UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 000-27707

 

 

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 ý No o

 

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. o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

 

The aggregate market value of voting stock held by nonaffiliates of the registrant was $124,482,714 as of June 28, 2002 ($2.95 per share).

 

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 5, 2003 was $139,102,681.

 

As of March 5, 2003, 42,280,450 shares of the registrant’s common stock, $.01 par value per share, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Proxy Statement for the 2003 Annual Meeting of the registrant, which will be filed with the Commission within 120 days after the close of the fiscal year, is incorporated by reference into Part III.

 

 

AETHER SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2002

 

INDEX

 

PART I
Item 1	Business
Item 2	Properties
Item 3	Legal Proceedings
Item 4	Submission of Matters to a Vote of Security Holders
PART II
Item 5	Market for the Company’s Common Equity and Related Security Holder Matters
Item 6	Selected Financial Data
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A	Quantitative and Qualitative Disclosures About Market Risk
Item 8	Financial Statements and Supplementary Data
Item 9	Change In and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10	Directors and Executive Officers of the Registrant
Item 11	Executive Compensation
Item 12	Security Ownership of Certain Beneficial Owners and Management
Item 13	Certain Relationships and Related Transactions
Item 14	Controls and Procedures
PART IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

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 ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND BUSINESS. AETHER UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

 

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PART I

 

ITEM 1. BUSINESS

 

OVERVIEW

 

Aether Systems, Inc. provides wireless and mobile workforce automation solutions that are designed to make people more productive and their organizations more profitable.  Our products and services are built on Aether Fusion (TM), our technology platform that allows for secure, reliable extension of critical information to virtually any wireless or mobile environment

 

We provide the technology and services necessary for businesses and government agencies to extend existing and future applications and data from the desktop to almost any wireless or mobile device.  Aether delivers these capabilities through its technology foundation, Aether Fusion (TM), which provides enterprise class security, scalability (the ability to grow more effectively as customer needs grow), device and network independence, and ease of use.  The Aether Fusion(TM) technology platform also is designed to enable flexible mobile and wireless solutions that will grow and adapt as the enterprise itself grows and changes.  Our market strategy is to develop, deploy and manage mobile and wireless solutions built on industry standard technology and backed by expertise in wireless hosting, software and services.

 

Aether 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 21, 1999, we converted our organizational structure from a limited liability company to a Delaware corporation and changed our name to Aether Systems Inc Our Internet address is www.aethersystems.com.  Since November 15, 2002, we have made available free of charge, on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  We are providing the address of our internet site solely for the information of investors.  We do not intend the internet address to be an active link, and the contents of the website is not a part of this report.

 

THE AETHER SOLUTION

 

Since its inception in 1996, Aether has recognized that wireless and mobile data applications are not just the extension of systems and applications used in environments where infrastructure is physically connected.  The continuing adoption of wireless and mobile data is driven by applications built to work in a mobile environment from the start.  Most applications require access to information from many back-end systems.  Aether’s expertise and focus has always been on the optimization of accessing and exchanging data in a mobile environment.

 

As an early entrant in the emerging wireless data solutions market, Aether has helped drive technology innovation while adapting to market change.  Over the last 18-24 months, growth in spending on wireless initiatives has been slower than anticipated.  As a result, Aether has focused its business strategy on markets that Aether believes have demonstrated near-term growth potential based on return on investment (ROI) from wireless and mobile solutions.  In the markets we have identified, we are focused on building a revenue base and achieving maximum customer satisfaction.

 

We believe that wireless and mobile data solutions have helped organizations increase productivity and efficiency in transportation, logistics, mobile office, field service, government and Homeland Security.  We believe that companies and agencies engaged in these activities are increasingly seeking to give their workforces mobile and wireless access to corporate applications, company data, and internal e-mail and groupware.  Remote access can be achieved either through continuous real-time communications, or by periodically synchronizing data to a handheld device.

 

We have seen many corporate IT managers who explore wireless and mobile data solutions quickly become overwhelmed with the complexity of the wireless world and its frequently incompatible and changing protocols for carrier networks, devices and applications, as well as the issues surrounding support for such deployments.  As carrier networks continue to deploy newer technologies, we provide our customers with the ability to migrate and upgrade to them due to the capabilities of our software.

