions where a suitable frequency band is available and dedicated
solely for use in the telephone access network.
Need for Fixed Wireless Access Solutions
The technology limitations and high costs of other existing solutions have
led many network operators to consider deployment of fixed wireless access
networks. Fixed wireless-technology permits
2
fast, flexible and cost-effective network rollouts. Many varieties of wireless
fixed access systems exist, some offering basic voice telephony services,
others delivering only IP data and data-derived services. Airspan's technology
provides a platform for bundled delivery of both high quality voice and
high-speed data services -- a unique and compelling combination for many of our
customers.
Wireless communications equipment operates within assigned, often licensed
frequency bands that can be segmented by the bandwidth of data that can be
carried, the effective range of a single cell hub and the cost of deployment.
Currently-available wireless technologies include cellular, fixed wireless,
cordless, wireless networks covering a building or a small geographic area,
known as wireless local area networks, (LANs), and radio systems using
frequencies between 10GHz and 100GHz, or millimeter wave, as well as various
"next generation" mobile wireless technologies.
Each of these technologies is best suited to specific applications.
Systems based on millimeter wave technologies (known as LMDS systems), for
example, provide high bandwidth services, but are costly to deploy, have
significant range limitations, require line-of-sight to provide services and
are adversely affected by weather conditions. These systems are generally
targeted at large business customers in major cities.
Lower frequency cordless and mobile cellular technologies have been widely
deployed to deliver wireless voice service. Cellular technologies typically
have a wider geographic range than our system -- the lower frequencies of
operation are able to propagate further -- while cordless and wireless LAN
(local area network) technologies have a more limited geographic range than our
system. The low bandwidth of cordless and cellular technologies today, however,
makes them unsuitable for delivering advanced high speed Internet access.
Wireless LANs have greater bandwidth than our system, but are, like cordless
technologies, generally more expensive to deploy because of their limited
geographic range. Furthermore Wireless LAN technologies are not optimized for
delivery of high quality voice services.
Our systems are designed to provide communications services in the 900MHz
to 4 GHz frequency bands, which are increasingly being licensed worldwide for
fixed wireless access services, particularly in the 3.5 GHz range. The
availability of technology at attractive prices in these frequencies and their
performance characteristics make them ideal for broader market applications for
service providers. These bands are less sensitive to line-of-sight obstructions
and weather conditions than the millimeter wave technologies described above
although they offer lower capacity for data transmission.
The Airspan Solution
We are a global supplier of Wireless DSL systems that enable network
operators to deliver bundled high-speed data and voice services using radio
frequencies rather than wires. Our systems deliver these services reliably and
cost effectively and provide the following benefits:
Bundled Data and Voice Services. Our solutions enable combined and
simultaneous delivery of both high-speed packet data and wire-quality voice
services, unlike many other access technologies that are optimized for either
data or voice traffic, but not both. We term this combination Wireless DSL. Our
systems flexibly allocate the available bandwidth to the services required,
thereby permitting the radio resources and spectrum to be used most
efficiently. Our AS4000/4020 system is designed as a modular solution to enable
deployments to be expanded as our technologies and customers' needs evolve. We
provide a single integrated subscriber unit that delivers a voice or data
connection, or a combination of both, to a subscriber. The unit can connect
from one to as many as 16 voice lines to a network, and also link a single
computer terminal or an entire data network to the Internet.
Quality of Service and Reliability. Our systems are based on DS-CDMA
technology, which allows network operators to offer high-quality data and voice
services with the same level of reliability that traditional telephone networks
provide. This technology provides wide-area coverage, security and resistance
to fading. In addition, our systems allow alternative service providers to
bypass the incumbent's network enabling them to monitor on a real time basis an
end user's network access connection. Our products are successfully deployed
and operated in a wide range of demanding environments throughout the world.
3
Rapid, Cost Effective Deployment. Our fixed wireless solutions are
generally less expensive to deploy than fiber or copper wire networks or other
high-speed fixed wireless networks. Our systems' wide area coverage requires
fewer base stations, allowing faster deployment with lower initial capital
outlays. A single base station covers up to 70 square miles in an urban setting
and as much as a 700 square miles in a rural setting. Network operators can
quickly begin generating new subscriber revenues due to the reduced time for
up-front planning and the relative ease and speed of installation of our base
stations. Our systems allow our customers to rapidly add new subscribers that
can be brought online in hours once the basic infrastructure is in place.
Network operators have the advantage of a lower up-front infrastructure cost,
adding extra network equipment to increase capacity only when they have demand
from their customers.
Flexibility and Expandability. Our systems can be easily and quickly
configured to meet specific customer requirements for capacity and frequency
allocations. The modular design of our systems allows for customization and
expansion as customer requirements increase. Our point-to-multipoint design
also facilitates expansion by permitting multiple subscribers to be connected
to a single base station and multiple base stations to be supported by a single
access concentrator. In addition, multiple types of service, including data and
voice, can be delivered over a single radio channel enabling network operators
to differentiate and customize their service offerings. The product uses
technology that allocates a CDMA channel on subscriber demand and allows a
single radio channel to be configured to support in excess of 400 subscriber
lines. Base stations may be configured with multiple radio channels -- a large
site with 24 radio channels can support up to 10,000 subscriber lines,
depending on the volume and type of customer traffic.
Comprehensive Implementation and Support Solutions. We offer our customers
a range of software tools that provide system-wide analysis for optimizing
geographic coverage and identifying and solving potential sources of
interference. Our software tools also initiate service for new customers and
provide alarm, maintenance and testing functions. In addition, to facilitate
deployment and operation of our systems, we offer network installation,
training and support services. The network operator is generally responsible
for site preparation and installation of the subscriber terminals. We have
developed a worldwide network of regional offices and subcontractors that
allows us to provide local technical and operational support for our customers
wherever our products are deployed. We also operate a 24-hour technical help
line providing additional support and troubleshooting for all our customers.
Our Strategy
Our goal is to be the world's leading provider of fixed wireless access
and wireless DSL systems to local exchange carriers and other network
operators. Key elements of our strategy include the following:
Capitalize on existing deployments of our systems to attract new
customers. Our numerous installations with network operators worldwide serve
both as proof that our technology concept works and as a reference point when
we sell to other network operators. We are building upon this acceptance of our
products to become the primary provider of fixed wireless systems to these
operators. We are particularly focused on expanding our existing customer
relationships to supply systems to their subsidiaries and affiliates worldwide.
Extend our strong technology position. We believe that we have established
a strong technology position in the market for fixed wireless access solutions,
and we intend to extend this position by continuing to invest substantially in
research and development. Our expertise in wireless telecommunications and
radio frequency engineering is based on nine years of development experience
and five years of deployment experience. Our research and development efforts
are particularly focused on increasing data transmission capability and
coverage area while reducing the cost of our infrastructure equipment. We are
also heavily focused on reducing the installation time and costs of our
subscriber terminals. To support our strong technological position, we are
actively involved in the development of standards through our membership in or
participation with leading standards organizations such as IEEE (Institute of
Electrical and Electronic Engineers) and ETSI (European Telecommunications
Standards Institute). We also expect to evaluate the acquisition of additional
businesses, products and technologies in order to accelerate the development of
and time-to-market with new technologically advanced products.
4
Target key growth market opportunities globally. Our fixed wireless
solutions find their strongest competitive advantage in areas where there is a
growing demand for integrated high-speed data and voice services and where cost
considerations make traditional solutions impracticable. As a result, in a
developed market like the United States, we focus on service providers that are
targeting small and medium sized businesses, small office/home office users and
high-end consumers as well as end users in suburban and rural areas.
Additionally in the United States we have sold to customers who have a
federally imposed requirement to use the PCS wireless spectrum they have
acquired by auction or risk losing that spectrum. In the developing world, our
opportunities are much broader due to the general inadequacy of the existing
communications infrastructure. In these markets, wireless solutions can be the
basis for a new national telecommunications infrastructure.
Develop and expand our strategic relationships. We intend to develop and
expand our strategic relationships with large communications equipment
manufacturers to help us market our products to network operators deploying
large-scale turnkey networks. These relationships facilitate broader
deployments of our systems worldwide, through stronger sales presence and
additional integration services and support capabilities provided by those
manufacturers. We also intend to form strategic relationships with
communications companies situated within certain countries where there are
competitive advantages to having a local presence.
Expand global sales, marketing and customer support presence in key
markets. We intend to expand and focus our sales, marketing and customer
support presence in key markets to drive additional deployments and increase
awareness of Airspan among network operators. We plan to hire sales and
marketing personnel in new sales and customer support offices in key strategic
markets globally where we have strong demand for our product.
Products
General
We supply fixed wireless access systems that connect residential and
business customers to a communications service provider's network. The end user
experiences a transparent connection between our equipment and the network with
performance and features equivalent to a high quality wireline access service.
Our products consist primarily of the following:
o AS4000, a multi-service platform consisting of an access concentrator
that is the connection point between an operator's voice and/or data
network and the multiple base stations that in turn connect multiple
subscriber terminals
o AS7020, a software tool enabling operators to rapidly deploy or
trouble-shoot subscriber installations
o AS8100, a network management system that performs and simplifies tasks
such as configuration and provisioning of subscribers, performance
monitoring and alarm management
o AS9000, a comprehensive radio frequency and deployment planning tool
During 2002 we are planning significant new product introductions,
including:
o A new range of subscriber terminals, based on our next-generation ASIC
technology: Trinity 2
o An enhancement of the AS4000 platform by introduction of AS4020:
offering higher speed packet data transmission and integrated voice
capabilities
o AS8200 Netspan -- a standards-based enhancement to our AS8100 network
management platform
Overview of Airspan's AS4000 Fixed Wireless Access / Wireless DSL Platform
Below is a diagram of our system that details the relationship between our
subscriber terminals, our base stations and our access concentrator, and the
public switched telecommunications network ("PSTN") and data networks.
5
The network operator installs base stations at various locations within
its geographical area of operation that are linked to the rest of the
telecommunications network via our access concentrator. Voice traffic is
typically routed from the access concentrator to PSTN via a Switch, whilst data
traffic can be connected directly to the Internet or to leased-line data
networks, typically via a router. The base station in turn transmits and
receives voice, high-speed data and Internet traffic via a wireless link of up
to 25km, to and from subscriber terminals located at residential and business
premises.
[Diagram of Airspan's Fixed Wireless Access System]
AS4000 Fixed Wireless Access Systems
Our AS4000 fixed wireless access systems, introduced in 1996, use reliable
wideband CDMA technology to deliver high-speed data, voice and ISDN (integrated
services digital network) services to a network operator's customers.
o the AS4000 System allows the signal to travel to and from the
subscriber's equipment (router, computer, fax or telephone) through
the building's existing internal wiring to a subscriber interface unit
o the subscriber interface unit is connected by a coaxial cable to an
external antenna which together form the subscriber terminal
o the antenna relays the information to the base station
o the signals from the various subscriber terminals (up to 2000
subscriber lines per base station) are routed through the base station
to the access concentrator, normally located at the communications
service provider's central switching center
o the signals are routed through the network to the final destination.
Our system typically allocates a line to a subscriber terminal only when
needed; for example, when a customer picks up a telephone handset and "demands"
a connection. This "demand-assigned" technology allocates spectrum efficiently
and increases total system capacity. Using it, a single radio channel can
support in excess of 400 subscriber lines, and a base station with multiple
radio channels -- a large base station site can have 24 radio channels can
support up to 10,000 subscriber lines depending on the volume and type of
customer traffic. This on-demand approach also applies to the transport of
Internet traffic (IP data), to maximize the efficiency of use of the allocated
spectrum, and to maximize the throughput for any individual customer.
6
The access concentrator assigns capacity and provides a node for network
management. Priority channels can be configured to provide access to key users
such as emergency services.
AS7020 Subscriber Terminal Deployment and Trouble Shooting Software
Airspan has developed a PC-based software product that assists operators
with the installation, commissioning and troubleshooting of subscriber
installations. The software provides setup information to the user and allows
modification of the key parameters. The software can also provide information
on the quality of the radio link and sources of interference, which can allow
an installation engineer to optimize the position and angular direction of the
external subscriber antenna. These features and functions greatly reduce the
time needed to set up and optimize a subscriber installation, and also enable
only one installer to complete work at a subscriber's premises.
AS8100 Sitespan Network Management System
The AS8100 Network Management System, introduced in 1998, is a
configuration, alarm, test and performance management system for the AS4000
range of products. The system helps ensure that the services provided over
AS4000 networks are uninterrupted and of high quality. AS8100 is flexible and
can be expanded to suit a range of different networks and is available in
different versions for the network center, desktop and the field.
The AS8100 Network Management System operates on a Microsoft Windows NT
platform and the user interface is entirely graphical and windows-based, using
drag-down menus, icon-based representations, maps and equipment views. The
system permits network operators to remotely manage a geographically dispersed
set of network elements.
AS9000 Airplan Planning and Configuration Tools
The AS9000 Planning and Configuration Tool, introduced in 1998, is a
sophisticated software solution that enables operators to plan and deploy our
systems. This product is based on third-party software customized for use with
our systems. The main task of the planning tool is to find the optimal location
and configuration for the base stations of an AS4000 deployment. The system
provides a powerful prediction engine that can generate coverage maps for
multiple scenarios until the best-case scenario is found.
Once the locations of the base stations have been determined, AS9000 can
be used to compare the way the radio signals fade as they spread out from a
base station transmitter and the extent of coverage. The four key aspects of
the predictive tool are the terrain (altitude) databases, clutter (natural
terrain features and man-made obstructions) information, antenna information
and system configuration, which are used to predict transmission coverage.
Technology
As of March 1, 2002, we had 63 people engaged in research and development.
Our technology has been under continuous development since the inception of the
system design in 1993, and from the outset our goal has been to develop high
performance systems that are resilient in a wide range of deployment
conditions.
Frequency Choice
We recognized early that no single fixed wireless spectrum would be made
available for access services around the world. Consequently, our designs have
accommodated the ability to easily change radio frequency subsystems to match
the customer's specific spectrum allocation. We believe we have the widest
choice of radio subsystems in the industry within the 0.9 to 4.0 GHz bands.
CDMA Technology
Our AS4000 and forthcoming AS4020 product lines are based on
well-established CDMA technology that allows multiple users to simultaneously
share a single radio channel while providing a high degree of security between
channels and other users.
7
CDMA functions differently from other access technologies such as
Frequency Division Multiple Access (FDMA) and Time Division Multiple Access
(TDMA). CDMA uses virtually random encoding of data based on a unique access
code per user, while FDMA divides the frequencies into narrow bands per user
and TDMA divides up the transmission into intervals of time per user. We
selected CDMA for our products because we believe CDMA can generally allow a
greater number of users per radio channel than either FDMA or TDMA, and with
greater security.
Intellectual Property
We have successfully developed a reliable CDMA-based system employing our
own enabling technology, which, as of March 1, 2002, has resulted in 34
separate patents granted in the U.S. and 10 pending applications in the U.S. We
do not license CDMA technology from or pay royalties to any other companies
that have developed CDMA-based wireless technologies. To improve system
performance and reduce costs, we have developed custom integrated circuits --
Trinity I, and more recently Trinity II -- which are the key elements of the
AS4000 and AS4020 Systems. We are currently researching our next generation
custom integrated circuit, Trinity III, which will provide added functionality
and lower product cost. We expect to deliver Trinity III in 2003.
Extensive testing and integration facilities
The performance and coverage area of a fixed-wireless system is largely
dependent on a number of factors including: the strength of the radio signal
transmitted, the sensitivity of the radio receiving apparatus, the radio
frequency used and the clutter (natural terrain features and man-made
obstructions). The ability of an operator to use a fixed wireless system is
predominantly dependent on the environment in which the fixed-wireless system
is deployed and base stations and customer premise equipment are installed. Our
process of radio planning considers these important factors to maximize
performance, coverage and availability. We have taken extensive steps to ensure
that our products are thoroughly stress-tested prior to release.
We continue to operate a live multi-cell test network that provides
always-on high-speed Internet access and voice services to a number of
volunteer end-users situated in and around the town of Stratford-upon-Avon,
U.K. In addition to providing valuable long-term system reliability,
availability and other performance data, this unique facility permits us to
empirically investigate radio transmission and reception and interference
behavior for existing and emerging products.
Research and development expenditures
During the years ended December 31, 2001, 2000 and 1999, we spent $15.1
million, $17.3 million and $16.3 million, respectively, on research and
development of our products. Of such amounts, $0.4 million, $0.6 million and
$2.5 million, respectively, were attributed to acquired in-process research and
development and amortization of intangibles in connection with the acquisition
of the business from DSC.
Customers
We began shipping our products in 1996. By the end of December 2001, we
had shipped to over 80 network operators in approximately 50 countries. Our
customers include integrated data and voice carriers, providers that focus
exclusively on data services, and mobile carriers. During 2001 there were no
customers that accounted for over 10% of our total revenue.
Our contracts with our customers typically provide for delivery of product
and services including installation and commissioning, training, maintenance
and upgrades. In addition, we generally also agree to provide warranty for the
equipment and software for a limited period of time.
Our contracts are generally non-exclusive and may contain provisions
allowing our customers to terminate the agreement without significant
penalties. Our contracts also may specify the achievement of shipment, delivery
and service commitments. We are generally able to meet these commitments or
negotiate extensions with our customers.
Sales, Marketing and Customer Service
We sell our systems and solutions through our direct sales force,
independent agents, resellers and OEM partners. Our direct sales force targets
network operators in both developed and developing
8
markets. Currently we have a direct sales presence in the U.S., U.K.,
Australia, Brazil, Canada, China, Czech Republic, Germany, Indonesia, the
Philippines, Poland, Russia and Sri Lanka. In markets where we do not have a
direct sales presence, we also sell through independent agents and resellers
who target network operators. In certain countries we also sell to OEMs who may
sell our products under their names.
Our marketing efforts are focused on network operators that provide voice
and data communications services to their customers. Through our marketing
activities we provide technical and strategic sales support including in-depth
product presentations, network design and analysis, bid preparation, contract
negotiation and support, technical manuals, sales tools, pricing, marketing
communications, marketing research, trademark administration and other support
functions.
A high level of ongoing service and support is critical to our objective
of developing long-term customer relationships. In order to facilitate the
deployment of our systems, we offer our customers a wide range of
implementation and support services including spectrum planning and
optimization, installation, commissioning, post-sales support, training,
helpline and a variety of other support services.
Our subcontractors, who have the expertise and ability to professionally
install our products, perform most major installations. This enables us to
efficiently manage fluctuations in volume of installation work.
As of March 1, 2002, we had 103 employees dedicated to sales, marketing
and customer service.
Manufacturing
We currently outsource our manufacturing to two global contract
manufacturers -- Flextronics International (Flextronics), based in Karlskrona,
Sweden, and Universal Scientific Industrial Co. (UK) Limited (USI), based in
Irvine, Scotland. We subcontract our manufacturing to realize advantages in
cost, quality, volume, geographic flexibility, and competitive benchmarking.
USI manufactures a range of printed circuit boards and all of our
Subscriber Terminal (ST) assemblies, while Flextronics provides a range of
printed circuit boards that primarily support our Central Terminal (CT)
products.
We have an agreement with Flextronics, which is non-exclusive and may be
terminated with four months' notice by either party without significant
penalty. Our agreement with USI, which is also non-exclusive, may be terminated
by either party upon six months' notice without significant penalty. Other than
agreeing to purchase the materials we request in forecasts we regularly
provide, we do not have any agreements with Flextronics or USI to purchase any
minimum volume. Our manufacturing support activities consist primarily of
prototype development, new product introduction, materials planning and
procurement and quality control.
Our base station manufacturing is contracted to Simclar International, in
Dunfermline, Scotland. Our agreement with Simclar provides for full base
station configuration, assembly and test. This arrangement would allow us to
ship orders directly to our customers from Simclar should we wish to do so.
Currently, we take all of the final products from the various suppliers
within our supply chain and fully configure the end-customer base station order
at our new systems integration and test facility at Uxbridge prior to final
shipping. All base stations are presently shipped to our customers from our
Uxbridge facility.
