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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION TO PERIOD FROM
COMMISSION FILE NUMBER 000-51958
NEXTWAVE WIRELESS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 20-5361360
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12670 HIGH BLUFF DRIVE, SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices) (Zip Code)
(858) 480-3100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
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 whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No |_|
As of November 5, 2007, there were approximately 92,667,000 shares of the
Registrant's common stock outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits
Signatures
Index to Exhibits
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTWAVE WIRELESS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
SEPTEMBER DECEMBER
29, 30,
2007 2006
----------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 72,871 $ 32,980
Marketable securities 188,854 167,705
Accounts receivable, net of allowance for doubtful
accounts of $375 and $321, respectively 22,722 5,056
Inventory 4,638 266
Deferred contract costs 20,821 2,397
Prepaid expenses and other current assets 12,145 7,571
----------- -----------
Total current assets 322,051 215,975
Restricted cash 75,000 75,000
Wireless spectrum licenses, net 574,931 527,998
Goodwill 140,262 32,184
Other intangible assets, net 80,813 18,570
Property and equipment, net 43,547 17,529
Other noncurrent assets 6,782 9,823
----------- -----------
Total assets $ 1,243,386 $ 897,079
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 28,785 $ 1,630
Accrued expenses 57,829 33,537
Current portion of long-term obligations 6,223 3,065
Deferred revenue 49,592 10,253
Other current liabilities and deferred credits
3,034 1,240
----------- -----------
Total current liabilities 145,463 49,725
----------- -----------
Deferred income tax liabilities 85,556 75,774
Long-term obligations, net of current portion 316,552 298,030
Other long-term obligations, deferred credits and
reserves 5,924 3,324
----------- -----------
Total liabilities 553,495 426,853
Minority interest in subsidiary -- 1,048
Commitments and contingencies
Redeemable Series A Senior Convertible Preferred Stock,
$0.001 par value; 355 shares authorized; 355 shares
issued and outstanding, liquidation preference of
$368,814 at September 29, 2007 364,919 --
----------- -----------
Stockholders' equity:
Preferred stock, $0.001 par value; 25,000 shares
authorized; 355 shares designated as Series A Senior
Convertible Preferred Stock; no other shares issued or
outstanding -- --
Common stock, $0.001 par value; 400,000 shares
authorized; 92,666 and 83,716 issued and outstanding
at September 29, 2007, and December 30, 2006,
respectively 93 84
Additional paid-in-capital 691,315 620,423
Accumulated other comprehensive income (loss) 48 (357)
Accumulated deficit (366,484) (150,972)
----------- -----------
Total stockholders' equity 324,972 469,178
----------- -----------
Total liabilities and stockholders' equity $ 1,243,386 $ 897,079
=========== ===========
--------------------------------------------------------------------------------
The accompanying notes are an integral part of
these consolidated financial statements.
2
NEXTWAVE WIRELESS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
29, 30, 29, 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Revenues $ 17,752 $ 6,670 $ 38,330 $ 16,868
--------- --------- --------- ---------
Operating expenses:
Cost of revenues 17,324 3,506 31,538 7,951
Engineering, research and development 42,556 11,634 99,953 36,017
General and administrative 30,939 14,896 70,351 35,528
Sales and marketing 7,449 2,992 16,684 7,144
Purchased in-process research and
development costs 11,200 -- 12,060 1,648
--------- --------- --------- ---------
Total operating expenses 109,468 33,028 230,586 88,288
--------- --------- --------- ---------
Loss from operations (91,716) (26,358) (192,256) (71,420)
--------- --------- --------- ---------
Other income (expense):
Interest income 4,870 3,419 12,387 9,803
Interest expense (12,033) (9,010) (34,619) (9,684)
Other income (expense), net (1,622) (26) (1,320) 98
--------- --------- --------- ---------
Total other income (expense), net (8,785) (5,617) (23,552) 217
--------- --------- --------- ---------
Loss before provision for income
taxes and minority interest (100,501) (31,975) (215,808) (71,203)
Income tax benefit (provision) (351) (93) (752) 116
Minority interest -- 265 1,048 1,136
--------- --------- --------- ---------
Net loss (100,852) (31,803) (215,512) (69,951)
Less: Preferred stock dividends (6,862) -- (13,814) --
Accretion of issuance costs on
preferred stock (69) -- (139) --
--------- --------- --------- ---------
Net loss applicable to common
shares $(107,783) $ (31,803) $(229,465) $ (69,951)
========= ========= ========= =========
Net loss per common share - basic and
diluted $ (1.17) $ (0.39) $ (2.60) $ (0.86)
Weighted average shares used in per
share calculation 92,468 81,833 88,413 81,722
The accompanying notes are an integral part of
these consolidated financial statements.
3
NEXTWAVE WIRELESS INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(IN THOUSANDS) (UNAUDITED)
REDEEMABLE
SERIES A
SENIOR
CONVERTIBLE ACCUMULATED
--------------------- OTHER
PREFERRED STOCK COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
--------------------- --------------------- PAID-IN INCOME ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) DEFICIT EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 30,
2006 -- $ -- 83,716 $ 84 $ 620,423 $ (357) $(150,972) $ 469,178
Shares issued for cash,
net of issuance costs and
embedded derivatives of
$ 4,035 355 350,966 -- -- -- -- -- --
Shares issued in business
combinations -- -- 7,651 8 74,514 -- -- 74,522
Shares issued under stock
incentive plans -- -- 629 -- 2,171 -- -- 2,171
Shares issued for warrants
exercised -- -- 670 1 3 -- -- 4
Share-based compensation
expense -- -- -- -- 8,157 -- -- 8,157
Imputed dividends on
Series A Senior
Convertible Preferred
Stock -- 13,814 -- -- (13,814) -- -- (13,814)
Accretion of issuance
costs on Series A Senior
Convertible Preferred
Stock -- 139 -- -- (139) -- -- (139)
Unrealized net gains on
marketable securities -- -- -- -- -- 405 -- 405
Net loss -- -- -- -- -- -- (215,512) (215,512)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 29,
2007 355 364,919 92,666 93 691,315 $ 48 $(366,484) $ 324,972
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
4
NEXTWAVE WIRELESS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER SEPTEMBER
29, 30,
2007 2006
--------- ---------
OPERATING ACTIVITIES
Net loss $(215,512) $ (69,951)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 8,023 4,235
Amortization of intangible assets 15,418 3,752
Non-cash share-based compensation 8,157 3,548
In-process research and development 12,060 1,648
Accretion of interest expense 15,647 4,643
Minority interest (1,048) (1,136)
Other non-cash adjustments 2,626 2,387
Changes in operating assets and liabilities:
Accounts receivable (2,631) (2,221)
Inventory 1,143 (59)
Deferred contract costs (16,546) (2,116)
Prepaid expenses and other current assets (813) (1,938)
Other assets 2,123 1,336
Accounts payable and accrued liabilities (3,584) 11,604
Deferred revenue 25,979 3,950
Other current liabilities and deferred credits 219 (238)
--------- ---------
Net cash used in operating activities (148,739) (40,556)
--------- ---------
INVESTING ACTIVITIES
Proceeds from maturities of marketable securities 19,273 192,226
Proceeds from sales of marketable securities 865,234 452,951
Purchases of marketable securities (905,251) (477,927)
Payments for wireless spectrum licenses (34,607) (397,817
Cash paid for business combinations, net of cash
acquired (80,332) (4,950)
Purchase of property and equipment (22,422) (10,990)
Other, net (500) (1,866)
--------- ---------
Net cash used in investing activities (158,605) (248,373)
--------- ---------
FINANCING ACTIVITIES
Proceeds from the sale of Series A Senior
Convertible Preferred Stock, net of costs to issue 351,146 --
Proceeds from long-term obligations, net of costs to
issue -- 295,098
Payment to restricted cash account securing
long-term obligations -- (75,000)
Payments on long-term obligations (4,052) (2,374)
Proceeds from the sale of common equity interests 2,175 2,379
Proceeds from investment by joint venture partner -- 1,995
Cash distributions paid to members (2,034) (1,447)
--------- ---------
Net cash provided by financing activities 347,235 220,651
--------- ---------
Net increase (decrease) in cash and cash
equivalents 39,891 (68,278)
Cash and cash equivalents, beginning of period 32,980 93,649
--------- ---------
Cash and cash equivalents, end of period
$ 72,871 $ 25,371
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
5
NEXTWAVE WIRELESS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
FINANCIAL STATEMENT PREPARATION
The unaudited consolidated financial statements have been prepared by
NextWave Wireless Inc. ("NextWave") according to the rules and regulations of
the United States Securities and Exchange Commission ("SEC"), and therefore,
certain information and disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted.
In the opinion of management, the accompanying unaudited consolidated
financial statements for the periods presented reflect all adjustments, which
are normal and recurring, necessary to fairly state NextWave's financial
position, results of operations and cash flows. These unaudited consolidated
financial statements should be read in conjunction with the audited financial
statements for the year ended December 30, 2006, included in NextWave's Annual
Report on Form 10-K filed with the SEC on March 30, 2007.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NextWave operates on a 52-53 week fiscal year ending on the Saturday
nearest to December 31 of the current calendar year or the following calendar
year. Normally, each fiscal year consists of 52 weeks, but every five or six
years the fiscal year consists of 53 weeks. Fiscal year 2007 will be a 52-week
year ending on December 29, 2007 and the first 53-week year will occur in 2009.
The three month periods ended September 29, 2007 and September 30, 2006 include
13 weeks each and the nine month periods ended September 29, 2007 and September
30, 2006 include 39 weeks each.
COMPREHENSIVE LOSS
Accumulated other comprehensive loss represents unrealized gains and
losses on available-for-sale marketable securities that are excluded from the
consolidated statements of operations and are reported as a separate component
in stockholders' equity. Comprehensive loss consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
29, 30, 29, 30,
(in thousands) 2007 2006 2007 2006
--------- --------- --------- ---------
Net loss $(100,852) $ (31,803) $(215,512) $ (69,951)
Other comprehensive income
(loss):
Net unrealized gains on
marketable securities 131 507 405 261
--------- --------- --------- ---------
Total comprehensive loss $(100,721) $ (31,296) $(215,107) $ (69,690)
========= ========= ========= =========
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the three and nine months
ended September 29, 2007 is computed by dividing net loss applicable to common
shares for the respective periods by the weighted average number of common
shares outstanding during the period, without consideration for common stock
equivalents. Basic and diluted net loss per common share for the three and nine
months ended September 30, 2006 is computed by dividing net loss applicable to
common shares for the period by the weighted average number of membership units
outstanding during the respective periods, on a converted basis as if NextWave's
holding company merger to implement its conversion to corporate form occurred on
January 1, 2006.
The following securities that could potentially dilute earnings per share
in the future are not included in the determination of diluted loss per share as
they are antidilutive. The share amounts are determined using a weighted average
of the shares outstanding during the respective periods and assume that
September 29, 2007 was the end of the contingency period for any contingently
issuable shares in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128,Earnings per Share.
6
THREE MONTHS ENDED NINE MONTHS ENDED
--------- --------- --------- ---------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
29, 30, 29, 30,
(in thousands) 2007 2006 2007 2006
--------- --------- --------- ---------
Outstanding stock
options 18,314 9,988 15,524 8,801
Common stock warrants 2,436 3,888 2,522 1,629
Contingently
issuable shares under
advisory contract 833 833 833 833
Restricted stock 216 204 212 113
Contingent merger
consideration for two
acquisitions and related
contingent stock bonus plan
shares 24,700 -- 12,495 --
Series A Senior
Convertible Preferred Stock 32,763 -- 22,110 --
REDEEMABLE SERIES A SENIOR CONVERTIBLE PREFERRED STOCK
Costs incurred to issue the Series A Preferred Stock are deferred and
recorded as a reduction to the reported balance of the preferred stock in the
consolidated balance sheet. The costs are accreted using the effective interest
method over the period from the date of issuance through March 28, 2017, the
stated redemption date. In accordance with Emerging Issues Task Force ("EITF")
Issue No. D-98, Classification and Measurement of Redeemable Securities, the
resulting increases from the accretion of the issue costs and accrued dividends
on the preferred stock are affected by charges against retained earnings or, in
the absence of retained earnings, by charges against paid-in capital. This
increases loss applicable to common stockholders in the calculation of loss per
common share.
NextWave's obligations to pay contingent cash dividends and cash premiums
upon redemption or liquidation of the preferred shares constitute embedded
derivatives under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133"). The initial estimated fair values of the
respective embedded derivative were recorded as long-term liabilities in the
consolidated balance sheet, reducing the reported value of the Series A
Preferred Stock. In accordance with SFAS No. 133, these derivatives will be
measured at fair value at each reporting date and any subsequent changes in the
estimated fair value of the embedded derivative are recorded as a charge to
other income (expense) in the consolidated statements of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements ("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS No. 157 is effective for NextWave's fiscal year
that begins on December 30, 2007, with early adoption permitted. NextWave's
management is in the process of evaluating the impact of the adoption of SFAS
No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure certain financial assets and liabilities
and other eligible items at fair value, which are not otherwise currently
required to be measured at fair value. Under SFAS 159, the decision to measure
items at fair value is made at specified election dates on an irrevocable
instrument-by-instrument basis. Entities electing the fair value option would be
required to recognize changes in fair value in earnings and to expense upfront
cost and fees associated with the item for which the fair value option is
elected. Entities electing the fair value option are required to distinguish on
the face of the statement of financial position, the fair value of assets and
liabilities for which the fair value option has been elected and similar assets
and liabilities measured using another measurement attribute. If elected, SFAS
No. 159 is effective for NextWave's fiscal year that begins on December 30,
2007, with earlier adoption permitted provided that the entity also early adopts
all of the requirements of SFAS No. 159. NextWave's management is currently
evaluating whether or not to elect the option provided for in this standard.
RECLASSIFICATION
Certain amounts in the previously reported financial statements have been
reclassified to conform to the current period presentation.