 

Using the Aether Fusion(TM) technology foundation, we develop, deploy and manage mobile and wireless solutions built on industry standard technology.  Businesses, systems integrators and developers can also use elements of Aether Fusion(TM) on their own to quickly create, deploy and manage wireless solutions across multiple devices and carrier networks.  We complement our technology with services including wireless data engineering and application development, wireless data hosting, product fulfillment and customer support.  These components can be used separately or in various combinations to extend existing and future applications and data to virtually any handheld device over virtually any wireless network.

 

On January 16, 2003, Aether announced two initiatives with EDS.  Under an alliance agreement with EDS, Aether and EDS agreed to develop and deliver wireless and mobile solutions based on Aether technologies and EDS services.  In addition, under a managed services agreement, EDS will manage on a fee basis, some of Aether’s internal information technology (IT) operations and customer care services.  This

 

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relationship will provide additional flexibility for Aether to scale its services component more cost-effectively while allowing Aether access to EDS’s client relationships as a sales channel.

 

On February 5, 2003, Aether announced a global strategic alliance with Sun Microsystems.  The alliance will expand the companies’ collaborative sales, marketing, and engineering efforts.  The companies will work together to develop joint solutions built on open standards using the Sun Open Net Environment and Aether Fusion (TM).  The companies will also work together to develop and market the joint solutions for field forces in businesses and government agencies that perform functions such as maintenance and service, distribution and delivery, public safety and healthcare.

 

On March 5, 2003, Aether announced the availability of Aether’s wireless data solutions for public safety on Nextel’s i95cl Java^TM technology-enabled handsets and Nextel’s iM1100.  Focused principally on PocketBlue^TM, a handheld application which can run on Nextel’s nationwide digital packet data network, this solution is part of a fully integrated mobile data system, providing wireless criminal database queries, secure messaging and alarm capabilities for all connected authorized mobile users.  The handheld application integrates with Aether PacketCluster^TM, which provides officers in vehicles with real-time silent communication through text messaging.

 

THE AETHER STRATEGY

 

We believe our capabilities and experience position Aether as a market leader in providing mobile and wireless data solutions to businesses and government agencies.  Our strategy is to extend our leadership position through our engineering expertise, our software products, our hosted services and our partnerships with global technology leaders to move into growth opportunities.

 

We will continue to focus resources on core areas where we either have developed a leadership position or have recognized a clear market opportunity.  A number of our products have cross-selling opportunities among the markets cited below.  We are seeking to maximize these opportunities as we work with partners like EDS and Sun Microsystems.  We currently focus on the following markets:

 

Transportation. Our main products in this area are MobileMax™, a vehicle location and messaging solution for long-haul trucks, and a number of asset monitoring products, including GeoLogic™, TrailerMax™ and 20/20v™.  MobileMAX™ allows transportation companies to increase their ROI through the least-cost-routing capability of multi-mode technology (terrestrial and satellite connectivity) to deliver two-way data and dispatch messaging and automatic, instantly communicated information on each vehicle - most typically trucks.  Least cost routing refers to MobileMax’s capability to utilize the less costly terrestrial-based wireless connectivity whenever possible.  Otherwise, MobileMax is connected using satellite connectivity.  The optional enhancements for MobileMax™ include a collection of geopositioning-driven features such as automatic state-line crossing information, arrival/departure notifications, and certain geo-fencing capabilities.  Geo-fencing is the ability to define geographic areas and boundaries upon which exception reporting, which is the ability to alert the appropriate personnel, can be based.  Once a geo-fence is established, users can be automatically notified, as a result of exception reporting, if a vehicle enters or leaves the defined area.  This functionality can be used for territory management, route verification, arrival/departure notification and prohibited locations.  Exception reporting can also be applied to a wide variety of additional events, such as arrivals, departures, deliveries, pick-ups, illegal entries, unauthorized movement, and more.

 

Aether markets GeoLogic™, TrailerMax™ and 20/20v™, three asset monitoring products for trailers and other mobile assets, that incorporate a variety of geo-fencing and exception reporting features.  GeoLogic™ is a management and satellite-based tracking solution that allows fleet managers to monitor thousands of trailers in the field by utilizing a unique, user-configurable event-driven and exception- based alert reporting system.  It incorporates the use of geo-fences and pre-determined events such as arrivals, departures, entry to the trailer, and disconnection from the truck to help with mission critical and secure load planning.  Its target market is large trucking fleets.

 

TrailerMax™ is an asset monitoring solution that is targeted towards for-hire truck fleets and private truck fleets.  As compared to GeoLogic, TrailerMax is a lower cost, terrestrial-based solution.

