Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27707
AETHER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2186634
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
11460 CRONRIDGE DR. OWINGS MILLS, MD 21117
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (410) 654-6400
Securities registered Pursuant to Section 12(b) of the Act: NONE.
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
CONVERTIBLE SUBORDINATED NOTES DUE 2005
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 2001 was $731,662,637.
As of February 28, 2001, 40,455,828 shares of the Registrant's common
stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2001 Annual Meeting of the Registrant which will be
filed with the Commission within 120 days after the close of the fiscal year and
is incorporated by reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
AETHER SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
INDEX
PAGE
----
PART I
Business.................................................... 3
Item 1
Properties.................................................. 13
Item 2
Legal Proceedings........................................... 13
Item 3
Submission of Matters to a Vote of Security Holders......... 13
Item 4
PART II
Market for the Company's Common Equity and Related Security
Holder Matters.............................................. 14
Item 5
Selected Financial Data..................................... 14
Item 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7
Quantitative and Qualitative Disclosures About Market
Risk........................................................ 33
Item 7A
Financial Statements and Supplementary Data................. 33
Item 8
Change In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
Item 9
PART III
Directors and Executive Officers of the Registrant.......... 34
Item 10
Executive Compensation...................................... 34
Item 11
Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 12
Certain Relationships and Related Transactions.............. 34
Item 13
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 35
Item
14...
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO AETHER SYSTEMS, INC. ("AETHER" OR "COMPANY") OR
ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND BUSINESS." AETHER UNDERTAKES NO OBLIGATION TO UPDATE
OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
2
3
PART I
OVERVIEW
We provide technologies that enable businesses to extend their data and
commercial transactions to wireless and mobile handheld devices. At the core of
Aether is a comprehensive family of software products, which we refer to as our
wireless technology foundation, upon which all types of wireless systems for
businesses can be built. Our wireless technology foundation includes wireless
integration, mobile data management and wireless infrastructure software
products. We add to this foundation individual technology components which
include our wireless data engineering and development services, wireless data
hosting, product fulfillment and customer support. These components can be used
separately or in various combinations to extend existing and future business
applications to any handheld device over any wireless network.
THE AETHER SOLUTION
We believe that businesses, seeking greater productivity and efficiencies,
increasingly seek to give their workforces mobile and wireless access to
internal e-mail, corporate applications and company data. Additionally, we
believe that many businesses look for a way to provide real-time data to their
customers using handheld devices. Remote access can be achieved either through
continuous real-time communications, or by periodically "synchronizing"
corporate data to a handheld device using a wired link. However, we believe
corporate information technology (IT) managers that explore wireless and mobile
data solutions often quickly become overwhelmed with the complexity of the
wireless world and its frequently incompatible and changing protocols for
carrier networks, devices and applications.
Aether provides a comprehensive approach to solving those complexities,
using our wireless technology foundation and other technology components. Our
wireless technology foundation, in whole or in part, can be licensed for
installation at a customer's premises or operated from (or "hosted") and
maintained at Aether's highly secure network operations center. With this
approach, businesses can quickly and cost-effectively deploy a wide range of
wireless applications, which improves their productivity and efficiency and
insulates them from the complexities inherent in wireless systems.
The wireless technology foundation gives businesses, systems integrators
and developers the ability to quickly create, deploy and manage wireless
solutions across multiple carrier networks and types of devices. Customers may
choose specific wireless products or services, or have Aether build and manage a
comprehensive wireless solution. In every case, Aether's flexibility to adapt to
a wide variety of systems protects businesses from "betting" on technologies in
a rapidly changing wireless environment.
THE AETHER STRATEGY
We believe our capabilities and experience have established us as an early
market leader in providing wireless data services and systems to businesses. Our
strategy is to extend our leadership position by using our engineering
expertise, our software products, our hosted solutions and our other resources
to move quickly into new opportunities. Our strategy includes the following key
elements:
Maximize licensing revenue from our mobile data and wireless software. Our
financial model is dependent in large part on licensing our family of wireless
integration, mobile data management and wireless infrastructure software
products. We seek to continue developing, marketing and licensing a
comprehensive array of software products to meet wireless data needs of our
business customers.
Win and retain contracts to develop and operate wireless data systems for
large businesses. Another key focus of our financial model is to create and
maintain recurring revenue from wireless system development, management, hosting
and support. Through our own sales force, and through external sales channels
with consulting firms and systems integrators, we continue to seek customer
contracts that will provide a continuous revenue stream over the contract
period.
Extend the industries and markets to which we provide wireless data systems
and services. Our strategy initially focused on developing services for the
financial services sector, whose participants we believe are
3
4
among the earliest adopters of wireless data services. Through recent
acquisitions and investments, we have also moved into other industries and
markets in the U.S. and internationally, including:
- the mobile data management market, through our acquisition of Riverbed
Technologies, Inc.;
- the mobile and wireless transportation and logistics services market,
through our acquisitions of LocusOne Communications, Inc. and Motient
Corp.'s transportation business;
- the European wireless data market, through our acquisition of IFX Group
Limited and a related joint venture with Reuters Plc called Sila
Communications Limited, which provides wireless data services and systems
to European businesses;
- the wireless lead management market, through our acquisition of
NetSearch, LLC;
- the mobile government market, through our acquisitions of Cerulean
Technology, Inc. and SunPro, Inc.; and
- the wireless infrastructure software market serving wireless carriers,
businesses and Internet businesses, through our acquisition of RTS
Wireless, Inc.
We also seek to extend our services to new markets through engineering and
strategic consulting services to businesses that are exploring the
implementation of a wireless data system. This helps us to assess the types of
wireless services that are most in demand within a particular market. In
addition, our research and development division continuously evaluates new
technologies, applications and business opportunities that demonstrate
significant market potential.
Maintain and strengthen our strategic relationships with suppliers and
customers. A key to our ability to provide complete wireless data services to
our customers is our relationships with wireless network carriers and
manufacturers of wireless devices. These relationships take time to develop,
providing us with an advantage by getting our services to market before our
competitors. We intend to maintain and strengthen these relationships by
negotiating more cost-effective rate plans with existing wireless network
carriers, testing our wireless services with providers of next-generation,
high-speed wireless networks and working with manufacturers and industry forums
to guide development of new devices and applications.
Participate in non-core markets through investments and partnerships. We
make investments in a variety of businesses engaged in wireless and mobile
computing. These investments support the development of new technology that can
be used in combination with systems and products developed by Aether and create
relationships that support our efforts to develop and sell wireless data
products and services. Our strategic investments to date include the following:
- OmniSky. We formed OmniSky, Inc. in August 1999 with 3Com Corporation.
OmniSky's wireless service, for use on handheld devices, enables its
customers to access and navigate the Internet, send and receive e-mail
messages and securely conduct e-commerce transactions. OmniSky made its
service commercially available beginning in May 2000 and completed its
initial public offering in August 2000. We have invested $9.2 million in
OmniSky and have a 25.7% equity interest in OmniSky.
- Inciscent. On March 17, 2000, we acquired a 27.5% interest in Inciscent,
Inc. in the form of preferred stock for a purchase price of $9.9 million.
We formed Inciscent with Metrocall, Inc., PSINet, Inc., Hicks, Muse, Tate
& Furst, Inc. and other investors to develop wireless e-mail, Internet
access and other applications for the small office and home office market
segments.
- Sila. We hold a 60.0% equity interest in Sila, which we acquired in
exchange for $13.5 million in cash plus 100% of our equity interest in
IFX, a company we purchased in April 2000 for $85 million. Reuters holds
a 40.0% equity interest in Sila.
- MindSurf. MindSurf Networks is a company jointly owned by Aether and
Sylvan Learning Systems, Inc., to provide affordable mobile computing
hardware and software to link grade-school students, teachers and
parents. Aether and Sylvan each have committed to invest $32.9 million in
MindSurf. On October 30, 2000, MindSurf announced it had acquired
HiFusion, an education technology company
4
5
offering age-specific information and communication tools for student, parent
and teacher communities. The acquisition gave MindSurf an established 75-person
sales force.
- Strategy.com. We invested $15 million in Strategy.com Incorporated, a
subsidiary of MicroStrategy Incorporated, to combine Aether's wireless
services with Strategy.com's customized content delivery services. In
January 2001, we invested an additional $10 million in Strategy.com.
- Other Investments. Since August 1999, we have also made investments in
16 other companies for the aggregate amount of approximately $115.4
million.
SERVICES AND PRODUCTS
We currently offer and are developing products and services in three
categories:
- Software Products for wireless integration, mobile data management and
wireless infrastructure;
- Hosted Services, including wireless integration, Internet and messaging
services and customized services specific to vertical market sectors
(financial services, transportation and logistics, mobile government,
healthcare); and
- Engineering Services to businesses seeking to develop wireless data
systems.
Software Products
Aether offers a complete set of software development tools and technologies
enabling businesses to rapidly build, deploy and manage internally-hosted mobile
and wireless solutions. Businesses use our software products to create their own
wireless and mobile data systems. We believe our products allow these businesses
to create systems at lower cost and more efficiently than if they developed the
systems entirely on their own.
The primary software products we currently license are the Scout family of
wireless integration and mobile data management software and development tools
and the Advantage(R) family of wireless infrastructure software products.
Our Scout software products allow remote and mobile workers to exchange
information with corporate databases and the Internet. Scout also gives
information technology managers tools to manage, deploy and connect their
corporate data with handheld devices. Scout products reside both on handheld
devices and on corporate computer servers. Mobile workers use Scout when they
electronically exchange, or synchronize, data between their handheld devices and
corporate databases.
The Scout family of products includes:
- ScoutSync(TM), which is mobile data exchange software that creates the
connection between a business's mobile workforce and the information
contained in corporate databases, mail systems and the Internet.
ScoutSync delivers a scalable, standards-based, wired/wireless,
platform-independent software solution, leveraging both wired and
wireless communications so the mobile workforce is working with the most
current information.