2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
MARKETABLE SECURITIES AND RESTRICTED CASH
Marketable securities and restricted cash consist of the following:
7
SEPTEMBER 29, DECEMBER 30,
--------- ---------
(in thousands) 2007 2006
--------- ---------
Municipal securities $ 178,784 $ 177,436
Commercial paper 79,680 --
Equity securities 5,079 --
Money market funds 311 500
U.S. Treasury and Agency obligations -- 39,051
Corporate notes -- 25,694
Cash -- 24
--------- ---------
Total portfolio of marketable securities 263,854 242,705
Less restricted portion (75,000) (75,000)
--------- ---------
Total unrestricted marketable securities $ 188,854 $ 167,705
========= =========
INVENTORY
Inventory consists of the following:
SEPTEMBER 29, DECEMBER 30,
------------- ------------
(in thousands) 2007 2006
------- -------
Raw materials $ 1,169 $ --
Work in process 67 266
Finished goods 3,402 --
------- -------
$ 4,638 $ 266
======= =======
WIRELESS SPECTRUM LICENSES, GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 29, 2007 DECEMBER 30, 2006
------------------------------- ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
LIFE GROSS LIFE GROSS
(IN CARRYING ACCUMULATED (IN CARRYING ACCUMULATED
(dollars in thousands) YEARS) AMOUNT AMORTIZATION YEARS) AMOUNT AMORTIZATION
------ ------ ------------ ------ ------ ------------
Amortized intangible assets:
Leased wireless spectrum
licenses 16.2 $97,801 $ 9,051 14.1 $82,385 $ 4,438
Purchased technology 7.0 67,704 9,676 7.0 9,614 1,821
Purchased customer base 8.5 10,120 1,998 8.0 5,960 1,044
Purchased tradenames and
trademarks 5.7 9,484 818 -- -- --
Non-compete agreements 3.5 4,420 2,203 4.0 2,800 1,193
Other 7.1 1,792 412 7.4 2,002 252
-------- -------- -------- --------
$191,321 $ 24,158 $102,761 $ 8,748
======== ======== ======== ========
Intangible assets not
subject to amortization:
Wireless spectrum
licenses $486,181 $450,051
Goodwill 140,262 32,184
Purchased tradenames and
trademarks 2,400 2,504
-------- --------
$628,843 $484,739
======== ========
In March 2007, NextWave acquired all of the outstanding shares of common
stock of 4253311 Canada Inc., a Canadian company, which resulted in the addition
of $36.0 million of wireless spectrum licenses not subject to amortization. The
assets of 4253311 Canada Inc. are comprised almost entirely of wireless spectrum
and therefore the acquisition was accounted for as an asset purchase rather than
as the purchase of a business based on guidance under EITF Issue No.
98-3,Determining Whether a Nonmonetary Transaction Involves Receipt of
Productive Assets or of a Business. The value assigned to the wireless spectrum
includes the cash purchase price of $26.0 million, closing costs of $0.2
million, and $9.8 million in associated deferred tax liabilities as determined
in accordance with EITF Issue No. 98-11, Accounting for Acquired Temporary
Differences in Certain Purchase Transactions That Are Not Accounted for as
Business Combinations ("EITF 98-11").
During the nine months ended September 29, 2007, NextWave acquired other
licensed spectrum rights for $8.4 million in cash and $5.6 million through the
assumption of lease liabilities.
The $108.1 million increase in goodwill in the consolidated balance sheets
from December 30, 2006 to September 29, 2007, resulted from $108.9 million from
current year business acquisitions, reduced by $0.8 million for reductions to
accrued liabilities related to 2005 and 2006 acquisitions.
8
The estimated aggregate amortization expense for amortized intangible
assets owned as of September 29, 2007, is expected to be $6.7 million during the
remainder of 2007 and $25.0 million, $22.4 million, $20.0 million, $17.9 million
and $75.2 million during fiscal years 2008, 2009, 2010, 2011 and thereafter,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
SEPTEMBER 29, DECEMBER 30,
(in thousands) 2007 2006
------------- ------------
Furniture and equipment $ 32,061 $ 13,626
Purchased software 8,941 7,296
Building and improvements 6,231 --
Leasehold improvements 4,863 2,358
Land 4,109 --
Construction in progress 1,496 846
-------- --------
57,701 24,126
Less: Accumulated depreciation (14,154) (6,597)
-------- --------
Total property and equipment, net $ 43,547 $ 17,529
======== ========
ACCRUED EXPENSES
Accrued expenses consist of the following:
SEPTEMBER 29, DECEMBER 30,
------------- ------------
(in thousands) 2007 2006
Accrued payroll and related expenses $17,714 $ 9,417
Accrued contract losses 14,223 528
Accrued interest 5,043 11,178
Accrued expenses 9,245 4,870
Value of put/call option to acquire WiMax Telecom AG
minority interest, net of $174 discount 4,685 --
Accrued professional fees 3,250 3,746
Accrued equity distributions payable 72 2,034
Other 3,597 1,764
------- -------
Total accrued liabilities $57,829 $33,537
======= =======
3. BUSINESS COMBINATIONS
During the nine months ended September 29, 2007, NextWave completed the
following business combinations which were accounted for in accordance with SFAS
No. 141, Business Combinations:
o IPWIRELESS - In May 2007, NextWave acquired all of the equity
interests in IPWireless, Inc., a privately-held company that
supplies TD-CDMA network equipment and subscriber terminals. The
IPWireless TDtv solution, based on 3GPP Multimedia Broadcast
Multicast Service (MBMS), is being designed to allow UMTS Operators
to deliver mobile television and other multimedia services using
their existing 3G spectrum and networks, without impacting their
current voice and data services. The primary reason for the
acquisition was to provide customers with cost-effective and
high-performance mobile broadband products and solutions by
expanding IPWireless' product portfolio to incorporate WiMAX and/or
Wi-Fi technologies.
o WIMAX TELECOM AG - In July 2007, NextWave's subsidiary, Inquam
Broadband GmbH, acquired a 65% controlling interest in WiMax Telecom
AG, a privately-held company domiciled in Zurich, Switzerland. WiMax
Telecom AG, through its subsidiaries, has obtained nationwide
wireless broadband spectrum concessions in Austria and Slovakia, and
a major spectrum concession in Croatia and currently operates WiMAX
networks in Austria and Slovakia. Contemporaneously with the
acquisition of WiMax Telecom AG, Inquam Broadband GmbH was granted
an exclusive and irrevocable call option and the remaining minority
shareholders were granted an exclusive and irrevocable put option,
both of which expire in December 2007, for the shares held by the
remaining minority shareholders of WiMax Telecom AG for 3.6 million
Euros ($5.1 million at September 29, 2007). Based on the guidance
provided by EITF Issue No. 00-4, Majority Owner's Accounting for a
Transaction in the Shares of Consolidated Subsidiary and a
Derivative Indexed to the Minority Interest in That Subsidiary,
NextWave has treated the WiMax Telecom AG put/call option as a
derivative contract that is viewed on a combined basis with the
minority interest and accounted for the derivative as a financing of
its acquisition of the minority interest in WiMax Telecom AG.
Accordingly, NextWave has consolidated 100% of WiMax Telecom AG
since the acquisition date. At acquisition, NextWave recognized a
liability for the fair value of the derivative of $4.5 million which
9
was included in the determination of the purchase price of WiMax
Telecom AG. NextWave is accreting the imputed interest on the
liability to interest expense over the stated term of the put/call
option.
o SDC SECURE DIGITAL CONTAINER - In January 2007, NextWave, through
its wholly-owned subsidiary, PacketVideo Corporation, acquired all
of the shares of SDC Secure Digital Container AG ("SDC"), a
privately held company headquartered in Basel, Switzerland that
develops Java music clients for mobile phones. The primary reason
for the acquisition was to complement PacketVideo's software for
native operating systems, such as Symbian and Linux, with a solution
that can address the large number of handsets that support Java
applications, expanding the number of mobile operators and music
services supported by PacketVideo.
o GO NETWORKS - In February 2007, NextWave acquired all of the
outstanding common stock and warrants of GO Networks, Inc., a
privately-held company with research and development facilities in
Tel Aviv, Israel. GO Networks develops advanced mobile Wi-Fi network
solutions for service providers. The primary reason for the
acquisition was to complement NextWave's WiMAX product line with
wide-area and local-area wireless broadband services using
stand-alone or integrated Wi-Fi/WiMAX solutions that utilize both
licensed and license-exempt spectrum.
In addition to the above acquisitions, NextWave completed an immaterial
acquisition during the nine months ended September 29, 2007. NextWave also
acquired a 69.2% interest in IPMobile, a Tokyo-based telecommunications company,
for $0.6 million in August 2007. In September 2007, NextWave exercised its
contractual right to rescind the transaction and the seller repaid in full
NextWave's original cash payment. Accordingly, these consolidated financial
statements exclude all transactions and accounts of IPMobile.
The consolidated financial statements include the operating results of
each business from their respective dates of acquisition.
The total cost of each acquisition was as follows:
WIMAX GO IMMATERIAL
(in thousands) IPWIRELESS TELECOM AG SDC NETWORKS ACQUISITION
---------- ---------- ---------- ---------- ----------
Cash, including closing costs $ 28,804 $ 9,812 $ 19,110 $ 15,795 $ 5,965
Fair value of common stock
issued 74,522 -- -- -- --
Accrual for contingent
consideration -- -- -- 223 --
Debt assumed and paid at
closing -- 5,825 -- 1,338 --
Value of put/call option to
acquire WiMax Telecom AG
minority interest -- 4,509 -- -- --
Less cash acquired (3,768) (676) (1,340) (462) --
---------- ---------- ---------- ---------- ----------
Total acquisition cost $ 99,558 $ 19,470 $ 17,770 $ 16,894 $ 5,965
========== ========== ========== ========== ==========
The fair value of common stock issued was based upon the actual number of
shares issued to the IPWireless shareholders using the average closing trading
price of NextWave common stock on Nasdaq during a five-day trading period
beginning two trading days prior to the announcement of the acquisition on April
9, 2007.
Under the purchase method of accounting, the purchase prices were
preliminarily allocated to the assets acquired and liabilities assumed based
upon their estimated fair values at the respective dates of acquisition in
accordance with SFAS No. 141 as follows:
WIMAX GO IMMATERIAL
(in thousands) IPWIRELESS TELECOM AG SDC NETWORKS ACQUISITION
---------- ---------- ---------- ---------- ----------
Accounts receivable, net $ 13,474 $ 442 $ 665 $ 86 $ --
Inventory 4,643 505 -- 366 --
Deferred contract costs 1,687 -- -- -- --
Prepaid and other current
assets 1,623 1,852 221 180 --
Property and equipment 1,996 9,107 56 1,110 --
Wireless spectrum -- 1,773 -- -- --
Intangible assets 54,610 -- 8,410 22,180 --
Goodwill 74,696 19,107 9,129 -- 5,965
Other noncurrent assets 413 -- -- 87 --
Accounts payable and other
current liabilities (26,843) (11,551) (677) (1,938) --
Deferred revenue (13,301) (114) (34) -- --
Provision for loss contract (13,440) -- -- -- --
Long-term obligations and
deferred credits -- (1,651) -- (5,177) --
---------- ---------- ---------- ---------- ----------
Total acquisition cost $ 99,558 $ 19,470 $ 17,770 $ 16,894 $ 5,965
========== ========== ========== ========== ==========
10
The amounts allocated to intangible assets and their respective
amortizable lives are attributed to the following categories:
WEIGHTED
AVERAGE
LIFE
(IN GO
(dollars in thousands) YEARS) IPWIRELESS SDC NETWORKS
------ ---------- --------- --------
Purchased technology 7.0 $34,240 $ 5,650 $18,200
Purchased trade names and 6.0 5,850 760 2,660
Non-compete agreements 2.6 680 100 840
Purchased customer base 8.8 2,640 1,040 480
In-process research and
development -- 11,200 860 --
------- ------- -------
$54,610 $ 8,410 $22,180
======= ======= =======
The fair values assigned to purchased technology and purchased in-process
research and development costs were determined by applying the income approach
using the excess earnings methodology which involves estimating the future
discounted cash flows to be derived from the currently existing technologies.
The purchased trade names and trademarks were valued using the income approach
using the relief from royalty method, which assumes value to the extent that the
acquired company is relieved of the obligation to pay royalties for the benefits
received from them. The fair values assigned to the purchased customer base
existing on the acquisition date was determined by applying the income approach
using the excess earnings methodology based upon estimated future discounted
cash flows attributable to revenues project to be generated from those
customers. The non-compete agreements were valued using the with-and-without
method, based on the present value of cash flows associated with the savings due
to having the agreements in place.
Purchased in-process research and development costs include IPWireless'
next-generation backwards compatible chip for use in wireless devices and six of
SDC's video and audio software projects valued at $11.2 million and $0.9
million, respectively, which had not yet reached technological feasibility and
had no alternative future uses at the date of acquisition. These costs were
expensed in the consolidated statement of operations at the respective dates of
acquisition.
Experienced employees with expertise in wireless technology and operations
in specialized niches in the wireless industry were among the factors that
contributed to purchase prices that resulted in the recognition of goodwill.
The excess of the purchase price over the acquired net tangible assets of
$25.1 million for two of our acquisitions has been preliminarily allocated to
goodwill in the consolidated balance sheet and is expected to be allocated
between goodwill and identifiable intangible assets during the fourth quarter of
2007 once NextWave has completed a purchased intangible asset valuation. The
related impact from value assigned to in-process research and development costs
or to amortization expense, if any, will be adjusted on a prospective basis.
In connection with the acquisition of IPWireless, NextWave recorded an
accrual for severance totaling $0.6 million for four IPWireless employees whose
employment terminated as a result of the acquisition. As of September 29, 2007,
$0.5 million of the accrued severance has been paid.
Additional purchase consideration of up to $135.0 million may be paid to
the selling shareholders of IPWireless based upon the achievement of certain
revenue milestones between 2007 and 2009, inclusive, as specified in the
agreement, with potential payments of up to $50.0 million in late 2007 or 2008,
up to $7.5 million in 2008, up to $24.2 million in 2009 and up to $53.3 million
in 2010. If earned, up to approximately $113.8 million of such additional
consideration will be payable in cash or shares of common stock at NextWave's
election and up to approximately $21.2 million of such amounts will be payable
in cash or shares of common stock at the election of the representative of
IPWireless shareholders. In accordance with SFAS No. 141, the contingent
consideration, if any, paid to non-employee and employee stockholders will be
recorded as additional purchase price when the contingency is resolved and the
consideration is determinable and becomes issuable. Contingent consideration, if
any, paid to employee shareholders is regarded as additional purchase price
rather than compensation as payment of the contingent consideration is not
contingent upon continuing employment.