 

20/20v™ is a nationwide vehicle location and management solution targeting commercial fleets.  The product, which we believe has cross-selling potential, is often used to track private fleets such as those used for field service, sales, and delivery organizations.  Location and status information is delivered in real-time to an Internet-based host, providing anywhere, anytime management of fleets.  Given 20/20v™’s applicability to large enterprises that have delivery and/or service fleets which support their businesses, Aether’s Enterprise Mobility Solutions division will also market and sell Aether 20/20v™ to enterprise fleets operating in North America.

 

Enterprise Mobility Solutions (EMS).  We are focused on providing integrated wireless data solutions to enterprises with product development emphasis on field service, sales force automation, distribution and delivery management, and mail and messaging access.  One of the primary tasks of EMS is supporting our relationships with EDS and Sun Microsystems.  EDS intends to add wireless and mobile capabilities to its product offerings by adopting Aether’s technologies and expertise.  The Sun Microsystems alliance expands our collaborative sales, marketing, and engineering efforts.  The EMS group will help EDS and Sun Microsystems as they market a wide variety of Aether’s applications.  For example, in addition to marketing 20/20v™, EMS will also market our supply chain management product, e-Mobile Delivery.  e-Mobile Delivery provides delivery confirmation through signature capture and allows for customer on-line order/delivery tracking. It limits paperwork, thus reducing lost documents and inaccurate information.  e-Mobile Delivery also streamlines a customer’s payment cycle, which reduces costs and increases the potential for profits.  e-Mobile Delivery is currently being transitioned to Aether Fusion (TM)™, and will then benefit from Aether Fusion’s improved capabilities, enterprise class security, greater scalability, device and network independence, and ease of use.  Another

 

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product with cross-selling potential is Aether’s mobile office solution, Aether Attaché.  Recently released, Attaché is designed to address the needs of office workers who have a need for mobile access to corporate e-mail and groupware.  Utilizing Aether Fusion (TM)™, Attaché extends collaborative applications, such as email and calendaring, to the mobile user, virtually regardless of device and carrier network.

 

Mobile Government. We are a service provider in the area of wireless data solutions for public safety.  We believe that our existing user base positions us to help agencies address their standard requirements as well as their expanded Homeland Security needs.  We believe that Aether is well positioned for certain aspects of Homeland Security in that we have products for both law enforcement and asset tracking.  The combination of the two could allow us, for example, to integrate the exception reporting capabilities of our asset tracking products with law enforcement notifications.  Our public safety solutions are integrated into 47 different state databases as well as local and federal databases to deliver real-time information in seconds without having to involve dispatch or other resources.  Our products in this area are the PacketCluster family of products, the handheld version of PacketCluster Patrol called PocketBlue, the FireRMS family of products for fire and rescue companies, and the handheld application for this community, PocketRescue.

 

PRODUCTS AND SERVICES

 

Currently we provide our products and services directly.  Through our alliance with EDS, EDS will begin to assume responsibility for the delivery of some of our products and services during 2003.  Specifically, as EDS sells our products, they will assist us, to varying degrees, with integration services.  Additionally, EDS will assume our hosted services and deployment support components for our EMS group.  We believe this arrangement will help us grow more cost-effectively.

 

Our products and services include:

 

• Software applications targeted to specific vertical market sectors  (transportation, mobile government, and mobile workforce

enablement applications) and for general wireless data management and infrastructure;

 

• Integration services to businesses and government agencies seeking to develop and incorporate wireless data systems;

 

• Hosted services, including wireless integration and connectivity, and Internet and messaging services, and

 

• Deployment support that includes product fulfillment and customer service.

 

Applications and Software

 

We have built on our experience in developing tailored applications for specific customers to develop an increasing number of products that are replicable and scalable for a range of customers.  Rapid application development on Aether Fusion(TM) has become an area of emphasis for us.  We currently market over twenty applications and software products.  Approximately 65 percent of our engineers are devoted to this activity.  The application types are as follows:

 

Automatic Vehicle Location (AVL)

• Aether 20/20V™

• Aether TrailerMax™

 

Delivery Management

• Aether e-Mobile Delivery™

 

Device and Software Management

• Aether FusionIT™

 

E-Mail and Mobile Office

• Aether Attaché™

• Blackberry™ by Aether™

 

Field Service

• Aether 20/20V™

• Tailored Solutions

 

Fleet Management

• Aether 20/20V™

• Aether GeoLogic™

• Aether MobileMax™ and related sub-products

• Aether Platinum Service™

• Aether TrailerMax™

 

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Logistics

• Aether e-Mobile Delivery™

 