Some of the key components of our products are purchased from single
vendors, including printed circuit boards from Flextronics and USI and
electronic connector panels from Sanmina (Ireland) Limited, for which
alternative sources are generally not readily available in the short to medium
term. Further, some of our printed circuit boards have key components that, due
to their complexity and uniqueness, are purchased from single vendors. If our
vendors fail to supply us with components because they do not have them in
stock when we need them, if they reduce or eliminate their manufacturing
capacity for these components or if they enter into exclusive relationships
with other parties which prevents them from selling to us, we could experience
significant delays in shipping our products while we seek other sources. See
"Risk Factors -- Our dependence on key suppliers." page 19.
9
Our operation and manufacturing strategies enable us to configure our
products to meet a wide variety of customer requirements and facilitate
technology transfer between our research and development group and our contract
manufacturers. We are ISO 9001 certified.
Competition
Competition in our markets is intense and involves rapidly changing
technologies and customer requirements. We compete with established vendors of
communications systems, including traditional wired communications systems.
The primary competitive challenges our business faces include:
o competing with established and installed traditional wired networks
equipment providers
o convincing alternative service providers that our solutions are
superior to competing wireless solutions
We face, or believe that we will face, competition from various other
providers of wireless communications products and services, including Alvarion,
ECI, Hybrid Networks, L3 Communications, Marconi and Vyyo. While we believe our
industry to be competitive, we do not believe there is a single dominant
competitor.
Competitors vary in size and scope, in terms of products and services
offered. In the particular frequencies where we sell our combined voice and
data solution, we compete directly with ECI as well as smaller start-up
companies. We compete indirectly with a number of large telecommunication
equipment suppliers such as Alcatel, Hughes, Marconi and Nortel. In addition,
our technology competes with other high-speed solutions, such as digital
subscriber lines, optical-fiber cable, cable modems and high-speed leased lines
and satellite technologies. The performance and coverage area of our fixed
wireless systems are dependent on some factors that are outside of our control,
including features of the environment in which the systems are deployed such as
the amount of clutter (natural terrain features and man-made obstructions) and
the radio frequency available. Any inability to overcome these obstacles may
make our technology less competitive in comparison with other technologies and
make other technologies less expensive or more accessible. Finally, our
business may compete in the future with products and services based on other
wireless technologies including TDMA, FDMA, Orthogonal Frequency Division
Multiplex (OFDM) and other technologies that have yet to be developed.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion, sale and financing of their products than we can.
Furthermore, some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves.
Intellectual Property Rights
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws together with confidentiality and/or license
agreements with our employees, customers and others to protect our proprietary
rights. As of March 1, 2002 our patent portfolio consists of 34 patents that
have been granted in the U.S., together with various foreign counterparts. We
also have 10 U.S. patent applications that are currently pending, together with
various foreign counterparts. Our other intellectual property rights relate to
the trademark and trade name Airspan (Registered Trademark) , our website, our
software and hardware design and technology.
Employees
As of March 1, 2002, we had a total of 225 full-time employees, including
contract personnel. Our employees are not presently represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.
10
Executive Officers and Directors
The names, ages and positions of our executive officers and directors as
of March 22, 2002 are listed below along with their business experience during
the past five years. Messrs. Cooper and Paget are officers of Airspan
Communications Ltd., our wholly-owned U.K. operating subsidiary.
Name Age Title
- ---- ---- -----
Matthew J. Desch ............... 44 Chairman of the Board of Directors
Eric D. Stonestrom ............. 40 President and Chief Executive Officer, Director
Peter Aronstam ................. 49 Senior Vice President and Chief Financial Officer
Ian Cooper ..................... 43 Vice President, Engineering
Jonathan Paget ................. 55 Executive Vice President and Chief Operating Officer
Henrik Smith-Petersen .......... 38 President, Asia Pacific
David Brant .................... 38 Vice President Finance and Controller
H. Berry Cash .................. 61 Director
Thomas S. Huseby ............... 54 Director
David A. Twyver ................ 55 Director
Guillermo Heredia .............. 60 Director
Michael T. Flynn ............... 53 Director
Matthew J. Desch became chairman of the board of directors on July 1,
2000. From 1996 to May 1, 2000, he served as executive vice president of Nortel
Networks Limited, a global supplier of networking solutions and services that
support voice, data, and video transmission over wireless and wireline
technologies, and president of Nortel's Wireless Networks division, responsible
for Nortel's global wireless infrastructure business. Mr. Desch joined Nortel
Networks in 1987 and served in a variety of management positions. Mr. Desch
currently serves on the board of directors of Glenayre Technologies Inc., a
global provider of enhanced services and unified communications solutions for
service providers including wireless, fixed network, ISP and broadband. Mr.
Desch has a B.S. from Ohio State University, and an M.B.A. from the University
of Chicago.
Eric D. Stonestrom joined Airspan at its inception in January 1998 as
executive vice president and chief operating officer. In May 1998, he was named
president and chief executive officer as well as a member of the board of
directors. From 1995 to 1998, Mr. Stonestrom was employed by DSC Communications
Corporation as the vice president of Network Management. From 1984 to 1995, Mr.
Stonestrom worked at Bell Laboratories and AT&T in a variety of positions. He
received B.S., M.S. and M. Eng. degrees in 1982, 1983 and 1984, respectively,
from the College of Engineering at the University of California at Berkeley.
Peter Aronstam joined Airspan in March 2001 as senior vice president and
chief financial officer. From 1983 to 2001, Mr. Aronstam served in a variety of
positions at Nortel Networks Limited, most recently as Vice President, Customer
Financing of Nortel's Caribbean and Latin America region. From 1978 to 1980, he
worked at Bank of Montreal in its international banking division; and from 1981
to 1983 at Bank of America in its Canadian corporate banking group. He received
B.Com., LLB and PhD. degrees in 1971, 1973 and 1978, respectively, from the
University of the Witwatersrand in Johannesburg, South Africa.
Ian Cooper joined Airspan in February 1998 as vice president, engineering.
Prior to joining Airspan, he joined DSC Communications Corporation in 1994 to
develop products for the Airspan unit. In 1997, he attained responsibility for
all research and development activities of the unit, including the development
of the AS4000 platform. Before joining DSC, he worked at various companies as
an ASIC and hardware/systems designer and, previously he worked as a scientist
for the New Zealand Department of Scientific and Industrial Research developing
satellite communication and signal processing solutions for precision
scientific instrumentation. He graduated from the University of Auckland with a
Science degree in 1981.
Jonathan Paget joined Airspan in April 1999 as vice president, product
operations. In June 2000, Mr. Paget was named executive vice president and
chief operating officer. Prior to joining Airspan, from 1997
11
to October 1998, he served as group chief executive of Telspec Plc, a company
specializing in the development, manufacture and sale of advanced
telecommunications equipment. From 1992 to 1996, he served as vice president
and general manager of the European Radio Networks Solutions Group of Motorola,
a provider of integrated communications solutions and embedded electronic
solutions. He holds a Masters Degree in Engineering Science from Cambridge
University.
Henrik Smith-Petersen joined Airspan in February 1998 as Senior Director
in Sales. He became Regional Vice President for Asia Pacific and later
President, Asia Pacific in February 2001. Prior to joining Airspan, he was with
DSC Communications Corporation as Director of Business Development. Within DSC
he gained extensive experience developing new business and partnerships
worldwide in the wireless telecommunication market. Before joining DSC, he
worked for four years for AT&T's Network Systems Group in Italy, where he
developed AT&T's operation systems business and later became Key Account
Manager for Italtel, AT&T's local partner in Milan, developing the Telecom
Italia business. He received his B.Sc. in Business Economics degree from
Copenhagen School of Economics in Denmark in 1990, and a M.B.A. from SDA
BOCCONI University in Milan in 1992.
David Brant joined Airspan at its inception in January 1998 as finance
director and in July 2000 was named vice president finance and controller. From
1990 to 1998, Mr. Brant was employed by DSC Communications Corporation in the
U.K. in various financial roles, the last post as Director of European
Accounting during 1997. He received a B.A. in Mathematical Economics in 1984
from Essex University and is a Fellow of the Association of Chartered Certified
Accountants.
H. Berry Cash has served as a director of Airspan since January 1998. He
has been a general partner with InterWest Partners, a venture capital fund
focused on technology and healthcare, since 1985. Mr. Cash currently serves as
a member of the board of directors of the following public companies: Silicon
Labs Inc., MicroTune Inc., a provider of RF silicon solutions for the broadband
communications and consumer electronics markets, CIENA Corporation, a provider
of next generation intelligent optical networking equipment, i2 Technologies,
Inc., a provider of software and services that help customers achieve
measurable value through improvements in coordination and collaboration, and
Liberte, Inc. Mr. Cash received a B.S. in Electrical Engineering from Texas A&M
University and a M.B.A. from Western Michigan University.
Thomas S. Huseby served as a director of Airspan since January 1998,
serving as the board's chairman from January 1998 to July 2000. Mr. Huseby
currently serves as a director of Airspan. Since August 1997, Mr. Huseby has
served as managing partner of SeaPoint Ventures, a venture capital fund focused
on communications and Internet infrastructure. Prior to SeaPoint Ventures, from
1994 to 1997, Mr. Huseby was the chairman and chief executive officer of
Metawave Communications, a manufacturer of cellular infrastructure equipment.
Previously he was president and chief executive officer of Innova Corporation,
a manufacturer of millimeter wave radios. Mr. Huseby holds a B.A. in Economics
from Columbia College, a B.S.I.E. from the Columbia School of Engineering and a
M.B.A. from Stanford University.
David A. Twyver joined the board of directors of Airspan in May 1999. Mr.
Twyver is currently chairman and chief executive officer of Ensemble
Communications Inc., a supplier of broadband fixed wireless equipment for
frequencies above 10GHz. From 1996 to 1997, he served as chief executive officer
of Teledesic Corporation, a satellite broadband telecommunications company. From
1974 to 1996, he served in several management positions at Nortel Networks
Limited, a leading global supplier of data and telephone network solutions and
services, most recently as president of Nortel Wireless Networks from 1993 to
1996. Mr. Twyver is a director of Metawave Communications Corporation, a
provider of smart antenna systems for mobile wireless networks. He received his
B.S. in Mathematics and Physics from University of Saskatchewan.
Guillermo Heredia joined the board of directors of Airspan in January
2001. Since 1999, Mr. Heredia has served as the managing partner of Consultores
en Inversiones Aeronauticas, a provider of consulting services to airline
operators and investors. Mr. Heredia has served in the senior management of
three major Mexican corporations: as president and chief operating officer of
Aeromexico from 1989 to 1992, of Grupo Iusacell, Mexico's number two wireless
carrier from 1992 to 1994, and as president and chief
12
executive officer of Previnter, a joint venture of AIG, Bank Boston and Bank of
Nova Scotia from 1995 to 1999. Mr. Heredia currently serves as a member of the
board of directors for W L Comunicaciones, a telecommunications company
involved in developing a wide band fiber optic network in Mexico City and
throughout Mexico and for Jalisco Tequilana Internacional, a distiller and
distributor of Tequila. Mr. Heredia holds a degree in Mechanical Engineering
from the Universidad de las Americas and in Business Administration from
Universidad Iberoamericana.
Michael T. Flynn joined the board of directors of Airspan in July 2001.
Mr. Flynn is Group President of Communications at ALLTEL Corporation. He serves
as a member of the "Office of the President" which guides the business of the
Communications Division at ALLTEL, an integrated telecommunications and
information services company. He joined ALLTEL in June of 1994 where he served
as President of the Telephone Group until April 1997 when he became President
of Communications Operations. Prior to joining ALLTEL in 1994, he spent
twenty-four years with Southwestern Bell and the Bell System where he served as
President of the Arkansas Division from 1991 to 1994. He earned his B.S. degree
in industrial engineering from Texas A&M University in 1970. He attended the
Dartmouth Institute in 1986 and the Harvard Advanced Management Program in
1988.
13
RISK FACTORS
In addition to other information in this Form 10-K, the following risk
factors should be carefully considered in evaluating the Company and its
business.
If we continue to incur substantial losses and negative operating cash flows,
we may not succeed in achieving or maintaining profitability in the future.
We have incurred net losses since we became an independent company, and as
of December 31, 2001 we had an accumulated deficit of $109.5 million. We
anticipate that we will continue to experience negative cash flow for at least
24 months. Our operating losses have been due in part to the commitment of
significant resources to our research and development and sales and marketing
organizations. We expect to devote additional resources to these areas and, as
a result, we will need to continue increasing our quarterly revenues to achieve
and maintain profitability. We cannot be certain that our revenues will grow at
past rates or that we will achieve sufficient revenues for profitability. If we
do achieve profitability, we cannot be certain that we can sustain or increase
profitability on a quarterly or annual basis in the future.
The slowdown in expenditures by communications service providers has had, and
could continue to have a negative impact on our results of operations.
The recent deterioration of the global economy has resulted in a
curtailment of capital investment by telecommunications carriers and service
providers. Many new and small service providers and wireless companies have
failed and existing service providers have been reducing or delaying
expenditures on new equipment and applications. We believe it is possible that
this slow down could continue for the foreseeable future, or at least through
fiscal year 2002. A further global long-term decline in capital expenditures
may reduce our sales, increase the need for inventory write-offs and could
result in downward pressure on the price of our products, all of which would
have a material adverse effect on our results of operation and stock price.
Since we have a limited operating history and a significant percentage of our
expenses are fixed and do not vary with revenues, our quarterly operating
results are volatile and difficult to predict, and our stock price could
decline.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful. Since our customers are not required to purchase a
specific number of our products in any given quarter, we may not be able to
accurately forecast our quarterly revenues. Revenues are further affected if
major deployments of our products do not occur in a particular quarter we
anticipated and our customers delay shipments or payments due to their
inability to obtain licenses or for other reasons. As a result, our quarterly
operating results have fluctuated in the past and will likely vary in the
future. This could cause the market price of our common stock to decline. Other
factors that may affect our quarterly operating results and our stock price
include the loss of a major customer, our ability to react quickly to new
competing technologies, products and services which may cause us to otherwise
lose our customers, or if our suppliers and manufacturers are not able to
fulfill our orders as a result of a shortage of key components which leads to a
delay in shipping our products. We incur expenses in significant part based on
our expectations of future revenue, and we expect our operating expense, in
particular salaries and lease payments, to be relatively fixed in the short
run. Accordingly, any unanticipated decline in revenue for a particular quarter
could have an immediate negative effect on results for that quarter, possibly
resulting in a change in financial estimates or investment recommendations by
securities analysts, which could result in a fall in our stock price. You
should not rely on any one quarter as an indication of future performance.
14
Competition from alternative communications systems, as well as larger,
better-capitalized or emerging competitors for our products, could result in
price reductions, reduced gross margins and loss of market share.
We compete in a new, rapidly evolving and highly competitive and
fragmented market. We compete with companies that are producing fixed wireless
communications access systems, satellite access systems, cable access systems
and other new entrants to this industry, as well as traditional communications
companies.
We expect competition to persist and intensify in the future. In the
particular frequencies where we operate, we compete directly with ECI as well
as smaller companies, or small fixed-wireless divisions of companies, such as
Alvarion, Vyyo, Hybrid Networks, Netro and L3 Communications. We compete
indirectly with a number of large telecommunication equipment suppliers such as
Alcatel, Ericsson, Hughes, Marconi and Nortel. In addition, our technology
competes with alternative technologies, including traditional copper wire and
fiber, digital subscriber lines, optical fiber cable, cable modems and high
speed leased lines and satellite technologies. The performance and coverage
area of our fixed wireless systems are dependent on some factors that are
outside of our control, including features of the environment in which the
systems are deployed such as the amount of clutter (natural terrain features
and man-made obstructions) and the radio frequency available. Any inability to
overcome these obstacles may make our technology less competitive in comparison
with other technologies and make other technologies less expensive or more
accessible.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion, sale and financing of their products than we can.
Furthermore, some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties to
increase their ability to gain customer market share rapidly. These competitors
may enter our existing or future markets with systems that may be less
expensive, provide higher performance or contain additional features.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that may
supplant or provide lower-cost alternatives to our systems. This or other
factors may result in changes in the market valuations of our competitors,
which has been volatile recently, and could cause our stock price to fall. To
remain competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer support. We cannot
be certain that we will have sufficient resources to make these investments or
that we will be able to make the technological advances necessary to remain
competitive.
Our customer contracts vary widely in terms and duration with a majority of our
customers executing only short-term purchase orders, and allow our customers to
terminate without significant penalties.
Our contracts and purchase orders are separately negotiated with each of
our customers and the terms vary widely. A majority of our customers may only
execute short-term purchase orders for a single or a few systems at one time
instead of long-term contracts for large-scale deployment of our systems. These
purchase orders do not ensure that they will purchase any additional products
beyond that specifically listed in the order.
Moreover, since we believe that these purchase orders may represent the
early portion of longer-term customer programs, we expend significant financial
and personnel resources and expand our operations to be able to fulfill these
programs. If our customers fail to purchase additional products to fulfill
their program as we expect, we may be unable to recover the costs we incur and
our business could suffer.
In addition, our contracts are generally non-exclusive and contain
provisions allowing our customers to terminate the agreement without
significant penalties. Our contracts also may specify the achievement of
shipment, delivery and installation commitments. If we fail to meet these
commitments or negotiate extensions in a timely manner, our customers may
choose to terminate their contracts with us or impose monetary penalties.
15
Changes in telecommunications regulation or delays in receiving licenses could
adversely affect our customers and may lead to lower sales.
Our customers are subject to extensive regulation as communications
service providers. Changes in legislation or regulation that adversely affect
our existing and potential customers could lead them to spend less, or delay
expenditures, on communications access systems, which would harm our business.
In the past, an anticipated customer order was postponed as a result of
regulatory issues in Ireland, when the licensing process became open to appeal.
Our customer warned us that the appeal process would be lengthy and the outcome
would be unpredictable. We also have received orders in the past from customers
that were contingent upon their receipt of licenses from regulators, the timing
of which were uncertain. The receipt of licenses by our customers may occur a
year or more after they initially seek those licenses, or even after they place
orders with us.
At present there are few laws or regulations that specifically address our
business of providing communications access equipment. However, future
regulation may include access or settlement charges or tariffs that could
impose economic burdens on our customers and us. We are unable to predict the
impact, if any, that future legislation, judicial decisions or regulations will
have on our business.
Our sales cycle is typically long and unpredictable, making it difficult to
accurately predict inventory requirements, forecast revenues and control
expenses.
Typically our sales cycle can range from one month to two years and varies
by customer. The length of the sales cycle with a particular customer is
influenced by a number of factors, including the:
o particular communications market that the customer serves
o testing requirements imposed by the customer on our systems
o customer's experience with sophisticated communications equipment
including fixed wireless technology
o cost of purchasing our systems, including the cost of converting to
our products from previously-installed equipment, which may be
significant
Before we receive orders, our customers typically test and evaluate our
products for a period that can range from a month to more than a year. In
addition, the emerging and evolving nature of the communication access market
may cause prospective customers to delay their purchase decisions as they
evaluate new technologies or competing technologies or wait for new products or
technologies. As the average order size for our products increases, our
customers' processes for approving purchases may become more complex, leading
to a longer sales cycle. We expect that our sales cycle will continue to be
long and unpredictable. Accordingly it is difficult for us to anticipate the
quarter in which particular sales may occur, to determine product shipment
schedules and to provide our manufacturers and suppliers with enough lead-time
to ensure that they have sufficient inventory on hand to meet our orders. In
addition, our sales cycle impairs our ability to forecast revenues and control
expenses.
Our sales in Asia, Latin America and Africa may be difficult and costly as a
result of the political, economic and regulatory risks in those regions.