Additional purchase consideration of up to $25.6 million and $0.1 million
may be paid to the selling shareholders of GO Networks in shares of NextWave
common stock and cash, respectively, subject to the achievement of specified
operational milestones in February and August 2008, which include customer
acceptance of certain product units and the continued employment of certain key
employees. In accordance with SFAS No. 141, the contingent consideration, if
any, paid to non-employee stockholders and to employee stockholders whose
consideration is not contingent upon continuing employment will be recorded as
11
additional purchase price when the contingency is resolved and the consideration
is determinable and becomes issuable. In accordance with EITF Issue No. 95-8,
Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination, contingent consideration, if any,
paid to employee stockholders that is contingent upon continuing employment will
be expensed over any remaining earnout period as compensation when the payment
becomes probable. The probability of achievement of the performance conditions
will be reassessed at each reporting date. As of September 29, 2007, management
assessed the probability of achievement of the performance conditions and
concluded that an accrual was not necessary.
NextWave has also adopted the IPWireless, Inc. Employee Stock Bonus Plan
and the GO Networks Employee Stock Bonus Plan which provide the respective
employees with shares of NextWave common stock having an aggregate value of up
to $12.0 million, to be valued at the time of grant. The awards are contingent
upon the achievement of certain revenue milestones from 2007 to 2009 relating to
IPWireless' public safety business and TDtv business and the achievement of
specified operational milestones for GO Networks in February and August 2008,
which include customer acceptance of certain product units and the continued
employment of the employee in addition to key employees. In accordance with SFAS
No. 123(R), Share-Based Payment, the fair value of the stock bonuses will be
determined on the date of grant and amortized to compensation expense over the
requisite service period once the achievement of the milestones becomes
probable. The probability of achievement of the performance conditions will be
reassessed at each reporting date. At September 29, 2007, management concluded
that a stock bonus under the IPWireless, Inc. Employee Stock Bonus Plan was
probable of payment and accordingly recognized $1.2 million of share-based
compensation expense based on the portion of the requisite service period
elapsed through September 29, 2007. As of September 29, 2007, management
assessed the probability of achievement of the milestones under the GO Networks
Employee Stock Bonus Plan and concluded that an accrual was not necessary.
PRO FORMA RESULTS
The following unaudited pro forma financial information assumes that the
acquisitions of IPWireless, SDC, GO Networks and WiMax Telecom AG occurred at
the beginning of the respective fiscal years presented. The unaudited pro forma
financial information does not reflect any other acquisitions, as the effect of
those acquisitions were not significant on an individual basis or in the
aggregate. These unaudited pro forma financial results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations that would have actually resulted had the acquisitions occurred on
these dates, or of future results of operations. The unaudited pro forma results
for the three and nine months ended September 29, 2007 and September 30, 2006,
are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
29, 30, 29, 30,
(in thousands) 2007 2006 2007 2006
--------- --------- --------- ---------
Revenues $ 17,752 $ 7,957 $ 42,228 $ 20,714
Net loss (87,837) (49,089) (249,312) (140,085)
Net loss applicable to common
shares (94,762) (49,089) (263,259) (140,085)
Net loss per common share - basic
and diluted $ (1.02) $ (0.55) $ (2.86) $ (1.57)
The pro forma amounts above include interest expense on debt assumed that
is calculated using NextWave's effective borrowing rate at the date of
acquisition and nonrecurring charges for in-process research and development of
$12.1 million for the nine months ended September 29, 2007 and September 30,
2006.
4. RELATED PARTY TRANSACTIONS
On March 28, 2007, NextWave issued and sold 355,000 shares of its Series A
Senior Convertible Preferred Stock at a price of $1,000 per share. In addition
to other investment funds and institutional investors, 14%, 14% and 28% of the
Series A Senior Convertible Preferred Stock was sold respectively to Navation,
Inc., an entity owned by Allen Salmasi, NextWave's Chairman and Chief Executive
Officer, Manchester Financial Group, L.P., an entity indirectly owned and
controlled by Douglas F. Manchester, a member of NextWave's Board of Directors,
and affiliates of Avenue Capital, of which a member of NextWave's Board of
Directors, Robert Symington, is a portfolio manager. Kevin Finn, NextWave's
Chief Compliance Officer, also purchased less than 1% of the Series A Senior
Convertible Preferred Stock.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
12
SEPTEMBER 29, DECEMBER 30,
(dollars in thousands) 2007 2006
--------- ---------
7% Senior Secured Notes, $350,000 due 2010, net of
unamortized discount and fair value of warrants
of $55,989 and $69,325 at September 29, 2007
and December 30, 2006, respectively, interest
payable semiannually in January and July each
year, secured by $488,300 in FCC licenses and
spectrum leases and $75,000 in restricted cash $ 294,011 $ 280,675
Wireless spectrum leases, weighted average imputed
interest rates of 9.65% and 8.43% at September 29,
2007 and December 30, 2006, respectively, scheduled
maturities ranging from 2011 through 2036, net of
unamortized discounts of $19,121 and $9,758 at
September 29, 2007 and December 30, 2006,
respectively, with three to five renewal options
ranging from 10 to 15 years each. 24,370 20,091
9.08% note, due June 1, 2009, principal and interest of
$214 payable monthly, net of unamortized discount of
$81, secured by $24,139 in assets held by GO Networks 4,050 --
Other 344 329
--------- ---------
Total long-term obligations 322,775 301,095
Less current portion (6,223) (3,065)
--------- ---------
Long-term portion $ 316,552 $ 298,030
========= =========
Payments due on these obligations during each of the five years subsequent
to September 29, 2007 are as follows:
(in thousands)
Fiscal Years:
2007 (remaining three months) $ 739
2008 6,272
2009 4,799
2010 353,506
2011 3,326
Thereafter 29,324
---------
397,966
Less unamortized discount (75,191)
Less current portion (6,223)
---------
Total long-term obligations $ 316,552
=========
The purchase agreement for the 7% Senior Secured Notes contains
representations and warranties, affirmative and negative covenants including,
without limitation, NextWave's obligation to not become liable to any additional
indebtedness, subject to certain exceptions including the ability to enter into
spectrum leases or to incur $25.0 million of acquired company debt or purchase
money indebtedness. As of September 29, 2007, NextWave has become liable for
additional indebtedness totaling $16.9 million. Therefore, management believes
that NextWave is in compliance with its debt covenants at September 29, 2007.
In connection with the issuance of the 7% Senior Secured Notes, NextWave
issued warrants to the purchasers of the Notes to purchase an aggregate of 2.6
million shares of common stock at an exercise price of $0.01 per share. The
warrants were exercisable from and after the date of issuance, November 13,
2006. During the three and nine months ended September 29, 2007, warrants to
purchase 0.7 million shares of common stock were exercised and at September 29,
2007, 1.9 million shares of common stock remained subject to issuance upon
exercise of outstanding and exercisable warrants.
6. INCOME TAXES
The provision for income taxes during interim quarterly reporting periods
is based on NextWave's estimate of the annual effective tax rate for the full
fiscal year. NextWave determines the annual effective tax rate based upon its
estimated "ordinary" income (loss), which is its annual income (loss) from
continuing operations before tax, excluding unusual or infrequently occurring
items. Significant management judgment is required in projecting NextWave's
annual income and determining its annual effective tax rate. NextWave provides
for income taxes in each of the jurisdictions in which it operates. This process
involves estimating the actual current tax expense and any deferred income tax
expense resulting from temporary differences arising from differing treatments
of items for tax and accounting purposes. These temporary differences result in
deferred tax assets and liabilities. Deferred tax assets are also established
for the expected future tax benefits to be derived from net operating loss and
tax credit carryforwards.
13
NextWave must then assess the likelihood that its deferred tax assets will
be recovered from future taxable income. To the extent that NextWave believes it
is more likely than not that its deferred tax assets will not be recovered, it
must establish a valuation allowance. NextWave considers all available evidence,
both positive and negative, to determine the need for a valuation allowance,
including its historical operating losses. NextWave has recorded a full
valuation allowance on its net deferred tax asset balances for all periods
presented because of uncertainties related to utilization of the deferred tax
assets. Deferred tax liabilities associated with certain wireless licenses held
in the U.S. and Canada cannot be considered a source of taxable income to
support the realization of deferred tax assets, because these deferred tax
liabilities will not reverse until some indefinite future period. The deferred
tax liability and the related assigned value of certain wireless license assets
were determined in accordance with EITF 98-11.
For each of the three and nine months ended September 29, 2007, NextWave's
effective tax rate was 0.35%. For the three and nine months ended September 29,
2007, NextWave recorded a provision for income taxes of $0.4 million and $0.8
million, respectively.
NextWave adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes ("FIN No. 48"), on December 31, 2006, the beginning of its 2007
fiscal year. The adoption of FIN No. 48 did not have an effect on NextWave's
effective income tax rate for the three and nine months ended September 29,
2007.
As of December 31, 2006, NextWave did not have any unrecognized tax
benefits or related accrued interest or penalties and no cumulative effect
adjustment was recorded to retained earnings as a result of adopting FIN No. 48.
NextWave did not generate any unrecognized tax benefits during the three and
nine months ended September 29, 2007 and does not believe any material
adjustments will be made related to unrecognized tax benefits for the remainder
of 2007. NextWave does not believe it will generate any material unrecognized
tax benefits within the next 12 months.
Interest and penalties related to income tax matters are recognized in
income tax expense. We did not incur any expense related to interest or
penalties for income tax matters during the nine months ended September 29,
2007, and no such amounts were accrued as of June 30, 2007.
As of September 29, 2007, NextWave is not subject to any material United
States federal, state, local or foreign income tax examinations by tax
authorities for the current or any prior reporting periods.
7. COMMITMENTS AND CONTINGENCIES
Services and Other Agreements
NextWave enters into non-cancelable inventory purchase agreements,
software license agreements and agreements for the purchase of software
development and engineering services to facilitate and expedite the development
of software modules and applications required in its WiMAX development
activities. At September 29, 2007, estimated future minimum payments due under
the terms of these agreements, which expire on various dates through 2011, are
as follows:
(in thousands)
Fiscal Years:
2007 (remaining three months) $ 6,592
2008 14,311
2009 2,474
2010 2,700
2011 4,361
-------
Total $30,438
=======
Capital Expenditures
In connection with its leased facilities in San Diego, California,
NextWave entered into an agreement in 2007 for the construction of interior
improvements aggregating $2.4 million, of which $0.5 million remains to be paid
under this contract at September 29, 2007.
Operating Leases
NextWave leases its office and research facilities, cell sites and certain
office equipment under noncancellable operating leases expiring on various dates
through 2015. Certain commitments have renewal options extending through the
year 2031. One of the new facility lease agreements requires a $2.5 million
letter of credit which will be reduced gradually until termination of the lease
14
in 2012. Future minimum lease payments under noncancellable operating leases,
net of sublease rentals at September 29, 2007, are as follows:
LEASE SUBLEASE
COMMITMENTS RENTALS NET
(in thousands) -------- -------- --------
Fiscal Years:
2007 (remaining three months) $ 2,508 $ (65) $ 2,443
2008 10,119 (198) 9,921
2009 8,770 -- 8,770
2010 7,369 -- 7,369
2011 4,989 -- 4,989
Thereafter 2,312 -- 2,312
-------- -------- --------
$ 36,067 $ (263) $ 35,804
======== ======== ========
LEGAL PROCEEDINGS
From time to time, NextWave is a party to various legal proceedings that
arise in the ordinary course of its business. While management presently
believes that the ultimate outcome of any such proceedings, individually and in
the aggregate, will not have a material adverse effect on NextWave's financial
position, cash flows or overall trends in results of operations, litigation is
subject to inherent uncertainties, and unfavorable rulings could occur.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On June 8, 1998,
NextWave Personal Communications Inc., NextWave Power Partners Inc. and the
predecessor to NextWave Wireless Inc., all direct and indirect wholly owned
subsidiaries of NextWave Telecom Inc., filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the southern District of New York. On December 23, 1998, NextWave Telecom
Inc. filed its voluntary petition, in order to implement an overall corporate
restructuring. On March 1, 2005, the Bankruptcy Court confirmed the Third Joint
Plan of Reorganization, dated January 21, 2005. The cornerstone of the Plan of
Reorganization was the sale of NextWave Telecom and its subsidiaries, excluding
the predecessor to NextWave Wireless inc., to Verizon Wireless for approximately
$3.0 billion. Pursuant to the Plan of Reorganization, on April 13, 2005, all
non-PCS assets and liabilities of the NextWave Telecom group were contributed to
the predecessor to NextWave Wireless Inc., and the predecessor to NextWave
Wireless Inc. was capitalized with $550.0 million in cash. Through this process,
the predecessor to NextWave Wireless Inc. was reconstituted as a company with a
new capitalization and a new wireless technology business plan. All claims made
in connection with the Chapter 11 case have been resolved, and NextWave has
received a decree of final judgment closing the Chapter 11 case.
8. SERIES A SENIOR CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
PREFERRED AND COMMON STOCK
NextWave has authorized 25 million shares of preferred stock, of which
355,000 shares have been designated as Series A Senior Convertible Preferred
Stock. Shares of the preferred stock may be issued in any number of series as
determined by the board of directors. The board of directors is also authorized
to define the terms of the preferred shares, including voting rights,
liquidation preferences, conversion and redemption provisions and dividend
rates.
NextWave has authorized 400 million shares of common stock, of which 92.7
million shares were issued and outstanding at September 29, 2007, including 0.2
million restricted shares. At September 29, 2007, NextWave had the following
common shares reserved for future issuance upon the exercise or issuance of the
respective equity instruments:
(in thousands)
Series A Senior Convertible Preferred Stock 33,377
Stock options:
Granted and outstanding 19,926
Available for future grants 13,959
Warrants 2,436
Contingently issuable shares under advisory contract 833
------
70,531
======
Additionally, NextWave may issue up to $25.6 million and $5.0 million in
shares of NextWave common stock, to be valued at the time of issuance, under the
GO Networks Merger Agreement and the GO Networks Employee Stock Bonus Plan,
respectively, upon the achievement of specified operational milestones in
February and August 2008. NextWave may also issue up to $135.0 million and $7.0
million in shares of NextWave common stock, to be valued at the time of
15
issuance, under the IPWireless Agreement and Plan of Merger and the IPWireless,
Inc. Employee Stock Bonus Plan, respectively, upon the achievement of specified
revenue and operational milestones during 2007 through 2009.
SERIES A SENIOR CONVERTIBLE PREFERRED STOCK
On March 28, 2007, NextWave issued and sold 355,000 shares of its Series A
Senior Convertible Preferred Stock (the "Series A Preferred Stock") at a price
of $1,000 per share. The Series A Preferred Stock was issued in a private
placement transaction exempt from the registration requirements of the
Securities Act of 1933. NextWave received $351.1 million in net proceeds from
the sale of the Series A Preferred Stock. Costs incurred to issue the shares
totaled $3.9 million. The net proceeds are used to fund operations, accelerate
the development of new wireless technologies, expand NextWave's business and
enable strategic acquisitions.