- ScoutIT(TM), which allows IT managers to remotely deploy, manage and
upgrade wireless devices and applications. Features of ScoutIT include
automated application, file and content distribution, profile grouping
and sub-grouping in any structure that is desired and back-up and restore
services through synchronization or direct wireless connection.
- ScoutWeb(TM), which extends business's web content to any
browser-equipped wireless device. By dynamically transcoding HTML content
for display on HTML-based or WML-based handheld devices, ScoutWeb
eliminates the need to re-create and maintain multiple copies of a web
site or an electronic commerce application. The software also allows
businesses to reduce overhead expenses and increase efficiency.
- ScoutBuilder(TM), which is a visual application development tool for the
Palm OS platform. From customer databases and inventory to stock market
tracking and project scheduling, ScoutBuilder helps
5
6
organizations leverage the potential of mobile and wireless computing by
making developers more productive and efficient.
- ScoutExtend(TM), which is a series of mobile connectivity products that
gives business workforces instant access to the most widely used business
data sources.
We sell the Advantage family of wireless infrastructure software products
to providers of paging services and wireless personal communication systems and
to traditional and Internet businesses. These products include server and
gateway software for advanced messaging, wireless alerting, e-mail access, fax
and voice messaging, Wireless Application Protocol (WAP) access and a line of
WAP software development tools.
The Advantage family of products includes:
- Advantage Internet Messaging Gateway enables providers of paging services
and wireless personal communication systems to provide advanced messaging
services and interactive applications to their end users.
- Advantage Wireless Alert Server enables businesses, Internet service
providers and Internet companies to provide wireless alerting to their
employees or end users.
- Advantage E-Mail Access Server enables carriers or businesses to provide
their customers or employees with remote telephone access to their
e-mail.
- Advantage Telephony Messaging Gateway enables providers of paging
services and wireless personal communication systems to provide advanced
fax and voice messaging services to their end users.
- Advantage WAP Gateway gives users anytime, anywhere access to the
Internet, whether it's to access corporate information systems, perform
bank transactions, receive stock updates or news briefs or avail
themselves of other Internet-based services.
- Advantage WAP Application Server is a development environment that makes
it possible to deploy WAP applications quickly and efficiently.
- Advantage Chat Server provides wireless network operators and messaging
service providers with an application that brings the popular Internet
Chat feature to mobile consumers. The Advantage Chat Server delivers an
easy-to-use service that appeals specifically to teens and young adults,
the fastest-growing market segment for text messaging.
Hosted Services
Aether provides secure, state-of-the-art hosting facilities for businesses
that wish to outsource the operation and management of their wireless systems.
These facilities allow us to operate, store and maintain wireless data services
and systems on behalf of these customers. Our offerings include:
- general wireless Internet and messaging services; and
- customized services specific to vertical market sectors (financial
services, transportation and logistics, mobile government, healthcare).
We describe below the services we offer in each of these categories and the
resources we use to provide these services.
General Wireless and Internet Messaging Services. Our current hosted
wireless Internet and messaging services include:
- Blackberry(TM) by Aether(TM). Aether is one of the largest resellers
of Blackberry e-mail service over Research in Motion Limited (RIM)
wireless handheld devices. Customers sign airtime agreements for the
service, while Aether provides devices and customer support.
Blackberry by Aether is often sold with other applications.
- Wireless Enterprise ISP Service. Aether offers wireless access to the
Internet on PocketPC devices to business customers who wish to
wirelessly enable their workforces or customers. Service includes
flat-rate pricing for airtime, Aether Intelligent Messaging (AIM)(TM)
network security and transmission optimization and customer support
for provisioning of devices.
6
7
- Wireless Web Adaptation and Delivery. We provide hosted website
adaptation and delivery services for businesses seeking to quickly
enable their Web-based content for handheld wireless devices.
- Wireless Lead Management is a technology and service that allows
businesses to quickly respond to inquiries from potential customers.
Using wireless devices, remote sales personnel can receive automatic
real-time alerts when prospective customers request information about
their products via the corporate Web site or other means. In the
automotive marketplace, for example, this service allows dealerships
to interact immediately with online car buyers.
Wireless Services to Vertical Market Sectors. The wireless services we
currently provide to vertical market sectors include:
- Aether Financial Services(TM). Our proprietary wireless financial
brokerage and mobile commerce technology allows financial
institutions to quickly offer wireless services on any handheld
device, including secure trading, real-time quotes, global
financial markets data and news and futures and commodities trading
and news. Services we offer or are developing include:
- Wireless Trading. Custom wireless trading systems for
brokerages, using client-server or browser-based applications
on any type of handheld device. Aether can develop a wireless
version of any financial institution's brokerage platform,
including combining the service with real-time quotes, alerts,
research and news from Reuters and other sources. Our
applications feature secure, hosted transaction and account
management capabilities. We serve or are developing services
for various financial brokerage institutions, including Charles
Schwab, Merrill Lynch, E*Trade and National Discount Brokers.
- MarketClip(TM). Aether's real-time wireless market information,
portfolio management and alerts service, available on Palm,
PocketPC and RIM devices and browser-enabled phones. We make
MarketClip available for licensing and re-branding by financial
institutions or other business customers.
- Aether Mobile Commerce(TM). We are also developing a
comprehensive mobile commerce offering for brokerage firms,
banks, credit card companies and other businesses that will
include hosted wireless banking and bill-payment services as
well as the ability to make time-sensitive purchases,
person-to-person payments and point-of-sale purchases.
- Transportation and Logistics. Our transportation and logistics
services keep businesses in the transportation, auto and
distribution industries connected to their mobile assets and in
control of their operations and revenue. Our Internet-enabled
solutions and tailored offerings include pick-up and delivery
automation, fleet and driver management, asset and freight tracking
and mobile Internet systems for the auto and truck industry.
Products and services include:
- E-Mobile(TM) Delivery is a wireless package-delivery automation
platform that integrates with existing host network systems and
allows businesses to track their products throughout the
delivery cycle. Fleet drivers use handheld devices to capture
critical information and make it immediately available over the
Internet.
- E-Fleet combines global-positioning satellite-based systems
with Aether's wireless Internet network to implement asset
management solutions for the auto, trucking and broader
transportation industry.
- E-Dispatch is a low cost, wireless, Internet-based software
application that can be used by dispatchers to receive,
dispatch, track, map and report job data.
- MobileMAX2(TM) combines land-based and satellite technology to
deliver vehicle information to a central location.
7
8
- Aether Mobile Government(TM). We provide mobile computing products
for federal, state and local governments. We entered this market
through our acquisitions of Cerulean and SunPro by combining their
state and local government products with Aether products such as
ScoutSync, Blackberry by Aether and others. These government
products include:
- PacketCluster, which provides police, fire and rescue workers
with vital records and information.
- FireRMS, which provides record management for fire departments
and emergency medical services.
- Aether Healthcare(TM). Aether is developing wireless applications
for healthcare delivery, including two-way messaging, workforce
automation, disease state management, compliance tracking and data
collection. We are seeking to develop products useful across the
entire healthcare industry, including pharmaceuticals, physicians'
automation, hospitals and integrated delivery systems, medical
laboratories and home healthcare.
Resources for Wireless Hosted Services. We are able to provide complete
wireless hosted services by using our Aether Intelligent Messaging (AIM)
software platform, direct communications links to most of the major U.S.
wireless data carriers, a secure network operations center including
encryption technology, and product fulfillment and customer service
capabilities.
- Aether Intelligent Messaging (AIM). AIM is the core technology
behind most of our hosted wireless data services and a key
component of our wireless technology foundation. AIM optimizes the
transmission of data over multiple bandwidth-constrained wireless
networks. It also serves as an application development link between
data on a business's home system and handheld devices, by providing
tools that allow businesses to quickly build applications that can
operate on a wide variety of wireless data network and handheld
devices. We use AIM in providing services to our business customers
and sell and license AIM to customers who develop their own
systems.
AIM supports the most widely used wireless data networks in the
U.S., including CDPD, Motient and Cingular packet networks, as well
as circuit-switched network protocols, including GSM and CDMA, and
wireless local-area network standards. As a result, our customers'
end users can choose the devices they prefer, including Palm,
Windows CE and other personal organizers, notebook computers,
pagers and mobile phones.
AIM also optimizes data transmissions for wireless networks. Most
of today's wireless data networks operate at less than half the
speed of telephone dial-up connections, limiting the delivery of
useful data to only small amounts of text and few graphics. Data
feeds typically include large amounts of unnecessary data,
including message headers and routing information. Because wireless
carriers typically charge by the kilobyte of data transmitted,
extraneous data add unnecessary cost. By employing compression and
data-thinning techniques, AIM allows users to receive information
faster when they send queries from their devices--and they get more
useful information for the price. Our AIM software platform reduces
the number of data packets required in a typical wireless
transmission by as much as 66%. We ensure reliable message delivery
through measures that confirm data have arrived properly and resend
data if no acknowledgement has been received.
Over the next several years, wireless carriers and equipment
vendors are planning to build so-called third generation, or 3G,
networks, which promise to transmit data at much higher speeds and
offer more compatibility among devices. No matter how fast networks
become, the need for low-cost, secure and reliable data
transmission will continue. We have designed our AIM software
platform to grow with the capabilities of wireless networks. For
example, we are currently working with U.S. and European wireless
network carriers to make our technology platform compatible with
networks using General Packet Radio Services, known
8
9
as GPRS, a new high-speed wireless network standard. We have
successfully completed GPRS testing of certain of our financial
applications.
- Carrier connectivity. We maintain relationships and direct data
connections with the leading wireless network carriers, including
AT&T Wireless Services, Inc., Verizon Wireless Inc., Cingular
Wireless and Motient. We have negotiated favorable airtime
agreements with these carriers, allowing us to offer our end users
flat-rate pricing no matter how much data is transmitted or where a
device is used.