Sales to customers based outside the U.S. have historically accounted for
a substantial majority of our revenues. In 2001, our international sales (sales
to customers located outside the U.S.) accounted for 87% of our total revenue,
with sales to customers in Asia Pacific, particularly Indonesia, Sri Lanka and
the Philippines, accounting for 37%, and sales to Africa, particularly Nigeria
and South Africa, accounting for 27% of total revenue. Sales in Asia, Latin
America and Africa in particular expose us to risks associated with
international operations including:
o longer payment cycles and customers seeking extended payment terms,
particularly since our customers in Asia and Latin America have
difficulty borrowing money or receiving lines of credit if there is
political and economic turmoil in their countries
16
o tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries; for
example, tariffs in Brazil make our systems expensive and
uncompetitive for local operators.
o import or export licensing or product-certification requirements
o unexpected changes in regulatory requirements and delays in receiving
licenses to operate
o political and economic instability, including the impact of economic
recessions. Currently Sri Lanka is in the midst of a civil war and we
face the possibility that the war will harm the economy in Sri Lanka,
which may mean that our local customers will not be able to accept
shipments or make payments
o our reluctance to staff and manage foreign operations as a result of
political unrest even though we have business opportunities in a
country, for example, in Nigeria
o limited ability to enforce agreements in regions where the judicial
systems may be less developed
In addition, changes in foreign currency exchange rates also affect our
revenues and expenses. See "Since we incur most of our expenses and a portion
of our cost of goods sold in foreign currencies, fluctuations in the values of
foreign currencies could have a negative impact on our profitability."
We may not be able to expand our sales and distribution capabilities, including
establishing relationships with international distributors, which would harm
our ability to generate revenue.
We believe that our future success depends upon our ability to expand our
direct and indirect sales operations, including establishing relationships with
international distributors. While we have been successful in signing
country-specific OEM agreements with major suppliers such as Siemens and L.M.
Ericsson, we cannot be certain that we will be successful in maintaining or
expanding these agreements.
Our rapid growth has strained our resources, and our results of operations
could be negatively affected if we are unable to manage our expansion
effectively.
We have experienced a period of rapid growth and expansion that has
strained our resources. Although the slowdown of the telecommunications market
during 2001 allowed us to reduce our workforce by 15% in the third quarter of
2001, we have increased the number of employees since we became an independent
company, from 74 to 233 including contract personnel, as of March 1, 2002. We
intend to continue to expand in key market areas and, in order to manage growth
effectively, we must continue to effectively integrate new hires, and develop
and expand our operational systems, procedures and controls. A failure to do so
would impair our ability to accurately forecast sales demand, manage our
product inventory and record and report financial and management information on
a timely and accurate basis. Our inability to manage growth effectively could
seriously harm our business.
We are entirely dependent on our line of fixed wireless communications systems
and our future revenue depends on their commercial success and our ability to
adapt to evolving industry standards and new technologies.
The market for communications systems has been characterized by rapid
technological developments and evolving industry standards. Our ability to
increase revenue in the future depends on the commercial success of our line of
fixed wireless communications systems and our ability to adapt to changing
technologies, industry standards and customer preferences in a timely and
cost-effective manner. To date, AS4000 fixed wireless access systems, the
AS7020 software tool, the AS8100 network management system and AS9000 Airspan
planning and configuration tools are the only products that have been shipped
to customers and we expect that revenue from these products will account for a
substantial portion of our revenue for the foreseeable future. We expect to
introduce significant new products in 2002 including a new range of subscriber
terminals, our AS4020 product, which is an enhancement to AS4000, and AS 8200
Netspan. In developing these next generation products, we made assumptions
about the standards that
17
may become adopted and potential demand for such products. If our assumptions
are incorrect and products based on new or alternative technologies or the
emergence of new industry standards are introduced, our products could be
rendered obsolete. We cannot assure you that we will be successful in
developing enhancements to existing products or new products to meet evolving
standards in the future.
In addition, because the market for fixed wireless communications is in an
early stage of development, we cannot assess the size of the market accurately,
and we have limited insight into trends that may emerge and affect our
business. For example, we may have difficulty in predicting customer needs,
developing products that could address those needs and establishing a
distribution strategy for those products
We are an early-stage company with a limited operating history, and a result
you have limited financial data with which to evaluate our business.
We are an early-stage company in the emerging fixed wireless
communications access market. We operated as a unit of DSC Communications
Corporation beginning in 1992 and did not become an independent company until
January 1998. As a result of our limited operating history, we have limited
financial data that can be used to evaluate our business.
Our dependence on key suppliers for some of our components and a single
contract manufacturer may result in product delivery delays if they do not have
components in stock or terminate their non-exclusive arrangements with us.
Some of the key components of our products are purchased from single
vendors, including printed circuit boards from Flextronics International and
Universal Scientific Industrial Co. (USI) and electronic connector panels from
Sanmina (Ireland) Limited, for which alternative sources are generally not
readily available. If our vendors fail to supply us with components because
they do not have them in stock when we need them, or if they reduce or
eliminate their manufacturing capacity for these components or if they enter
into exclusive relationships with other parties which prevents them from
selling to us, we could experience significant delays in shipping our products
while we seek other supply sources, which may result in our customers claiming
damages. At times we have been forced to purchase these components from
distributors instead of from the manufacturers, which significantly increases
our costs. We do not have long-term contracts with all of these suppliers.
Instead, we execute purchase orders approximately three to six months in
advance of when we believe we may need the components. These purchase orders
are non-exclusive, and we are generally not required to purchase any minimum
volume of components from any of these suppliers. Where we do not have
long-term contracts with these suppliers, they may terminate our relationship
with up to six months' notice.
In addition, we outsource most of our manufacturing processes to
Flextronics and USI. Flextronics and USI rely on our forecasts of future orders
to make purchasing and manufacturing decisions. We provide them with forecasts
on a biweekly basis. If our forecast turns out to be inaccurate, it may lead
either to excess inventory that would increase our costs or a shortage of
components that would delay shipments of our systems. Our contract with
Flextronics is non-exclusive and may be terminated with four months' notice by
either party without significant penalty. Our contract with USI is also
non-exclusive and may be terminated with six months' notice by either party
without significant penalty. Other than agreeing to purchase the materials we
request in the forecasts, we do not have any agreements with them to purchase
any minimum volume. It is possible that our major competitors may enter into
contracts with either Flextronics or USI.
We currently depend on a few key customers for substantially all of our sales.
A loss of one or more of those customers could cause a significant decrease in
our net revenue.
We currently derive, and expect to continue to derive, a substantial
percentage of our net sales from fewer than ten customers. Although no single
customer accounted for more than 10% of our annual revenue in fiscal 2001, 59%
of our revenue was derived from our top ten customers. A number of our
customers are affiliated in that they have cross investments in each other,
which means we may lose more
18
than one customer at once if one party decides to discontinue deploying our
equipment. The amount of revenue we derive from a specific customer is likely
to vary from period to period, and a major customer in one period may not
produce significant additional revenue in a subsequent period. We anticipate
that our operating results will continue to depend on sales to a small number
of key customers in the foreseeable future. In general, our contracts with our
customers involve major deployments that require several months to fulfill, so
our results may depend on the same major customers for consecutive quarters.
Once a contract is fulfilled, we cannot assure you that the customer will
continue to purchase upgrades or services from us, or possibly new products. It
is necessary therefore for us to continually seek new customers in order to
increase our revenue. To the extent that any major customer terminates its
relationship with us, our revenues could decline significantly.
If we lose Eric Stonestrom or any of our other executive officers, we may
encounter difficulty replacing their expertise, which could impair our ability
to implement our business plan successfully.
We believe that our ability to implement our business strategy and our
future success depends on the continued employment of our senior management
team, in particular our president and chief executive officer, Eric Stonestrom.
Our senior management team, who have extensive experience in our industry and
are vital to maintaining some of our major customer relationships, would be
difficult to replace. The loss of the technical knowledge and management and
industry expertise of these key employees could make it difficult for us to
execute our business plan effectively, could result in delays in new products
being developed, lost customers and diversion of resources while we seek
replacements.
If we are not able to implement a program to reduce costs over time, introduce
new products or increase sales volume to respond to declines in the average
selling prices of our products, our gross margin may decline.
We expect the average selling prices of our products to decline due to a
number of factors, including our own changes in design and manufacturing,
competitive pricing pressures, rapid technological change and volume sales
discounts. Accordingly, to maintain or increase our gross margin, we must
develop and introduce new products or product enhancements with higher gross
margins and implement cost reductions.
If our average selling prices continue to decline and we are not able to
maintain or increase our gross margin, our results of operations could be
harmed.
We may not have adequate protection for our intellectual property, which may
make it easier for others to misappropriate our technology and enable our
competitors to sell competing products at lower prices and harm our business.
Our success depends in part on proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret laws and
contractual restrictions on disclosure to protect our intellectual property
rights. Despite our efforts to protect our proprietary rights, we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology, and we may not be able to detect unauthorized use or take
appropriate steps to enforce our intellectual property rights. The laws of some
foreign countries, particularly in Asia, do not protect our proprietary rights
to the same extent as the laws of the U.S. and the U.K., and we may encounter
substantial infringement problems in those countries. In addition, we do not
file for patent protection in every country where we conduct business. If we
fail to adequately protect our intellectual property rights, or fail to do so
under applicable law, it would be easier for our competitors to copy our
products and sell competing products at lower prices, which would harm our
business.
Our products may infringe on the intellectual property rights of third parties,
which may result in lawsuits that could be costly to defend and prohibit us
from selling our products.
Third parties could assert exclusive patent, copyright, trademark and
other intellectual property infringement claims against the technologies that
are important to us. In the past, we have dropped a
19
trademark application for a product name, and we stopped our use of that name
because we found that a third party had already obtained a trademark for it. If
any inquiry from a third party relating to patents or trademarks leads to a
proceeding against us and we are unable to defend ourselves successfully, our
ability to sell our products may be adversely affected and our business would
be harmed. In addition, third parties may assert claims, or initiate litigation
against us, or our manufacturers, suppliers or customers with respect to
existing or future products, trademarks or other proprietary rights. There is a
substantial risk of litigation regarding intellectual property rights in our
industry. Any claims against us or customers that we indemnify against
intellectual property claims , with or without merit, may:
o be time-consuming, costly to defend and harm our reputation
o divert management's attention and resources
o cause delays in the delivery of our products
o require the payment of monetary damages
o result in an injunction, which would prohibit us from using these
technologies and require us to stop shipping our systems until they
could be redesigned, if possible
o require us to enter into license or royalty agreements, which may not
be available on acceptable terms or require payment of substantial
sums.
Since we incur most of our expenses and a portion of our cost of goods sold in
foreign currencies, fluctuations in the values of foreign currencies could have
a negative impact on our profitability.
Although 97% of our sales in 2001 and a majority of our cost of goods sold
were denominated in U.S. dollars, we incur most of our operating expenses in
British pounds. We expect these percentages to fluctuate over time.
Fluctuations in the value of foreign currencies could have a negative impact on
the profitability of our global operations and our business and our currency
hedging activities may not limit these risks. The value of foreign currencies
may also make our products more expensive than local products.
A material defect in our products that either delays the commencement of
services or affects customer networks could seriously harm our credibility and
our business, and we may not have sufficient insurance to cover any potential
liability.
Fixed wireless devices are highly complex and frequently contain
undetected software or hardware errors when first introduced or as new versions
are released. We have detected and are likely to continue to detect errors and
product defects in connection with new product releases and product upgrades.
In the past, some of our products have contained defects that delayed the
commencement of service by our customers.
If our hardware or software contains undetected errors, we could
experience:
o delayed or lost revenues and reduced market share due to adverse
customer reactions
o higher costs and expenses due to the need to provide additional
products and services to a customer at a reduced charge or at no
charge
o claims for substantial damages against us, regardless of our
responsibility for any failure, which may lead to increased insurance
costs
o negative publicity regarding us and our products, which could
adversely affect our ability to attract new customers
o diversion of management and development time and resources
Our general liability insurance coverage may not continue to be available
on reasonable terms or in sufficient amounts to cover one or more large claims,
or our insurer may disclaim coverage as to any future claim. The successful
assertion of any large claim against us could adversely affect our business.
20
Since our products typically contain components from several sources, if there
is a problem in one of our networks, we may have difficulty identifying the
source of the problem.
Our products must successfully integrate with products from other
companies. When problems occur in a network, it may be difficult to identify
the source of the problem. Although a third-party's product may be the source
of hardware or software errors in our network, our customers may hold us
responsible. We may not be able to respond quickly to correct these problems,
which may result in the loss of future sales and harm to our reputation. In
addition, we may be forced to incur significant expenses to find and fix
errors.
Because some of our executive officers are in the United Kingdom, you may not
be able to enforce judgments against them that are obtained in U.S. courts.
Since some of our executive officers reside outside the U.S. and a
substantial portion of our assets are located outside the U.S., it may be
difficult for investors to effect service of process upon such persons within
the U.S. or to enforce against such persons judgments obtained in the U.S.
courts, including judgments predicated upon the civil liability provisions of
the federal securities laws of the U.S.
Item 2. PROPERTIES
Our corporate headquarters are located in Sunrise, Florida. This office
consists of approximately 9,000 square feet. The lease on this property expires
in 2007. This property is 25% utilized and we are looking to sublet it and to
move to a smaller office in 2002.
Our primary location of operations, manufacturing and product development
remains in Uxbridge, UK. In Uxbridge, we lease three facilities with
approximately 25,000, 17,000 and 12,000 square feet, respectively. These leases
expire in 2006, 2010 and 2003, respectively.
Item 3. LEGAL PROCEEDINGS.
On and after July 23, 2001, three Class Action Complaints were filed in
the United States District Court for the Southern District of New York naming
as defendants Airspan, Eric D. Stonestrom (our President and Chief Executive
Officer), Joseph J. Caffarelli (our former Senior Vice President and Chief
Financial Officer), Matthew Desch (our Chairman) and Jonathan Paget (our
Executive Vice President and Chief Operating Officer) together with certain
underwriters of our July 2000 initial public offering. The complaint alleges
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934 for issuing a Registration Statement and Prospectus that contained
materially false and misleading information and failed to disclose material
information. In particular, Plaintiffs allege that the underwriter-defendants
agreed to allocate stock in our initial public offering to certain investors in
exchange for excessive and undisclosed commissions and agreements by those
investors to make additional purchases of stock in the aftermarket at
pre-determined prices. Plaintiffs allege that the Prospectus for our initial
public offering was false and misleading in violation of the securities laws
because it did not disclose these arrangements. The actions seek damages in an
unspecified amount. The complaints have been consolidated into a single action,
which is being coordinated with over three hundred other nearly identical
actions. We are not required to respond to Plaintiffs' claims before a
consolidated complaint is filed, and no date has been set for any response to
the complaint. We intend to vigorously defend the Company and its officers
against this lawsuit.
We are not currently subject to any other material legal proceedings.
We may from time to time become a party to various other legal proceedings
arising in the ordinary course of our business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"AIRN". Our initial public offering of stock was on July 19, 2000 at $15.00 per
share. The price range per share, reflected in the table below, is the highest
and lowest sale price for our stock as reported by the Nasdaq National Market
during each quarter the stock has been publicly traded.
High Low
---------- ----------
2002 First Quarter (through March 22 2002) .......... $ 2.98 $ 1.61
2001 Fourth Quarter ................................. 3.17 1.52
2001 Third Quarter .................................. 3.18 1.30
2001 Second Quarter ................................. 4.02 2.00
2001 First Quarter .................................. 6.97 2.06
2000 Fourth Quarter ................................. 11.88 2.63
2000 Third Quarter (from July 19, 2000) ............. 49.02 10.00
Our present policy is to retain earnings, if any, to finance future
growth. We have never paid cash dividends and have no present intention to pay
cash dividends.
At March 22, 2002 there were approximately 241 shareholders of record and
the price per share of our common stock was $2.11.
During the quarter ended December 31, 2001 we issued an aggregate of
23,352 shares of our common stock upon exercise of outstanding options to
purchase our common stock.
22
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with our
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report. The financial information for the year ended
December 31, 1997 and month ended January 25, 1998 relates to the periods while
we were a unit of DSC, which we refer to as the business unit. The information
relating to the business unit has been prepared as a statement of revenues and
direct costs and expenses and is not intended to be a complete presentation of
the financial results of operations of the business unit. The statement of
revenues and direct costs and expenses for the year ended December 31, 1997 and
month ended January 25, 1998 and the consolidated statement of operations data
and balance sheet data for the eleven months ended as of December 31, 1998 and
the years ended December 31, 1999, December 31, 2000 and December 31, 2001 are
derived from our audited consolidated financial statements which have been
audited by Ernst & Young LLP, independent auditors.
Business Unit (1)
----------------------------
Year Ended Month Ended
December 31, January 25,
1997 1998
-------------- -------------
(in thousands, except for
share data)
Consolidated Statement of
Operations Data:
Revenue .................................. $ 4,818 $ 135
Cost of revenue .......................... 3,948 100
--------- --------
Gross profit ............................. 870 35
--------- --------
Research and development ................. 9,747 1,074
Sales and marketing ...................... 3,832 398
General and administrative ............... 4,034 378
Acquired in-process research and
development and amortization of
intangibles (2) ......................... -- --
Restructuring Provisions ................. -- --
--------- --------
Total operating expenses ................. 17,613 1,850
--------- --------
Loss from operations ..................... $ (16,743) $ (1,815)
========= ========
Interest and other income, net ........... -- --
Income taxes ............................. -- --
Loss before extraordinary items .......... -- --
Extraordinary item .......................
Gain on extinguishment of debt .......... -- --
Income Tax charge on gain ............... -- --
Net Loss ................................. -- --
Net loss per share--basic and diluted -- --
Shares used to compute net loss per
share--basic and diluted ................ -- --
Pro forma net loss per share--basic
and diluted (3) ......................... -- --
Shares used to compute pro forma
net loss per share--basic and
diluted ................................. -- --
Company
-----------------------------------------------------------
Eleven
Months Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1999 2000 2001
-------------- -------------- -------------- --------------
(in thousands, except for share data)
Consolidated Statement of
Operations Data:
Revenue .................................. $ 11,485 $ 12,480 $ 30,279 $ 37,422
Cost of revenue .......................... 9,531 8,086 18,782 24,708
--------- ------------ ------------ ------------
Gross profit ............................. 1,954 4,394 11,497 12,714
--------- ------------ ------------ ------------
Research and development ................. 10,524 13,845 16,746 14,667
Sales and marketing ...................... 6,765 9,883 14,358 16,711
General and administrative ............... 3,960 7,686 9,368 10,735
Acquired in-process research and
development and amortization of
intangibles (2) ......................... 16,270 2,476 595 425
Restructuring Provisions ................. -- -- -- 1,235
--------- ------------ ------------ ------------
Total operating expenses ................. 37,519 33,890 41,067 43,773
--------- ------------ ------------ ------------
Loss from operations ..................... (35,565) (29,496) (29,570) (31,059)
Interest and other income, net ........... 119 147 3,928 2,726
Income taxes ............................. (150) (100) 5 3,018
--------- ------------ ------------ ------------
Loss before extraordinary items .......... (35,596) (29,449) (25,637) (25,315)
Extraordinary item .......................
Gain on extinguishment of debt .......... -- -- -- 9,244
Income Tax charge on gain ............... -- -- -- (2,773)
--------- ------------ ------------ ------------
Net Loss ................................. $ (35,596) $ (29,449) $ (25,637) $ (18,844)
========= ============ ============ ============
Net loss per share--basic and diluted $ (65.72) $ (33.84) $ (1.44) $ (0.54)
Shares used to compute net loss per
share--basic and diluted ................ 541,667 870,328 17,797,899 34,810,311
Pro forma net loss per share--basic
and diluted (3) ......................... -- $ (1.37) $ (0.82) $ (0.54)
Shares used to compute pro forma
net loss per share--basic and
diluted ................................. -- 21,446,122 31,163,574 34,810,311
23
December 31, December 31, December 31, December 31,
1998 1999 2000 2001
------------- -------------- -------------- --------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents ......... $36,178 $58,828 $115,340 $ 70,260
Working capital ................... 39,758 68,795 131,100 98,680
Total assets ...................... 57,840 88,220 157,334 119,694
Long term debt .................... 16,095 20,138 15,754 1,250
Stockholders' equity .............. 32,624 57,212 123,655 105,253
(1) The statement of operations data relating to the business unit is further
described in Note 2 to our financial statements.