DIVIDEND RIGHTS. Holders of the Series A Preferred Stock are entitled to
receive quarterly dividends on the liquidation preference at a rate of 7.5% per
annum. Until March 2011, NextWave can elect whether to declare dividends in cash
or to not declare and pay dividends, in which case the per share dividend amount
will be added to the liquidation preference. From and after March 2011, NextWave
must declare dividends in cash each quarter, subject to applicable law. The
terms of NextWave's 7% Senior Secured Notes due 2010 currently prevent the
payment of cash dividends on the Series A Preferred Stock. The dividend rate is
subject to adjustment to 10% per annum if NextWave defaults on its dividend
payment obligations or fails to cause its shelf registration statement filed
with the Securities and Exchange Commission to be declared effective on or prior
to November 30, 2007. The dividend rate is also subject to adjustment to 15% per
annum if NextWave fails to comply with the protective covenants of the Series A
Preferred Stock described below and to 18% per annum if NextWave fails to
convert or redeem the Series A Preferred Stock when required to do so, as
described below.
NextWave accrued for $6.9 million and $13.8 million in undeclared
dividends during the three and nine months ended September 29, 2007,
respectively.
VOTING RIGHTS. Pursuant to the terms of the Series A Preferred Stock, so
long as at least 25% of the issued shares of Series A Preferred Stock remain
outstanding, and until the date on which NextWave elects to redeem all shares of
Series A Preferred Stock in connection with an asset sale, as described below,
NextWave must receive the approval of the holders of shares representing at
least 75% of the Series A Preferred Stock then outstanding to (i) incur
indebtedness in excess of $500 million, subject to certain adjustments and
exceptions, (ii) create any capital stock that is senior to or on a parity with
the Series A Preferred Stock in terms of dividends, distributions or other
rights, or (iii) consummate asset sales involving the receipt of gross proceeds
of, or the disposition of assets worth, $500 million or more based on their fair
market value. In addition, so long as at least 25% of the issued shares of
Series A Preferred Stock remain outstanding, NextWave may not distribute rights
or warrants to all holders of its common stock entitling them to purchase shares
of its common stock, or consummate any sale of its common stock, for an amount
less than the fair market value on the date of issuance, with certain
exceptions. With respect to other matters requiring stockholder approval, the
shares of Series A Preferred Stock will be entitled to vote as one class with
the common stock on an as-converted basis.
CONVERSION RIGHTS AND REDEMPTION RIGHTS. Each share of Series A Preferred
Stock is convertible into a number of shares of NextWave's common stock equal to
the liquidation preference then in effect divided by $11.05. The Series A
Preferred Stock is convertible at any time at the option of the holder, or at
NextWave's election after September 28, 2008, subject to the trading price of
its common stock reaching $22.10 for a specified period of time, except that
such threshold price will be reduced to $16.575 on the earlier of March 28,
2010, or NextWave's consummation of a qualified public offering. NextWave will
not be entitled to convert the Series A Preferred Stock at its election unless a
shelf registration statement covering the shares of common stock to be issued
upon conversion is then effective or the shares are no longer considered
restricted securities under the Securities Act. At September 29, 2007, the
liquidation preference totaled $368.8 million. If all shares of Series A
Preferred Stock were converted at September 29, 2007, NextWave would be
obligated to issue 33.4 million shares of its common stock.
NextWave will be required to redeem all outstanding shares of Series A
Preferred Stock, if any, on March 28, 2017, at a price equal to the liquidation
preference plus unpaid dividends. If NextWave elects to convert the Series A
Preferred Stock after its common stock price has reached the qualifying
threshold, NextWave must redeem the shares of holders of Series A Preferred
Stock who elect not to convert into common stock at a price equal to 130% of the
liquidation preference. However, NextWave is not required to redeem more than
50% of the shares of Series A Preferred Stock subject to any particular
conversion notice. In the event that NextWave fails to obtain approval of the
holders of Series A Preferred Stock to an asset sale transaction, NextWave must
either not consummate such asset sale or elect to redeem all shares of Series A
Preferred Stock at a redemption price equal to 120% of the liquidation
preference. Holders will be entitled to opt-out of such a redemption.
RIGHT TO RECEIVE LIQUIDATION DISTRIBUTIONS. The Series A Preferred Stock
has an initial liquidation preference of $1,000 per share, subject to increase
for accrued dividends as described above. The liquidation preference would
become payable upon redemption, as described above, upon a liquidation or
16
dissolution of our company, or upon deemed liquidation events including a change
in control, merger or sale of all or substantially all of NextWave's assets,
unless the holders of Series A Preferred Stock provide a 75% vote to not treat a
covered event as a deemed liquidation. Upon a deemed liquidation event, the
Series A Preferred Stock will be entitled to receive an amount per share equal
to the greater of 120% of the liquidation preference or the amount that would
have been received if such share had converted into common stock in connection
with such event.
NextWave's obligations to pay contingent cash dividends and cash premiums
upon redemption or liquidation of the preferred shares constitute embedded
derivatives, the initial estimated fair values of which aggregated $0.2 million,
and were recorded as long-term liabilities in the consolidated balance sheet,
reducing the carrying value of the Series A Preferred Stock. At September 29,
2007, the estimated fair values of the embedded derivatives totaled $0.8
million. Changes in the estimated fair value of the embedded derivatives of $0.4
million and $0.6 million during the three and nine months ended September 29,
2007, respectively, were recorded as a charge to other income (expense) in the
consolidated statements of operations.
9. EQUITY COMPENSATION PLANS
During the nine months ended September 29, 2007, NextWave added four
share-based compensation plans that provide for awards to acquire shares of
NextWave's common stock, increasing the total number of plans from two to six:
the PacketVideo 2005 Equity Incentive Plan, the NextWave 2007 New Employee Stock
Incentive Plan, the GO Networks Employee Stock Bonus Plan and the IPWireless,
Inc. Employee Stock Bonus Plan.
On January 3, 2007, concurrent with the listing of NextWave's common stock
on Nasdaq, an option to purchase one share of common stock of NextWave with an
exercise price of $6.00 per share was issued for every six options to purchase
shares of common stock of NextWave's wholly-owned subsidiary, PacketVideo,
outstanding under the PacketVideo 2005 Equity Incentive Plan, resulting in the
issuance of options to purchase approximately 1.6 million shares of NextWave
common stock. The exchange of options was accounted for as a modification of the
cancelled stock options under SFAS No. 123(R). Accordingly, because the
grant-date fair value of the NextWave options issued in the exchange was less
than the fair value of the exchanged PacketVideo options measured immediately
before the exchange, no incremental share-based compensation expense resulted
from the exchange.
In February 2007, the board of directors for NextWave adopted the NextWave
2007 New Employee Stock Incentive Plan. The plan, as amended in June 2007,
provides for an aggregate of 5.0 million shares of common stock to be available
for future grants of nonqualified stock options, or restricted, bonus, phantom
or other share-based awards to employees or directors of NextWave.
In February 2007, concurrent with NextWave's acquisition of GO Networks
Inc., NextWave established the GO Networks Employee Stock Bonus Plan whereby a
select group of employees may receive up to an aggregate of $5.0 million in
shares of NextWave common stock, valued at the time of issuance, upon the
achievement of specified operational milestones in February and August 2008.
In May 2007, concurrent with NextWave's acquisition of IPWireless, Inc.,
NextWave established the IPWireless, Inc. Employee Stock Bonus Plan whereby
employees and consultants may receive up to an aggregate of $7.0 million in
shares of NextWave common stock, valued at the time of issuance, payable upon
the achievement of certain revenue milestones in 2007 through 2009.
In May 2007, NextWave stockholders approved an amendment to the NextWave
Wireless Inc. 2005 Stock Incentive Plan to provide for an additional 15.0
million common shares for awards under the plan.
At September 29, 2007, NextWave may issue up to $5.0 million in shares of
NextWave common stock under the GO Networks plan, $7.0 million in shares of
common stock under the IPWireless plan and an aggregate of approximately
33,885,000 shares of common stock under its remaining plans, of which
approximately 19,926,000 shares are reserved for issuance upon exercise of
granted and outstanding options and approximately 13,959,000 shares are
available for future grants.
The following table summarizes stock option activity under these plans
during the nine months ended September 29, 2007:
17
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE
(IN PRICE PER
THOUSANDS) SHARE
Outstanding at December 30, 2006 10,934 $ 6.20
PacketVideo options exchanged 1,566 $ 6.00
Granted 8,478 $ 8.65
Exercised (377) $ 5.75
Canceled (675) $ 7.20
-------
Outstanding at September 29, 2007 19,926 $ 7.21
=======
Exercisable at September 29, 2007 10,325 $ 5.98
Employee Share-Based Compensation
NextWave recognized employee share-based compensation expense from stock
options of $2.0 million and $4.4 million for the three and nine months ended
September 29, 2007, respectively, and $0.5 million and $2.2 million for the
three and nine months ended September 30, 2006, respectively, under the
provisions of SFAS No. 123(R).
NextWave utilized the Black-Scholes option-pricing model for estimating
the grant-date fair value of NextWave employee stock options, with the following
assumptions:
NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
29, 30,
----------- ----------
2007 2006
Risk-free interest rate 4.05%-4.99% 4.36%-5.11%
Expected term (in years) 3.5-5.5 1.5-5.5
Weighted average expected stock price volatility 50% 50%
Expected dividend yield 0% 0%
Weighted average grant-date fair value of options
granted $3.54 $2.34
Total unrecognized compensation cost of unvested options granted to
employees as of September 29, 2007, was $23.7 million, which is expected to be
recognized over a weighted average period of 3.3 years.
In addition to the employee share-based compensation expense resulting
from stock options, in May 2007, NextWave recognized share-based compensation
expense of $2.3 million from the issuance of approximately 0.2 million shares of
its common stock to certain employees as additional compensation in lieu of
annual cash bonuses.
NON-EMPLOYEE SHARE-BASED COMPENSATION
Share-based compensation expense from non-employee stock options, warrants
and restricted shares totaled $0.2 million and $1.5 million during the three and
nine months ended September 29, 2007, respectively, and $0.4 million and $1.1
million during the three and nine months ended September 30, 2006, respectively.
The fair value assigned to the vested increments of these awards was estimated
at the date of vesting and, for the unvested increments, at the respective
reporting date, using the Black-Scholes option-pricing model with the following
assumptions:
RESTRICTED
COMMON
OPTIONS WARRANTS SHARES
------- -------- ------
NINE MONTHS ENDED SEPTEMBER 29, 2007:
-------------------------------------
Risk-free interest rate 4.54%-5.14% 4.16% 4.12%-4.95%
Expected life (in years) 6.0-9.9 3.0 0.5-4.0
Weighted average expected stock price
volatility 50% 50% 50%
Expected dividend yield 0% 0% 0%
Weighted average fair value of awards $3.84 $2.72 $2.22
NINE MONTHS ENDED SEPTEMBER 30, 2006:
-------------------------------------
Risk-free interest rate 4.60%-4.79% 4.68%-4.69% 4.58%-4.78%
Expected life (in years) 6.0-9.9 3.0-4.0 0.1-4.0
Expected stock price volatility 50% 50% 50%
Expected dividend yield 0% 0% 0%
Weighted average fair value of awards $3.62 $2.48 $1.77
The fair value of the unvested increments will be remeasured at the end of
each reporting period until vested, when the final fair value of the vesting
increment is determined. Unamortized estimated share-based compensation totaled
$1.9 million at September 29, 2007, which is expected to be recognized over a
weighted average period of 1.6 years.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
18
NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
29, 30,
(in thousands) 2007 2006
------- -------
Cash paid for income taxes $ 282 $ 109
Cash paid for interest 24,789 --
Noncash investing and financing activities:
Equity interests issued for business
acquisitions 74,522 1,558
Wireless spectrum licenses acquired with
lease obligations 5,569 2,478
Fair value of warrants issued
in connection with the issuance of
7% Senior Secured Notes -- 24,600
11. SUBSEQUENT EVENTS
In November 2007, NextWave entered into definitive agreements to lease
spectrum located in California for initial payments aggregating $20.0 million,
plus annual lease payments approximating $0.8 million through 2017. The initial
terms of the leases expire on various dates from 2015-2017 and each provides for
three consecutive 10-year renewals for a total lease term for each license not
to exceed 30 years.
In October 2007, NextWave acquired Websky Argentina S.A., a developer and
operator of wireless broadband services over licensed frequencies in Argentina,
for $12.5 million in cash from Websky, Inc. The change in control of the
wireless licenses remains subject to governmental approval and approximately
$2.4 million of the purchase price is held in escrow to cover, among other
things, any liabilities relating to failure to obtain governmental approval. In
connection with this acquisition, NextWave also entered into a one-year advisory
services agreement with Websky, Inc. under which NextWave will pay to Websky,
Inc. an aggregate of $2.5 million, payable in monthly installments, with up to
$2.0 million upon the consummation of long-term contracts for wireless services
as specified in the services agreement and royalties equal to 7% of revenues
derived over a period of up to four years from any supply contracts with
companies specified in the services agreement. The acquisition will be accounted
for in the fourth quarter of 2007 using the purchase method of accounting
whereby the total purchase price, including any transaction related expenses,
will be allocated to tangible and intangible assets acquired based upon their
respective fair values.
In April 2007, Inquam-BMR GP, the minority shareholder of NextWave's
majority-owned subsidiary, Inquam Broadband Holding Limited, exercised its
contractual option to put its shares of Inquam Broadband Holding Limited to
NextWave, thereby requiring NextWave to acquire the minority interest. In
October 2007, NextWave closed the acquisition of the remaining 44% interest in
Inquam Broadband Holding Limited for a cash payment of $0.9 million and the
assignment to Inquam-BMR GP of a $2.1 million receivable owned by Inquam
Broadband Holding Limited. Additionally, in connection with the acquisition,
NextWave's subsidiary Inquam Broadband GmbH agreed to provide certain project
management and support services to a subsidiary of Inquam-BMR GP for a period of
up to two years. The performance of the services by Inquam Broadband GmbH is
secured by a $0.6 million cash deposit from NextWave. The acquisition of this
minority interest will be accounted for using the purchase method of accounting
by stepping-up to fair value the portion of assets acquired and liabilities
assumed based on the percentage interest acquired.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
In addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results may differ substantially from those referred to herein due to a number
of factors, including but not limited to risks described in the section entitled
Risk Factors and elsewhere in this Quarterly Report. Additionally, the following
discussion and analysis should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 1 of Part I of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 30, 2006, contained in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 30, 2007.