Market Data

• Aether Energy Pager

• Aether FX Alert

• Aether MarketClip and MarketClip Plus

• Aether Scrappy Pager

 

Mobile Communications

• Aether MobileMax™ and related sub-products

 

Public Safety and Homeland Security

• Aether FireRMS™ and FireRMS Web

• Aether PocketBlue™

• Aether PocketFD™

• Aether PacketCluster® Patrol™

• Aether PacketCluster® Rescue™

• Aether PacketWriter®

• Aether StopTracker™* (trademark of PSComm)

 

Sales Force Automation

• Tailored Solutions

 

Supply Chain Management

• Aether e-Mobile Delivery™

 

Wireless and Mobile Platform

• Aether Fusion™

 

Integration Services

 

Integration Services includes consulting and engineering, and integration into the backend infrastructure of businesses and government agencies for wireless data solutions.  We provide engineering services to complement our software products and some of our hosted services and on a stand-alone basis.  We also may accept engineering assignments that might allow us to embrace technological advances or expand into new industry sectors or services.  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.  Approximately 15 percent of our engineers are devoted to integration.

 

Hosted Services

 

We provide secure, state-of-the-art hosting facilities for businesses and government agencies that wish to outsource the operation and management of their wireless deployments.  Our hosted services offerings include wireless integration into our Data Center described below for application hosting and/or wireless connectivity, and Internet and messaging services that augment vertical market applications.

 

Corporate managers require rigorous security standards when entrusting their data to third parties.  Our Data Center has numerous redundant elements and serves as a high-security physical link between data feeds from our customers’ and others’ data systems and wireless carrier networks.  We scramble digital messages as they move along wireless networks using the latest encryption technologies.  Our Data Center and the services we offer through it relieve corporations from the burden of constructing similar facilities.  We believe our network operations center described below is capable of meeting the security standards for services we developed or are developing for our customers.

 

We built a Network Operations Center (NOC), the monitoring center for operations, and a Data Center, the facility which holds the computing elements, that we believe are unique to the industry in that they were built specifically for robust wireless deployments.

 

Pursuant to our January 2003 agreement with EDS, EDS plans to install a network to deliver wireless solutions connecting us with suppliers and clients using an EDS facility as the management hub.  As a result of this agreement, we will be transferring responsibility for monitoring our network operations to EDS.  We are currently analyzing plans relating to our current Network Operations Center.

 

Deployment Services

 

Our deployment services are currently headquartered in Owings Mills, Maryland and include product fulfillment and customer support, which help alleviate the complexities associated with implementing and supporting a solution. In today’s environment in which IT departments have limited resources yet are tasked to do more dispersed work, we offer these services.

 

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Product fulfillment and provisioning facilitate the delivery of devices to the customer/employee base.  During the development process, device(s) are chosen based on the application’s use, and these devices are delivered with the application(s) already on them.  For our customers, 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 the modem and software application only.  We handle all repair and warranty issues for devices we provide to our customers.

 

Additionally, we offer post-deployment customer support and customer billing.  Our customer care specialists can provide support on virtually any issue that might arise from application troubleshooting to wireless network and device issues.  We can also handle customer billing for our customers’ user fees, device and modem purchases, and other charges.  Our billing system can support increases in our customers’ end user base.  We alleviate the complexities that would otherwise be placed upon a customer’s IT department.

 

Pursuant to our January 2003 agreement, EDS will assume responsibility for the call center and fulfillment operations for Aether’s EMS group.

 

SALES AND MARKETING

 

As of March 2002, we have approximately 50 salespeople, sales engineers for technical support during the sales cycle and marketing professionals.  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., plus Europe from offices in the United Kingdom.  In addition to having a vertical market focus, our salespeople focus on Fortune 1000 companies that can benefit from field force automation applications including field service, sales force automation, and mobile collaboration tools such as cross-device messaging and personal information management.  Our business development personnel and senior executives also assist in developing potential strategic relationships, such as the ones with EDS and Sun Microsystems, for selling and promoting our products and services.

 

EUROPEAN OPERATIONS THROUGH SILA

 

We address the needs of business customers abroad through our European division, Sila Communications, Ltd (Sila).  In the fourth quarter of 2002, we acquired the remaining portion of Sila.  Sila currently targets major corporations throughout Europe that seek to extend their applications to handheld devices, as well as wireless carriers seeking to outsource wireless data services.  Sila, headquartered in London, provides wireless system hosting and end user support primarily to financial services customers via various wireless networks from the European countries of the United Kingdom, Sweden and Spain and the region of Benelux.