(2) The eleven months ended December 31, 1998 includes a charge of $14
million for acquired in-process research and development in connection
with the acquisition of the net assets of the business unit.
(3) Pro forma basic and diluted per share calculations reflect the pro forma
conversion of all outstanding preferred stock at the date of issuance
common stock.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and the related notes included elsewhere
in this report.
Overview
We are a global supplier of broadband Fixed Wireless Access ("FWA")
equipment that allows communications service providers (often referred to as
"local exchange carriers", or simply telephone companies) to cost-effectively
deliver integrated high-speed data and voice services using radio frequencies
rather than wires. We were originally organized in 1994 as a unit within DSC
Communications Corporation, a telecommunications equipment manufacturer. DSC
began developing fixed wireless access systems in 1992. In January 1998 we
created a new corporation that purchased the Airspan unit from DSC for $25
million, $15 million of which was due in the form of debt payable over three
years beginning February 1, 2001 and the balance through the issuance of 10
million shares of preferred stock. When Alcatel acquired DSC in 1998, we
redeemed the preferred stock held by DSC for a cash payment of $10 million.
During February 1999 we moved to our own premises in Uxbridge, U.K. Our
corporate headquarters are in Sunrise, Florida.
We generated revenue of $12.5 million in 1999, $30.3 million in 2000, and
$37.4 million in 2001. We have incurred net losses of $29.4 million, $25.6
million, and $18.8 million for 1999, 2000 and 2001, respectively. Since
becoming an independent company, we have generated significant net losses and
negative cash flow and expect to continue to do so in 2002. We have an
accumulated deficit of $110.0 million as of December 31, 2001.
We generate revenue from sales of our systems (including both hardware and
software) and from services related to implementation and support activities.
Sales of our systems, primarily our AS4000 product, constituted 89% of revenues
in 1999, 92% in 2000 and 97% in 2001. Following our purchase of the Airspan
unit from DSC, we continued to sell products developed while we were a division
of DSC, which we refer to as our older generation products. The older
generation products allowed only one subscriber terminal on each CDMA radio
channel, which limits the number of subscriber lines per base station to 120.
In 1998, we introduced products that assign radio channels to users only when
needed, which significantly expanded the potential number of users per system.
We refer to these products, which also have higher margins than our older
generation products, as our newer generation products. The newer generation
products use technology that allocates a CDMA channel on subscriber demand and
allow a single radio channel to support in excess of 400 subscriber lines. Base
stations may be configured with multiple radio channels -- a large site with 24
radio channels can support up to 10,000 subscriber lines. Older generation
product sales accounted for 15% of total sales in 1999, 2% of total sales in
2000 and less than 1% in 2001. We expect future sales of older generation
products to be insignificant.
24
Our proprietary software is integral to our products and is not sold
separately. Customer service contracts are generally of a short-term nature,
for days and weeks rather than months, and are sold separately from sales of
our systems. Although service revenue does not currently constitute a material
portion of our revenue, we believe that going forward, services will increase
as a percentage of our revenue.
We recognize revenue pursuant to Staff Accounting Bulletin No. 101, as
amended by SAB 101A and 101B "Revenue Recognition in Financial Statements".
Accordingly, revenues are recognized when all of the following conditions are
met:
o an arrangement exists with the customer,
o delivery has occurred or services have been endered,
o the price for the product or service is fixed and determinable, and
o collection of the receivable is reasonably assured.
Revenue from product sales, including sales to our distributors and
resellers, is generally recognized at the time the product is shipped to the
customer. Revenue is deferred when, customer acceptance is required, rights of
return exist, or other significant obligations remain that are essential to the
functionality of the delivered products. Once these conditions have been
satisfied, revenue is recognized. The estimated cost of any post-sale
obligations, including basic product warranties, is accrued at the time revenue
is recognized based on historical experience.
Revenue from time-and-material service contracts is recognized once the
services have been performed. Revenue from service contracts that relate to a
period of cover is recognized ratably over the given contract period. Revenue
is recognized on fixed-price service contracts using the percentage of
completion method unless we are not unable to make reasonable estimates under
that method, in which case revenue is recognized on a completed contract basis.
In certain cases, we enter into agreements with customers whereby we are
obligated to deliver multiple products and/or multiple services (multiple
deliveries). In these transactions, we allocate the total revenue to be earned
under the arrangement among the various elements based on their relative fair
value. Revenue for these transactions is recognized on each element when the
revenue recognition criteria have been met for that element. We recognize
revenue for delivered products and services only if: (i) the above Product
Revenue or Service Revenue criteria are met; (ii) undelivered products or
services are not essential to the functionality of the delivered elements,
(iii) payment for the delivered products or services is not contingent upon
delivery of the remaining products or services; and (iv) the fair value for
each of the undelivered elements is known.
We sell our products primarily through our direct sales force and, to a
lesser extent, through distribution channels. We have a direct sales presence
in the U.S., U.K., Australia, Brazil, Canada, China, Czech Republic, Germany,
Indonesia, the Philippines, Poland, Russia, and Sri Lanka. We also sell through
independent agents and resellers in markets where we do not have a direct sales
presence and to original equipment manufacturers, or OEMs, who may sell our
products under their name. Our sales cycle is typically long and unpredictable
and typically varies from one month to two years, often involving extensive
testing and evaluation by prospective customers, which makes it difficult for
us to anticipate the quarter in which particular sales may occur.
In 2001, our non-U.S. sales accounted for 87% of our total revenue. Of the
U.S. sales, 25% consisted of systems sold to U.S. customers that were shipped
to destinations outside the U.S. In the longer term, we expect U.S. sales to
increase as a percentage of our total sales. In 2001, our top ten customers
accounted for 59% of our revenue compared to 83% in 2000. We currently derive,
and expect to continue to derive, a substantial percentage of our revenue from
fewer than ten customers. In the year ended December 31, 2001 there were no
customers that individually accounted for more than ten percent of the year's
revenue. In the year ended December 31, 2000, Suntel Private Ltd., eircom plc
and Telbeskid SP.zo.o represented 25%, 18% and 10%, respectively, of our
revenue. For the year ended December 31, 1999, Suntel Private Ltd., Aliatel
a.s. and eircom, plc represented 28%, 18% and 13%, respectively, of our
25
revenue. While we anticipate that our operating results will continue to depend
on sales to a small number of key customers in the foreseeable future, we
believe that the concentrated dependence will continue to lessen. The following
table identifies the percentage of our revenue by geographic region in the
periods identified.
Percentage of Revenue
-----------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Geographic Area 1999 2000 2001
- ------------------------------- -------------- -------------- -------------
United States ................. 3.9% 11.4% 12.7%
Asia Pacific .................. 39.5 41.4 36.6
Europe ........................ 41.3 42.2 16.3
Africa and Middle East ........ 13.8 3.7 26.9
South America ................. 1.5 1.3 7.5
Cost of revenue consists of component and material costs, direct labor
costs, warranty costs, royalties, overhead related to manufacture of our
products and customer support costs. Our gross margin is affected by changes in
our product mix because our gross margin on base stations and related equipment
is higher than the gross margin on subscriber terminals. In addition, our gross
margin is affected by changes in the average selling price of our systems,
volume discounts granted to significant customers and the proportion of total
revenue of sales of software, which typically carries a higher gross margin
than hardware. We expect the average selling prices of our products to decline
and we intend to continue to implement product cost reductions and develop and
introduce new products or product enhancements to maintain or increase our
gross margins. Further, we expect to derive an increasing proportion of our
revenue from the sale of our integrated systems through distribution channels.
Revenue derived from these sales channels typically carries a lower gross
margin than direct sales.
Research and development expenses consist primarily of salaries and
related costs for personnel and expenses for design, development and testing
facilities and equipment. These expenses also include costs associated with
product development efforts, including consulting fees and prototyping costs
from initial product concept to manufacture and production. We expect to
continue to make substantial investments in research and development.
Sales and marketing expenses consist of salaries and related costs for
personnel, sales commissions, consulting fees and expenses for advertising,
travel, technical assistance, trade shows, and promotional and demonstration
materials. We expect to continue to incur substantial expenditures related to
sales and marketing activities including cost associated with the recruitment
of additional sales and marketing personnel and for the expansion of our
distribution channels.
General and administrative expenses consist of salaries and related
expenses for personnel, professional and consulting fees and other related
expenses including facilities costs. We expect to continue to incur substantial
expenditures related to general and administrative expenses.
During the third quarter 2001, in an effort to reduce our expenses to a
level that supported our revised revenue expectations at the time, we reduced
our expenses across all of the above-described categories. In 2002, we expect
that research and development, sales and marketing and general and
administrative expenses will remain broadly in line with levels of expenditure
in the third and fourth quarter of 2001. However, the percentage of revenue
that each of these categories represents will vary depending on the rate of our
revenue growth and investments that may be required to support the development
of new products and our penetration of new markets.
We outsource most of our manufacturing processes to Universal Scientific
Industrial Co. and, to a lesser extent, Flextronics International and we expect
to continue to use contract manufacturers. We also purchase some of the key
components of our products from single vendors for which alternative sources
are generally not readily available.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles
26
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis, we
evaluate our estimates and judgments, including those related to revenue
recognition; reserves for doubtful debt, excess or obsolete inventory; warranty
costs; restructuring costs; the valuation goodwill; and legal proceedings.
We base our estimates and judgments on historical experience and on
various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions and may change as future events occur.
We believe the following critical accounting policies are dependant on
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue recognition
Within our revenue recognition policy (See Note 1 in the Notes to the
Financial Statements) we are required to make a judgement as to the
collectibility of the resultant receivable. We use our judgment in assessing
the collectibility of the resultant receivable, and the criteria by which each
judgment is made may change in future periods and therefore may change future
revenue recognition.
Accounts Receivable
We are required to assess the collectibility of our accounts receivable
balances. A considerable amount of judgment is required in assessing the
ultimate realization of these receivables including the current
credit-worthiness of each customer. Significant changes in required reserves
have been recorded in recent periods to reflect our current judgment, and
changes may occur in the future due to the market environment.
Inventory
We value inventory at the lower of cost or market value. As a result, we
exercise judgment as to the level of provisions required for excess and
obsolete inventory. These judgments are based on our assumptions about future
demand and market conditions. Should we decide in future that actual market
conditions have become less favorable, or our assumptions change due to
changing market conditions, then additional inventory provisions may be
required.
Warranty costs
Typically our products are covered by a warranty for periods ranging from
one to two years. We accrue a warranty reserve for estimated costs to provide
warranty services. Our estimate of costs required to fulfill our warranty
obligations is based on historical experience and expectation of future
conditions. To the extent we experience increased warranty claim activity,
increased costs or our assessment of future conditions change, our warranty
accrual will increase, which will result in decreased gross profit.
Restructuring
During 2001, we recorded reserves of $1.2 million in connection with our
restructuring program. These reserves include estimates pertaining to employee
termination costs, the loss on subletting excess facilities, and the write down
of assets to be disposed of as part of the restructuring. Although we do not
anticipate significant changes, the actual costs may differ from the amount of
the reserves.
Valuation of Goodwill
Goodwill, the excess of purchase price (including associated expenses)
paid over net assets of the business acquired, is being amortized over its
estimated useful life. We assess the impairment of goodwill
27
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. In the review, we make various assumptions regarding
the estimated future cash flows and other factors to determine the fair value
of goodwill. If these estimates or related assumptions change in the future, we
may be required to record an impairment charge that would adversely affect our
results.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we
will cease to amortize approximately $0.8 million of goodwill. We had recorded
approximately $0.1 million of amortization on goodwill during 2001 and would
have recorded approximately $0.1 million of amortization during 2002. In lieu
of amortization, we are required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. We currently do
not expect to record an impairment charge upon completion of the initial
impairment review. However, there can be no assurance that a material
impairment charge will not be recorded at the time the review is completed.
Legal Proceedings
We are subject to class action complaints related to alleged false and
misleading information in our Registration Statement and Prospectus (See Item
3. Legal Proceedings), and may also face litigation for labor and other
matters. We are required to assess the likelihood of adverse judgments or
outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these
contingencies are made after careful analysis of each individual issue. The
required reserves may change in the future due to changes in circumstances
within each case.
Results of Operations
The following table provides operating data as a percentage of revenue for
the periods presented.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Revenue ......................................... 100.0% 100.0% 100.0%
Cost of revenue ................................. 64.8 62.0 62.2
Inventory provision ............................. -- -- 3.8
------ ----- -----
Gross Profit ................................... 35.2 38.0 34.0
------ ----- -----
Operating expenses:
Research and development ....................... 110.9 55.3 39.2
Sales and marketing ............................ 79.2 47.4 41.4
Bad debt provision ............................. 3.2
General and administrative ..................... 61.6 30.9 28.7
Acquired in-process research and development and
amortization of intangibles .................. 19.8 2.0 1.1
Restructuring provision ........................ -- -- 3.3
Total operating expenses ........................ 271.6 135.6 117.0
------ ----- -----
Loss from operations ............................ (236.3) (97.7) (83.0)
Interest and other income, net .................. 1.2 13.0 7.3
Income taxes .................................... 0.8 -- ( 8.1)
------ ----- -----
Net loss before extraordinary item .............. (236.0) (84.7) (67.6)
Extraordinary Item:
Gain on extinguishment of debt ................. -- -- 24.7
Income tax charge . ............................ 7.4
------ ----- -----
Gain after tax ................................. -- -- 17.3
------ ----- -----
Net loss ........................................ (236.0)% (84.7)% (50.4)%
====== ===== =====
28
Restructuring
In the summer of 2001, we announced our plan to reduce spending levels as
a result of the global economic slow down in the telecommunications sector. In
the third quarter of 2001, we implemented a restructuring program to reduce
operating expenses and recorded a charge of $1.2 million in relation to this
program. Included in this charge are costs related to excess facilities and
severance. There was no corresponding restructuring charge in 2000. We
initially expected to sublease our excess facility space by the end of the
first quarter of 2002; however, due to the severity of the economic slow down
we now expect to sublet such space by the end of 2002. This change in our
expectations does not have a material effect on the restructuring provision.
All severance payments will be made by the end of the third quarter 2002. The
total number of employees being terminated as part of this plan is 30. At
December 31, 2001, four of these employees were still working in the Company.
As of December 31, 2001 the restructuring charge and its utilization is
summarized as follows:
Initial Remaining
Accrued Charged Accrued
Restructuring against Restructuring
Charge Liability Charge
--------------- ----------- --------------
Facility related . .......... $ 551 $244 $307
Severance and other ......... 684 450 234
------ ---- ----
$1,235 $694 $541
------ ---- ----
Included within the third quarter 2001 facility restructuring charge is
$0.2 million for the write down of certain fixed assets, mainly furniture and
fixtures. All other charges will result in direct cash outlays. The fixed
assets will be disposed of as part of the sublease program, once the office is
sublet. The realizable value of these assets has been estimated from the
expected market price of similar assets.
As a result of our restructuring plan we expect to make savings in the
region of $4 million, $2 million and $1 million, within sales and marketing,
research and development, and general and administrative expenditure,
respectively. The majority of the savings arise from reduced personnel costs.
All savings are cashflow savings on the day that we cease the activity or
release the specific personnel, except for our provision for under utilized
space in which we are contractually obligated, to December 2004, to pay the
full rental amount until a sub-lessor is found. Full annual rental on this
property, payable quarterly in advance, is $0.2 million.
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
2001
Revenue
Revenue increased 23.6% from $30.3 million for the year ended December 31,
2000 to $37.4 million for the year ended December 31, 2001. The growth in
revenue was due to the increased demand from the USA, Africa and South America,
which was partially offset by declines in Europe. Africa's and South America's
growth occurred as a result of further network build outs and the addition of
new customers in those regions. The strong growth in the USA was significantly
aided by FCC-mandated usage rules for PCS spectrum that was auctioned in 1996,
which require PCS operators to use that spectrum within 5 years of acquiring it
or to give it back to the U.S. government. Our increase in revenue was driven
by volume, rather than price increases.
Cost of Revenue
Cost of revenue increased 24.0% from $18.8 million in the year ended
December 31, 2000 to $23.3 million in the year ended December 31, 2001. The
increase was due primarily to the substantial increase in revenue. During the
third quarter of 2001 we ceased marketing certain product variants and we also
undertook a detailed review of the levels and mix of related inventory. As a
result we wrote down inventory in the third quarter of 2001 by $1.4 million.
Excluding the inventory write down, gross margin was 38% for the year ended
December 31, 2000 and 2001. We were able to keep the 2001 gross margin
29
at 38% as a result of cost savings from product design changes and, to a lesser
extent, efficiencies from increased volume and introduction of lower- priced
components in products sold, offset by lower selling prices.
Research and Development Expenses
Research and development expenses decreased 12.4% from $16.7 million in
the year ended December 31, 2000 to $14.7 million in the year ended December
31, 2001. As part of our operating expense reduction program introduced in the
third quarter of 2001, we have re-focused our research and development
priorities to lower our ongoing product development costs. Under the program,
we will focus spending only on those products we can sell in large volumes and
in markets that we believe are strategic to our long-term growth. The full year
effect of this program will be felt in 2002.
Sales and Marketing Expenses
Sales and marketing expenses increased 8.4% from $14.3 million in the year
ended December 31, 2000 to $15.5 million in the year ended December 31, 2001,
reflecting a higher headcount and the expansion of our sales and marketing
activities. During 2001 we wrote down receivables by $1.2 million due to our
concerns with customers and countries that have been most effected by economic
slow downs. In 2000 we created bad debt provisions of $0.1 million.
General and Administrative Expenses
General and administrative expenses increased 14.6% from $9.4 million in
the year ended December 31, 2000 to $10.7 million in the year ended December
31, 2001. This reflected our higher headcount, additional costs associated with
being a public company and the full year costs of our corporate headquarters
facility in Florida that opened at the end of 2000.
Amortization of Goodwill and Intangibles
Amortization of goodwill and intangibles expense decreased 28.6% from $0.6
million in the year ended December 31, 2000 to $0.4 million in the year ended
December 31, 2001, reflecting the full write off of purchase contracts and
patents.
Restructuring Provision
In the middle of 2001, we announced our plan to reduce spending levels as
a result of the global economic slow down in the telecommunications sector.
During the third quarter of 2001, we made a restructuring provision of $1.2
million to cover employee termination costs and facility closures. There was no
corresponding restructuring charge in 2000.
Interest and Other Income Net
Interest and other income, which decreased 46% from $5.6 million for the
year ended December 31, 2000 to $3.1 million in the year ended December 31,
2001, consisted of interest earned on cash deposits with financial
institutions, foreign exchange gains and losses on cash balances and the cost
of purchasing foreign exchange contracts and options. The decrease in interest
income arose from lower cash balances and lower interest rates in 2001. Amounts
from interest income were partially offset by interest expense of $1.7 million
in the year ended December 31, 2000, predominantly on outstanding indebtedness
owed to Alcatel related to the purchase of the Company's assets in January 1998
and $0.3 million in the year ended December 31, 2001. Interest expense
decreased 81% as a result of the prepayment of the debt to Alcatel.
Income Taxes
In general we did not record an income tax benefit for the tax losses
generated in the U.K. because we have experienced operating losses since
inception. The 2000 tax provision relates to the repayment of
30
overpaid U.S. federal income taxes. The 2001 tax credit provision of $3.0
includes a $2.7 million credit to offset the income tax expense recorded on our
extraordinary gain and a $0.2 million income tax benefit for U.S. tax losses
offset against previous years' federal income taxes paid on intercompany
interest income.