OVERVIEW
THIRD QUARTER OF 2007 HIGHLIGHTS
o Our revenues, net loss and net loss applicable to common shares for
the third quarter of 2007 totaled $17.8 million, $100.9 million and
$107.8 million, or $1.17 per share, respectively, compared to $6.7
million, $31.8 million, $31.8 million, or $0.39 per share,
respectively, for the third quarter of 2006.
o Our revenues, net loss and net loss applicable to common shares for
the first nine months of 2007 totaled $38.3 million, $215.5 million
and $229.5 million, or $2.60 per share, respectively, compared to
$16.9 million, $70.0 million, $70.0 million, or $0.86 per share,
respectively for the first nine months of 2006.
o In July 2007, our majority owned subsidiary, Inquam Broadband GmbH,
acquired a 65% controlling interest in WiMax Telecom AG, a
privately-held company domiciled in Zurich, Switzerland for $19.5
million. WiMax Telecom AG, through its subsidiaries, has obtained
nationwide wireless broadband spectrum concessions in Austria and
Slovakia, and a major spectrum concession in Croatia and currently
operates WiMAX networks in Austria and Slovakia.
OUR BUSINESS
We are a wireless technology company that develops and markets
next-generation mobile broadband and wireless multimedia products and
technologies. Our products and technologies are designed to make wireless
broadband faster, more reliable, more accessible and more affordable. At
present, our customers include many of the largest mobile handset and wireless
service providers in the world.
We believe that mobile broadband represents the next logical step in the
evolution of the Internet and that consumer demand for fully-mobile, wireless
broadband service will transform the global wireless communications industry
from one driven primarily by circuit-switched voice to one driven by IP-based
broadband connectivity. In addition, we believe that wireless will play a major
role in facilitating digital media convergence and provide people the ability to
easily access and share multimedia content across multiple types of mobile
device and consumer electronics platforms. Our business activities are focused
on developing products, technologies and network solutions to enable affordable,
fully-mobile broadband access and seamless digital media convergence solutions
that will allow individuals to access the information and multimedia content
they want, where they want, when they want, on virtually any type of digital
communications device.
Our wireless broadband products and technologies are developed and
marketed through our operating subsidiaries. While, on a stand-alone basis, each
subsidiary is focused on providing customers with competitive products and
technologies targeted at a specific aspect of the mobile broadband ecosystem, we
expect that the combined offerings of our operating companies will form a
complete, end-to-end, next-generation wireless broadband solution. The following
is a summary of each of our major subsidiaries products and capabilities:
NEXTWAVE BROADBAND INC. - Mobile broadband semiconductors and network
components based on WiMAX and Wi-Fi technologies, terminal device
reference designs and network implementation services;
PACKETVIDEO CORPORATION - Multimedia software applications for wireless
handsets and digital media convergence software solutions;
GO NETWORKS, INC. - Carrier-class, wide-area, mobile Wi-Fi systems; and
IPWIRELESS, INC. - Commercial and public service mobile broadband systems,
access devices, and mobile broadcast systems based on TD-CDMA technology.
NEXTWAVE BROADBAND INC. Through its Advanced Technology Group, NextWave
Broadband is developing a family of mobile broadband semiconductor products
based on WiMAX and Wi-Fi technologies including multi-band RF chips and
high-performance, digital baseband WiMAX chips. Our chipsets are intended to
provide wireless device and network equipment manufacturers with an advanced
20
platform to develop next-generation WiMAX mobile terminal and infrastructure
products. Samples of our first-generation, NW1000 chipset family which includes
a WiMAX baseband system-on-a-chip (SOC) and matched multi-band RFIC were made
available in the third quarter of 2007. Initial availability of our
second-generation, NW2000 chipset family, the company's first chipset family
designed for high-volume commercial production, is planned for the first half of
2008. In addition, the Advanced Technology Group is developing wireless network
components and a family of handset and media player reference designs to
highlight the features of its subscriber station semiconductor products.
The primary design objectives of the Advanced Technology Group's products
and technologies, which are intended to be sold or licensed to network
infrastructure vendors, device manufacturers and service providers worldwide,
are to:
o Improve the performance, service quality and economics of WiMAX
networks and enhance their ability to cost-effectively handle the
large volume of network traffic associated with bandwidth-intensive,
multimedia applications such as mobile television, video-on-demand,
streaming audio, two-way video telephony and real-time gaming;
o Improve the performance, power consumption and cost characteristics
of WiMAX subscriber terminals;
o Improve the degree of interoperability and integration between Wi-Fi
and WiMAX systems for both Local Area Networks (LANs) and Wide Area
Networks (WANs); and
o Improve service provider economics and roaming capabilities by
enabling WiMAX networks and WiMAX enabled devices to seamlessly
operate across multiple frequency bands including certain unlicensed
bands.
Through its Network Solutions Group, NextWave Broadband intends to offer a
full array of network services, including RF and core network design services,
network implementation and management services, and back-office service
solutions to service providers who deploy our WiMAX, Wi-Fi, and TD-CDMA network
solutions. To demonstrate the capabilities of our network service capabilities
and our wireless broadband products, the Network Solutions Group is implementing
a mobile WiMAX/Wi-Fi/TD-CDMA test site in Las Vegas, Nevada.
PACKETVIDEO CORPORATION. Through our PacketVideo subsidiary, we supply
device-embedded multimedia software to many of the world's largest wireless
carriers and wireless handset manufacturers, who use it to transform a mobile
phone into a feature-rich multimedia device that provides people with the
ability to stream, download and play video and music, receive live TV
broadcasts, and engage in two-way video telephony. PacketVideo's software is
compatible with virtually all network technologies, including WiMAX, CDMA,
WCDMA, and GSM. PacketVideo has been contracted by some of the world's largest
carriers, such as Verizon Wireless, Vodafone, NTT DoCoMo, Orange and T-Mobile to
design and implement the embedded multimedia software capabilities contained in
their handsets. To date, over 160 million PacketVideo-powered handsets have been
shipped by PacketVideo's service provider and device OEM customers.
To further enhance its market position, PacketVideo has invested in the
development and acquisition of a wide range of technologies and capabilities to
provide its customers with software solutions to enable home/office digital
media convergence using communication protocols standardized by the Digital
Living Network Alliance(TM) (DLNA(TM)). An example is PacketVideo's
network-based PacketVideo Experience(TM) platform that provides for content
search, discovery, organization and content delivery/sharing between mobile
devices and consumer electronics products connected to an IP-based network. This
innovative platform is designed to provide an enhanced user experience by
intelligently responding to user preferences based on content type, day-part,
and content storage location. In addition, PacketVideo's patented Digital Rights
Management (DRM) solutions, already in use by many carriers globally, represent
a key enabler of digital media convergence by preventing the unauthorized access
or duplication of multimedia content used or shared by PacketVideo-enabled
devices.
We believe that the continued growth in global shipments of high-end
handsets with multimedia capabilities, increasing demand for home/office digital
media convergence solutions, and the acceleration of global deployments of
mobile broadband enabled networks will substantially expand the opportunity for
PacketVideo to license its suite of multimedia software solutions to service
providers and to handset and consumer electronic device manufacturers.
GO NETWORKS, INC. Through our GO Networks subsidiary, which was acquired
in February 2007, we offer carrier-class mobile Wi-Fi network systems to
commercial and municipal service providers worldwide. GO Networks' family of
micro, pico and femto Wi-Fi base stations utilize advanced xRFTM adaptive
beamforming smart-antenna technology and a cellular-mesh Wi-Fi architecture to
deliver superior Wi-Fi coverage, performance, and economics and provide service
providers with a cost-effective solution to support bandwidth-intensive mobile
broadband services such as video streaming, real-time gaming, web browsing, and
other types of multimedia applications on a wide-area basis.
21
IPWIRELESS, INC. Our IPWireless subsidiary, which was acquired in May
2007, played a leading role in the development of 3GPP TDD Universal Mobile
Telecommunications Systems (UMTS) standards and currently provides customers
with an assortment of TD-CDMA mobile broadband products and technologies. Mobile
broadband networks that utilize IPWireless' TD-CDMA technology, one of the first
standards-based mobile broadband technologies in the world, have been
commercially deployed in more than a dozen countries, including the Czech
Republic, New Zealand, Germany, South Africa, Sweden, and the United Kingdom.
The IPWireless TDtv solution, based on 3GPP Multimedia Broadcast Multicast
Service (MBMS), allows UMTS operators to deliver mobile television and other
multimedia services using their existing 3G spectrum and networks, with little
impact on their current voice and data services. A trial of TDtv technology,
recently conducted in the UK by several of the largest mobile operators in
Europe, successfully demonstrated its ability to deliver high-quality,
multi-channel broadcast services using the trial participants' existing
spectrum. TDtv supports key consumer requirements including fast channel change
times, operation at high travel speeds, and seamless integration into small
profile handsets.
In September 2006, IPWireless' TD-CDMA mobile broadband wireless
technology was selected by New York City's Department of Information Technology
and Telecommunications as part of a five-year contract awarded to Northrop
Grumman for the deployment of a citywide, public safety, mobile wireless
network. IPWireless has received an initial purchase order to deliver network
equipment through November 2007 in connection with this network deployment. We
believe that IPWireless' technology, as optimized for public safety
applications, can be utilized to deliver cost-effective and reliable public
safety network solutions in the 700MHz spectrum band plan currently under
consideration by the FCC for public safety purposes.
We believe the breadth of products, technologies, spectrum assets and
services offered by our various subsidiaries represents a unique platform to
provide advanced wireless broadband solutions to the market. While our
subsidiaries are intended to be operated as stand-alone businesses, we also
believe that they will provide synergistic value to each other and collectively
drive accelerated market penetration and share of the wireless broadband market
for us.
To help accelerate global market adoption of our mobile broadband
products, we intend to make our significant spectrum holdings available, under a
variety of business arrangements, to customers of our wireless broadband
products and technologies. Our spectrum footprint in the U.S. covers over 248
million people and includes many of the largest metropolitan areas in the
country. In addition, we have also acquired nationwide spectrum in numerous
international markets including Germany, Switzerland, Austria, Slovakia, Croatia
and Canada.
THIRD QUARTER OF 2007 COMPARED TO THE THIRD QUARTER OF 2006
REVENUES. Revenues for the third quarter of 2007 were $17.8 million
compared to $6.7 million for third quarter of 2006, an increase of $11.1
million. Of the increase in revenue, $6.9 million resulted from sales of
infrastructure products by our newly acquired subsidiaries, IPWireless and GO
Networks.. PacketVideo accounted for $3.4 million of the increase and reflects
increases in revenue from unit sales growth and market penetration of mobile
subscriber services by PacketVideo's customer base, which includes wireless
operators and device manufacturers. Our July 2007 acquisition of WiMax Telecom
AG accounted for the remaining increase in revenues of $0.8 million during 2007.
Sales to Verizon Wireless Communications and T-Mobile International
accounted for 32% and 27%, respectively, of our revenues during the three months
ended September 29, 2007.
In general, the financial consideration received from wireless carriers
and mobile phone and wireless device manufacturers is primarily derived from a
combination of technology development contracts, royalties, and wireless
broadband products.
Since our inception in April 2005, substantially all of our revenues have
been generated by our PacketVideo subsidiary, which we acquired in July 2005,
and our newly acquired subsidiaries, IPWireless and GO Networks. We believe that
PacketVideo, IPWireless and GO Networks will continue to account for a
substantial portion of our revenues in 2007. Following the development and
expected commercialization of our mobile broadband semiconductors, network
components, and technologies by the Advanced Technology Group of NextWave, we
believe that the sale or licensing of our proprietary chipsets, network
components and device technologies will become an additional source of recurring
revenue.
We expect that future revenues will be affected by, among other things,
new product and service introductions, competitive conditions, customer
marketing budgets for introduction of new subscriber products, the rate of
expansion of our customer base, the build out rate of networks that utilize our
Wi-Fi and WiMAX technologies, services and products, price increases, subscriber
device life cycles, demand for wireless data services and acquisitions or
dispositions of businesses or product lines.
22
OPERATING EXPENSES.
THREE MONTHS ENDED
SEPTEMBER SEPTEMBER
29, 30,
-------- --------
(in millions) 2007 2006 INCREASE
-------- -------- --------
Cost of revenues $ 17.3 $ 3.5 $ 13.8
Engineering, research and development 42.6 11.6 31.0
General and administrative 30.9 14.9 16.0
Sales and marketing 7.5 3.0 4.5
Purchased in-process research and
development 11.2 -- 11.2
-------- -------- --------
Total operating expenses $ 109.5 $ 33.0 $ 76.5
======== ======== ========
COST OF REVENUES. Cost of revenues from our products sold by IPWireless
and GO Networks, which we acquired in May and February 2007, respectively,
accounted for $11.1 million of the increase during the third quarter of 2007 and
primarily includes costs associated with product mix and the ramp up of
manufacturing subcontractor operations.
The increase in cost of revenues for our PacketVideo subsidiary, which
accounted for $1.0 million of the increase during the third quarter of 2007,
includes higher amortization expenses of $0.2 million for the purchase of
intangible assets related to our 2007 and 2006 business acquisitions. Cost of
revenues for PacketVideo includes direct engineering labor expenses, allocated
overhead costs, costs associated with offshore contract labor costs, other
direct costs related to the execution of technology development contracts as
well as amortization of acquired software and other costs.
Our July 2007 acquisition of WiMax Telecom AG accounted for the remaining
increase in cost of goods sold of $1.7 million during 2007.
We believe that cost of revenues as a percentage of revenue for future
periods will be affected by, among other things, the integration of acquired
businesses in addition to sales volumes, competitive conditions, royalty
payments by us on licensed technologies, changes in average selling prices, and
our ability to make productivity improvements through continual cost reduction
programs.
ENGINEERING, RESEARCH AND DEVELOPMENT. Costs for the internal and external
development of our wireless broadband products and technologies, including our
chipsets, for the third quarter of 2007 were $26.5 million compared to $9.0
million for the third quarter of 2006, an increase of $17.5 million which is due
primarily to the expansion of the engineering development organization and
development activities relating to the pre-commercialization of our 65 nanometer
WiMAX baseband and RFIC integrated circuits.
The acquisitions of our infrastructure products subsidiaries, GO Networks
in February 2007 and IPWireless in May 2007, accounted for $10.9 million of the
increase during the third quarter of 2007.
Over the past twelve months, NextWave Broadband has progressed from early
stage WiMAX development to pre-commercialization of its family of WiMAX
integrated circuit products. To accomplish our business and financial objectives
of commercializing these products in 2008 and beyond, we have added the required
complement of engineering and product development staff. In addition to
augmenting the staff of our Base Station Development teams in IPWireless and GO
Networks, we have increased the staff of our Advanced Technology Group to
produce WiMAX Baseband, Network and radio frequency integrated circuit products.