 

STRATEGIC RELATIONSHIPS

 

We believe that partnerships are critical to our success and vital to our growth.  The partnerships we have created include joint development relationships in which we work together with firms to develop products and/or next generation technologies to address specific vertical market opportunities.  We also work with various suppliers at the platform and application level in Original Equipment Manufacturer (OEM) relationships to embed technologies from suppliers in Aether FusionTM.  Finally, we have distribution partnerships where we can gain the marketing capacity of other firms with greater market presence in markets than we have today.

 

A significant focus of ours during 2002 was to secure relationships such as the ones we now have with EDS and Sun Microsystems.  Aether and EDS have formed an alliance to deliver wireless and mobile solutions based on Aether technologies and EDS services.  In addition, EDS will manage Aether’s internal IT operations and customer care services.  This relationship with EDS will provide additional flexibility for Aether to scale its services component of our offerings more cost effectively as we work to leverage EDS’ customer relationships.  Aether and Sun Microsystems formed a global strategic alliance to expand collaborative sales, marketing, and engineering efforts.  The companies will work together on joint solutions built on open standards using the SunTM  Open Net Environment (Sun ONE) and Aether’s FusionTM for scalability and availability.  Aether and Sun Microsystems will market the joint solutions for field forces in businesses and government agencies that perform functions such as maintenance and service, distribution and delivery, public safety and healthcare.  We believe the combination of these companies’ products and services offer opportunities that were not previously present to us.

 

Wireless Network Carriers

 

As a relatively large purchaser of wireless data network capacity for many of the carriers, 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 wireless carriers including Verizon Wireless, AT&T Wireless, Cingular Wireless and Motient.  As a result, we can give our customers a wide variety of wireless carrier choices.

 

COMPETITION

 

The market for our solutions is competitive.  We believe we offer the broadest range of applications and services to businesses and government agencies necessary to enable the development, offering and ongoing support of wireless data communication systems for their employees and customers.  The widespread adoption of industry standards may make it easier for new market entrants to offer some or all of the services we

 

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offer and may make it easier for existing competitors to introduce some or all of the applications and services they do not currently provide, or improve the 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 and database vendors, including IBM, EDS, and Oracle.

 

• mobile and/or wireless software companies, including Brience, Inc., Comverse Technology, Inc., Extended Systems, Inc., Everypath, Inc., Openwave Systems, and Puma Technology, Inc.

 

• wireless data services providers, such as 724 Solutions Inc. and GoAmerica, Inc.

 

• wireless network carriers, such as, AT&T Wireless, Cingular Wireless, Nextel Communications, Inc., Sprint PCS Group, and Verizon Wireless.

 

Some of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. In the category of wireless network carriers, some of these companies may also sell us airtime for our solutions.  Additionally, some 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 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.

 

INTELLECTUAL PROPERTY RIGHTS

 

We rely on a combination of trademark, patent, copyright, service mark, trade secret laws and contractual restrictions to establish and protect proprietary rights in our products and services.  We have applied for various trademarks and patents.

 

The following trademarks are registered with the United States Patent and Trademark Office.  ScoutSync, Cerulean, Cerulean Design, PacketCluster, PacketCluster Patrol, PacketWriter, MobileMax2, Advantage, ScoutBuilder, Aether & Design, ScoutWeb, ScoutIT, Pro2000, e-Mobile, and Airbroker.  The following trademarks have been published or allowed by the United States Patent and Trademark Office: Aether, Aether Systems, Aether Design, Unwired By Aether, Aether Attache, MobileFusion, PocketInvestigator, AIM Aether Intelligent Messaging, The Power Behind Mobile Workers, AerLead, Aether Fusion, PocketBlue, PocketEMS, PocketInspector, and PocketRescue.  There can be no assurances that our applications will be granted or that holders of other trademarks will not claim that the published or allowed trademarks, or other Aether pending trademark applications, infringe their trademarks.

 

We have received notices of allowance for four of our applications while the remaining patent applications are pending.  There is no assurance that the patent applications will result in patents being issued by the United States Patent and Trademark Office or other foreign patent offices, nor is there any guarantee that any issued patent will be valid and enforceable.  Other companies may independently develop or otherwise acquire similar technology or gain access to our proprietary technology.  Despite our precautions, there can be no assurance that we will be able to adequately protect our technology from competitors in the future.  The enforcement of patent rights often requires the institution of litigation against infringers.  This litigation is often costly and time consuming.