Extraordinary Gain
The Company negotiated a settlement of its $18.5 million promissory note
with DSC Telcom L.P. in the first quarter of 2001. Under the settlement
agreement, the Company agreed to pay $9.3 million in the first half of 2001, in
exchange for complete forgiveness of the debt owed by the Company that was
originally repayable in 36 equal installments over three years starting
February 1, 2001. In addition, the Company and DSC Telcom L.P. mutually
released each other from certain claims made by the parties relating to the
formation of Airspan in January 1998. The extraordinary gain of $9.2 million
that arose from this transaction was partially offset by tax on the gain of
$2.7 million to show an extraordinary gain, net of taxes, of $6.5 million.
Net Loss
Net loss decreased by 26.5% from $25.6 million in 2000 to $18.8 million in
2001. Before the inventory provision, bad debt provision, restructuring
provision and extraordinary gain our net loss for 2001 was $24.2 million, a
5.5% decrease over 2000. This was primarily due to the increase in gross profit
of $2.6 million before provisions, and decrease in research and development
costs of $2.1 million, which were partially offset by an increase in sales and
marketing expenses and general and administrative expenses of $1.2 million and
$1.4 million, respectively, and a decrease in net interest and other income of
$1.2 million.
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31,
2000
Revenue
Revenue increased 142.6% from $12.5 million for the year ended December
31, 1999 to $30.3 million for the year ended December 31, 2000. The growth in
revenue was due to the increased demand of our newer generation, higher priced
products predominantly from customers located in Europe, Asia Pacific and USA,
in which revenues increased by 148% and 154% and 611%, respectively. Our
increase in revenue was driven by volume, rather than price increases.
Cost of Revenue
Cost of revenue increased 132.3% from $8.1 million in the year ended
December 31, 1999 to $18.8 million in the year ended December 31, 2000,
resulting from the substantial increase in revenue. Gross margin increased from
35.2% for the year ended December 31, 1999 to 38.0% for the year ended December
31, 2000. The gross margin improvement reflected primarily the results of
product design changes and, to a lesser extent, efficiencies from increased
volume and introduction of lower priced components in products sold.
Research and Development Expenses
Research and development expenses increased 21.0% from $13.8 million in
the year ended December 31, 1999 to $16.7 million in the year ended December
31, 2000, due to increased headcount and increased spending on the product
development of our packet data product.
Sales and Marketing Expenses
Sales and marketing expenses increased 45.3% from $9.9 million in the year
ended December 31, 1999 to $14.4 million in the year ended December 31, 2000,
reflecting a higher headcount and the expansion of our sales and marketing
activities. Sales and marketing expenses for 1999 and 2000 included provisions
of less than $0.1 million and $0.1 million, respectively, for potential bad
debt expense.
31
General and Administrative Expenses
General and administrative expenses increased 21.9% from $7.7 million in
year ended December 31, 1999 to $9.4 million in the year ended December 31,
2000, reflecting a higher headcount and additional costs associated with being
a public company.
Amortization of Goodwill and Intangibles
Amortization of goodwill and intangibles expense decreased 76.0% from $2.5
million in the year ended December 31, 1999 to $0.6 million in the year ended
December 31, 2000, reflecting the write off of purchase contracts and patents.
Interest and Other Income Net
Interest and other income increased 254.6% from $1.6 million for the year
ended December 31, 1999 to $5.6 million in the year ended December 31, 2000 and
consisted of interest earned on cash deposits with financial institutions,
foreign exchange gains and losses on cash balances and the cost of purchasing
foreign exchange contracts and options. The increased interest was from higher
cash balances from additional equity capital raised in 2000. Amounts from
interest income were partially offset by interest expense of $1.4 million and
$1.7 million respectively, predominantly on outstanding indebtedness owed to
DSC related to the purchase of the Company's assets in January 1998.
Income Taxes
We did not record an income tax benefit for the tax losses generated in
the U.K. because we have experienced operating losses since inception. The 1999
tax provisions relates to U.S. federal income taxes currently payable primarily
attributable to intercompany interest income. The 2000 tax provision relates to
the repayment of overpaid U.S. federal income taxes.
Net Loss
Net loss decreased by 12.9% from $29.4 million in 1999 to $25.6 million in
2000, due to increases in interest income. Increases in research and
development, sales and marketing and general and administrative expenses offset
increases in revenue, gross profits and interest income.
Liquidity and Capital Resources
As of December 31, 2001, we had cash and cash equivalents totaling $70.3
million, and $1.3 million of restricted cash that is held as collateral for
performance guarantees on customer and supplier contracts and with landlords.
We do not have a line of credit or similar borrowing facility, nor do we have
any material capital commitments.
Since inception, we have financed our operations through private sales of
convertible preferred stock, which totaled $117.3 million (net of transaction
expenses) and an initial public offering of common stock, which we completed on
July 25, 2000. In that offering, we issued 6,325,000 shares of common stock for
approximately $86.0 million in cash (net of underwriting discounts, commission
and other expenses). We have used the net proceeds of the offering for
additional working capital and other general corporate purposes.
At December 31, 2001, we had outstanding debt of $2.6 million compared to
$22.3 million at December 31, 2000. The reduction was primarily due to the
first-half 2001 settlement for $9.3 million of the $18.5 million promissory
note payable to Alcatel (formerly to DSC Telecom L.P.).
For the year ended December 31, 2001, we used $37.6 million cash in
operating activities compared with $27.8 million for the year ended December
31, 2000. The cash used in operations is primarily a result of the operating
loss and changes in working capital.
The net cash used in investing activities in the year ended December 31,
2001 and December 31, 2000 was all related to capital equipment. Our financing
cash flows for the year ended December 31, 2001 were
32
a net outflow of $4.3 million. The outflows arose from $9.8 million of payment
of long-term debt, of which $9.3 million was paid to Alcatel in settlement of
the $18.5 million promissory note, offset by a $5.9 million decrease in
restricted cash. Restricted cash increases whenever the Company issues a
guarantee secured by cash collateral: and decreases whenever such a guarantee
is cancelled or expires according to its terms.
We have no material commitments other than obligations under our long term
debt, capital equipment leases, operating leases, and the forward exchange
contracts mentioned herein.
Other Matters
On October 1, 2000, the Company adopted SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires enterprises to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The requisite accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. In accordance with the transition provisions of SFAS No. 133, the
Company recorded a net-of-tax cumulative effect type adjustment of $0.44
million at December 31, 2000 in accumulated other comprehensive income to
recognize at fair value all derivatives that were designated as cash flow
hedging instruments. The Company recorded cash flow hedge derivatives assets of
$0.44 million at December 31, 2000 as a cumulative effect of the change in
accounting principle. Based on the exchange rate at December 31, 2001, the
Company would expect to reclassify as gains to earnings during the next twelve
months $0.46 million from accumulated other comprehensive income.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
The Company's earnings are affected by changes in interest rates. As of
December 31, 2000 and 2001 we had cash and cash equivalents and restricted cash
of $122.5 million and $71.7 million, respectively. Substantially all of these
amounts consisted of highly liquid investments with remaining maturities at the
date of purchase of less than 90 days. These investments are exposed to
interest rate risk, but a hypothetical increase or decrease in market interest
rates of 2 percent from December 31, 2001 rates would cause the fair market
value of these short-term investments to change by an insignificant amount. Due
to the short duration of these investments, a short-term increase in interest
rates would not have a material effect on our financial condition or results of
operations. Declines in interest rates over time would, however, reduce our
interest income. Due to the uncertainty of the specific actions that would be
taken to mitigate this, and their possible effects, the sensitivity analysis
does not take into account any such action.
Foreign currency exchange rate risk
For the year ended December 31, 2001, 98.2% of our sales were denominated
in U.S. dollars, with the remaining 1.8% predominantly denominated in euro. For
the year ended December 31, 2000, 19.6% of our sales were denominated in euro
and the remaining 80.4% were denominated in U.S. dollars. Our total
euro-denominated sales for the year ended December 31, 2001 were
(EUR)0.8 million, which were recorded at an average exchange rate of $1U.S. =
(EUR) 1.1026. If the average exchange rate used had been higher or lower by 10%
it would have decreased or increased the euro-denominated sales value by $0.07
million. We expect the proportions of sales in euro to fluctuate over time. The
Company's sensitivity analysis for changes in foreign currency exchange rates
does not factor in changes in sales volumes.
Since May 2000, we have from time to time entered into fair value currency
hedging contracts that lock in minimum exchange rates for payments due to us
under some of our sales contracts where those payments are to be made in
currencies other than U.S. dollars. We do not enter into any currency hedging
activities for speculative purposes. There was no impact from such contracts
during 2001 on earnings, nor were there any fair value hedges outstanding at
December 31, 2001. We will continue to monitor our foreign currency exposures
and may modify our hedging strategies, as we deem appropriate.
33
We have also entered into cash flow currency hedges. Our operating results
are affected by moves in foreign currency exchange rates, particularly the rate
between U.S. dollars and U.K. pounds sterling. This is because most of our
operating expenses, which may fluctuate over time, are incurred in pounds
sterling. To manage our pound sterling foreign currency risk we have at various
times forecast our likely net spending in pounds sterling until December 31,
2002 and, based on these forecasts, we have entered into forward exchange
contracts to cover at least 80% of the projected exposure.
We have entered into the following forward exchange contracts:
> In November 2000, we entered into a forward exchange contract to
purchase 24.0 million pounds sterling at an average exchange rate of
$1U.S. = 0.6793 pounds sterling in sixteen equal amounts from that
date to February 2002. At December 31, 2001, there were two payments
outstanding at an average exchange rate of $1U.S. = 0.6772 pounds
sterling.
> In May 2001, we entered into two forward exchange contracts. The first
was to purchase 5.5 million pounds sterling at an average exchange
rate of $1U.S. = 0.7038 pounds sterling in eleven equal amounts from
June 2001 to April 2002. At December 31, 2001, there were four
payments outstanding at an average exchange rate of $1U.S. = 0.7056
pounds sterling. The second was to purchase 3.0 million pounds
sterling at an average exchange rate of $1U.S. = 0.7096 pounds
sterling in two equal amounts, one in March 2002, the other in April
2002. At December 31, 2001, these were outstanding at an average
exchange rate of $1U.S. = 0.7096 pounds sterling.
> In October 2001, we entered into a forward exchange contract to
purchase 10.0 million pounds sterling at an average exchange rate of
$1U.S. = 0.7017 pounds sterling in eight equal amounts, from May 2002
to December 2002. At December 31, 2001 these were outstanding at an
average exchange rate of $1U.S. = 0.7017 pounds sterling.
The total forward purchases of pounds sterling for the year ended December
31, 2001, was 21.5 million pounds sterling, and we paid expenses in local
currency of approximately 20.7 million pounds sterling over the same period.
The effectiveness of the contracts as a hedge was therefore 104% of spending.
The cost of the ineffectiveness was immaterial. If the expenses in pounds
sterling had not been hedged and the average exchange rates had been higher or
lower by 10%, the pound-sterling denominated operating expenses would have
decreased or increased by $3.0 million.
During 2000, we incurred the majority of our cost of revenue in Swedish Krona.
With the move of our printed circuit board sub-contracted production from
Sweden to Scotland at the beginning of 2001, we eliminated the Krona payments,
and for the year ended December 31, 2001 we incurred the majority of our cost
of revenue in U.S. dollars.
Equity price risk
We do not own any equity investments, other than in our subsidiaries. As a
result, we do not currently have any direct equity price risk.
Commodity price risk
We do not enter into contracts for the purchase or sale of commodities. As
a result, we do not currently have any direct commodity price risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are included on pages F-1 to
F-26.
34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended December 31, 2001.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended December 31, 2001.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended December 31, 2001.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed within 120 days after the end
of the Company's fiscal year ended December 31, 2001.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Page
----
Report of Independent Auditors ..................................................... F-1
Consolidated Balance Sheets as of December 31, 2000 and 2001 ....................... F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 2000
and 2001 ......................................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 2000 and 2001 . ............................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000
and 2001 . ....................................................................... F-5
Notes to the Financial Statements .................................................. F-6
(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts for the year ended December 31, 1999,
2000 and 2001 ......................................................................... II-1
(3) Exhibits and Reports on Form 8-K
(a) Exhibits With Each Management Contract or Compensatory Plan or
Arrangement Required to be Filed Identified.
See paragraph (c) below.
35
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the quarter
ended December 31, 2001.
(c) Exhibit Listing.
Certain exhibits have been previously filed with the Commission and are
incorporated herein by reference.
36
AIRSPAN NETWORKS INC.
EXHIBIT INDEX
Year Ended December 31, 2001
Exhibit
Number Description of Exhibit
- -------- -------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of Airspan (1)
3.2 Bylaws of Airspan (2)
4.1 Form of Airspan's common stock certificate (2)
10.1 Manufacturing Contract, dated August 27, 1998, between Airspan Communications Limited and
Flextronics International Sweden AB (2)
10.2 Contract for the Sale and Purchase of Equipment and Ancillary Facilities for the Establishment of a
Wireless Access System, dated October 25, 1999, between AZ Communications Network, Inc. and
Airspan Communications Limited (2), (3)
10.3 Contract for the Engineering, Project Management, Factory Inspection, Training and Technical
Assistance Services for the Establishment of a Wireless Access System, dated October 25, 1999, between
AZ Communications Network, Inc. and Airspan Communications Limited (2), (3)
10.4 Contract for purchase order No. LP/0442/99 between Airspan Communications Ltd and Suntel Private
Ltd. dated April 29, 1999 (2), (3)
10.5 Distributor Agreement between Airspan Networks Inc. and GLS LLC. (2), (3)
10.6 Supply Agreement between Airspan Networks Inc. and GLS LLC. (2), (3)
10.7 Lease for Registrant's facilities located at Oxford House and Cambridge House, Uxbridge, U.K. (2)
10.8 Lease for Registrant's facilities located at Riverside Way, Uxbridge, U.K. (2)
10.9 Agreement to tender with eircom, plc (2), (3)
10.10 1998 Stock Option and Restricted Stock Plan (2)
10.11 2000 Employee Stock Purchase Plan (2)
10.12 Employment Agreement with Eric Stonestrom (2), (4)
10.13 Employment Agreement with Jonathan Paget (2), (4)
10.14 Employment Agreement with Ian Cooper (2), (4)
10.15 Compromise/Settlement Agreement with Alcatel, dated February 14, 2001 (4
)
10.16 Subordinated Loan and Notes with Comdisco (2)
10.17 Employment Agreement with Matthew J. Desch (2), (4)
10.18 License Agreement dated November 16, 1995, between Mobile Systems International And DSC
Communications Limited, As Amended (2), (3)
10.19 Lease for Registrant's facilities located at 13450 West Sunrise Boulevard, Sunrise, FL 33323
10.20 Employment Agreement with Peter Aronstram (4), (5)
10.21 2001 Supplemental Stock Option Plan (5)
10.22 Reseller Agreement with VADO TELECOM Kommunikationstechnik-, Planungs-und
Errichtungsgesellschaft m.b.H (3), (5)
10.23 Frame Contract for Fixed Wireless between Airspan and AS Eesti Telefon (5)
10.24 Reseller Agreement between Airspan and Titan Wireless Inc. (3), (5)
10.25 Supply Agreement between Airspan and Telecable Siglo (3), (5)
10.26 Supply Agreement between Airspan and Telbeskid Sp. z o.o. (3), (5)
10.27 Supply Agreement between Airspan and TES Media, spol.s.r.o. (3), (5)
10.28 Asic Development Agreement between Airspan and EBV Electronik GmbH (3), (5)
37
Exhibit
Number Description of Exhibit
- ---------- -----------------------------------------------------------------------------
10.29 Supply contract with Monarch Communications Limited (1), (3)
10.30 Supply contract with Monarch Communications Limited (6)
10.31 Purchase order between Airspan and Seimens Telecommunications (PTY) Ltd. (6)
21 Subsidiaries of registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
- ----------
1 Incorporated by Reference to Airspan's Form 10-Q for the three months ended
September 30, 2001
2 Incorporated by Reference to Airspan's Registration Statement on Form S-1
(333-34514) filed July 18, 2000
3 Confidential treatment granted for portions of this agreement.
4 Management Agreement or Compensatory Plan or Arrangement
5 Incorporated by Reference to Airspan's Form 10-K for the year ended December
31, 2000
6 Confidential treatment requested for portions of this agreement
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Airspan has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Sunrise, Florida, on
the 28th day of March, 2002.
AIRSPAN NETWORKS INC.
By: Eric D. Stonestrom
------------------------------------
Eric D. Stonestrom,
President and Chief Executive Office
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Airspan, in
the capacities and dates indicated.
Signature Title Dated
- -------------------------------- --------------------------------------- ---------------
/s/ Eric D. Stonestrom Chief Executive Officer, March 28, 2002
- ------------------------------ Director (Principal Executive Officer)
Eric D. Stonestrom
/s/ Matthew J. Desch Chairman of the Board of Directors March 26, 2002
- ------------------------------
Matthew J. Desch
/s/ Peter Aronstam Senior Vice President, Finance; March 28, 2002
- ------------------------------ Chief Financial Officer (Principal
Peter Aronstam Financial and Accounting Officer)
/s/ H. Berry Cash Director March 28, 2002
- ------------------------------
H. Berry Cash
/s/ Guillermo Heredia Director March 26, 2002
- ------------------------------
Guillermo Heredia
/s/ Thomas S. Huseby Director March 27, 2002
- ------------------------------
Thomas S. Huseby
/s/ David Twyver Director March 26, 2002
- ------------------------------
David Twyver
/s/ Michael T. Flynn Director March 26, 2002
- ------------------------------
Michael T. Flynn
39
REPORT OF INDEPENDENT AUDITORS
To: The Board of Directors and Shareholders
Airspan Networks Inc.
We have audited the consolidated balance sheets of Airspan Networks Inc. as of
December 31, 2000 and 2001, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurances about whether the financial
statements are free from 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 the management, as well as evaluating the overall
financial presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the consolidated financial position of Airspan Networks
Inc. at December 31, 2000 and 2001 and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
London, England
January 29, 2002
F-1
AIRSPAN NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
December 31, December 31,
2000 2001
-------------- -------------
ASSETS
Current Assets
Cash and cash equivalents .................................... $ 115,340 $ 70,260
Restricted cash .............................................. 7,207 1,290
Accounts receivable, less allowance for doubtful accounts of
$1,371 in 2000 and $2,601 in 2001 .......................... 14,482 23,475
Unbilled accounts receivable ................................. 349 706
Inventory .................................................... 8,166 11,907
Prepaid expenses and other current assets .................... 3,481 4,233
--------- ----------
Total Current Assets ....................................... 149,025 111,871
Property, plant and equipment, net ............................ 6,800 6,284
Intangible assets, net ....................................... 1,209 784
Accounts receivable greater than one year .................... -- 648
Other non current assets ..................................... 300 107
--------- ----------
Total Assets ............................................... $ 157,334 $ 119,694
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................. $ 6,038 $ 5,956
Short term debt .............................................. 849 --
Accrued taxes ................................................ 351 326
Deferred Revenue ............................................. 1,210 790
Other accrued expenses ....................................... 3,720 4,779
Current portion of capital lease obligations ................. 34 --
Current portion of long-term debt ............................ 5,723 1,340
--------- ----------
Total Current Liabilities .................................. 17,925 13,191
--------- ----------
Non Current Liabilities
Long-term portion of note payable to DSC Telcom L.P. ......... 12,983 --
Other long-term debt ......................................... 2,500 1,250
Accrued interest on long-term debt ........................... 271 --
--------- ----------
15,754 1,250
--------- ----------
Stockholders' Equity
Common stock, $0.0003 par value; 50,000,000 shares
authorized in 2000 and 2001: 34,692,331 issued in 2000 and
35,120,199 issued in 2001 .................................. 10 10
Note receivable--stockholder ................................. (180) (180)
Additional paid in capital ................................... 214,066 214,491
Accumulated Other Comprehensive Income ....................... 441 458
Accumulated deficit .......................................... (90,682) (109,526)
--------- ----------
Total Stockholders' Equity ................................. 123,655 105,253
--------- ----------
Total Liabilities and Stockholders' Equity ................. $ 157,334 $ 119,694
========= ==========
The accompanying notes are an integral part of the financial statements.