Costs for the internal and external development of our PacketVideo
software for the third quarter of 2007 were $5.2 million compared to $2.6
million for the third quarter of 2006, an increase of $2.6 million, of which
$0.6 million is due to 2006 and 2007 acquisitions by PacketVideo and the
remainder is due to an increase in headcount in the engineering development
organization.
Largely due to our planned increase in engineering personnel coupled with
our business acquisitions to further our WiMAX related and other technology
development initiatives, we expect our engineering, research and development
expenses to increase over the next twelve months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$16.0 million during the third quarter of 2007 when compared to 2006, of which
$9.1 million resulted from our business acquisitions since October 2006,
including IPWireless and GO Networks, which accounted for $7.2 million of the
increase and WiMax Telecom AG, which accounted for $1.4 million of the increase.
The increase in general and administrative expenses reflects increases in
spending for compensation and associated costs of general and administrative
personnel of $7.5 million, amortization of intangible assets of $6.5 million,
professional fees of $1.6 million and share-based compensation of $0.4 million.
We expect that general and administrative costs will increase in absolute
terms due to our business acquisitions and as we hire additional personnel and
incur costs related to the anticipated growth of our business and our global
operations. We also expect an increase in our general and administrative
expenses to occur as a result of our efforts to develop and protect intellectual
property rights, including expenses associated with the identification and
documentation of intellectual property, the preparation and prosecution of
patent applications and as we incur additional expenses associated with being a
publicly traded company, including expenses associated with comprehensively
analyzing, documenting and testing our system of internal controls and
maintaining our disclosure controls and procedures as a result of the regulatory
requirements of the Sarbanes-Oxley Act.
23
SALES AND MARKETING. Sales and marketing expenses increased $4.5 million
during the third quarter of 2007 when compared to 2006, of which $3.7 million
resulted from our acquisitions since October 2006, including IPWireless and GO
Networks, which accounted for $3.4 million of the increase, and WiMax Telecom
AG, which accounted for $0.1 million of the increase.
The increase in sales and marketing expenses reflects increases in
spending for compensation and associated costs for marketing and sales personnel
of $3.6 million, expenses associated with marketing and promotional activities
of $0.5 million, share-based compensation of $0.3 million and amortization of
intangible assets of $0.1 million.
We expect sales and marketing expenses to increase in absolute terms with
the growth of our global business in the upcoming year, primarily from the
addition of international sales offices and related personnel costs to support
company products and services.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Purchased in-process
research and development costs during the third quarter of 2007 include
IPWireless' next-generation backwards compatible chip for use in wireless
devices, a development project valued at $11.2 million, which had not yet
reached technological feasibility and had no alternative future uses at the date
of acquisition. These costs were expensed at the date of acquisition.
INTEREST INCOME. Interest income for the third quarter of 2007 was $4.9
million compared to $3.4 million for the third quarter of 2006, an increase of
$1.5 million, and consisted of interest earned during the respective periods on
our unrestricted and restricted cash, cash equivalents and marketable securities
balances, which totaled $336.7 million and $299.0 million at September 29, 2007
and September 30, 2006, respectively.
Interest income in the future will be affected by changes in short-term
interest rates and changes in our cash, cash equivalents and marketable
securities balances, which may be materially impacted by development plans,
acquisitions and other financial or equity activities.
INTEREST EXPENSE. Interest expense for the third quarter of 2007 was $12.0
million compared to $9.0 million for the third quarter of 2006, an increase of
$3.0 million. Our issuance of $350.0 million in principal amount of 7% Senior
Secured Notes in July 2006 accounted for $2.1 million of the increase and the
accretion of discounted wireless spectrum license lease liabilities acquired
during 2006 and 2007 accounted for $0.2 million of the increase. The remainder
of the increase of $0.7 million consists primarily of interest on debt assumed
in connection with our acquisitions during 2007 and the accretion of the value
of the put/call option to acquire the WiMax Telecom AG minority interest.
Our interest expense will continue to increase during 2007 primarily due
to the accrual of interest for a full year on our 7% Senior Secured Notes,
amortization of the discount and debt issue costs related to our 7% Senior
Secured Notes, interest on debt assumed in connection with our 2007 acquisitions
and interest accreted on our newly acquired spectrum lease liabilities and the
value of the put/call option to acquire the WiMax Telecom AG minority interest.
OTHER INCOME (EXPENSE), NET. Other expense, net, for the third quarter of
2007 was $1.6 million compared to $26,000 for the third quarter of 2006, an
increase of $1.6 million. Net foreign currency exchange losses accounted for
$1.2 million of the increase and the change in the estimated fair value of the
Series A Senior Convertible Preferred Stock embedded derivatives accounted for
the remaining $0.4 million of the increase.
PROVISION FOR INCOME TAXES. During the third quarter of 2007,
substantially all of our U.S. subsidiaries had net losses for tax purposes and,
therefore, no material income tax provision or benefit was recognized for these
subsidiaries. Certain of our controlled foreign corporations had net income for
tax purposes based on cost sharing and transfer pricing arrangements with our
U.S. subsidiaries in relation to research and development expenses incurred. An
income tax provision of $0.1 million was recorded during the third quarter of
2007 for these controlled foreign corporations. An additional income tax
provision of $0.3 million was recorded for foreign withholding tax on accrued
interest on intercompany debt between one of our United States subsidiaries and
a German subsidiary and for royalty payments received from our PacketVideo
customers.
MINORITY INTEREST. Minority interest for the third quarter of 2006 of $0.3
million represents the minority shareholder's share of losses to the extent of
their capital contributions in Inquam Broadband Holding Limited.
FIRST NINE MONTHS OF 2007 COMPARED TO THE FIRST NINE MONTHS OF 2006
REVENUES. Revenues for the first nine months of 2007 were $38.3 million
compared to $16.9 million for first nine months of 2006, an increase of $21.4
million. PacketVideo accounted for $8.7 million of the increase and reflects
increases in revenue from unit sales growth and market penetration of mobile
subscriber services by PacketVideo's customer base, which includes wireless
operators and device manufacturers, and higher contract revenues which resulted
from growth in technology development contracts, addressing an increasing number
of wireless devices in which PacketVideo technology is embedded.
Sales of infrastructure products by our newly acquired subsidiaries,
IPWireless and GO Networks, accounted for $11.9 million of the increase in
revenues. Our July 2007 acquisition of WiMax Telecom AG accounted for the
remaining increase in revenues of $0.8 million during 2007.
24
Sales to Verizon Wireless Communications and T-Mobile International
accounted for 44% and 24%, respectively, of our revenues during the nine months
ended September 29, 2007.
OPERATING EXPENSES.
NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
29, 30,
-------- --------
(in millions) 2007 2006 INCREASE
-------- -------- --------
Cost of revenues $ 31.5 $ 8.0 $ 23.5
Engineering, research and development 100.0 36.0 64.0
General and administrative 70.3 35.5 34.8
Sales and marketing 16.7 7.2 9.5
Purchased in-process research and
development 12.1 1.6 10.5
-------- -------- --------
Total operating expenses $ 230.6 $ 88.3 $ 142.3
======== ======== ========
COST OF REVENUES. Cost of revenues from our infrastructure products sold
by IPWireless and GO Networks accounted for $17.8 million of the increase during
the first nine months of 2007 when compared to 2006.
The increase in cost of revenues for our PacketVideo subsidiary accounted
for $4.1 million of the increase during the first nine months of 2007 and
includes higher amortization expenses of $0.7 million for the purchase of
intangible assets related to our 2007 and 2006 business acquisitions.
Our July 2007 acquisition of WiMax Telecom AG accounted for the remaining
increase in cost of goods sold of $1.6 million during 2007.
ENGINEERING, RESEARCH AND DEVELOPMENT. Costs for the internal and external
development of our wireless broadband products and technologies, including our
chipsets, for the first nine months of 2007 were $67.0 million compared to $28.2
million for the first nine months of 2006, an increase of $38.8 million which is
due primarily to the expansion of the engineering development organization and
development activities relating to the pre-commercialization of our 65 nanometer
WiMAX baseband and RFIC integrated circuits.
Our acquisitions of our infrastructure products subsidiaries, IPWireless
and GO Networks in 2007, accounted for $17.2 million of the increase during the
first nine months of 2007.
Over the past twelve months, NextWave Broadband has progressed from early
stage WiMAX development to pre-commercialization of its family of WiMAX
integrated circuit products. To accomplish our business and financial objectives
of commercializing these products in 2008 and beyond, we have added the required
complement of engineering and product development staff. In addition to
augmenting the staff of our Base Station Development teams in IPWireless and GO
Networks, we have increased the staff of our Advanced Technology Group to
produce WiMAX Baseband, Network and radio frequency integrated circuit products.
Costs for the internal and external development of our PacketVideo
software for the first nine months of 2007 were $15.8 million compared to $7.8
million for the first nine months of 2006, an increase of $8.0 million, of which
$1.7 million is due to 2006 and 2007 business acquisitions by PacketVideo and
the remainder is due primarily to an increase in headcount in the engineering
development organization.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$34.8 million during first nine months of 2007 when compared to 2006, of which
$13.4 million resulted from our acquisitions since October 2006, including
IPWireless and GO Networks, which accounted for $10.4 million of the increase
and WiMax Telecom AG, which accounted for $1.4 million of the increase.
The increase in general and administrative expenses reflects increases in
spending for compensation and associated costs of general and administrative
personnel of $19.1 million, professional fees of $5.1 million, amortization of
intangible assets of $10.2 million and share-based compensation of $0.4 million.
SALES AND MARKETING. Sales and marketing expenses increased $9.5 million
during the first nine months of 2007 when compared to 2006, of which $6.6
million resulted from our acquisitions since October 2006, including IPWireless
and GO Networks, which accounted for $5.8 million of the increase and WiMax
Telecom AG, which accounted for $0.1 million of the increase.
The increase in sales and marketing expenses reflects increases in
spending for compensation and associated costs for marketing and sales personnel
of $7.6 million, expenses associated with marketing and promotional activities
of $1.3 million, share-based compensation of $0.4 million and amortization of
intangible assets of $0.2 million.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. Purchased in-process
research and development costs during the first nine months of 2007 include
IPWireless' next-generation backwards compatible chip for use in wireless
devices and six of SDC's video and audio software projects, valued at $11.2
million and $0.9 million, respectively, which had not yet reached technological
feasibility and had no alternative future uses at the date of acquisition. We
also purchased similar in-process project costs associated with one of our
immaterial acquisitions during the second quarter of 2006 valued at $1.6
million. These costs were expensed at the respective dates of acquisition.
25
INTEREST INCOME. Interest income for the first nine months of 2007 was
$12.4 million compared to $9.8 million for the first nine months of 2006, an
increase of $2.6 million, and consisted of interest earned during the respective
periods on our unrestricted and restricted cash, cash equivalent and marketable
securities balances, which totaled $336.7 million and $299.0 million at
September 29, 2007 and September 30, 2006, respectively.
INTEREST EXPENSE. Interest expense for the first nine months of 2007 was
$34.6 million compared to $9.7 million for the first nine months of 2006, an
increase of $24.9 million. Our issuance of $350.0 million in principal amount of
7% Senior Secured Notes in July 2006 accounted for $23.5 million of the increase
and the accretion of discounted wireless spectrum license lease liabilities
acquired during 2006 and 2007 accounted for $0.6 million of the increase. The
remainder of the increase of $0.8 million consists primarily of interest on debt
assumed in connection with our acquisitions during 2007 and the accretion of the
value of the put/call option to acquire the WiMax Telecom AG minority interest.
OTHER INCOME (EXPENSE), NET. Other expense, net, for the first nine months
of 2007 was $1.3 million compared to other income, net of $0.1 million for the
first nine months of 2006, an increase of $1.4 million. Net foreign currency
exchange losses accounted for $0.7 million of the increase and the change in the
estimated fair value of the Series A Senior Convertible Preferred Stock embedded
derivatives accounted for an additional $0.6 million of the increase.
PROVISION FOR INCOME TAXES. During the first nine months of 2007
substantially all of our U.S. subsidiaries had net losses for tax purposes and,
therefore, no material income tax provision or benefit was recognized for these
subsidiaries. Certain of our controlled foreign corporations had net income for
tax purposes based on cost sharing and transfer pricing arrangements with our
U.S. subsidiaries in relation to research and development expenses incurred. An
income tax provision of $0.2 million was recorded during the first nine months
of 2007 for these controlled foreign corporations. An additional income tax
provision of $0.6 million was recorded for foreign withholding tax on accrued
interest on intercompany debt between one of our U.S. subsidiaries and a German
subsidiary and for royalty payments received from our PacketVideo customers.
MINORITY INTEREST. Minority interest for the first nine months of 2007 was
$1.0 million compared to $1.1 million for the first nine months of 2006 and
primarily represents the minority shareholder's share of losses to the extent of
their capital contributions in Inquam Broadband Holding Limited.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception (April 13, 2005), we have incurred operating losses
and negative cash flows and had an accumulated deficit of $366.5 million at
September 29, 2007. We have funded our operations, strategic investments and
wireless license acquisitions primarily with the $550.0 million in cash received
in our initial capitalization in April 2005, the net proceeds of $295.1 million
from the issuance of our 7% Senior Secured Notes in July 2006 and the net
proceeds of $351.1 million from our issuance of Series A Senior Convertible
Preferred Stock in March 2007. Our total unrestricted cash, cash equivalents and
marketable securities at September 29, 2007 totaled $261.7 million.