- Network Operations Center. We operate a secure network operations
center at our headquarters in Owings Mills, Maryland and are
preparing to open a second such facility in Tempe, Arizona later
this year. We believe that these centers are vital components of
our wireless data service offerings and differentiate us from our
competitors. By outsourcing to us, our customers are relieved of
the technology and operations burden of managing a highly complex
wireless data system.
From our Owings Mills network operations center, we maintain
high-speed data transmission lines, both to our customers' data
sources and to the wireless data networks we use. The center is
equipped with Cisco networking equipment, Sun Sparc UNIX servers
and high-end clustered Compaq and Hewlett Packard NT servers. In
the event of a power failure, we maintain multiple Uninterruptible
Power Supply systems as well as diesel-powered generators that are
tested and serviced regularly. Our network operations center is
capable of meeting the security standards for services we developed
or are developing for our clients. Our primary center is staffed 24
hours a day, seven days a week. Our facility in Tempe will provide
expanded capacity when it is completed.
Corporate managers require rigorous security standards when
entrusting their data to third parties. Our network operations
center has numerous redundant elements and serves as a
high-security physical link between data feeds from our business
customers' and others' data systems and wireless carrier networks.
We "scramble" digital messages as they move along wireless networks
using the latest encryption technologies. This relieves
corporations from the burden of constructing similar facilities. We
believe our network operations center is capable of meeting the
security standards for services we developed or are developing for
our customers.
- Product fulfillment and customer support. We provide product
fulfillment and provisioning, customer service and billing for our
business customers at our customer service centers in Owings Mills,
Maryland; Vienna, Virginia; Tempe, Arizona; and Richmond, Virginia.
We maintain an inventory of mobile devices and wireless modems,
which we buy in bulk from manufacturers and resellers. For our
customers' end users, we have the ability to load and configure
tailored software on mobile devices, activate wireless modems and
perform quality assurance checks. We then pack, ship and track the
product until the user receives it. For end users who already own a
device, we can provide only the modem and software application. We
handle all repair and warranty issues for devices we provide to our
customers' end users.
We train our customer service representatives to handle inquiries
about our services, device features and wireless communications.
Our customer service personnel are available seven days a week from
8:00 a.m. until 11:00 p.m. Eastern time. We currently employ
approximately 30 customer service representatives.
We can handle customer billing for our business customers' end user
fees, device and modem purchases, securities exchange and market
fees and other charges. Our billing system can support increases in
our customers' end user base.
9
10
Engineering services to businesses seeking to develop wireless data systems
We provide engineering services to complement our software products and
hosting services and on a stand alone basis. We also take on engineering
assignments that might allow us to embrace technological advances or expand into
new industry sectors or services. Through our work with Merrill Lynch and
Multex.com, Inc., for example, we are developing next-generation wireless
trading and financial information services for financial professionals. We
generally charge our clients for engineering time on an hourly basis or a
per-project flat fee.
Our engineering staff includes wireless systems engineers, software
engineers who specialize in developing applications for handheld devices and
engineers who specialize in systems integration and testing. We have steadily
built our engineering ranks from ten in 1998, to approximately 500 in March
2001. Many of our engineers come from engineering departments at some of the
largest companies, including International Business Machines Corporation,
Westinghouse Electric Corporation and UPS/Roadnet. Seventy-six of our engineers,
including our chief technology officer, comprise our research and development
division. This group evaluates emerging technologies and business opportunities
and plays a key role in determining which projects to pursue.
SALES AND MARKETING
As of March 2001, we have over 200 sales and marketing professionals sales.
Our sales and marketing staff specialize in market sectors, but also sell across
the entire product and service line. Our direct sales team covers all regions of
the U.S. and has offices in London, Hamburg and Munich. In addition to having a
vertical market focus, our salespeople focus on companies that make up the
Fortune 1000 list of top-performing companies by revenue. We are also targeting
the Big Five consulting firms to provide wireless systems for their clients. Our
business development personnel and senior executives also assist in developing
potential customer relationships and selling and promoting our services.
In addition to our sales and marketing staff we advertise in a variety of
media. During 2000, we focused our marketing spending on increasing awareness of
the Aether brand name and promoting awareness of our products and services, and
lead generation in the transportation, healthcare and financial services
vertical markets and for our general wireless and Internet messaging products
and services such as Blackberry by Aether and merchant notification. We intend
to spend an estimated $25 million on marketing and advertising activities in
2001.
EUROPEAN OPERATIONS THROUGH SILA
We address the needs of business customers abroad through Sila, our joint
venture with Reuters in which we hold a 60.0% equity interest. Sila currently
targets major corporations in Europe who seek to extend their applications to
handheld devices, as well as wireless carriers seeking to outsource wireless
data services. Sila, headquartered in London, plans to expand its efforts to
Asia, Africa and the Middle East. Sila currently has data center facilities in
London, Frankfurt, Madrid and Copenhagen and is planning to construct additional
facilities in Geneva and Stockholm later in 2001.
Sila provides wireless system design development, integration, hosting and
end user support. Sila provides services to wireless carriers through its
Carrier Loyalty Services program, targeted to help carriers attract and retain
high-value subscribers. Sila's family of wireless data technologies, which it
calls its Wireless Extension Platform, supports a range of possible entry points
into mobile applications. A customer may begin, for example, by obtaining a
rapid mobile presence through wireless adaptation of its website, then upgrade
over time to a full-featured production system. Sila's platform supports a broad
range of applications and data feeds, running over a wide variety of devices and
networks. The Sila platform supports browser-based protocols such as WAP and
HTML, as well as Aether Intelligent Messaging for personal digital assistant
(PDA) devices, Short Messaging Service (SMS) for phones and Subscriber Identity
Module (SIM) applications for secure browser-based application delivery.
Sila's commercial and engineering teams are grouped in vertical business
segments, with each comprising industry specialists in Financial Services,
Healthcare and Media and Entertainment.
10
11
We received our 60.0% interest in Sila in exchange for $13.5 million in
cash plus 100% of the equity interests of IFX, a company we purchased in April
2000 for $85 million. Reuters holds 40.0% of the equity interests of Sila, which
it received in exchange for approximately $20.8 million in cash plus
contribution of all of its rights to Futures Pager Limited, a European paging
company. Under a marketing and strategic agreement with Sila and Reuters, we
have agreed to give Sila sales leads and to assist its sale of our products. The
agreement also gives Sila the right to a non-exclusive license to use our
technology and requires Sila to give us an opportunity to sell its products. For
as long as we continue to own a greater than 50% equity interest in Sila, we
have the right to appoint four directors to its seven-director board. David S.
Oros, chairman of Sila, and J. Carter Beese, Jr., a director of Sila, also serve
as directors of Aether and Mr. Oros is the chairman and chief executive officer
of Aether.
STRATEGIC RELATIONSHIPS
A key to our ability to provide complete wireless data services to our
customers is our relationships with third parties. These relationships take time
to develop, and having already formed them provides us with an advantage in
getting our services to market before our competitors. We maintain the strategic
relationships described below.
Wireless Network Carriers
We believe our relationships with wireless network carriers are mutually
beneficial. We believe we are among the largest buyers of wireless data network
capacity for many of the carriers we use. As a result, we are able to negotiate
favorable rates. Typically, we have one-year contracts to buy data network
capacity either for an agreed amount of kilobytes at a flat fee or on a
cents-per-kilobyte basis. We have contracts with Verizon Wireless, AT&T
Wireless, Cingular Wireless, Metrocall and Motient. As a result, we can give our
customers a wide variety of wireless carrier choices.
Hardware and Software Vendors
Our services increase the usefulness of wireless handheld devices, and we
believe our services will increase sales of these devices. Mobile device
manufacturers have therefore assisted us in various projects we have undertaken.
In February, 2001, we announced a strategic partnership with Symbol
Technologies, Inc., to offer Aether's wireless data systems and services with
Symbol handheld devices. In April 2000, we announced a multi-tiered business and
marketing agreement with RIM, a manufacturer of wireless devices and software,
to promote each other's wireless solutions. In 1999, we signed an agreement with
OmniSky to supply us with Novatel Wireless, Inc. wireless modems. We worked
closely with 3Com, an early Aether investor, on the development of our wireless
applications for Palm devices. We participate in industry development groups
dedicated to bringing new applications to wireless data, such as the Palm
developers group, the WAP Forum and the Windows CE developers forum.
Other Strategic Relationships
We work to develop new products and services through strategic
relationships with a variety of companies. For example, we recently formed a
strategic relationship with Computer Associates International, Inc. to securely
extend business e-commerce infrastructure to mobile devices.
COMPETITION
The market for our services is becoming increasingly competitive. We
believe we offer the broadest range of services to businesses necessary to
enable the development, offering and ongoing support of wireless data
communication systems for their employees or customers. The widespread adoption
of industry standards may make it easier for new market entrants to offer some
or all of the services we offer and may make it easier for existing competitors
to introduce some or all of the services they do not now provide, or improve the
11
12
quality of their services. We expect that we will compete primarily on the basis
of the functionality, breadth, quality and price of our services. Our current
and potential competitors include:
- wireless systems integrators, including IBM, Science Applications
International Corporation, Wireless Telecom, Inc. and Razorfish, Inc.;
- wireless infrastructure software companies, including Openwave Systems,
TeleCommunication Systems, Inc. and Comverse Technology, Inc.
- wireless data services providers, such as 724 Solutions Inc., Everypath,
Inc., OracleMobile, Inc., w-Technologies Inc., Brience, Inc., Mobileum,
Inc., Wireless Knowledge, Inc., GoAmerica, Inc. and i3 Mobile, Inc.
- wireless network carriers, such as Verizon Wireless, AT&T Wireless,
Cingular Wireless, Sprint PCS Group, Nextel Communications, Inc. and
Metricom, Inc.