F-2
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Revenue .......................................... $ 12,480 $ 30,279 $ 37,422
Cost of revenue .................................. (8,086) (18,782) (23,291)
Inventory provision .............................. -- -- (1,417)
----------- ----------- ------------
Gross profit ..................................... 4,394 11,497 12,714
----------- ----------- ------------
Operating expenses:
Research and development ......................... 13,845 16,746 14,667
Sales and marketing .............................. 9,047 14,297 15,504
Bad debt provision ............................... 836 61 1,207
General and administrative ....................... 7,686 9,368 10,735
Amortization of goodwill and intangibles ......... 2,476 595 425
Restructuring provision .......................... -- -- 1,235
----------- ----------- ------------
Total operating expenses ........................ 33,890 41,067 43,773
----------- ----------- ------------
Loss from operations ............................. (29,496) (29,570) (31,059)
Interest expense ................................. (1,434) (1,678) (326)
Interest and other income ........................ 1,581 5,606 3,052
----------- ----------- ------------
Loss before income taxes ......................... (29,349) (25,642) (28,333)
Income taxes ..................................... (100) 5 3,018
----------- ----------- ------------
Loss before extraordinary items .................. (29,449) (25,637) (25,315)
Extraordinary item
Gain on extinguishment of debt .................. -- -- 9,244
Income tax charge on gain ....................... -- -- (2,773)
----------- ----------- ------------
Net loss ......................................... $ (29,449) $ (25,637) $ (18,844)
=========== =========== ============
Net loss per share -- basic and diluted
Loss before extraordinary item .................. $ (33.84) $ (1.44) $ (0.73)
Extraordinary item, net of taxes ................ -- -- 0.19
Net loss per share .............................. $ (33.84) $ (1.44) $ (0.54)
Weighted average shares outstanding -- basic
and diluted ..................................... 870,328 17,797,899 34,810,311
Pro forma net loss per share -- basic and
diluted ......................................... $ (1.37) $ (0.82) $ (0.54)
Pro forma weighted average shares outstanding
-- basic anddiluted ............................. 21,446,122 31,163,574 34,810,311
The accompanying notes are an integral part of these financial statements.
F-3
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except for share data)
Preferred Stock
--------------------------
Par
Shares value
---------------- ---------
At January 1, 1999 ..................................................... 56,442,858 $ 564
Net loss for the year ..................................................
Issuance of Series B preferred stock ................................... 2,128,571 21
Issuance of Series C preferred stock ................................... 20,000,000 200
Issuance of Series B stock warrants ....................................
Issuance of common stock ...............................................
Exercise of stock options ..............................................
Stock compensation .....................................................
Repayment of note receivable ...........................................
----------- -------
At December 31, 1999 ................................................... 78,571,429 785
Comprehensive loss:
Net loss for the year .................................................
Other Comprehensive Income:
Unrealized gains on foreign currency cash flow hedges ................
Issuance of Series C preferred stock ................................... 2,178,571 22
Conversion of preferred to common stock and reverse three for one
stock split ........................................................... (80,750,000) (807)
Issuance of shares of common stock in connection with initial public
offering ..............................................................
Exercise of stock options ..............................................
Stock compensation .....................................................
Increase in notes receivable ...........................................
Transfer from par value to additional paid in capital on change of
incorporation .........................................................
----------- -------
At December 31, 2000 ................................................... -- --
Comprehensive Loss:
Net loss for the year .................................................
Other Comprehensive Income:
Movement in the fair value of cash flow hedges
Unrealized gains on foreign currency cash flow hedges ................
Less: reclassification of adjustment for gains realized in net
income ..............................................................
Issuance of common stock under the employee share purchase plan ........
Exercise of stock options ..............................................
----------- -------
At December 31, 2001 ................................................... -- --
=========== =======
Common Stock
--------------------- Additional Note
Par Paid in receivable
Shares value Capital stockholder
------------ -------- ------------ -------------
At January 1, 1999 ..................................................... 1,041,667 $ 31 $ 67,775 $ (150)
Net loss for the year ..................................................
Issuance of Series B preferred stock ................................... 3,704
Issuance of Series C preferred stock ................................... 49,800
Issuance of Series B stock warrants .................................... 95
Issuance of common stock ............................................... 83,333 3 42
Exercise of stock options .............................................. 196,720 6 53
Stock compensation ..................................................... 93
Repayment of note receivable ........................................... 20
---------- ------ -------- ------
At December 31, 1999 ................................................... 1,321,720 40 121,562 (130)
Comprehensive loss:
Net loss for the year .................................................
Other Comprehensive Income:
Unrealized gains on foreign currency cash flow hedges ................
Issuance of Series C preferred stock ................................... 5,425
Conversion of preferred to common stock and reverse three for one
stock split ........................................................... 26,916,667 8 799
Issuance of shares of common stock in connection with initial public
offering .............................................................. 6,325,000 2 85,996
Exercise of stock options .............................................. 128,944 1 40
Stock compensation ..................................................... 203
Increase in notes receivable ........................................... (50)
Transfer from par value to additional paid in capital on change of
incorporation ......................................................... (41) 41
---------- ------ -------- ------
At December 31, 2000 ................................................... 34,692,331 $ 10 $214,066 $ (180)
Comprehensive Loss:
Net loss for the year .................................................
Other Comprehensive Income:
Movement in the fair value of cash flow hedges
Unrealized gains on foreign currency cash flow hedges ................
Less: reclassification of adjustment for gains realized in net
income ..............................................................
Issuance of common stock under the employee share purchase plan ........ 157,094 247
Exercise of stock options .............................................. 270,774 178
---------- ------ -------- ------
At December 31, 2001 ................................................... 35,120,199 $ 10 $214,491 $ (180)
========== ====== ======== ======
Accumulated
Other
Comprehensive Accumulated
Income deficit Total
--------------- -------------- ------------
At January 1, 1999 ..................................................... -- $ (35,596) $ 32,624
Net loss for the year .................................................. (29,449) (29,449)
Issuance of Series B preferred stock ................................... 3,725
Issuance of Series C preferred stock ................................... 50,000
Issuance of Series B stock warrants .................................... 95
Issuance of common stock ............................................... 45
Exercise of stock options .............................................. 59
Stock compensation ..................................................... 93
Repayment of note receivable ........................................... 20
------- ---------- ---------
At December 31, 1999 ................................................... -- (65,045) 57,212
Comprehensive loss:
Net loss for the year ................................................. (25,637) (25,637)
Other Comprehensive Income:
Unrealized gains on foreign currency cash flow hedges ................ $ 441 441
---------
(25,196)
---------
Issuance of Series C preferred stock ................................... 5,447
Conversion of preferred to common stock and reverse three for one
stock split ........................................................... --
Issuance of shares of common stock in connection with initial public
offering .............................................................. 85,998
Exercise of stock options .............................................. 41
Stock compensation ..................................................... 203
Increase in notes receivable ........................................... (50)
Transfer from par value to additional paid in capital on change of
incorporation ......................................................... --
------- ---------- ---------
At December 31, 2000 ................................................... $ 441 $ (90,682) $ 123,655
Comprehensive Loss:
Net loss for the year ................................................. (18,844) (18,844)
Other Comprehensive Income:
Movement in the fair value of cash flow hedges
Unrealized gains on foreign currency cash flow hedges ................ 521
Less: reclassification of adjustment for gains realized in net
income .............................................................. (504)
-------
17 17
---------
18,827
---------
Issuance of common stock under the employee share purchase plan ........ 247
Exercise of stock options .............................................. 178
------- ---------- ---------
At December 31, 2001 ................................................... $ 458 $ (109,526) $ 105,253
======= ========== =========
The accompanying notes are an integral part of these financial statements.
F-4
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Cash Flows from Operating Activities
Net loss ................................................... $ (29,449) $ (25,637) $ (18,844)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 4,821 3,703 4,093
Gain on settlement of long-term debt ..................... -- -- (9,252)
Loss on sale of fixed assets ............................. -- -- 28
Stock compensation ....................................... 93 203 --
Other comprehensive income ............................... -- 441 17
Accretion of interest on notes payable ................... 1,134 1,236 109
Amortization of deferred financing costs ................. 20 -- --
Changes in operating assets and liabilities:
Increase in receivables ................................. (748) (8,691) (9,448)
Increase in inventories ................................. (4,105) (1,039) (3,741)
Increase in other current assets ........................ (1,561) (279) (1,109)
(Decrease)/increase in accounts payable ................. (348) 704 (82)
Increase/(decrease) in deferred revenue ................. 1,922 (731) (420)
(Decrease)/increase in other accrued expenses ........... (1,576) 2,291 1,034
Decrease/(increase) in notes receivable from
stockholders ........................................... 20 (50) --
--------- --------- ---------
Net cash used in operating activities ....................... (29,777) (27,849) (37,615)
--------- --------- ---------
Cash Flows from Investing Activities
Purchase of property and equipment ......................... (4,276) (3,175) (3,229)
Proceeds from the sale of property and equipment ........... -- 18 49
--------- --------- ---------
Net cash used in investing activities .................... (4,276) (3,157) (3,180)
--------- --------- ---------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock ................. 45 -- 247
Net proceeds from issuance of preferred stock .............. 53,725 5,447 --
Net proceeds from initial public offering, net of issuance
costs of $8,877 .......................................... -- 85,998 --
Net proceeds from issuance of short-term debt .............. -- 1,320 --
Net proceeds from issuance of long-term debt ............... 5,000 -- --
Payment of short-term debt ................................. -- (471) (849)
Payment on long-term debt, including capital lease
obligations .............................................. (479) (1,678) (9,778)
Exercise of stock options .................................. 59 41 178
Restricted cash movement ................................... (1,647) (3,139) 5,917
--------- --------- ---------
Net cash provided/(used)by financing activities ............ 56,703 87,518 (4,285)
--------- --------- ---------
Increase/(decrease) in cash and cash equivalents ........... 22,650 56,512 (45,080)
Cash and cash equivalents, beginning of period .............. 36,178 58,828 115,340
--------- --------- ---------
Cash and cash equivalents, end of period .................... $ 58,828 $ 115,340 $ 70,260
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Issuance of preferred stock warrants in connection with debt
facilities ............................................... $ 95 -- --
Interest paid .............................................. 296 $ 442 $ 318
Income taxes ............................................... -- 312 7
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
1. THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is a global supplier of fixed wireless communications access
systems that enable network operators to deliver bundled high-speed data and
voice services. The Company's systems are based on Code Division Multiple
Access ("CDMA") technology that can be deployed rapidly and cost effectively,
providing an alternative to traditional copper wire and fiber communications
networks. The Company's integrated solutions include software tools that
provide coverage and spectrum optimization and ongoing network management. To
facilitate the deployment and operation of its systems, the Company also offers
network installation, integration, training and support services. The Company's
main operations are based in Uxbridge, United Kingdom, with corporate
headquarters in Sunrise, Florida, U.S.A.
Effect of the three for one reverse split
On May 25, 2000 there was a three for one reverse split on the common
stock of the Company. For comparative purposes, in these financial statements
we have shown outstanding common stock numbers as if the split was retroactive.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
inter-company transactions and balances have been eliminated on consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fair value of financial instruments
The financial instruments of the Company consist mainly of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, promissory
notes, foreign currency forward contracts and foreign currency options. The
estimated fair values approximate amounts at which these financial instruments
could be exchanged in a current transaction between willing parties. Therefore,
fair values are based on estimates using present value and other techniques,
which are significantly affected by assumptions used concerning the amount and
timing of, estimated future cash flows and discount rates, which reflect
varying degrees of risk. Specifically, the fair value of long term debt
instruments reflects a current yield valuation based on a 5.56% borrowing rate
at December 31, 2000 and a 2.43% borrowing rate at December 31, 2001, the fair
value of foreign currency forward contracts reflect the present value of the
potential gain or loss if settlement were to take place on December 31, 2001,
and the fair value of option contracts reflect the cash flows due to or by the
company if settlement were to take place on December 31, 2001. Accordingly, the
estimates which follow, are not necessarily indicative of the amounts that the
company could potentially realize in a current market exchange.
F-6
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
At December 31, 2001 and 2000, the carrying amount of all financial
instruments approximates fair value with the following exceptions:
2000 2001
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ---------
Financial Liabilities
Long term debt due within one year ......... $ 5,723 $ 5,558 $1,340 $1,340
Long term debt ............................. 15,754 14,651 1,250 1,373
Derivative financial instruments and hedging activities
The Company enters into forward and option contracts to manage its
exposure to fluctuation in foreign exchange rates. The Company does not hold
any derivative instruments for trading purposes. As part of the Company's risk
management policy the Company assesses its foreign currency risk on each
transaction on a case-by-case basis. The Company will only enter into forward
and option contracts after taking into account the size of the transaction,
expected volatility of the currency and prevailing foreign currency exchange
rates.
On October 1, 2000, the Company adopted SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires enterprises to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The requisite accounting for changes in the fair value of a
derivative depends on whether it is designated and qualifies for hedge
accounting and the nature of the resulting designation.
Our foreign exchange option contracts are designated as hedging the
exposure to changes in the fair value of a recognized asset and the gain or
loss is recognized in income in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged.
Our foreign exchange forward contracts are designated as hedging the
exposure to variable cash flows of a forecasted transaction. The effective
portion of the derivatives gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into income when the
forecast transaction affects earnings. Any ineffective portion of the
derivatives gain or loss is reported in interest and other income as it arises.
In year 2001 we have no ineffective portion. Our cash flow hedges are being
used to manage our pound sterling foreign currency risk, primarily on our U.K.
based employee salaries and other U.K. expenses. Our U.K. salaries and expenses
are accounted for each month and therefore reclassification into earnings from
comprehensive income will occur every month.
In accordance with the provisions of SFAS No. 133, in 2000 the Company
recorded $441 of unrealized gains in accumulated other comprehensive income to
recognize at fair value all derivatives that are designated as cash flow
hedging instruments. The tax effects of comprehensive income or loss are not
considered material for the years ended December 31, 2000 and 2001. During 2001
the Company recorded a net unrealized gain in other comprehensive income of $17
related to derivatives that are designated as cash flow hedging instruments.
Based on the exchange rate at December 31, 2001, the Company would expect to
reclassify as gains to earnings during the next twelve months $458 from other
comprehensive income.
The foreign exchange forward contracts hedge our UK expenses through to
December 2002.
The total forward purchases of pounds sterling for the year ended December
31, 2001, was 21.5 million pounds sterling, and we paid expenses in local
currency of approximately 20.7 million pounds sterling over the same period.
F-7
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
The effectiveness of the contracts as a hedge was therefore 104% of
spending. The cost of the ineffectiveness was immaterial.
The fair value of foreign exchange forward and options contracts are
determined using published rates.
Inventories
Inventories are stated at the lower of cost or market value. Cost includes
all costs incurred in bringing each product to its present location and
condition, as follows:
Raw materials, consumables and goods for resale--average cost
Work in progress and finished goods--cost of direct materials, labor and
allocated manufacturing overhead
Property, plant and equipment
Property plant and equipment are stated at cost. Depreciation is provided
on all tangible fixed assets at rates calculated to write off the cost, less
estimated residual value based on prices prevailing at the date of acquisition,
of each asset evenly over its expected useful life, as follows:
Leasehold improvements--over the minimum lease term
Plant, machinery and equipment--over 2 to 5 years
Furniture and fixtures--over 4 to 5 years
Identifiable intangible assets
Identifiable intangible assets arose in connection with the simultaneous
formation of the Company and acquisition of a business unit of DSC
Communications Corporation. They are stated at fair value cost and include
developed technology, purchase contracts, patents and assembled workforce.
Identifiable intangible assets are amortized using the straight line method
over their estimated useful lives ranging from two to four years.
Goodwill arising on business combinations
The excess of the purchase price (including associated expenses) paid over
net assets of the business acquired is being amortized over its estimated
useful life of ten years on the straight-line method. The Company assess the
impairment of goodwill and identifiable intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
When we determine that the carrying value of goodwill and other intangible
assets may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we measure
F-8
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
any impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net goodwill and other intangible
assets amounted to $0.8 million as of December 31, 2001.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, the
Company will cease to amortize approximately $0.8 million of goodwill. We had
recorded approximately $0.1 million of amortization on these amounts during
2001 and would have recorded approximately $0.1 million of amortization during
2002. The Company is required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. We currently do
not expect to record an impairment charge upon completion of the initial
impairment review.
Restricted cash
Restricted cash consists of bank accounts set aside for the guarantees
described in note 10.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed", the Company reviews its long-lived assets for impairment when
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. This review consists of a comparison of the
carrying value of the asset with the asset's expected future undiscounted cash
flows. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flows exceed the carrying value of the asset, no
impairment is recognized. If the carrying value of the asset exceeds the
expected future cash flows, an impairment exists and is measured by the excess
of the carrying value over the fair value of the asset. Any impairment
provisions recognized are permanent and may not be restored in the future. No
impairment expense was recognized in 1999, 2000 or 2001.
Research and development
All research and development expenditures are charged to research and
development expense in the period incurred. Generally accepted accounting
principles require the capitalization of certain software development costs
after technological feasibility of the software is established. In the
development of the Company's new products and enhancements to existing
products, the technological feasibility of the software is not established
until substantially all product development is complete, including the
development of a working model. Internal software development costs that were
eligible for capitalization in 2000 and 2001 were insignificant and were
charged to research and development expense in the accompanying statements of
operations.
Revenue recognition
General
The company recognizes revenue pursuant to Staff Accounting Bulletin No.
101, as amended by SAB 101A and 101B "Revenue Recognition in Financial
Statements". Accordingly, revenues are recognized when all of the following
conditions are met:
o an arrangement exists with the customer,
o delivery has occurred or services have been rendered,
F-9
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
o the price for the product or service is fixed and determinable, and
o collection of the receivable is reasonably assured.
Product Revenue
Revenue from product sales, including sales to distributors and resellers,
is generally recognized at the time the product is shipped to the customer.
Revenue is deferred when customer acceptance is required, rights of return
exist, or other significant obligations remain that are essential to the
functionality of the delivered products. Revenue is recognized when these
conditions have been satisfied. The estimated cost of any post-sale
obligations, including basic product warranties, is accrued at the time revenue
is recognized based on historical experience.
Service Revenue
Revenue from time-and-material service contracts is recognized once the
services have been performed. Revenue from service contracts that relate to a
period of cover is recognized ratably over the given contract period. Revenue
is recognized on fixed-price service contracts using the percentage of
completion method unless it is not possible to make reasonable estimates under
that method, in which case revenue is recognized on a completed contract basis.
Revenue Arrangements that include Multiple Deliveries
In certain cases, the company enters into agreements with customers
whereby it is obligated to deliver multiple products and/or multiple services
(multiple deliveries). In these transactions, the Company allocates the total
revenue to be earned under the arrangement among the various elements based on
their relative fair value. Revenue for these transactions is recognized on each
element when the revenue recognition criteria have been met for that element.
Revenue is recognized for delivered products and services only if: (i) the
above Product Revenue or Service Revenue criteria are met; (ii) undelivered
products or services are not essential to the functionality of the delivered
elements, (iii) payment for the delivered products or services is not
contingent upon delivery of the remaining products or services; and (iv) the
fair value for each of the undelivered elements is known.
Warranty
The Company provides a limited warranty for periods usually ranging from
twelve to twenty-four months, to all purchasers of its new equipment. Warranty
expense is accrued at the date revenue is recognized on the sale of equipment
at a fixed percentage of the equipment value and amortized over the warranty
period. The warranty expense is recognized as a cost of revenue. The percentage
applied is based on historic analysis of costs to date. Management believes
that the amounts provided for are sufficient for all future warranty cost on
equipment sold through December 31, 2001.
Shipping and handling costs
Shipping and handling costs are included within cost of sale.
Foreign currency transactions
Transactions in currencies other than U.S. dollars are converted at the
monthly average exchange rate in effect on the date of the transaction. The
group's functional currency is the U.S. dollar.