The following table presents working capital, cash, cash equivalents and
marketable securities:
INCREASE INCREASE
(DECREASE) (DECREASE)
FOR THE FOR THE
THREE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER JUNE SEPTEMBER DECEMBER SEPTEMBER
29, 30, 29, 30, 29,
(in millions) 2007 2007 2007 2006 2007
-------- -------- -------- -------- -------
Working capital $ 176.6 $ 289.5 $ (112.9) $ 166.3 $ 10.3
======== ======== ======== ======== =======
Cash and cash equivalents 72.9 167.2 (94.3) 33.0 39.9
Marketable securities 188.8 189.0 (0.2) 167.7 21.1
-------- -------- -------- -------- -------
Total cash, cash
equivalents and
marketable securities $ 261.7 $ 356.2 $ (94.5) $ 200.7 $ 61.0
======== ======== ======== ======== =======
The following table presents our utilization of cash, cash equivalents and
marketable securities for the three and nine months ended September 29, 2007,
compared to the three and nine months ended September 30, 2006:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
29, 30, 29, 30,
(in millions) 2007 2006 2007 2006
-------- -------- -------- --------
Beginning cash, cash
equivalents and marketable
securities $ 356.2 $ 340.4 $ 200.7 $ 459.2
Proceeds from the issuance of
Series A Senior Convertible
Preferred Stock, net of
costs to issue -- -- 351.1 --
Proceeds from 7% Senior
Secured Notes -- 295.1 -- 295.1
Payment to restricted cash
account securing long-term
obligation -- (75.0) -- (75.0)
26
Cash paid for business
combinations, net of cash
acquired (20.9) (0.1) (80.3) (5.0)
Cash paid for acquisition of
wireless spectrum licenses
and subsequent lease
obligations (0.5) (317.6) (37.4) (400.0)
Cash used by operating
activities (66.0) (17.4) (148.7) (40.6)
Cash paid for property and
equipment (8.2) (3.8) (22.4) (11.0)
Other, net 1.1 0.6 (1.3) (0.5)
-------- -------- -------- --------
Ending cash, cash equivalents
and marketable securities $ 261.7 $ 222.2 $ 261.7 $ 222.2
======== ======== ======== ========
The decrease in cash, cash equivalents and marketable securities of $94.5
million during the third quarter of 2007 is primarily due to $20.9 million paid
for business combinations, $0.5 million paid for wireless spectrum licenses and
subsequent lease obligations, cash used in operating activities of $66.0 million
and $8.2 million in cash paid for capital expenditures.
The increase in cash, cash equivalents and marketable securities of $61.0
million during the first nine months of 2007 is primarily due to the net
proceeds of $351.1 million from our issuance of Series A Senior Convertible
Preferred Stock in March 2007, offset by $80.3 million paid for business
combinations, $37.4 million paid for wireless spectrum licenses and subsequent
lease obligations, cash used in operating activities of $148.7 million and $22.4
million in cash paid for capital expenditures.
INVESTING ACTIVITIES
During the first nine months of 2007, we consummated transactions to
acquire licensed spectrum rights totaling $40.2 million, which includes the
acquisition of all of the outstanding shares of common stock of 4253311 Canada
Inc., a Canadian company whose assets are comprised almost entirely of wireless
spectrum, for $26.2 million in cash and the acquisitions of spectrum in other
locations, including Switzerland, Texas and Illinois, for a total of $8.4
million in cash and $5.6 million in future lease obligations.
Capital expenditures totaled $22.4 million during the first nine months of
2007 and were primarily related to our acquisition of a build-to-suit office
building in Las Vegas, Nevada and our lease facilities in San Diego, California.
In connection with our San Diego facilities, we entered into an agreement in
2007 for the construction of interior improvements aggregating $2.4 million, of
which $0.5 million remains to be paid under this contract at September 29, 2007.
During the first nine months of 2007, we acquired ownership interests in
five companies for net cash of $80.3 million which includes cash paid to the
respective shareholders of $74.8 million, closing costs of $4.6 million, the
assumption of $7.1 million in debt which was paid at closing, less cash acquired
of $6.2 million.
Additional purchase consideration of up to $135.0 million may be payable
to the selling shareholders of IPWireless upon the achievement of certain
revenue milestones between 2007 and 2009, as specified in the agreement, with
potential payments of up to $50.0 million in late 2007 or 2008, up to $7.5
million in 2008, up to $24.2 million in 2009 and up to $53.3 million in 2010. If
earned, up to $113.8 million of such additional consideration will be payable in
cash or shares of common stock at our election and up to $21.2 million of such
amounts will be payable in cash or shares of common stock at the election of
representatives of IPWireless shareholders. Additional purchase consideration of
up to $25.6 million and $0.1 million may be paid to the selling shareholders of
GO Networks in shares of our common stock and cash, respectively, subject to the
achievement of certain operational milestones in February and August 2008.
Contemporaneously with the acquisition of WiMax Telecom AG, our then
majority-owned subsidiary, Inquam Broadband GmbH, was granted an exclusive and
irrevocable call option and the remaining minority shareholders of WiMax Telecom
AG were granted an exclusive and irrevocable put option, both of which expire in
December 2007, for the shares held by the remaining minority shareholders for
3.6 million Euros ($5.1 million at September 29, 2007).
In October 2007, we acquired the remaining 44% interest in Inquam
Broadband Holding Limited, a joint venture with Inquam-BMR GP, for a cash
payment of $0.9 million and the assignment to Inquam-BMR GP of a $2.1 million
receivable owned by Inquam Broadband Holding Limited. Additionally, in
connection with the acquisition, our subsidiary Inquam Broadband GmbH agreed to
provide certain project management and support services to a subsidiary of
Inquam-BMR GP for a period of up to two years. The performance of the services
by Inquam Broadband GmbH is secured by a $0.6 million cash deposit from
NextWave.
27
In October 2007, we acquired Websky Argentina S.A., a developer and
operator of wireless broadband services over licensed frequencies in Argentina,
for $12.5 million in cash from Websky, Inc. The change in control of the
wireless licenses remains subject to governmental approval and approximately
$2.4 million of the purchase price is held in escrow to cover, among other
things, any liabilities relating to failure to obtain governmental approval. In
connection with this acquisition, we also entered into a one-year advisory
services agreement with Websky, Inc. under which we will pay to Websky, Inc. an
aggregate of $2.5 million, payable in monthly installments, with up to $2.0
million upon the consummation of long-term contracts for wireless services as
specified in the services agreement and royalties equal to 7% of revenues
derived over a period of up to four years from any supply contracts with
companies specified in the services agreement.
In November 2007, we entered into definitive agreements to lease spectrum
located in California for initial payments aggregating $20.0 million, plus
annual lease payments approximating $0.8 million through 2017. The leases expire
on various dates through 2017 and each provides for three consecutive 10-year
renewals.
FINANCING ACTIVITIES
On March 28, 2007, we issued and sold 355,000 shares of our Series A
Senior Convertible Preferred Stock (the "Series A Preferred Stock") at a price
of $1,000 per share. We received $351.1 million in net proceeds from the sale of
the Series A Preferred Stock. Costs incurred to issue the shares totaled $3.9
million. The net proceeds will be used to fund operations, accelerate the
development of new wireless technologies, expand the company's business, and
enable future strategic acquisitions. In addition to other investment funds and
institutional investors, we sold 14%, 14% and 28% of the Series A Senior
Convertible Preferred Stock respectively to Navation, Inc., an entity owned by
Allen Salmasi, NextWave's Chairman and Chief Executive Officer, Manchester
Financial Group, L.P., an entity indirectly owned and controlled by Douglas F.
Manchester, a member of NextWave's Board of Directors, and affiliates of Avenue
Capital, of which a member of NextWave's Board of Directors, Robert Symington,
is a portfolio manager. Kevin Finn, NextWave's Chief Compliance Officer, also
purchased less than 1% of the Series A Senior Convertible Preferred Stock.
Dividend Rights. Holders of the Series A Preferred Stock are entitled to
receive quarterly dividends on the liquidation preference at a rate of 7.5% per
annum. Until March 2011, we can elect whether to declare dividends in cash or to
not declare and pay dividends, in which case the per share dividend amount will
be added to the liquidation preference. From and after March 2011, we must
declare dividends in cash each quarter, subject to applicable law. The dividend
rate is subject to adjustment to 10% per annum if NextWave defaults on its
dividend payment obligations or fails to cause its shelf registration statement
filed with the Securities and Exchange Commission to be declared effective on or
prior to November 30, 2007. The dividend rate is also subject to adjustment to
15% per annum if we fail to comply with the protective covenants of the Series A
Preferred Stock described below and to 18% per annum if we fail to convert or
redeem the Series A Preferred Stock when required to do so, as described below.
We accrued for $6.9 million and $13.8 million in undeclared dividends during the
three and nine months ended September 29, 2007, respectively.
Voting Rights. Pursuant to the terms of the Series A Preferred Stock, so
long as at least 25% of the issued shares of Series A Preferred Stock remain
outstanding, and until the date on which we elect to redeem all shares of Series
A Preferred Stock in connection with an asset sale, as described below, we must
receive the approval of the holders of shares representing at least 75% of the
Series A Preferred Stock then outstanding to (i) incur indebtedness in excess of
$500 million, subject to certain adjustments and exceptions, (ii) create any
capital stock that is senior to or on a parity with the Series A Preferred Stock
in terms of dividends, distributions or other rights, or (iii) consummate asset
sales involving the receipt of gross proceeds of, or the disposition of assets
worth, $500 million or more based on their fair market value. In addition, so
long as at least 25% of the issued shares of Series A Preferred Stock remain
outstanding, we may not distribute rights or warrants to all holders of our
common stock entitling them to purchase shares of our common stock, or
consummate any sale of our common stock, for an amount less than the fair market
value on the date of issuance, with certain exceptions. With respect to other
matters requiring stockholder approval, the shares of Series A Preferred Stock
will be entitled to vote as one class with the common stock on an as-converted
basis.
Conversion Rights and Redemption Rights. Each share of Series A Preferred
Stock is convertible into a number of shares of our common stock equal to the
liquidation preference then in effect divided by $11.05. The Series A Preferred
Stock is convertible at any time at the option of the holder, or at our election
after September 28, 2008, subject to the trading price of our common stock
reaching $22.10 for a specified period of time, except that such threshold price
will be reduced to $16.575 on the earlier of March 28, 2010, or our consummation
of a qualified public offering. We will not be entitled to convert the Series A
Preferred Stock at our election unless a shelf registration statement covering
the shares of common stock issued upon conversion is then effective or the
shares are no longer considered restricted securities under the Securities Act.
At September 29, 2007, the liquidation preference totaled $368.8 million. If all
shares of Series A Preferred Stock were converted at September 29, 2007, we
would be obligated to issue 33.4 million shares of our common stock.
We will be required to redeem all outstanding shares of Series A Preferred
Stock, if any, on March 28, 2017, at a price equal to the liquidation preference
plus unpaid dividends. If we elect to convert the Series A Preferred Stock after
our common stock price has reached the qualifying threshold, we must redeem the
shares of holders of Series A Preferred Stock who elect not to convert into
common stock at a price equal to 130% of the liquidation preference. However, we
are not required to redeem more than 50% of the shares of Series A Preferred
Stock subject to any particular conversion notice. In the event that we fail to
obtain approval of the holders of Series A Preferred Stock to an asset sale
transaction, we must either not consummate such asset sale or elect to redeem
28
all shares of Series A Preferred Stock at a redemption price equal to 120% of
the liquidation preference. Holders will be entitled to opt-out of such a
redemption.
Right to Receive Liquidation Distributions. The Series A Preferred Stock
has an initial liquidation preference of $1,000 per share, subject to increase
for accrued dividends as described above. The liquidation preference would
become payable upon redemption, as described above, upon a liquidation or
dissolution of our company, or upon deemed liquidation events including a change
in control, merger or sale of all or substantially all our assets, unless the
holders of Series A Preferred Stock provide a 75% vote to not treat a covered
event as a deemed liquidation. Upon a deemed liquidation event, the Series A
Preferred Stock will be entitled to receive an amount per share equal to the
greater of 120% of the liquidation preference or the amount that would have been
received if such share had converted into common stock in connection with such
event.
During the nine months ended September 29, 2007, we paid $24.5 million in
interest on our 7% Senior Secured Notes due 2010, principal amount of $350.0
million. We are obligated to pay interest of 7% per annum semiannually in
January and July each year, or $24.5 million per year. The purchase agreement
for the 7% Senior Secured Notes contains representations and warranties,
affirmative and negative covenants including, without limitation, our obligation
to not become liable to any additional indebtedness, subject to certain
exceptions including the ability to enter into spectrum leases or to incur $25.0
million of acquired company debt or purchase money indebtedness. As of September
29, 2007, we have become liable for additional indebtedness totaling $16.9
million.
During the nine months ended September 29, 2007, we paid $2.0 million in
cash distributions that were accrued for in 2006 to the former NextWave Wireless
LLC membership holders.
LOOKING FORWARD
As of September 29, 2007, we had $261.7 million of unrestricted cash, cash
equivalents and marketable securities, and $75.0 million in restricted cash
required to be reserved under our Senior Secured Notes financing.
We anticipate that our businesses, other than the multimedia software
business of our PacketVideo subsidiary, will require further substantial
investment before our revenues are sufficient to fund our expenses and generate
earnings:
o Our wireless broadband products, services and technologies are in
the pre-commercialization stage of development and will require a
substantial investment before they may become commercially viable.
Although we currently anticipate that our second generation NextWave
Broadband WiMAX technologies designed for high volume commercial
production will initially be available in the first half of 2008, we
are currently unable to project when our chipsets, network
components and related technology licensing agreements based on
WiMAX and Wi-Fi technologies will be commercially deployed.
o GO Networks, Inc., acquired in February 2007, develops
high-performance mobile Wi-Fi systems for commercial and municipal
service providers. GO Networks will continue to require working
capital funding through 2008 to invest in establishing worldwide
sales and distribution channels, along with high volume
manufacturing capabilities and related administrative and
information technology systems to support anticipated unit volume
growth.
o IPWireless, Inc., acquired in May 2007, is a leading supplier of
TD-CDMA based mobile broadband network equipment and subscriber
terminals. We expect increased investment through 2008 in augmenting
sales and distribution channels, working capital, capital equipment
and research and development with respect to the commercialization
of TDtv, WiMAX, and additional public safety products.
o Inquam Broadband GmbH and WiMax Telecom AG are strategic investments
in European wireless spectrum and wireless broadband network
operations and we are presently exploring alternative plans in order
to further enhance these investments in 2008. If these plans are
successful, we do expect further working capital investments will be
needed to expand these businesses.
Based upon our current plans, we believe that our existing cash, cash
equivalents, working capital and strategic financing alternatives, together with
the incremental gross margins forecasted from our newly acquired GO Networks and
IPWireless wireless broadband network businesses, along with incremental margins
from revenue growth in our PacketVideo multimedia software business, will be
sufficient to cover our estimated liquidity needs for at least the next twelve
months.
We will need to secure significant additional capital to implement changes
to, or expansions of, our business plan and to continue to fund our research and
development activities and our operating losses until we become cash flow
positive. We may also require additional cash resources for other future
developments, including any investments or acquisitions we may pursue, such as
investments or acquisitions of other business or technologies. To augment our
existing working capital resources in order to satisfy our cash requirements, we
may seek to sell debt securities or additional equity securities or to obtain a
29
credit facility. Our Senior Secured Notes and our Series A Senior Convertible
Preferred Stock prohibit our incurrence of additional indebtedness, subject to
certain exceptions. The sale of equity securities or convertible debt securities
could result in additional dilution to our stockholders.