- mobile data management software providers, including, AvantGo, Inc.,
Extended Systems, Inc. and Puma Technology, Inc.
Some of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do.
Additionally, many of these companies have greater name recognition and more
established relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can.
Notwithstanding the increasing competitiveness of our market, we believe
that our potential competitors face substantial barriers to market entry.
Development of wireless data systems comparable to those we have already
developed is time consuming and costly. Moreover, we believe the engineering
talent necessary to develop such systems is scarce.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of patent, copyright, trademark, service mark,
trade secret laws and contractual restrictions to establish and protect
proprietary rights in our services. We have applied for various patents and
trademarks. All of our patent applications are pending and the only trademark
currently granted is for Advantage(R). There can be no assurances that our
applications will be granted or, if granted, that holders of other patents or
trademarks will not claim that the patents or trademarks infringe their patents
or trademarks.
The steps we have taken to protect our intellectual property may not prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies. The laws of certain foreign
countries may not protect our services or intellectual property rights to the
same extent as do the laws of the U.S. We also rely on certain technologies that
we license from third parties, including data feeds and related software from
Reuters Select Feed Plus and Bridge Information Services and encoding technology
from Certicom Corp. In addition, our Scout software suite relies on a license of
Prism software by Spyglass, Inc. (which was acquired by OpenTV Corp. in 2000).
These third-party technology licenses may not continue to be available to us on
commercially attractive terms. The loss of the ability to use such technology
could require us to obtain the rights to use substitute technology, which could
be more expensive or offer lower quality or performance, and therefore have a
material adverse effect on our business, financial condition or results of
operations.
Third parties could claim infringement by us with respect to current or
future services or products we offer. We expect that participants in our markets
will be increasingly subject to infringement claims as the number of services
and competitors in our industry segment grows.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime and some of our
hardware suppliers are subject to regulation by the Federal Communications
Commission. Changes in
12
13
FCC regulations could affect the availability of wireless coverage these
carriers are willing or able to sell to us. We could also be adversely affected
by developments in regulations that govern or may in the future govern the
Internet, the allocation of radio frequencies or the placement of cellular
towers. Regulations of the SEC governing online trading could reduce the level
of online trading or the demand for wireless financial information. Also,
changes in these regulations could create uncertainty in the marketplace that
could reduce demand for our services or increase the cost of doing business as a
result of costs of litigation or increased service delivery cost or could in
some other manner have a material adverse effect on our business, financial
condition or results of operations.
We currently do not collect sales or other taxes with respect to the sale
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states in which we
have offices and are required by law to do so. Some jurisdictions have sought to
impose sales or other tax obligations on companies that engage in online
commerce within their jurisdictions. A successful assertion by one or more
jurisdictions that we should collect sales or other taxes on our products and
services, or remit payment of sales or other taxes for prior periods, could have
a material adverse effect on our business, financial condition or results of
operations.
Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.
EMPLOYEES
As of December 31, 2000, we and our wholly-owned subsidiaries had a total
of approximately 1,375 employees, excluding employees of Sila, and of these
employees over 480 were engineers. As of December 31, 2000, Sila had a total of
171 employees. None of our employees is covered by a collective bargaining
agreement. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
Our principal offices are located in Owings Mills, Maryland in a 91,208
square foot facility under a lease expiring in January 2005 with no renewal
option. We also lease an aggregate of approximately 466,000 square feet for our
offices in Larkspur, California; San Jose, California; San Rafael, California;
Boca Raton, Florida; Bethesda, Maryland; New York, New York; Long Island, New
York; Bethpage, New York; Reston, Virginia; Richmond, Virginia; Vienna,
Virginia; Tempe, Arizona; Scottsdale, Arizona; Marlborough, Massachusetts;
Chicago, Illinois; Yakima, Washington; Zillah, Washington; Olmsted, Ohio;
Durham, North Carolina; and Monterey, Mexico. Of the approximately 466,000
leased square feet, approximately 121,000 square feet are utilized for our
vertical markets segment, approximately 279,000 square feet are utilized for our
software products segment and approximately 67,000 square feet are utilized for
corporate and other purposes. Our wireless services segment is included in our
principal office space in Owings Mills. Sila has offices located throughout
Europe and in Singapore.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. However, we
may from time to time become a party to legal proceedings arising in the
ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration
during the fiscal quarter ended December 31, 2000.
13
14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "AETH" since our initial public offering on October 20, 1999. Prior to
that time, there was no public market for the common stock. The following table
sets forth, for the periods indicated, the high and low prices per share of the
common stock as reported on the Nasdaq National Market.
2000 1999
------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31.................................................... $345 $73 n/a n/a
June 30..................................................... $216 $62 n/a n/a
September 30................................................ $203 3/4 $99 3/4 n/a n/a
December 31................................................. $122 1/2 $28 1/2 $89 3/8 $41 1/8
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The number of record holders of the Company's common stock as of December
31, 2000 was 94. The Company believes that in excess of 5,000 beneficial owners
hold such shares of common stock in depository or nominee form.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock nor,
when we were organized as a limited liability company, did we make any
distributions to our members. We currently intend to retain earnings, if any, to
support the development of our business and do not anticipate paying cash
dividends in the foreseeable future. Payment of future dividends, if any, will
be at the discretion of our board of directors after taking into account factors
such as our financial condition, operating results and current and anticipated
cash needs.
UNREGISTERED SECURITIES ISSUED IN THE FOURTH QUARTER
On December 22, 2000, in connection with our acquisition of RTS Wireless,
we issued 1,259,752 shares of our common stock. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The table that follows presents portions of our consolidated financial
statements and is not complete. You should read the following selected
consolidated financial data together with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1998, 1999, and 2000, and the consolidated balance sheet data as of
December 31, 1999 and 2000 are derived from our consolidated financial
statements, which are included as exhibits to this report on Form 10-K beginning
on page F-1. The consolidated statement of operations data for the years ended
December 31, 1996 and 1997 and the consolidated balance sheet data as of
December 31, 1996, 1997 and 1998 is derived from audited financial statements
that do not appear in this annual report on Form 10-K. The historical results
presented below are not necessarily indicative of the results to be expected for
any future fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7. The pro forma net loss per share
information for the historical periods presented gives effect to our conversion
from a limited liability company to a corporation immediately prior to our
initial public offering.
14
15
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Subscriber revenue........................ $ -- $ 161 $ 549 $ 3,732 $ 31,160
Engineering services revenue.............. 1,355 1,625 963 2,594 9,444
Software and related services revenue..... -- -- -- -- 17,550
------- ------- ------- -------- ---------
Total revenue..................... 1,355 1,786 1,512 6,326 58,154
Cost of subscriber revenue................ -- 447 797 2,110 18,412
Cost of engineering services revenue...... 1,007 846 304 1,366 5,693
Cost of software and related services
revenue................................ -- -- -- -- 5,911
------- ------- ------- -------- ---------
Total cost of revenue............. 1,007 1,293 1,101 3,476 30,016
------- ------- ------- -------- ---------
Gross profit...................... 348 493 411 2,850 28,138
Operating expenses:
Research and development.................. 161 734 1,267 2,614 30,189
General and administrative................ 395 1,505 2,773 5,891 52,937
Selling and marketing..................... 333 840 2,095 54,151
In process research and development....... -- -- -- -- 7,860
Depreciation and amortization............. 45 189 265 1,089 238,074
Option and warrant expense................ -- 40 33 19,198 14,345
------- ------- ------- -------- ---------
Total operating expenses.......... 601 2,801 5,178 30,887 397,556
------- ------- ------- -------- ---------
Operating loss.............................. (253) (2,308) (4,767) (28,037) (369,418)
Interest income (expense), net.............. 8 (295) 74 (229) 42,351
Equity in losses of investments............. (172) (144) -- (2,425) (47,886)
Minority interest........................... -- -- -- -- 10,692
------- ------- ------- -------- ---------
Loss before income taxes.................... $ (417) $(2,747) $(4,693) $(30,691) $(364,261)
Income tax benefit.......................... -- -- -- -- 1,561
------- ------- ------- -------- ---------
Net loss.................................... $ (417) $(2,747) $(4,693) $(30,691) $(362,700)
======= ======= ======= ======== =========
Net loss per share -- basic and diluted..... $ (9.99)
=========
Weighted average shares used in computing
net loss per share -- basic and diluted... 36,310
=========
Pro forma net loss per share -- basic and
diluted................................... $ (0.04) $ (0.22) $ (0.29) $ (1.45)
======= ======= ======= ========
Pro forma weighted average shares used in
computing net loss per share -- basic and
diluted................................... 10,555 12,656 15,916 21,207
======= ======= ======= ========
1996 1997 1998 1999 2000
------ ----- ------ -------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents (including
restricted cash).......................... $ 51 $ 132 $1,755 $ 78,542 $ 872,747
Working capital (deficit).................... 181 (323) 7,519 83,128 819,624
Total assets................................. 1,269 822 8,765 102,534 2,677,375
Total debt................................... -- 150 -- -- 334,942
Members' capital............................. 1,101 74 8,030 -- --
Stockholders' equity......................... -- -- -- 98,342 2,167,698
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following description of our financial condition and
results of operations in conjunction with our Consolidated Financial Statements
and Notes thereto and other financial data appearing elsewhere in this Form
10-K.
OVERVIEW
Aether Systems, Inc. was originally formed as Aeros, L.L.C. in January
1996. We changed our name to Aether Technologies International, L.L.C. effective
August 1996 and to Aether Systems L.L.C. effective September 1999. Immediately
prior to the completion of our initial public offering of common stock on
October 26, 1999, the limited liability company was converted into a Delaware
corporation and our name was changed to Aether Systems, Inc.