Monetary assets and liabilities denominated in currencies other than U.S.
dollars are translated into U.S. dollars at the rate of exchange on the balance
sheet date. Transactional gains and losses arising from transactions not
denominated in U.S. dollars are recognized in the consolidated statement of
operations as `Other income or expense'.
F-10
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
Advertising costs
Advertising costs are expensed at the time the promotion is held or the
advertisement is first aired. Advertising expenses amounted to $1,176 in 2001,
$1,043 in 2000 and $264 in 1999. Prepaid advertising expenditure amounted to
$141 at December 31, 2000 and $132 at December 31, 2001.
Comprehensive Income
The Company reports comprehensive income or loss in accordance with the
provisions of Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income or loss, as defined, includes all changes in equity (net assets) during
a period from non-owner sources. Tax effects of comprehensive income or loss
are not considered material for any period. There were no items of
comprehensive income in 1999.
Pension, post retirement and post employment benefits.
The Company contributes to a defined contribution pension plan for all
eligible employees. The Company recorded pension expense of $445, $660 and $645
in 1999, 2000 and 2001, respectively.
Concentration of credit risk
Financial instruments, which potentially subject Airspan to concentration
of credit risk, consist primarily of cash and cash equivalents and accounts
receivable. Airspan places its cash equivalents and short-term investments only
in highly rated financial instruments. Airspan's accounts receivable are
derived from sales of wireless local loop products and approximately 96%, 89%
and 87% of product sales were to non U.S. customers for the year ended December
31, 1999, 2000 and 2001 respectively. Airspan generally requires a dollar
irrevocable letter of credit for the full amount of significant sales to be in
place at the time of shipment, except in cases where credit risk is considered
to be acceptable. Airspan derived 59% of revenue from the top three customers
in 1999, 54% of revenue from the top three customers in 2000 and 24.1% of
revenue from the top three customers in 2001. In 1999 Airspan received 66% of
goods for resale from two suppliers, DSC Communications Ireland and Flextronics
International, and 69% in 2000 from one supplier, Flextronics International. In
2001 the Company received 79% of goods for resale from two suppliers,
Flextronics International and Universal Scientific Industrial Co. These
suppliers act as sub-contractors to manufacture a substantial part of Airspan's
product for resale.
Stock based compensation
Stock options are granted under various stock compensation programs to
employees and independent directors. The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). In rare instances, stock
is issued to non-employees as consideration in lieu of payment. The Company
recognizes compensation expense for options granted to non-employees in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"), and Emerging
Issues Task Force Consensus 96-18, "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services".
Segment reporting
During the periods, the Company operated as a single segment, being the
development and supply of wireless local loop systems and solutions.
F-11
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
Reclassifications
Certain prior-year amounts have been reclassified to conform to the
current year presentations. The reclassification includes bad debts on the
income statement, which has been separately identified due to materiality in
size in 2001, and common stock par value, additional paid in capital and
consolidated statement of shareholders equity on the balance sheet arising from
reclassification on change of state of incorporation in 1999.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The
new rules require business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and goodwill acquired
after this date will no longer be amortized. On adoption of FAS 142, on January
1, 2002, all goodwill is required to be subject to annual impairment tests and
not to be amortized. All other intangible assets will continue to be amortized
over their estimated useful lives. At December 31, 2001 we hold $25 of
intangible assets and $759 of Goodwill. The Company does not expect the
adoption of SFAS No. 141 or SFAS No. 142 to have a material impact on the
Company's financial position, results of operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective
for all fiscal years beginning after June 15, 2002, with early application
permitted. The Company does not expect the adoption of SFAS No. 143 to have a
material impact on the Company's financial position, results of operations, or
cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets", which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. This statement
is effective for fiscal years beginning after December 15, 2001. The Company
does not expect the adoption of SFAS No. 144 to have a material impact on the
Company's financial position, results of operations or cash flows.
2. THE ACQUISITION OF A BUSINESS UNIT OF DSC COMMUNICATIONS CORPORATION
The Company was formed simultaneously with the acquisition of a business
unit of DSC Communications Corporation, which began development of fixed
wireless access systems in 1994. In accordance with the terms of the
acquisition, the assets and liabilities of the business unit were transferred
from DSC to the Company on January 26, 1998.
Venture capital raised:
Issue of Series A stock for cash ......... $30,000
Stock issue costs ........................ (575)
-------
29,425
-------
Consideration issued to DSC in exchange for the business unit and costs
incurred:
F-12
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
Promissory note issued ................................ 15,016
Fair value of Preferred Series A stock issued ......... 10,000
Direct and incremental acquisition costs .............. 100
------
25,116
------
Total initial assets of the Company .................. $54,541
=======
As consideration for the acquisition of the business unit, Airspan issued
10,000,000 shares of Preferred Series A stock to DSC. Total direct costs
relating to the acquisition and the issuance of venture capital were $675. Of
this, $575 has been accounted for as a reduction in the proceeds of Series A
stock as this represents the cost of issuing the shares. The remaining $100
represents other direct and incremental acquisition costs and has been included
in the cost of the acquisition.
The purchase price allocation was as follows:
Inventory ........................................... $ 4,796
Accounts receivable ................................. 1,225
Tangible fixed assets ............................... 2,706
Accounts payable .................................... (4,161)
--------
4,566
Goodwill and identifiable intangible assets ......... 20,550
--------
$ 25,116
========
The allocation of the excess of the purchase price over the net tangible
assets acquired to goodwill and identifiable intangibles was as follows:
Amortization
allocated in
Value years
--------- -------------
Assembled workforce ......................... $ 1,200 4
Purchase contracts .......................... 2,083 2
Patent technology ........................... 119 2
Developed technology ........................ 1,900 2
In process research and development ......... 14,000 --
Goodwill .................................... 1,248 10
-------
$20,550
=======
A detailed review was undertaken to arrive at these fair values by
management, who have primary responsibility, to estimate the fair values and
remaining economic lives for all material intangible assets, including any
in-process technology, purchased from DSC Communications Corporation in
accordance with "Fair Value" as referred to in APB Opinion No. 16.
The amount allocated to in-process research and development was recorded
as a one-time charge to operations in 1998 because the technology was not fully
developed and had no future alternative use. Management's expectations of the
future revenue streams to be generated from this technology meant that a
material amount of the purchase price was allocated to in-process research and
development. The product under development was 80% complete at acquisition,
with an estimated $4.1 million of cost required to complete the project
associated with final development, system verification and test, documentation
and release to manufacturing processes.
The acquired in-process research and development represented the
development of technologies associated with a new generation of the AS4000
System, which allowed a significantly larger number of
F-13
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
subscribers to be supported on a single radio channel. This project was
materially completed by March 31, 1998, with the first shipment in June 1998
and revenue first recognized in December 1998.
The appraisal method used to value the in-process technology was the
Income Approach where the valuation is focused on the income-producing
capability of the Demand Assigned product. The premise being that the value of
an asset can be measured by the present worth of the net economic benefit to be
received over the life of the asset. Expected cash flows attributable to the
demand assigned product over its product life cycle were converted to present
value through discounting. The discounting process used a rate of return that
accounted for the time value of money and risk factors.
The significant assumptions made in the valuation were as follows:
o The valuation was performed as at January 31, 1998, the date of
acquisition, with the knowledge and assumptions held at that date
o Revenue streams were expected to commence in the second half of 1998
and carry on through to 2003
o Average sales prices would be significantly lower than that of the
older generation product
o Forecasted average sales prices and costs of goods relating to the new
product offering would decrease over the life of the product. The
product costs decreasing at a greater rate, leading to an improvement
in margins for future years
o Risk adjusted discount factor used was 28%, assessed to be 100 basis
points greater than the Company's weighted average cost of capital to
allow for the required return on in-process technology
The developed technology relates to the older generation product, designed
to provide a fixed network service.
The purchase contracts represented contractual obligations as of the
acquisition date to provide existing products to customers in the future. The
revenue would not be recognized until such delivery occurred. The products were
to be delivered during fiscal 1998 and 1999. To arrive at an indication of
value, the benefit was quantified over the life of the contract through
application of the Income Approach.
3. TAXATION
The income tax benefit recorded of $3,018 relates to $2,773 income tax
benefit in the UK offsetting income tax incurred on the extraordinary gain of
$2,773 against tax losses incurred in the UK, and a $245 reclaim of US federal
income taxes paid in 1998 and 1999, primarily attributable to intercompany
interest income, against tax losses generated in the USA.
The Company did not record an income tax benefit for the remainder of the
tax losses generated in the U.K. because it has experienced operating losses
since inception. At December 31, 2001 the Company has U.K. income tax net
operating loss carry-forwards of $80,000, which do not expire; $7,500 U.S.
income tax net operating loss carry-forwards that expire in 20 years; and
Australian income tax net operating loss carry-forwards of $1,000, which do not
expire.
F-14
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
Significant components of the Company's deferred tax assets are as
follows:
December 31, December 31,
2000 2001
-------------- -------------
Net operating loss carry-forwards ......... $ 20,252 $ 26,932
Accruals and reserves ..................... 90 95
Fixed assets .............................. 29 980
--------- ---------
20,371 28,007
Valuation allowance ....................... (20,371) (28,007)
--------- ---------
$ -- $ --
========= =========
Since the Company's utilization of these deferred tax assets is dependent
on future profits, a valuation allowance equal to the net deferred tax assets
has been provided following the criteria under SFAS 109 as it is considered
more likely than not that such assets will not be realized.
4. PROPERTY, PLANT AND EQUIPMENT
December 31, December 31,
2000 2001
-------------- -------------
Plant, machinery and equipment ......... $ 10,505 $ 13,399
Furniture and fixtures ................. 1,053 762
Leasehold improvements ................. 2,021 2,500
-------- ---------
13,579 16,661
Accumulated depreciation ............... (6,779) (10,377)
-------- ---------
$ 6,800 $ 6,284
======== =========
Depreciation expense totaled, $2,345 for the year ended December 31, 1999,
$3,108 for the year ended December 31, 2000 and $3,598 for year ended December
31, 2001.
5. INTANGIBLE ASSETS
December 31, December 31,
2000 2001
-------------- -------------
Assembled workforce ................... $ 1,200 $ 1,200
Customer contracts .................... 2,083 2,083
Patent technology ..................... 119 119
Developed technology .................. 1,900 1,900
Goodwill .............................. 1,248 1,248
-------- --------
6,550 6,550
Less accumulated amortization ......... (5,341) (5,766)
-------- --------
Net intangible assets ................. $ 1,209 $ 784
======== ========
Amortization of intangible assets amounted to $2,476 for the year ended
December 31, 1999, $595 for the year ended December 31, 2000 and $425 for the
year ended December 31, 2001.
F-15
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
6. INVENTORY
Inventory consists of the following:
December 31, December 31,
2000 2001
-------------- -------------
Purchased parts and materials .......... $5,713 $ 5,488
Finished goods and consumables ......... 2,453 6,419
------ -------
$8,166 $11,907
====== =======
7. ACCOUNTS RECEIVABLE
Accounts receivable consists of:
December 31, December 31,
2000 2001
-------------- -------------
Amounts due within one year .......... $ 15,853 $ 26,076
Amounts due after one year ........... -- 648
-------- --------
Allowance for doubtful debts ......... (1,371) (2,601)
-------- --------
$ 14,482 $ 24,123
======== ========
During 2001 the Company entered into a contract with one customer for
which extended payment terms were granted up to 24 months from shipment.
Accounts receivable balances that are due after more than 12 months are
classified under non current assets.
8. OTHER ACCRUED EXPENSES
December 31, December 31,
2000 2001
-------------- -------------
Warranty ............................... $ 546 $ 761
Restructuring .......................... -- 541
Other .................................. 3,174 3,447
------ ------
$3,720 $4,779
====== ======
9. ACCRUED RESTRUCTURING CHARGES
In the third quarter of 2001, the Company implemented a restructuring
program to reduce operating expenses and recorded a charge of $1.2 million in
relation to this program. Included in this charge are costs related to excess
facilities and severance. The Company initially expected to sublease the excess
facility space by the end of the first quarter of 2002. Due to the severity of
the economic slow down, it is now expected to be sublet by the end of 2002. All
severance payments will be made by the end of the third quarter 2002. The total
number of employees being terminated as part of this plan is 30. At December
31, 2001, four of these employees were still working in the Company.
F-16
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
As of December 31, 2001 the restructuring charge and its utilization is
summarized as follows:
Remaining
Initial Accrued Charged Accrued
Restructuring against Restructuring
Charge Liability Charge
----------------- ----------- --------------
Facility related ............ $ 551 $244 $307
Severance and other ......... 684 450 234
------ ---- ----
$1,235 $694 $541
====== ==== ====
Included in the third-quarter 2001 facility restructuring charge is $0.2
million for the write down of certain fixed assets, mainly furniture and
fixtures. All other charges will result in direct cash outlays. These assets
will be disposed of as part of the sublease program, once the office is sublet.
The realizable value of these assets has been estimated from the expected
market price of similar assets.
10. LONG-TERM DEBT
Long-term debt consists of:
December 31, December 31,
2000 2001
-------------- -------------
Promissory note payable to DSC, bearing interest at 7% ......... $18,394 --
Promissory note, bearing interest at 9% ........................ 583 $ 90
Subordinated promissory notes, bearing interest at 6% .......... 2,500 2,500
------- ------
$21,477 $2,590
======= ======
The Company negotiated a settlement with DSC Telcom L.P. in the first
quarter of 2001. Under the settlement agreement the Company agreed to pay $9.3
million in 2001 in exchange for complete forgiveness of the debt which would
have been repayable in 36 equal monthly installments commencing February 1,
2001. This gave rise to an extraordinary gain of $9.2 million, which was
partially offset by tax on the gain of $2.7 million to show an extraordinary
gain, net of taxes, of $6.5 million. In addition, the Company and DSC Telcom
L.P. mutually released each other from certain claims made by the parties
relating to the formation of Airspan in January 1998.
On March 19, 1999 the Company entered into two Loan Agreements to borrow
$2,500 in installments of $1,250 each. The Company executed the borrowing of
$1,250 against this Loan Agreement on March 29, 1999 as evidenced by the
issuance of a promissory note. The promissory note is repayable in 30 equal
monthly installments of $46 commencing May 1, 1999, an installment of $94 on
October 1, 2001 and a final installment to be paid on May 1, 2002. The
promissory note has an interest rate of 9% per annum.
On March 19, 1999 the Company also entered into a subordinated loan and
security agreement to borrow $3,750 in increments of $1,250 each. The Company
executed the loan on March 29, 1999 by the issuance of three subordinated
promissory notes of $1,250. Two of the subordinated promissory notes have the
same repayment conditions of 54 monthly installments consisting of one monthly
installment of interest only of $0.4 (paid April 1999), 52 monthly installments
of interest only of $6 (starting May 1, 1999) and one final balloon payment of
$1,256 on September 1, 2003. The Company is required to prepay one of the notes
in 2002 under the terms of the lease agreement because the security it
finances, a guarantee to a supplier, has lapsed. Both subordinated promissory
notes have an interest rate of 6% per annum. The third subordinated promissory
note was payable in 21 monthly installments consisting of one monthly
installment of interest only of $0.4 (paid April 1999), 19 monthly installments
of interest only of $6 (starting May 1, 1999) and one final balloon payment of
$1,256 made on December 1, 2000. The promissory note had an interest rate of 6%
per annum.
F-17
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
Long term debt maturities at December 31, 2001 are as follows:
2002 ......................................... $1,340
2003 ......................................... 1,250
------
$2,590
======
11. COMMITMENTS
There were no capital lease obligations at December 31, 2001.
The net book value of machinery and equipment under capital lease
obligations, at December 31, 2000 was $16 and at December 31, 2001 was $NIL.
Airspan has $234 in commitments for the acquisition of property, plant and
equipment at December 31, 2001.
Airspan has commitments with its two main sub contract manufacturers
Flextronics and USI, under various purchase order and forecast arrangements, to
a value of $4,100.
Airspan Networks Inc. has entered into various operating lease agreements,
primarily for office space, warehouse space and vehicles. Rent expense for the
year ended December 31, 1999 was $1,554, $1,800 for the year ended December 31,
2000 , and $2,531 for the year ended December 31, 2001.
Future minimum lease payments for assets under non-cancelable operating
lease agreements with original terms of more than one year as of December 31,
2001 are as follows:
2002 .............................................. $ 1,791
2003 .............................................. 1,576
2004 .............................................. 1,295
2005 .............................................. 1,273
2006 .............................................. 1,158
Thereafter ........................................ 3,852
-------
$10,945
=======
The Company had bank guarantees with its landlords, a supplier and
customers totaling $7,207 at December 31, 2000 and $1,290 at December 31, 2001.
The guarantees secure payment or performance obligations of the Company under
contracts. The Company has pledged cash to the banks as collateral for the
guarantees in the same amounts as the guarantees. These pledges have been
classified as restricted cash.
12. SEGMENTS
As a developer and supplier of fixed wireless communications access
systems and solutions, the Company has one reportable segment. The revenue of
this single segment is comprised primarily of revenue from products and, to a
lesser extent, services. All of the Company's revenue is generated from the
United Kingdom operations.
F-18
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
An analysis of revenue by geographical market is given below:
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
United States ..................... $ 487 $ 3,465 $ 4,745
Asia Pacific ...................... 4,928 12,533 13,685
Europe ............................ 5,151 12,786 6,108
Africa and Middle East ............ 1,725 1,112 10,083
South America & Caribbean ......... 189 383 2,801
------- ------- -------
$12,480 $30,279 $37,422
======= ======= =======
For the year ending December 31, 1999 the Company had revenues from
transactions with three customers, which amounted to 27%, 18% and 13% of total
revenues. For the year ended December 31, 2000 the Company had revenues from
transactions with three customers, which amounted to 25%, 18% and 10% of total
revenues. During the year ended December 31, 2001 the Company had no customers
whose revenue was greater than 10% of the year's total.
Substantially all of the Company's assets other than most of the cash and
certain intangibles are located within the United Kingdom and Ireland.
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Long-lived assets:
Property, plant and equipment, net:
United States ...................... $ 11 $ 142 $ 273
United Kingdom and Ireland ......... 6,740 6,658 5,831
Rest of the world .................. -- -- 180
------- -------- --------
6,751 6,800 6,284
------- -------- --------
Intangible assets, net:
United States ...................... 1,092 884 759
United Kingdom and Ireland ......... 712 325 25
------- -------- --------
1,804 1,209 784
------- -------- --------
Total long-lived assets .......... $ 8,555 $ 8,009 $ 7,068
======= ======== ========
Total assets:
United States ...................... $55,464 $106,523 $ 39,874
United Kingdom and Ireland ......... 32,756 50,811 79,367
Rest of the world .................. -- -- 453
------- -------- --------
$88,220 $157,334 $119,694
======= ======== ========
13. STOCK OPTIONS AND COMMON STOCK
On February 1, 1998, the Board of Directors authorized the establishment
of a non-qualified employee stock options plan whereby the Company may grant
employees stock options to purchase up to 2,791,667 shares of common stock.
Under subsequent amendments to the 1998 plan the Board of Directors approved an
increase in the number of shares of common stock reserved under the plan from
2,791,667 to 4,591,667 in May 2000 and from 4,591,667 to 6,091,667 in February
2001.
The exercise price of each option is equal to the market price of the
Company's common stock on the date of grant. Prior to the Company's initial
public offering, the Board of Directors of the Company
F-19
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
determined the market price. Since the offering it is taken as the closing
price from the previous day's closing price on the Nasdaq. Employee stock
options generally vest over a four-year period and expire on the tenth
anniversary of their issuance. The total number of options granted to employees
under the plans were 537,334 in 1999, 769,585 in 2000 and 1,823,265 in 2001.
Also, within the plans described above, the Company granted non-qualified
common stock options to directors under various discrete option agreements. The
number of non-qualified options granted to directors were 96,666, 1,100,000 and
685,000 in 1999, 2000 and 2001, respectively.