 

We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others, even though we take steps to assure that neither our employees nor our contractors knowingly incorporates unlicensed copyrights or trade secrets into our products.  It is possible that third parties may claim that our products and services may infringe upon their trademark, patent, copyright, or trade secret rights.  Any such claims, regardless of their merit, could be time consuming, expensive, cause delays in introducing new or improved products or services, require us to enter into royalty or licensing agreements or require us to stop using the challenged intellectual property.  Successful infringement claims against us may materially disrupt the conduct of our business or affect profitability. There are currently no legal proceedings or claims for infringement of intellectual property rights pending against us.

 

GOVERNMENT REGULATION

 

We are subject generally to government regulations that apply to publicly traded Delaware corporations of similar size that are headquartered in Maryland.  Through sales and license agreements with federal, state and local entities, we are sometimes subject to regulations concerning the acquisition of goods and services by such entities.

 

The wireless network carriers we contract with to provide airtime and some of our hardware suppliers may be subject to regulation by the Federal Communications Commission. Changes in FCC regulations could affect the availability of wireless service 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, data privacy, 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.

 

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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, 2002, we and our wholly-owned subsidiaries had a total of approximately 542 employees and of these employees over 180 were engineers.  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 an 86,000 square foot facility under a lease expiring in January 2005 with no renewal option. We also lease an aggregate of approximately 303,000 square feet for our offices in Larkspur, California; San Rafael, California; Boca Raton, Florida; Bethesda, Maryland; New York, New York (which is being sublet); McLean, Virginia; Richmond, Virginia; Vienna, Virginia; Tempe, Arizona; Marlborough, Massachusetts; Zillah, Washington; Richardson, Texas; Joplin, Missouri; London, England; and Monterey, Mexico. We share space among our segments and for corporate and other purposes. Sila has offices in different European locations. We are currently holding approximately 224,000 square feet of space for sublease, which we plan to exit or have exited in connection with our restructuring plans. We believe that our retained facilities are adequate for the purposes for which they are presently used and that replacement facilities are available at comparable cost, should the need arise.

 

ITEM 3. LEGAL PROCEEDINGS

 

Aether is among the hundreds of defendants named in nine class action lawsuits seeking damages on account of alleged violations of securities law.  The case is being heard in the United States District Court for the Southern District of New York.  The court has consolidated the actions by all of the named defendants that actually issued the securities in question.  Now there are approximately 310 consolidated cases before Judge Scheindlin, including the Aether Systems action, under the caption In Re Initial Public Offerings Litigation, Master File 21 MC 92 (SAS).

 

These actions were filed on behalf of persons and entities that acquired our common stock after our initial public offering in October 20, 1999.  Among other things, the complaints claim that prospectuses, dated October 20, 1999 and September 27, 2000 and issued by Aether in connection with the public offerings of common stock, allegedly contained untrue statements of material fact or omissions of material fact in violation of securities laws because the prospectuses allegedly failed to disclose that the offerings’ underwriters had solicited and received additional and excessive fees, commissions and benefits beyond those listed in the arrangements with certain of their customers which were designed to maintain, distort and/or inflate the market price of the Company’s common stock in the aftermarket.  The actions seek unspecified monetary damages and rescission.  Aether believes the claims are without merit and is vigorously contesting these actions.

 

Initial motions to dismiss the case were filed and the court held oral argument on the motions to dismiss on November 1, 2002.  On February 19, 2003, the court issued an Opinion and Order on defendants’ motions to dismiss, which granted the motions in part and denied the motions in part.  As to Aether Systems, the motion to dismiss the claims against it was denied in its entirety.  Discovery is now commencing.  Because the litigation is at a very early stage, the Company is unable to assess the likelihood of an unfavorable outcome and can make no determination as to the amount or range of potential loss, if any.

 

Aether is also a party to other legal proceedings in the normal course of business.  Based on evaluation of these matters and discussions with counsel, the Company believes that liabilities arising from these matters will not have a material adverse effect on the consolidated results of its operations or financial position.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to Aether’s stockholders for consideration during the fiscal quarter ended December 31, 2002.

 

9

 

 

PART II

 

ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS

 

(1) 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.

 

QUARTER ENDED		2002						2001
		HIGH			LOW			HIGH			LOW
March 31		$	11.09		$	4.10		$	60.25		$	12.19
June 30		$	4.77		$	2.50		$	18.95		$	7.39
September 30		$	4.15		$	2.52		$	11.50		$