Development of our business. From our inception until March 1997, we
primarily provided wireless engineering services, including the development of
wireless software applications for customers. In March 1997, we began offering
services that provide the users of wireless handheld devices access to real-time
financial information. During 1997, we made a strategic decision to focus a
significant portion of our engineering resources on the development of these and
other wireless data services and systems, including our Aether Intelligent
Messaging (AIM) package of wireless messaging software and software development
tools.
In 1998 and 1999, we continued to develop financial information
services -- as well as financial transaction services -- internally and through
our acquisition of Mobeo, Inc. In 1999, we also completed our initial public
offering and began to expand our service offerings to areas other than financial
information and transactions.
In 2000, we continued our expansion into other vertical markets, including:
the transportation and logistics vertical market through our acquisitions of
LocusOne and Motient's retail transportation business unit, the mobile
government vertical market through the acquisitions of Cerulean and SunPro; and
the healthcare vertical market through investments and our own service
offerings. We broadened our software offerings through our purchase of Riverbed
and RTS Wireless. Also in 2000, we moved into the European marketplace with our
acquisition of IFX, and the related formation of Sila. We entered the general
wireless and Internet messaging services market through strategic relationships
with RIM and others and through our own service offerings.
We began to report our financial results by segment as of the first quarter
of 2000. Our current segments are vertical markets, software products, wireless
services and European operations. During 2000, our reportable segments have
changed -- and we expect them to continue to change -- as our operating
structure, business and the market in which we operate evolve. Each of our
segments has distinct management teams. In 1998 and 1999, all of our revenue was
generated from what is now reported as our vertical market segment.
FACTORS AFFECTING COMPARABILITY
Our results of operations in 1999 and 2000, have been affected by
acquisitions, investments and the formation of Sila. In addition, a combination
of factors have resulted in operating losses that we expect will continue for
some time. The factors identified below have had a significant impact on our
operations and should be considered in comparing our results of operations in
2000 to those in 1999 and in comparing our results of operations in 1999 to
those in 1998.
Acquisitions
We have acquired companies to expand our product offerings and geographic
markets and to acquire additional engineering resources to develop products.
From September 1999 through December 31, 2000, we have acquired 10 businesses
(or parts of businesses) for an aggregate consideration (not including
contingent
16
17
payments that had not yet been earned) of $367.4 million and equity of $1.284
billion, consisting of 6,259,445 shares of our common stock and 1,093,785
replacement options. These acquisitions included the following:
- During 1999, we acquired Mobeo for a purchase price and related
expenses of $11.5 million in cash and 46,105 options valued at
$374,000.
- In early 2000, we acquired LocusOne, NetSearch, and IFX for purchase
prices aggregating approximately $160.6 million.
- On March 6, 2000, we acquired Riverbed for 4,537,281 shares of our
common stock and 862,480 options with an aggregate value of $1.136
billion. In connection with our acquisition of Riverbed, we incurred
costs totaling approximately $16.9 million.
- In September 2000, we acquired Cerulean, SunPro and Sinope for
purchase prices and related expenses aggregating approximately $93.4
million and 462,412 shares of our common stock and 94,952 options with
an aggregate value of $69.9 million.
- On November 30, 2000, we acquired Motient's retail transportation
business unit for $49.2 million in cash and related expenses plus an
additional sum of up to $22.5 million depending on whether certain
revenue and other incentive targets are met in 2001.
- On December 22, 2000, we acquired RTS for a purchase price of $34.2
million in cash and related expenses plus 1,259,752 shares of our
common stock and 90,248 options with an aggregate value of $78.0
million.
Our acquisitions increase our operating revenues and expenses from the date
of acquisition. In the discussion of results below, we quantify the effects of
acquisitions on our revenues and expenses. Acquisitions also increase
depreciation and amortization significantly as we amortize the value of
acquisition intangibles. Amortization related to acquisition intangibles was
$556,000 in 1999 and $230.4 million in 2000. Finally, acquisitions affect
non-cash compensation when we issue options to employees at the time of an
acquisition. The related costs were $430,000 in 1999 and $10.4 million in 2000.
We discuss below under "Investments" charges we may need to take in the future
to write down the carrying values of our acquisitions.
Investments
We have made investments through Aether Capital, L.L.C., our wholly-owned
subsidiary, to promote the development of new technologies that are compatible
with the services we offer or that we may wish to integrate into our services.
Since August 1999, we have invested $154.2 million in 20 companies. These
investments include:
- In August 1999, we formed a new company called OpenSky, which was renamed
OmniSky in October 1999. We have invested a total of $9.2 million in
OmniSky. We formed OmniSky with 3Com to pursue opportunities in the
emerging consumer and business mass markets for wireless e-mail, Internet
access and other electronic transactions applications. As of December 31,
2000, we owned approximately 25.7% of OmniSky after completion of
OmniSky's initial public offering. We account for our investment in
OmniSky under the equity method of accounting.
- In March 2000, we acquired a 27.5% interest in Inciscent in the form of
preferred stock for a purchase price of $9.9 million. We formed Inciscent
with Metrocall, PSINet, and Hicks, Muse, Tate & Furst and other investors
to develop wireless e-mail, Internet access and other applications for
the small office and home office markets. We account for our investment
in Inciscent under the equity method of accounting.
- In July 2000, we entered into a non-binding Agreement with Sylvan to
establish Mindsurf, a new company focused on educational services. We
have committed to acquire a 47% interest in Mindsurf for $32.9 million in
cash. Sylvan has also committed to acquire a 47% interest for $32.9
million in cash while the remaining 6% will be owned by other minority
investors. As of December 31, 2000, we have funded $4.7 million of our
commitment to Mindsurf. We account for our investment in Mindsurf under
the equity method of accounting.
17
18
- In July 2000, we acquired a 23% interest in Veristar for $5.6 million in
cash. Veristar enables access to accounts and content through Internet
and wireless technology. We account for investment in Veristar under the
equity method of accounting.
We also have invested $51.5 million in five publicly-traded companies
including $17 million in Metrocall, $10 million in DataCritical Corporation, and
$20 million in Novatel. We account for these five investments at fair value
based on quoted market prices. As of December 31, 2000, the carrying value of
these investments was $54.0 million. Net unrealized holding gains and losses are
excluded from income and recorded as a separate component of stockholders'
equity. Subsequent to year-end, the market values of these investments have
decreased significantly.
Finally, we have also invested $73.3 million in eleven private companies
including $15.0 million in Strategy.com, $11.0 million in ePhones, $14.9 million
in Parkstone Medical Information Systems, Inc., and $10.0 million in Juniper
Financial Corp. In January 2001, we invested an additional $10.0 million in
Strategy.com. We account for these investments at cost unless circumstances
indicate the carrying amount of the investment may not be recoverable.
At the time of our acquisitions and investments, market valuations and the
availability of capital for such companies were at historically high levels.
Since the end of 2000, stock prices and market valuations in our industry and
similar industries have fallen substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures. The
market valuations of those publicly traded companies in which we have invested,
and of other companies similar to those we have acquired or invested in, have
declined substantially since December 31, 2000.
We are currently evaluating the recent decline in the valuation of our
acquisitions and investments to determine if the decline is other than
temporary. We believe that if market valuations of similar companies remain at
their current levels or decline further, it is likely that we will determine the
market decline to be other than temporary and record an impairment charge to
reduce the carrying value of the goodwill and intangibles related to our
acquisitions and our investments to fair value. Although we cannot determine the
amount of any charge we may decide is necessary until we complete our
evaluation, any such charge is likely to be substantial.
Formation of Sila
On May 4, 2000, we formed Sila with Reuters to extend our operations to the
European market. We contributed our IFX subsidiary (which we purchased for $85.0
million shortly before forming Sila), plus $13.5 million in cash to acquire a
60.0% interest in Sila. Reuters contributed cash of approximately $20.8 million
and Futures Pager Limited, a European paging company, for the remaining 40.0%
interest. The results of Sila are consolidated in our financial statements.
Factors producing operating losses
Since our inception, we have invested significant capital to build our
customer service and network operations center. Additionally, we have incurred
significant operating costs to develop our software platforms and other software
applications, and to grow our business. As a result, we have incurred operating
losses since our inception. Part of our strategy is to continue to invest in
business development, research and development, and marketing and advertising.
In addition, our past acquisitions will continue to result in option and warrant
expense and significant amortization of intangible assets, as will any
acquisitions we make in the future. Accordingly, we expect to continue to incur
operating losses for the foreseeable future.
OPERATING REVENUES AND EXPENSES
We describe below the components of our operating revenues and expenses.
18
19
Subscriber revenue and expenses
We derive recurring revenue from subscribers in the vertical markets,
wireless services, software products and European operations segments.
Subscriber revenue may consist of:
- a one-time non-refundable activation fee, which we recognize ratably
over the expected life of the customer relationship;
- monthly per-subscriber service fees, which we recognize as services
are provided;
- monthly per-subscriber exchange fees for access to financial
information from the securities exchanges and markets, which we
recognize as services are provided; and
- monthly fees for providing access to our network operations center,
which we recognize as services are provided.
We also generate revenue by providing our subscribers the option to
purchase wireless handheld devices from us at or near cost, which we bill either
up front or over the initial term of the contract. For certain of our products,
our subscribers' monthly fee includes the use of a wireless handheld device.
Contracts with our wireless data subscribers are generally for a one-year period
and include a termination penalty if cancelled by the subscriber before the
one-year period expires. These contracts are generally renewable at the option
of the subscriber for additional one-year periods or otherwise continue on a
monthly basis until cancelled by the subscriber.
Cost of subscriber revenue consists primarily of airtime costs, financial
data costs, wireless handheld device costs and securities exchange and market
fees. Our airtime costs are determined by agreements we have with several
wireless carriers. Typically, we have one-year contracts to buy data network
capacity either for an agreed amount of kilobytes at a flat fee or on a
cents-per-kilobyte basis.