The Company has a full recourse note receivable from a director relating
to the exercise of such options in the amount of $130 outstanding at December
31, 2000 and December 31, 2001. Such options may be exercised for the issuance
of restricted stock to the extent such options are not vested. Restrictions on
such stock would lapse over the same four year vesting schedule as the
underlying option. In the event of termination, the Company has a repurchase
right determined at the original exercise price.
In December 1999 the Company granted options to purchase 5,000 shares of
common stock to a consultant at an exercise price of $6.00 per share. These
options were granted in exchange for consulting services. In July 2000 the
Company granted non-qualified options to purchase 30,000 shares of common stock
to an agent at an exercise price of $15.00 per share. These options were
granted in exchange for release from a previous distributor agreement. The
Company valued all these options using the Black-Scholes option-pricing model.
As such, $93 was charged to operations in 1999 and $203 was charged to
operations in 2000 to reflect the estimated fair value of the underlying
options. There was no charge to operations in 2001. All such options remain
unexercised as of December 31, 2001. There were no options granted to
consultants during 2001.
At December 31, 2001 the Company had reserved 942,348 of its Common Stock
for purchase upon exercise of options to be granted in the future.
The following table sets forth the activity for all common stock options:
Weighted
Number of Average
Shares Exercise Price
------------- ---------------
Outstanding, December 31, 1998 ......... 1,217,167 $ 0.30
Granted ............................... 639,000 2.32
Forfeited ............................. (69,548) 0.50
Exercised ............................. (196,720) 0.30
---------
Outstanding, December 31, 1999 ......... 1,589,899 1.11
Granted ............................... 1,899,585 10.57
Forfeited ............................. (331,724) 3.95
Exercised ............................. (128,944) 0.37
---------
Outstanding, December 31, 2000 ......... 3,028,816 6.75
Granted ............................... 2,508,265 3.20
Forfeited ............................. (311,961) 3.50
Exercised ............................. (270,774) 0.66
---------
Outstanding, December 31, 2001 ......... 4,954,346 $ 5.47
========= ======
F-20
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
The following table sets forth stock options outstanding at December 31,
2001:
Outstanding Options Exercisable Options
Weighted Average Weighted Average
-------------------------- -------------------------
Exercise Remaining Remaining
Price Exercise Contractual Exercise Contractual
Ranges Number Price Life Number Price Life
- ----------------------- ------------ ---------- ------------- ------------ ---------- ------------
$0.30 ................ 560,051 $ 0.30 6.15 515,336 $ 0.30 6.14
0.54 ................. 120,195 0.54 7.18 80,327 0.54 7.17
1.17 -- 1.67 ......... 9,361 1.37 8.52 2,361 1.17 7.42
1.79 -- 2.61 ......... 854,929 1.93 9.73 32,372 1.85 9.26
2.83 -- 3.62 ......... 631,499 3.16 8.63 131,333 3.57 7.82
4.38 -- 5.93 ......... 1,053,950 4.44 9.10 9,214 4.51 9.08
6.00 -- 6.18 ......... 553,833 6.00 8.81 72,576 6.00 8.73
7.50 ................. 119,361 7.50 8.16 54,280 7.50 8.16
9.60 ................. 261,666 9.60 8.45 99,301 9.60 8.45
15.00 ................ 789,501 15.00 8.54 542,741 15.00 8.54
--------- ------ ---- ------- ------ ----
Total ................. 4,954,346 $ 5.47 8.59 1,539,841 $ 6.95 7.61
========= ====== ==== ========= ====== ====
The Company applies APB 25 in accounting for its stock options and
warrants. On a pro forma basis, had compensation cost been determined on the
basis of fair value determined under the Black-Scholes method pursuant to SFAS
123, net loss would have been as follows for the years ended December 31, 1999,
2000 and 2001:
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Net loss, as reported ............. $ (29,449) $ (25,637) $ (18,844)
Pro forma net loss ................ (29,480) (36,412) (25,036)
Net loss per share ................ (33.84) (1.44) (0.54)
Pro forma net loss per share ...... (33.87) (2.05) (0.72)
The weighted average fair value of the options at their grant date was
$0.60 during 1999, $5.80 during 2000 and $2.54 during 2001. The estimated fair
value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted average of the
assumptions used in the model:
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Risk-free interest rate ............ 5.60% 6.13% 4.4%
Expected years until exercised ..... 5 5 5
Expected dividend yield ............ -- -- --
Expected volatility ................ -- 50% 108%
The pro forma effect of applying SFAS 123 is not likely to be
representative of the effects on reported net income or loss for future years.
F-21
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
In July 2001 the Board of Directors approved a plan to allow eligible
employees to exchange outstanding options granted between and including October
1, 1999 and December 13, 2001 under the Airspan Networks Inc. 1998 stock option
and restricted stock plan and the 2001 supplemental stock option plan for new
options.
The number of new options offered in exchange for eligible options that
were to be cancelled was as follows:
(1) For eligible options with an exercise price of US$4.00 or more, 4 new
options for every 5 eligible options cancelled;
(2) For eligible options issued before November 1, 2001 with an exercise
price of less than US$4.00, 3 new options for every 4 eligible options
cancelled; and
(3) For eligible options issued on or after November 1, 2001, 1 new option
for every 1 eligible option cancelled in the offer.
The new options will have the same terms and conditions as the related
eligible options cancelled in the offer, except for the following:
(1) The exercise price of the new options will be equal to 100% of the
closing market price of one of our common shares on the date of grant
of the new options.
(2) The new options will have a term of ten years from the original date
of grant of the eligible options.
(3) The new options will have the same vesting schedule as the related
eligible options cancelled in the offer.
The offer of exchange closed on January 18, 2002. On the closing, 665,796
options were cancelled at a weighted average price of $6.64. New options will
be granted on July 19, 2002 to those eligible employees who elected to
participate in this offer.
In 2000, the Company adopted the 2000 Employee Stock Purchase Plan
("ESPP"), which is intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986. As of December 31, 2001,
342,906 shares of common stock were reserved for issuance under the ESPP. The
first offering commenced on July 19, 2000, and continued through July 31, 2001.
Thereafter, offerings shall commence on each subsequent August 1 and shall last
for a period of one year, and the final offering under this Plan shall commence
on August 1, 2005 and terminate on July 31, 2006.
On August 1, 2001, the Company issued 157,094 shares at $1.57 per share to
employees participating in the ESPP.
14. CONVERTIBLE PREFERRED STOCK
The holders of the $1.00 Series A Convertible Preferred Stock (Series A
Stock) and $1.75 Series B Convertible Preferred Stock (Series B Stock) and
$2.50 Series C Convertible Preferred Stock (Series C Stock) all converted to
common stock on a three for one basis upon the closing of a qualified initial
public offering. As at December 31, 2001 there is no issued Convertible
Preferred Stock.
15. STOCK WARRANTS
As of December 31, 2001, in addition to the option plans discussed above,
Airspan has various warrants outstanding to purchase 83,333 shares of the
Company's common stock at exercise prices of $5.25 per share which were issued
in connection with debt facilities and lease agreements. As of December 31,
2001 all of these warrants were currently exercisable. These warrants expire on
July 19, 2003. The number
F-22
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
of shares of Common Stock to be obtained upon exercise of certain of these
warrants are subject to adjustment under certain conditions. The estimated fair
value of the warrants, determined based on the Black-Scholes valuation model,
was $95. The value of these warrants was recorded as deferred loan costs and
are amortized over the life of the loan.
16. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase.
Shares associated with stock options, warrants and the convertible preferred
stock are not included in the calculation of diluted net loss per share because
they are antidilutive. As described above, each share of convertible preferred
stock automatically converted to common stock upon the completion of the
Company's initial public offering. Pro forma net loss per share data has been
determined as if each share of convertible preferred stock had converted to
common stock at the time of issuance.
The following table sets forth the computation of basic and diluted net
loss per share and pro forma basic and diluted net loss per share for the
periods indicated:
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 2000 2001
-------------- -------------- -------------
Numerator:
Loss before tax and extraordinary item ...................... $ (29,349) $ (25,642) $ (28,333)
Income taxes ................................................ (100) 5 3,018
Loss before extraordinary item .............................. (29,449) (25,637) (25,315)
Extraordinary item, net of taxes ............................ -- -- 6,471
Net loss .................................................... $ (29,449) $ (25,637) $ (18,844)
=========== =========== ===========
Denominator:
Weighted average common shares outstanding .................. 1,231,728 18,014,913 34,902,325
Less weighted average shares of restricted stock ............ (361,400) (217,014) (92,014)
----------- ----------- -----------
Denominator for basic and diluted calculations .............. 870,328 17,797,899 34,810,311
Weighted average pro forma conversion of convertible
preferred Stock ............................................ 20,575,794 13,365,675 --
----------- ----------- -----------
Denominator for pro forma basic and diluted calculation ..... 21,446,122 31,163,574 34,810,311
=========== =========== ===========
Earnings per share -- basic and diluted:
Loss before tax and extraordinary item ...................... $ (33.72) $ (1.44) $ (0.81)
Income tax credit ........................................... $ (0.12) -- $ 0.08
Loss before extraordinary item .............................. $ (33.84) $ (1.44) $ (0.73)
Extraordinary item, net of taxes ............................ -- -- $ 0.19
Net Loss per share:
Basic and diluted ........................................... $ (33.84) $ (1.44) $ (0.54)
=========== =========== ===========
Pro forma basic and diluted ................................. $ (1.37) $ (0.82) $ (0.54)
=========== =========== ===========
There were 1,589,899 stock options, 249,998 Series B Convertible stock
warrants and 78,571,429 shares of convertible preferred stock outstanding at
December 31, 1999, and 3,028,816 stock options, 83,333 Common stock warrants
and no shares of convertible preferred stock outstanding at December 31,
F-23
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
2000 and 4,954,346 stock options, 83,333 common stock warrants and no shares of
convertible preferred stock at December 31, 2001 that were excluded from the
computation of diluted net loss per share as their effect was antidilutive. If
the Company had reported net income, the calculation of these per share amounts
would have included the dilutive effect of these common stock equivalents using
the treasury stock method for stock options and warrants using the if converted
method for convertible preferred stock.
17. PAR VALUE
The Company's common stock originally had a par value of $0.01. On August
6, 1999, the Company reincorporated from Delaware to Washington. In connection
with this reincorporation, the par value of the common stock was changed to
$0.0001. As a result of the reverse split described in note 1, the par value of
common stock is now $0.0003.
18. RELATED PARTY TRANSACTIONS
Airspan paid $263 in 1999 and $240 in 2000 to SeaPoint Ventures for
executive management and accounting services. Thomas Huseby was chairman of the
Company's board of directors in 1998, 1999 and part of 2000 and is a general
partner of SeaPoint Ventures. No payments were made to SeaPoint Ventures in
2001 other than Thomas Huseby's director's fees as disclosed in the proxy
statement.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents our consolidated results for each of the
eight quarters ending December 31, 2001. The information for each of these
quarters is unaudited and has been prepared on the same basis as our audited
consolidated financial statements appearing elsewhere in this Form 10-K. In the
opinion of management, all necessary material adjustments have been included to
present fairly the unaudited quarterly results when read in conjunction with
our audited financial statements and related notes.
Quarter Ended
-----------------------------------------------
Apr. 2, July 2, Oct. 1, Dec. 31,
2000 2000 2000 2000
----------- ----------- ----------- -----------
($ in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenue .......................... $ 5,661 $ 6,862 $ 8,801 $ 8,955
Cost of Revenue .................. 3,530 4,469 5,546 5,237
Inventory Provision .............. -- -- -- --
--------- --------- --------- ---------
Gross Profit ..................... 2,131 2,393 3,255 3,718
Operating Expenses ...............
Research and Development ........ 4,199 4,194 4,355 3,998
Sales and Marketing ............. 2,982 3,335 3,443 4,537
Bad Debt Reserve ................ 117 39 57 (152)
General and Administration ...... 2,243 2,105 2,330 2,690
Amortization of Intangibles ..... 276 105 108 106
Restructuring provision ......... -- -- -- --
--------- --------- --------- ---------
Total Operating Expense ......... 9,817 9,778 10,293 11,179
--------- --------- --------- ---------
Loss from Operations ............. (7,686) (7,385) (7,038) (7,461)
Quarter Ended
------------------------------------------------
Apr. 2, July 1, Oct. 1, Dec. 31,
2001 2001 2001 2001
----------- ----------- ------------ -----------
($ in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenue .......................... $ 10,051 $ 8,618 $ 8,597 $ 10,156
Cost of Revenue .................. 5,964 5,683 5,028 6,616
Inventory Provision .............. -- -- 1,417 --
-------- --------- ---------- --------
Gross Profit ..................... 4,087 2,935 2,152 3,540
Operating Expenses ...............
Research and Development ........ 4,045 3,902 3,672 3,048
Sales and Marketing ............. 4,426 4,466 3,530 3,082
Bad Debt Reserve ................ (289) (102) 1,040 558
General and Administration ...... 2,859 2,867 2,668 2,341
Amortization of Intangibles ..... 106 106 106 107
Restructuring provision ......... -- -- 1,235 --
-------- --------- ---------- --------
Total Operating Expense ......... 11,147 11,239 12,251 9,136
-------- --------- ---------- --------
Loss from Operations ............. (7,060) (8,304) (10,099) (5,596)
F-24
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
(in thousands, except for share and per share data)
Quarter Ended
-------------------------------------
Apr. 2, July 2, Oct. 1,
2000 2000 2000
----------- ------------- -----------
($ in thousands, except per share
data)
Other Income (expense):
Interest expense ................... (473) (399) (407)
Interest and other income .......... 1,111 750 1,508
----- ---- -----
Loss before income taxes ........... (7,048) (7,034) (5,937)
------ ------ ------
Income Tax (charge)/credit ......... (16) -- 16
------ ------ ------
Loss before extraordinary item ..... (7,064) (7,034) (5,921)
------ ------ ------
Extraordinary item
Gain on extinguishment of
debt ............................ -- -- --
------ ------ ------
Income tax charge ................. -- -- --
------ ------ ------
Gain after tax ..................... -- -- --
------ ------ ------
Net (Loss)/Profit .................. $ (7,064) $ (7,034) $ (5,921)
======== ======== ========
Loss before extraordinary item
per share, basic and diluted ...... $ (6.50) $ (6.21) $ (0.17)
Net loss per share basic and
diluted ........................... $ (6.50) $ (6.21) $ (0.17)
Quarter Ended
--------------------------------------------------------------
Dec. 31, Apr. 2, July 1, Oct. 1, Dec. 31,
2000 2001 2001 2001 2001
------------ ----------- ----------- ----------- -------------
($ in thousands, except per share data)
Other Income (expense):
Interest expense ................... (399) (191) (73) (54) (8)
Interest and other income .......... 2,237 1,361 648 714 329
------ ------ ------ ------ -------
Loss before income taxes ........... (5,623) (5,890) (7,729) (9,439) (5,275)
------ ------ ------ ------ -------
Income Tax (charge)/credit ......... 5 -- 2,773 -- 245
------ ------ ------ ------ -------
Loss before extraordinary item ..... (5,618) (5,890) (4,956) (9,439) (5,030)
------ ------ ------ ------ -------
Extraordinary item
Gain on extinguishment of
debt ............................ -- -- 9,244 -- --
------ ------ ------ ------ -------
Income tax charge ................. -- -- (2,773) -- --
------ ------ ------ ------ -------
Gain after tax ..................... -- -- 6,471 -- --
------ ------ ------ ------ -------
Net (Loss)/Profit .................. $ (5,618) $ (5,890) $ 1,515 $ (9,439) $(5,030)
======== ======== ======== ======== ========
Loss before extraordinary item
per share, basic and diluted ...... $ (0.16) $ (0.17) $ (0.14) $ (0.27) $ (0.14)
Net loss per share basic and
diluted ........................... $ (0.16) $ (0.17) $ 0.04 $ (0.27) $ (0.14)
The quarters ended April 2, 2001 and July 1, 2001 differ from amounts
previously reported in the respective Form 10-Q's with respect to the quarters
in which the extraordinary item is recognized.
On February 14, 2001 we entered into a settlement agreement with Alcatel,
which released the Company from our $18.5 million promissory note with DSC
Telecom L.P. Under the settlement agreement the Company agreed to pay $9.3
million in two installments, the first one due in the first quarter of 2001,
the second in the second quarter of 2001, in exchange for complete forgiveness
of the debt. The extraordinary gain of $9.2 million that arose from this
transaction was partially offset by tax on the gain of $2.7 million to show an
extraordinary gain, net of taxes of $6.5 million. We recorded this
extraordinary gain in the first quarter of 2001. After careful review of the
settlement agreement, we now consider that technically the promissory note was
not extinguished until the second quarter when the final payment under the
settlement agreement was made. Therefore the extraordinary gain and tax effect
have now been recorded in the second quarter 2001. There were no other changes
to amounts previously reported.
F-25
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS -- (Concluded)
(in thousands, except for share and per share data)
Previously Currently Previously Currently
reported reported reported Reported
April. 2, Reconciling April. 2, July 1, Reconciling July 1,
2001 Differences 2001 2001 Differences 2001
------------ ------------- ----------- ------------ ------------- ------------
Loss before income taxes ................ $ (5,890) -- $ (5,890) $ (7,729) -- $ (7,729)
-------- -- -------- -------- -- --------
Income tax (charge)/credit .............. 2,773 $ (2,773) -- -- $ 2,773 2,773
-------- -------- -------- -------- -------- --------
Loss before extraordinary item .......... (3,117) (2,773) (5,890) (7,729) 2,773 (4,956)
Extraordinary item ......................
Gain on extinguishment of debt ......... 9,244 (9,244) -- -- 9,244 9,244
Income tax charge ...................... (2,773) 2,773 -- -- (2,773) (2,773)
-------- -------- -------- -------- -------- --------
Gain after tax ......................... 6,471 (6,471) -- -- 6,471 6,471
-------- -------- -------- -------- -------- --------
Net Gain/(Loss) ......................... $ 3,354 $ (9,244) $ (5,890) $ (7,729) $ 9,244 $ 1,515
======== ======== ======== ======== ======== ========
Loss before extraordinary item
per share, basic and diluted ........... $ (0.09) $ (0.08) $ (0.17) $ (0.22) $ 0.08 $ (0.14)
Net loss per share basic and diluted..... $ 0.10 $ (0.27) $ (0.17) $ (0.22) $ 0.27 $ 0.04
F-26
Schedule II
Airspan Networks Inc. Valuation and Qualifying Accounts
---------------------------------------------------------------------------
Additions Deductions
------------------------ -----------------------
Balance at Written Charged Balance at
Beginning of Charged to Back to Credit to Against End of
Period Expenses Provision Expenses Provision Period
-------------- ------------ ----------- ----------- ----------- -----------
(in thousands of U.S. Dollars)
Allowance for doubtful debts:
Year ended December 31, 2001 ......... $1,371 $1,741 $ 23 $ (534) -- $2,601
Year ended December 31, 2000 ......... 1,130 829 180 (768) -- 1,371
Year ended December 31, 1999 ......... 578 856 -- (21) $ (283) 1,130
II-I
EXHIBIT 21
Airspan's Subsidiaries
Airspan Communications (Ireland) Ltd.
Airspan Communications Holdings (Ireland)
Airspan Communications Ltd.
Airspan Networks PTY Ltd (Australia) (Subsidiary of Airspan Communications Ltd.)
Airspan Communications (Shanghai) Co. Ltd
Airspan Networks Eastern Europe Ltd (Subsidiary of Airspan Communications Ltd.)
P.T. Airspan Networks Indonesia
Financial Statement Schedules
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-45260) pertaining to the 1998 Stock Option and Restricted
Stock Plan and the Registration Statement (Form S-8 No. 333-45262) pertaining
to the 2000 Employee Stock Purchase Plan and the Registration Statement (Form
S-8 No. 333-62024) pertaining to the 2001 Supplemental Stock Option Plan of
Airspan Networks, Inc. of our report dated January 29, 2002, with respect to
the consolidated financial statements and schedule of Airspan Networks, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 2001.
Ernst & Young LLP
London England
March 28, 2002