The subscription products we offer fall into three distinct categories:
- Enterprise ASP/ISP services. These services wirelessly connect
critical functions of a business to end users within the business or
to third parties such as customers. Through our Enterprise ASP/ ISP
services, we provide a full wireless solution to the end user,
including product development, fulfillment, network hosting, customer
service and carrier connections between the business and wireless
carriers. For this type of product, we typically receive revenue from
the sale of hardware and a monthly recurring fee for the full range of
services between $40 and $70 per month per subscriber.
- Premium information and commerce services. These services provide the
end user with information critical to their business, such as market
information or sales inquiries. Premium information products are
packaged with fulfillment, customer service and carrier connections
between the business and wireless carriers. For this type of product,
we typically receive revenues such as activation fees and a monthly
recurring fee for the full range of services between $70 and $200 per
month per subscriber.
- Network hosting services. These services connect businesses and
wireless carriers. Hosting services may be charged per subscriber or
on a usage basis. Average revenue per subscriber typically ranges
between $5 and $25 per month.
The nature of revenue and costs for these product categories is similar,
regardless of the segment in which we offer them. Accordingly, we believe it is
valuable to analyze our subscribers on the basis of these product categories.
19
20
The following table sets forth the number of subscribers for each of our
product types as of December 31, 1998, 1999, and 2000.
AS OF DECEMBER 31,
---------------------
1998 1999 2000
---- ----- ------
Enterprise ASP/ISP services............................... -- 277 26,702
Premium information & commerce services................... 656 4,288 20,122
Network hosting services.................................. -- -- 449
--- ----- ------
Total subscribers................................. 656 4,565 47,273
=== ===== ======
A substantial portion of the growth in subscribers over this period is
attributable to service offerings obtained through recent acquisitions and the
remainder is due to the attraction of new subscribers to our services and the
introduction of new services.
Engineering services revenue and expenses
Revenue from wireless engineering services consists of amounts billed to
our customers for engineering time on an hourly basis or fixed fees on a per
project basis. This revenue is recognized as the work is performed. Cost of
engineering services revenue consists of cash compensation and related costs for
engineers and other project-related costs.
Software and related services revenue and expenses
We derive revenue from the licensing of software products, including the
AIM platform, the ScoutWare software suite, the e-Mobile software suite, the
PacketCluster software suite, the FireRMS software suite and the Advantage
software suite. Cost of software and related services revenue consists of costs
of licensing, including royalty payments and personnel costs.
Research and development expenses
Research and development expenses consist primarily of cash compensation
and related costs for engineers engaged in research and development activities
and, to a lesser extent, costs of materials relating to these activities. We
expense research and development costs as we incur them.
General and administrative and selling and marketing expenses
General and administrative expenses consist primarily of cash compensation
and related costs for general corporate and business development personnel,
along with rent and other costs. Selling and marketing expenses consist
primarily of advertising and promotions, sales and marketing personnel, travel
and entertainment and other costs.
Depreciation and amortization expenses
Depreciation and amortization expenses consist primarily of the
amortization of intangible assets obtained in connection with our acquisitions.
Depreciation and amortization expenses also include depreciation expenses
arising from equipment purchased for our network operations centers and other
property and
20
21
equipment purchases.
Option and warrant expenses
Option and warrant expense consists of expenses recorded to account for the
difference, on the date of grant, between the fair market value and the exercise
price of stock options issued to employees, and the fair value of equity-based
awards to non-employees. We commonly issue options and/or warrants at prices
below market value in connection with our acquisitions. Given our numerous
acquisitions since our inception, we expect to continue to have substantial
option and warrant expense.
Interest income (expense), net
Interest income (expense), net consists primarily of interest income from
cash equivalents and short term investments, interest expense and realized gains
(losses) on sale of our investments.
Equity in losses of investments
Equity in losses of investments consists of our proportionate share of the
net losses of OmniSky, Inciscent, MindSurf and VeriStar Corporation, which are
recorded under the equity method of accounting.
Minority interest
Minority interest consists wholly of Reuters' ownership interest in Sila.
Income tax benefit
Income tax benefit consists of a foreign deferred tax benefit associated
with the losses generated by Sila.
COMPARISON OF RESULTS FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Subscriber revenue. Subscriber revenue increased to $31.2 million for the
year ended December 31, 2000, from $3.7 million for the year ended December 31,
1999, and from $549,000 for the year ended December 31, 1998. Approximately
$21.3 million of the increase in 2000 was due to continued sales of product and
service offerings obtained in connection with acquisitions. Additionally, $6.2
million of the increase in subscriber revenue resulted from the increased number
of subscribers that signed on to our existing and new product and service
offerings such as wireless messaging and online trading products. Our subscriber
product and service offerings fell primarily into our Enterprise ASP/ISP
services and premium information and commerce services subscriber categories.
The increase in 1999 from 1998 was primarily due to the sale of product and
service offerings obtained in connection with our acquisition of Mobeo which
contributed $2.4 million of subscriber revenue in 1999.
Cost of subscriber revenue. Cost of subscriber revenue increased to $18.4
million for the year ended December 31, 2000, from $2.1 million for the year
ended December 31, 1999, and from $797,000 for the year ended December 31, 1998.
We generally expect the cost of subscriber revenue to increase proportionately
with any increase in subscriber revenue. Approximately $11.1 million of the
increase for 2000 was from product and service offerings obtained in connection
with our acquisitions and subsequent growth of those acquisitions. An additional
$5.2 million of the growth in 2000 was from an increase in subscribers resulting
from new offerings such as wireless messaging and online trading products
primarily in our Enterprise ASP/ ISP services and premium information and
commerce services. The increase in 1999 from 1998 was primarily due to product
and service offerings obtained in connection with our acquisition of Mobeo which
accounted for $859,000 of cost of subscriber revenue in 1999.
Engineering services revenue. Engineering services revenue increased to
$9.4 million for the year ended December 31, 2000, from $2.6 million for the
year ended December 31, 1999, and from $1.0 million for the year ended December
31, 1998. The increase between 2000 and 1999 was primarily due to our
engineering services contracts with OmniSky, Merrill Lynch, Response Services,
LLC and Inciscent. We recognized
21
22
$6.9 million under these contracts for the year ended December 31, 2000. The
increase between 1999 and 1998 was primarily due to our engineering services
contracts with OmniSky and Response Services. We recognized $2.6 million under
these contracts for the year ended December 31, 1999.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $5.7 million for the year ended December 31, 2000, from $1.4
million for the year ended December 31, 1999, and from $304,000 for the year
ended December 31, 1998. The increase between 2000 and 1999 was primarily due to
the cost of our engineering services contracts with OmniSky, Merrill Lynch,
Response Services and Inciscent. We recognized costs of $4.1 million under these
contracts for the year ended December 31, 2000. The increase between 1999 and
1998 was primarily due to the cost of our engineering services contracts with
OmniSky and Response Services. We recognized costs of $1.3 million under these
contracts for the year ended December 31, 1999.
Software and related services revenue. Software and related services
revenue was $17.6 million for the year ended December 31, 2000. We did not have
any software and related services revenue for the years ended December 31, 1999
or 1998. Approximately $17.0 million of software and related services revenue in
2000 was generated from the sale of licenses and services of the ScoutWare
software platform, e-Mobile Delivery platform, PacketCluster software suite,
FireRMS software suite and the Advantage software suite all of which were
obtained in conjunction with acquisitions and their subsequent growth occurring
in 2000. The remaining software and related services revenue was generated
primarily from our licensing of AIM.
Cost of software and related services revenue. Cost of software and
related services revenue was $5.9 million for the year ended December 31, 2000,
relating to royalty fees for third-party intellectual property used in the
software that we sell and personnel costs. We did not have any costs of software
and related services revenue for the years ended December 31, 1999 or 1998.
Research and development expenses. Research and development expenses,
including in-process research and development related to acquisitions, increased
to $38.0 million for the year ended December 31, 2000, from $2.6 million for the
year ended December 31, 1999, and from $1.3 million for the year ended December
31, 1998. The increase in 2000 from 1999 was primarily due to the hiring of
additional engineers and consultants for increased research and development
activities associated with the development of our software products, mobile
computing platforms and wireless data services. In addition, we incurred charges
of $7.9 million for in-process research and development in connection with our
acquisitions of Riverbed, Cerulean, RTS Wireless, and IFX in 2000. The increase
in 1999 from 1998 was primarily due to the hiring of additional engineers for
increased research and development activities associated with the development of
our software products and wireless data services. We expect research and
development expenses to continue to increase as we expand our product offerings.
General and administrative expenses. General and administrative expenses
increased to $52.9 million for the year ended December 31, 2000, from $5.9
million for the year ended December 31, 1999, and from $2.8 million for the year
ended December 31, 1998. The increase in 2000 was primarily due to additional
personnel and consultants performing general corporate activities, additional
facilities and our acquisitions since the prior year. The increased scope of our
business has required additional personnel and other expenses, such as
consulting and facilities, in all areas including: customer service, network
operations, project management, legal and accounting. The increase in 1999 from
1998 was primarily due to the addition of personnel performing general corporate
functions. We anticipate continued increases in our general and administrative
expenses as we expand our operations.
Selling and marketing expenses. Selling and marketing expenses increased
to $54.2 million for the year ended December 31, 2000, from $2.1 million for the
year ended December 31, 1999, and from $840,000 for the year ended December 31,
1998. The increase in 2000 was primarily due to an increase in advertising and
promotion costs, which increased from $933,000 to $23.1 million for the years
ended December 31, 1999 and 2000, respectively, including a nationwide broadcast
and print branding campaign, as well as increases in the number of sales and
marketing personnel primarily obtained through acquisitions. The increase in
1999 was primarily due to an increase in the number of sales and marketing
personnel. We expect selling and marketing
22
23
expenses to continue at an increased level as we incur additional expenses
focused on generating leads and sales opportunities.
Depreciation and amortization. Depreciation and amortization increased to
$238.1 million for the year ended December 31, 2000, from $1.1 million for the
year ended December 31, 1999, and from $265,000 for the year ended December 31,
1998. This increase in 2000 was primarily due to the amortization of intangibles
and goodwill relating to the acquisition of Riverbed, which accounted for $186.2
million of the expense in 2000, while $44.2 million related to our other
acquisitions. The increase in 1999 was primarily due to amortization of goodwill
and other intangibles related to the Mobeo acquisition. We expect this expense
to increase in 2001 as a result of a full year of amortization on several of our
acquisitions made late in 2000.
Option and warrant expense. Option and warrant expense decreased to $14.3
million for the year ended December 31, 2000, from $19.2 million for the year
ended December 31, 1999 and increased from $33,000 for the year ended December
31, 1998. The decrease between 2000 and 1999 was due to our general policy
subsequent to our initial public offering of granting shares to employees at
their fair value, partially offset by options granted in connection with
acquisitions at exercise prices less than fair value on the date of grant. The
increase between 1999 and 1998 was due to expenses associated with options
granted to the selling stockholders of Mobeo for consulting and employee
services. The increase was also due to an increase in the number of options that
vested during the period in connection with our initial public offering with
exercise prices less than the fair value on the date of grant resulting in an
expense of $17.9 million in 1999. In January 2001, we canceled 2.5 million
options granted to its employees and issued approximately 756,000 shares of
restricted stock to a number of employees holding options with exercise prices
higher than our then-current market value. We expect to record $26.6 million of
expense over the vesting period of the restricted stock grants.
Interest income, net. Net interest income increased to $42.4 million for
the year ended December 31, 2000, from an expense of $229,000 for the year ended
December 31, 1999. Interest income was $74,000 for the year ended December 31,
1998. The increase between 2000 and 1999 was primarily due to an increase in
interest earned on cash and cash equivalents following the completion of our
secondary offering on March 17, 2000. The decrease between 1999 and 1998
primarily relates to interest and related expense of a loan that funded the
purchase price of Mobeo, partially offset by interest earned on the proceeds
from our initial public offering.
Equity in losses of investments. Equity in losses of investments was $47.9
million for the year ended December 31, 2000, and $2.4 million for the year
ended December 31, 1999, and there was no equity in losses of investments for
the year ended December 31, 1998. The increase related to our proportionate
share of losses from OmniSky, Inciscent, MindSurf, and VeriStar, which are all
accounted for under the equity method of accounting. We expect to continue to
record equity losses in investments as these companies continue to develop their
operations.
Income tax benefit. Income tax benefit was $1.6 million for the year ended
December 31, 2000. There was no income tax benefit for the year ended December
31, 1999 or 1998. This increase was due to a foreign deferred tax benefit
associated with the losses generated by Sila.
Minority interest. Minority interest was $10.7 million for the year ended
December 31, 2000, relating to Reuters' proportional share of losses in Sila,
which is consolidated into our financial statements. We expect that Sila will
continue to incur losses as it develops its operations. There was no minority
interest for the years ended December 31, 1999 and 1998.
23
24
SEGMENT RESULTS
VERTICAL SOFTWARE WIRELESS EUROPEAN CORPORATE AND
MARKETS PRODUCTS SERVICES OPERATIONS OTHER TOTAL
-------- ---------- -------- ---------- ------------- ----------
Year ended December 31, 1999
Revenue.................... $ 6,326 $ -- $ -- $ -- $ -- $ 6,326
Gross profit............... $ 2,850 $ -- $ -- $ -- $ -- $ 2,850
Total assets............... $102,534 $ -- $ -- $ -- $ -- $ 102,534
Year ended December 31, 2000
Revenue.................... $ 31,100 $ 7,938 $5,633 $ 13,483 $ -- $ 58,154
Gross profit............... $ 13,837 $ 4,997 $2,984 $ 6,320 $ -- $ 28,138
Total assets............... $294,683 $1,083,996 $ -- $178,001 $1,120,695 $2,677,375
The type of revenue we earn in each of our segments varies from segment to
segment.
Vertical markets segment. In 1999 and 1998, all of our revenue was from
operations that are now included in our vertical markets segment. As we operate
in a wide variety of vertical markets, our vertical markets segment can have
subscriber revenue, engineering services revenue and software and related
services revenue depending on the needs of the customer. Revenue in the vertical
markets segment increased from $6.3 million in 1999 to $31.1 million in 2000 and
gross profit in that segment increased from $2.8 million in 1999 to $13.8
million in 2000. The increase in this segment was primarily the result of sales
of product and service offerings obtained in connection with acquisitions and
their subsequent growth which contributed $22.0 million and $12.8 million to
revenue and gross profits, respectively. The remaining growth related to
increases in subscribers to existing services in the amount of $9.1 million and
$1.0 million to revenue and gross profit, respectively.
Software products segment. The software products segment typically has
software products maintenance and related services revenue. The sales of
software application and product offerings obtained in connection with the
acquisitions of Riverbed and RTS contributed approximately $7.5 million of the
revenues and $4.6 million of the gross profits to the software products segment
in 2000. The remaining portion of our software revenues and gross profits relate
to the sale of our AIM software package.
Wireless services segment. Our wireless services segment can derive
revenue from subscribers and from engineering services related to setting up and
servicing these subscribers. All of the increase in revenue and gross profit in
the wireless services segment was a result of new product and service offerings,
including our Blackberry by Aether and wireless Enterprise ISP services.
European operations segment. Our European operations segment consists of
Sila and generates revenue from subscribers, engineering services and from the
sale of software and related services. Sila was formed in May 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private and public placements of our equity securities. Through December 31,
2000, we have raised aggregate net proceeds of approximately $1.5 billion
including the issuance of $310.5 million of 6% convertible subordinated notes.
As of December 31, 2000, we had approximately $875.4 million in cash and
short-term investments (including restricted cash of $16.4 million) and working
capital of approximately $819.6 million.
Net cash used in operating activities was $63.8 million, $12.1 million and
$4.4 million for the years ended December 31, 2000, 1999 and 1998, respectively.
The principal use of cash in each of these periods was to fund our losses from
operations.
Net cash used in investing activities was $512.2 million, $12.6 million and
$6.5 million for the years ended December 31, 2000, 1999 and 1998 respectively.
For the twelve months ended December 31, 2000, we used $48.3 million for the
purchase of property and equipment, $158.4 million for investments in 20
24
25
companies and $303.7 million to acquire LocusOne, NetSearch, Cerulean, SunPro,
Sinope, Motient's retail transportation unit, RTS Wireless, IFX and for the
related formation of Sila, and Sila's subsequent acquisitions. Cash used by
investing activities for the year ended December 31, 1999 was primarily for the
purchase of property and equipment and the acquisition of Mobeo partially offset
by the sale of short-term investments. For the year ended December 31, 1998 cash
used in investing activities was for the purchase of property and equipment and
purchase of short-term investments.
Net cash provided by financing activities was $1.354 billion, $101.4
million and $12.5 million for the years ended December 31, 2000, 1999 and 1998.
For the year ended December 31, 2000, cash provided by financing activities was
primarily attributable to proceeds received from our secondary offering of
common stock and convertible subordinated notes. For the year ended December 31,
1999 cash provided by financing activities was primarily attributable to
proceeds received from our initial public offering and the issuance of notes
payable. For the year ended December 31, 1998, cash provided by financing
activities was primarily attributable to cash proceeds from the sale of
membership interests.
While not a measure under generally accepted accounting principles, EBITDA
is a standard measure of financial performance in our industry. EBITDA means
earnings before interest, taxes, depreciation and amortization and option and
warrant expense. EBITDA should not be considered in isolation or as an
alternative to net income (loss), income (loss) from operations, cash flows from
operating activities, or any other measure of performance under generally
accepted accounting principles. Cash expenditures for various long-term assets,
interest expense and income taxes have been, and will be, incurred which are not
reflected in the EBITDA presentations. EBITDA losses in 2000 increased from
$10.4 million in the first quarter, to $24.9 million in the second quarter,
$28.9 million in the third quarter and $44.9 million in the fourth quarter. The
increases from quarter to quarter were due to increases in operating expenses as
a result of acquisitions and our continued growth.
We expect to continue to use cash to fund operations as we continue to
develop our products and markets. The time at which our operating revenues will
exceed operating expenses, if ever, depends on a wide variety of factors
including general business trends, development of our markets, the progress of
and changes in our research and development activities and the effect of
potential future acquisitions. Given our current cash resources and our ability
to control some of the factors that will affect when operating revenues may
exceed operating expenses, we believe we have substantial flexibility to
continue operations and still have funds available for our operating and capital
requirements for at least the next twelve months.
For fiscal year 2001, we expect to have the following expenditures:
- We are committed to purchase 87,050 RIM handheld devices. Depending on
the mix of products ordered, we estimate the cost will be between $27.8
and $40.0 million.
- Through 2001, we will spend $18.6 million for debt service on our
convertible subordinated notes.
- We may be required to pay $23.0 million for purchase earn-outs related to
certain acquisition related activities.
- In accordance with our agreement with MindSurf, we have committed to
invest an additional $28.2 million in MindSurf in 2001.
- In January 2001, we invested an additional $10.0 million in Strategy.com.
- We are committed to provide additional funding of up to $9.6 million to
Sila in 2001.
In addition to the specific expenditures identified above, we expect to
continue to invest cash on other capital expenditures, including acquisitions
and other strategic opportunities, additional leasehold improvements, network
operations centers and associated furniture and equipment.
25
26
FACTORS AFFECTING OPERATING RESULTS
Our results of operations are affected by a variety of factors, including
those described below.
We have historically incurred losses and these losses may increase in the
future. We reported net losses of $4.7 million, $30.7 million and $362.7
million for the years ended December 31, 1998, 1999, and 2000, respectively. Our
amortization of intangible assets has grown significantly as a result of recent
acquisitions. In addition, we expect to continue to incur significant sales and
marketing, systems development and administrative expenses. Therefore, we will
need to generate significant revenue to become profitable and sustain
profitability on a quarterly or annual basis. We expect to continue to incur
significant losses for the foreseeable future. As a result, we may not be able
to achieve profitability on a quarterly or annual basis.
We may not be able to recover the full value of goodwill recorded on some
of our acquisitions and investments. During 1999 and 2000, we recorded
approximately $1.7 billion in goodwill and other intangibles related to our
acquisitions and made investments in other companies of approximately $154.2
million. Consideration for some of our acquisitions was partially or fully
funded through the issuance of shares of our common stock at a time when our
stock price was at historically high prices. Most of the companies we acquired
or invested in were start-up or newly formed entities. Most of these companies
were privately held and their fair values are highly subjective and not readily
determinable. At December 31, 2000, the market value of the public companies in
which we have invested exceeded our cost of acquiring those investments. Our
policy is to review the value of all our acquisitions and investments for
impairment whenever events or circumstances indicate that the carrying amount
may not be recoverable.
At the time of our acquisitions and investments, market valuations and the
availability of capital for such companies were at historically high levels.
Since the end of 2000, stock prices and market valuations in our industry and
similar industries have fallen substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures. The
market valuations of those publicly traded companies in which we have invested
and of other companies similar to those we have acquired or invested in have
declined substantially since December 31, 2000.
We are currently evaluating the recent decline in the valuation of our
acquisitions and investments to determine if the decline is other than
temporary. We believe that if market valuations of similar companies remain at
their current levels or decline further, it is likely that we will determine the
market decline to be other than temporary and record an impairment charge to
reduce the carrying value of the goodwill and intangibles related to our
acquisitions and our investments to fair value. Although we cannot determine the
amount of any charge we may decide is necessary until we complete our
evaluation, any such charge is likely to be substantial.
Our future results are uncertain because our historical revenue was derived
from services other than those we expect to be the focus of our business in the
future. We only have a limited history selling our current services, by which
you can evaluate our business, financial condition and operating results.
Although we commenced operations in January 1996, until March 1997, all of our
revenue came from engineering services and not from monthly service
subscriptions or software licensing which we now provide and which will be our
focus in the future. In addition, our monthly service subscriptions have come
primarily from subscriptions to our financial data, wireless internet and
messaging and online trading services. Our strategy includes development of
other services in other industries. Because of this change in focus and our
recent acquisitions, you should not rely on our past performance to evaluate our
future performance.
There is no established market for our services; we may not be able to sell
enough of our services to become profitable. The markets for wireless data and
transaction services are still emerging. Continued growth in demand for, and
acceptance of, these services remains uncertain. Current barriers to market
acceptance of these services include cost, reliability, functionality and ease
of use. We cannot be certain that these barriers will be overcome. We are
currently developing services for some of our business customers pursuant to
preliminary agreements, and expect to develop other Aether products. We cannot
assure you that these parties will enter into contracts for our services or that
products developed for future sale will result in
26
27
revenue. Our competitors may develop alternative wireless data communications
systems that gain broader market acceptance than our systems. If the market for
our services does not grow, or grows more slowly than we currently anticipate,
we may not be able to attract customers for our services and our revenues would
be adversely affected.
Our customers include technology companies that may be experiencing
shortages in capital. This could result in reduced sales to these companies and
difficulty in collecting outstanding receivables. During 1999 and 2000, a
portion of our revenues came from newly formed technology-based companies,
including companies in which we have made investments. Revenues from companies
in which we have investments, including OmniSky, Inciscent, MindSurf, ePhones,
and ParkStone, were approximately $2.2 million and $10.5 million for the years
ended December 31, 1999 and 2000, respectively. Accounts receivable from these
companies at December 31, 1999 and 2000 were $612,000 and $4.9 million,
respectively. All of our investments were made in participation with other
unrelated investors at the same per share price as the other investors. Our
investment policy generally limits our investments to companies that have
completed at least two rounds of financing and generally requires that an
unrelated investor lead the round of financing that we participate in.
Newly formed technology-based companies have a limited operating history
and many have reported significant losses since inception. They are subject to
many of the risks and uncertainties that we are, including rapid changes in
technology, no established markets for their products, and intense competition,
among others. In addition, many of these companies may require significant
infusions of capital to continue operations. The availability of such capital
has been curtailed and some of these companies may not be able to raise
sufficient funds to continue to operate, which could limit our ability to
generate further revenues from such companies as well as to collect their
outstanding receivables.
Our recent acquisitions, investments and strategic alliances may not
deliver the value we paid or will pay for them. Excessive expenses may result if
we do not successfully integrate them, or if the costs and management resources
we expend in connection with the integrations exceed our expectations. We
expect that our recent acquisitions, investments and strategic alliances and any
acquisitions, investments or strategic alliances we may pursue in the future
will have a continuing, significant impact on our business, financial condition
and operating results. The value of the companies that we acquired or invested
in may be less than the amount we paid and our financial results may be
adversely affected if:
- we fail to assimilate the acquired assets with our pre-existing business;
- we lose key employees of these companies or of Aether as a result of the
acquisitions;
- our management's attention is diverted by other business concerns; or
- we assume unanticipated liabilities related to the acquired assets.
In addition, the companies we have acquired or invested in or may acquire
or invest in are subject to each of the business risks we describe in this
section, and if they incur any of these risks the businesses may not be as
valuable as the amount we paid. Further, we cannot guarantee that we will
realize the benefits or strategic objectives we were seeking to obtain by
acquiring or investing in these companies.
We may have to take actions that are disruptive to our business strategy to
avoid registration under the Investment Company Act of 1940. As part of our
business strategy, we own minority and majority equity interests in a number of
ventures. While we believe we are not currently an investment company, our
ownership of these securities could potentially subject us to registration under
the Investment Company Act of 1940, which, absent an applicable exclusion or
exemption, requires registration for companies that are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities. If
we were required to register as an investment company, we would not be able to
continue operating our business in accordance with our business plan.
Accordingly, we intend to take all necessary steps to avoid being deemed an
investment company. These necessary steps might disrupt our business strategy of
forming joint ventures with strategic partners and making equity investments in
companies with whom we have a strategic relationship to develop new technology
or extend the reach of existing products and services. A company may
27
28
be deemed to be an investment company if it owns investment securities with a
value exceeding 40% of its total assets excluding cash items and government
securities as defined in the Investment Company Act, subject to certain
exclusions and exemptions. Any acquisition or disposition of assets, or
fluctuations in the value of our assets may require us to take steps to avoid
registration under the Investment Company Act. In particular, a write down of
the value of our acquisitions such as those that may occur as a result of the
recent market downturn, could increase the percentage of our total assets
accounted for by investment securities. The steps required to avoid registration
could include buying, refraining from buying, selling or refraining from selling
securities in circumstances where we would not take these actions except to
avoid registration under the Investment Company Act. For example, we may have to
retain majority or controlling interests in our joint ventures after their
initial public offerings, which would require us to expend significant amounts
of capital that we might otherwise use to expand our products and services in
other market segments. Moreover, we may incur tax liabilities if we are required
to sell assets. We may also be unable to purchase additional investment
securities that may be important to our business strategy. We have applied to
the SEC for an exemptive order declaring that we are not an investment company
and are not required to register under the Investment Company Act. We may not
ultimately be successful in receiving such an order.
We may not achieve profitability if we are unable to maintain, improve and
develop the wireless data services we offer. We believe that our future
business prospects depend in part on our ability to maintain and improve our
current services and to develop new ones on a timely basis. Our services will
have to achieve market acceptance, maintain technological competitiveness and
meet an expanding range of customer requirements. As a result of the
complexities inherent in our service offerings, major new wireless data services
and service enhancements require long development and testing periods. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new services and service enhancements.
Additionally, our new services and service enhancements may not achieve market
acceptance. If we cannot effectively develop and improve services we may not be
able to recover our fixed costs or otherwise become profitable.
If we do not respond effectively and on a timely basis to rapid
technological change, our services may become obsolete and we may lose
sales. The wireless and data communications industries are characterized by
rapidly changing technologies, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. Our
services are integrated with wireless handheld devices and the computer systems
of our corporate customers. Our services must also be compatible with the data
networks of wireless carriers. We must respond to technological changes
affecting both our customers and suppliers. We may not be successful in
developing and marketing, on a timely and cost-effective basis, new services
that respond to technological changes, evolving industry standards or changing
customer requirements. Our ability to grow and achieve profitability will
depend, in part, on our ability to accomplish all of the following in a timely
and cost-effective manner:
- effectively use and integrate new wireless and data technologies;
- continue to develop our technical expertise;
- enhance our wireless data, engineering and system design services;
- develop applications for new wireless networks; and
- influence and respond to emerging industry standards and other changes.
We depend upon wireless networks owned and controlled by others. If we do
not have continued access to sufficient capacity on reliable networks, we may be
unable to deliver services and our sales could decrease. Our ability to grow and
achieve profitability partly depends on our ability to buy sufficient capacity
on the networks of wireless carriers such as Verizon Wireless, Bell South
Corporation, Motient and AT&T Wireless and on the reliability and security of
their systems. All of our services are delivered using airtime purchased from
third parties. We depend on these companies to provide uninterrupted and "bug
free" service and would not be able to satisfy our customers' needs if they
failed to provide the required capacity or needed level of service. In addition,
our expenses would increase and our profitability could be materially adversely
affected if
28
29
wireless carriers were to increase the prices of their services. Our existing
agreements with the wireless carriers generally have one-year terms. Some of
these wireless carriers are, or could become, our competitors and if they
compete with us they may refuse to provide us with their services.
Our failure to develop recognition for the Aether brand could prevent us
from achieving a profitable level of sales. Our expenses related to sales and
marketing activities were $840,000, $2.1 million and $54.2 million for the years
ended December 31, 1998, 1999 and 2000 respectively. We intend