The incurrence of additional indebtedness would result in additional debt
service obligations and the requirement that we comply with operating and
financial covenants that would restrict our operations. In addition, there can
be no assurance that any additional financing will be available on acceptable
terms, if at all.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The critical accounting policies and estimates used in the preparation of
our consolidated financial statements are described in Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," of
our Annual Report on Form 10-K for the year ended December 30, 2006. There have
been no significant changes in our critical accounting policies and estimates
from December 31, 2006, other than as described below.
Revenue Recognition. Included in revenue recognized during the nine months
ended September 29, 2007 is revenue from sales of infrastructure products by our
newly acquired IPWireless, Inc. and GO Networks, Inc. subsidiaries. These
infrastructure products are generally integrated with software. For products
where the software component is considered incidental and not essential to the
functionality of the hardware, revenue from the sale of infrastructure products
is recognized in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104,
Revenue Recognition. Accordingly, revenue is recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is reasonably assured. In instances where final
acceptance of the product is specified by the customer, revenue is deferred
until all acceptance criteria have been met.
For arrangements where the software is considered more than incidental and
essential to the functionality of the hardware, revenue from the sale of
infrastructure products is recognized pursuant to American Institute of
Certified Public Accountants Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, and Emerging Issues Task Force ("EITF") Issue No. 00-21,
Multiple Element Arrangements ("EITF No. 00-21"). Accordingly, we evaluate each
deliverable in the arrangement to determine whether it represents a separate
unit of accounting based on the following criteria: (i) whether the delivered
item has value to the customer on a stand-alone basis, (ii) whether there is
objective and reliable evidence of the fair value of the undelivered item(s),
and (iii) if the contract includes a general right of return relative to the
delivered item, delivery or performance of the undelivered item(s) is considered
probable and substantially in our control. If objective and reliable evidence of
fair value ("VSOE") exists for all units of accounting in the arrangement,
revenue is allocated to each unit of accounting or element based on relative
fair values. In situations where there is VSOE of fair value for all undelivered
elements, but not for delivered elements, the residual method is used to
allocate the arrangement consideration. Under the residual method, the amount of
revenue allocated to delivered elements equals the total arrangement
consideration less the aggregate fair value of any undelivered elements. Each
unit of accounting is then accounted for under the applicable revenue
recognition guidance. So long as elements otherwise governed by separate
authoritative accounting standards cannot be treated as separate units of
accounting under the guidance in EITF No. 00-21, the elements are combined into
a single unit of accounting for revenue recognition purposes and the associated
revenue is deferred until all combined elements have been delivered or, once
there is only one remaining element to be delivered, based on the revenue
recognition guidance applicable to the last delivered element within the unit of
accounting.
Income Taxes. We adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN No.
48"), effective December 31, 2006, the beginning of our 2007 fiscal year. FIN
No. 48 prescribes a recognition threshold and measurement standard for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN No. 48 requires that we determine
whether the benefits of our tax positions are more likely than not of being
sustained upon audit based on the technical merits of the tax position. We
recognize the impact of an uncertain income tax position taken on our income tax
return at the largest amount that is more-likely-than-not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax position is not
recognized if it has less than a 50% likelihood of being sustained.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS No. 157"). This
Standard defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 is effective for our fiscal year that
begins on December 30, 2007. We are in the process of evaluating the impact
of the adoption of SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure certain financial assets and liabilities
and other eligible items at fair value, which are not otherwise currently
required to be measured at fair value. Under SFAS 159, the decision to measure
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items at fair value is made at specified election dates on an irrevocable
instrument-by-instrument basis. Entities electing the fair value option would be
required to recognize changes in fair value in earnings and to expense upfront
cost and fees associated with the item for which the fair value option is
elected. Entities electing the fair value option are required to distinguish on
the face of the statement of financial position, the fair value of assets and
liabilities for which the fair value option has been elected and similar assets
and liabilities measured using another measurement attribute. If elected, SFAS
No. 159 is effective for our fiscal year that begins on December 30, 2007, with
earlier adoption permitted provided that the entity also early adopts all of the
requirements of SFAS No. 159. We are currently evaluating whether or not to
elect the option provided for in this standard.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at September
29, 2007 as well as significant contractual obligations entered into subsequent
to that date, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods.
PAYMENTS DUE BY PERIOD(1)
-----------------------------------------------------
YEARS 2012
REMAINDER YEARS YEARS AND
(in thousands) TOTAL OF 2007 2008-2009 2010-2011 THEREAFTER
-------- -------- -------- -------- --------
Long-term obligations $397,966 $ 739 $ 11,071 $356,832 $ 29,324
Services and other purchase
agreements 30,438 6,592 16,785 7,061 --
Capital expenditures 542 542 -- -- --
Operating leases 36,067 2,508 18,889 12,358 2,312
Pending business investment(2) 853 853 -- -- --
Series A Senior Convertible
Preferred Stock(3) 355,000 -- -- -- 355,000
-------- -------- -------- -------- --------
Total $820,866 $ 11,234 $ 46,745 $376,251 $386,636
======== ======== ======== ======== ========
Significant contractual
obligations entered into
subsequent to September
29, 2007:
Pending business investment(4) $ 14,655 $ 12,780 $ 1,875 $ -- $ --
Pending spectrum lease
obligations(5) 27,571 20,131 1,754 1,612 4,074
(1) Amounts presented do not include interest or dividend payments. Please
refer to the accompanying notes to the consolidated financials statements
for information on respective interest rates, interest and dividend
payment dates.
(2) In April 2007, Inquam-BMR GP, the minority shareholder of our
majority-owned subsidiary, Inquam Broadband Holdinig Limited, exercised
its contractual option to put its shares of Inquam Broadband Holding
Limited to NextWave, thereby requiring NextWave to acquire the minority
interest. In October 2007, we closed the acquisition of the remaining 44%
interest in Inquam Broadband Holding Limited for a cash payment of $0.9
million and the assignment to Inquam-BMR GP of a $2.1 million receivable
owned by Inquam Broadband Holding Limited. Additionally, in connection
with the acquisition, Inquam Broadband GmbH agreed to provide certain
project management and support services to a subsidiary of Inquam-BMR GP
for a period of up to two years. The performance of the services by Inquam
Broadband GmbH is secured by a $0.6 million cash deposit from NextWave.
(3) We will be required to redeem all outstanding shares of Series A Preferred
Stock, if any, on March 28, 2017, at a price equal to the liquidation
preference plus unpaid dividends. Each share of Series A Preferred Stock
is convertible into a number of shares of our common stock equal to the
liquidation preference then in effect divided by $11.05 and is convertible
at any time at the option of the holder, or at our election after
September 28, 2008, subject to the trading price of our common stock
reaching $22.10 for a specified period of time, subject to adjustment. The
Series A Preferred Stock is entitled to receive quarterly dividends on the
liquidation preference at a rate of 7.5% per annum. Until March 28, 2011,
we can elect whether to declare dividends in cash or to not declare and
pay dividends, in which case the per share dividend amount will be added
to the liquidation preference. At September 29, 2007, the liquidation
preference totaled $368.8 million. If all shares of Series A Preferred
Stock were converted at September 29, 2007, we would be obligated to issue
33.4 million shares of our common stock.
(4) In October 2007, we acquired Websky Argentina S.A., a developer and
operator of wireless broadband services over licensed frequencies in
Argentina, from Websky, Inc. for $12.5 million in cash, of which $0.3
million was paid in September 2007. The change in control of the wireless
licenses remains subject to governmental approval and approximately $2.4
million of the purchase price is held in escrow to cover, among other
things, any liabilities relating to failure to obtain governmental
approval. In connection with this acquisition, we also entered into a
one-year advisory services agreement with Websky, Inc. under which we will
pay to Websky, Inc. an aggregate of $2.5 million payable in monthly
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installments, with up to $2.0 million upon the consummation of long-term
contracts for wireless services as specified in the services agreement and
royalties equal to 7% of revenues derived over a period of up to four
years from any supply contracts with companies specified in the services
agreement.
(5) In November 2007, we entered into definitive agreements to lease spectrum
located in California for initial payments aggregating $20.0 million, plus
annual lease payments approximating $0.8 million through 2017. The leases
expire on various dates through 2017 and each provides for three
consecutive 10-year renewals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided in Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," of our Annual
Report on Form 10-K for the year ended December 30, 2006. Our exposures to
market risk have not changed materially since December 31, 2006, other than as
described below.
Foreign Currency Risk. In addition to our U.S. operations, we conduct
business through subsidiaries in Europe, Israel, Asia-Pacific, Canada and South
America. As a result, our financial position, results of operations and cash
flows can be affected by fluctuations in foreign currency exchange rates,
particularly fluctuations in the pound sterling, Euro and Swiss franc exchange
rates. Additionally, a portion of our sales to customers located in foreign
countries, specifically certain sales by our IPWireless subsidiary, are
denominated in Euros, which subjects us to foreign currency risks related to
those transactions. We analyze our exposure to currency fluctuations and may
engage in financial hedging techniques in the future to reduce the effect of
these potential fluctuations. We do not currently have hedging contracts in
effect.
ITEM 4. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to provide reasonable assurance
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required financial disclosures. Because of
inherent limitations, our disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of such disclosure controls and procedures are met.
As more fully described in Item 9A of our Annual Report on Form 10-K for
the year ended December 30, 2006, in connection with the preparation of our
annual financial statements, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were not
effective as of December 30, 2006. In particular, in connection with the
restatement of our previously issued unaudited quarterly financial statements
for the year ended December 30, 2006, management identified certain control
deficiencies that represent a material weakness in our internal control over
financial reporting, as more fully described below. Subsequently, we amended our
quarterly report filed on Form 10-Q for the quarterly period ended on September
30, 2006, and included corrected interim unaudited condensed consolidated
financial statements for the first three quarters of 2006, together with
restatement adjustments, in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on March 30, 2007. Because all material
information relating to the restatement was provided in our 2006 Form 10-K, and
because our predecessor NextWave Wireless LLC has terminated its SEC reporting
obligations, the Form 10-Qs filed by our predecessor NextWave Wireless LLC for
the fiscal quarters ended April 1, 2006 and July 1, 2006 have not been amended
to reflect the restatement and accordingly should not be relied upon.
The material weakness in our internal control over financial reporting
relates to revenue recognition pursuant to software contracts at our PacketVideo
subsidiary. Our failure to properly apply software revenue recognition
principles resulted from a lack of a sufficient number of employees with
appropriate levels of knowledge, expertise and training in the application of
generally accepted accounting principles relevant to software revenue
recognition. We will be required to provide an assessment of the effectiveness
of our internal control structure and procedures for financial reporting when we
files our Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
In 2007, in order to remediate the identified material weakness in our
internal control over financial reporting at PacketVideo, we initiated the
following remediation actions:
(1) We hired two senior-level accounting employees in September and
October 2007 who have significant expertise in financial controls
and the application of generally accepted accounting principles
relevant to our business, including software revenue recognition.
(2) We implemented an enhanced sales contracts review process to include
additional levels of analysis and review by legal and accounting
personnel.
Notwithstanding the initiation of these remediation actions, the
identified material weaknesses in our internal control over financial reporting
will not be considered remediated until the new controls are fully implemented,
in operation for a sufficient period of time, are tested and our management
concludes that the new controls are operating effectively.
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In order to provide our assessment of the effectiveness of our internal
control structure and procedures for financial reporting as of December 29,
2007, management has commenced a Sarbanes-Oxley Section 404 compliance project
under which management has engaged outside consultants and adopted a detailed
project work plan to assess the adequacy of our internal control over financial
reporting, remediate any control deficiencies that may be identified (aside from
the deficiency relating to our PacketVideo subsidiary described herein),
validate through testing that controls are functioning as documented and
implement a continuous reporting and improvement process for internal control
over financial reporting.
As of the end of the period covered by this Quarterly Report on Form 10-Q,
we conducted an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and
15d-15(b). Based on this evaluation, our principal executive officer and
principal financial officer concluded that, although the remediation actions set
forth above had been initiated as of September 29, 2007, these remediation
actions had not been in operation for a sufficient period of time and had not
yet been tested. Therefore, the identified material weaknesses in our internal
control over financial reporting had not been fully remediated and, as a result,
our disclosure controls and procedures were not considered to be effective as of
September 29, 2007. As a result of the restatement of our previously issued
unaudited quarterly financial statements and notwithstanding the material
weaknesses described above, management believes that the consolidated financial
statements included in this Quarterly Report on Form 10-Q fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as described above, during the three months ended September 29,
2007, there have been no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to various legal proceedings that arise
in the ordinary course of our business. While we presently believe that the
ultimate outcome of any such proceedings, individually and in the aggregate,
will not have a material adverse effect on our financial position, cash flows or
overall trends in results of operations, litigation is subject to inherent
uncertainties, and unfavorable rulings could occur.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On June 8, 1998,
NextWave Personal Communications Inc., NextWave Power Partners Inc. and the
predecessor to NextWave Wireless Inc., all direct and indirect wholly owned
subsidiaries of NextWave Telecom Inc., filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the southern District of New York. On December 23, 1998, NextWave Telecom
Inc. filed its voluntary petition, in order to implement an overall corporate
restructuring. On March 1, 2005, the Bankruptcy Court confirmed the Third Joint
Plan of Reorganization, dated January 21, 2005. The cornerstone of the Plan of
Reorganization was the sale of NextWave Telecom and its subsidiaries, excluding
the predecessor to NextWave Wireless inc., to Verizon Wireless for approximately
$3.0 billion. Pursuant to the Plan of Reorganization, on April 13, 2005, all
non-PCS assets and liabilities of the NextWave Telecom group were contributed to
the predecessor to NextWave Wireless Inc., and the predecessor to NextWave
Wireless Inc. was capitalized with $550.0 million in cash. Through this process,
the predecessor to NextWave Wireless Inc. was reconstituted as a company with a
new capitalization and a new wireless technology business plan. All claims made
in connection with the Chapter 11 case have been resolved, and NextWave has
received a decree of final judgment closing the Chapter 11 case.
ITEM 1A. RISK FACTORS
Our business involves a high degree of risk. You should carefully consider
the following risks together with all of the other information contained in or
incorporated by reference into this quarterly report before making a future
investment decision with respect to our securities. If any of the following
risks actually occurs, our business, financial condition and results of
operations could be materially adversely affected, and the value of our
securities could decline.
RISKS RELATING TO OUR BUSINESS
WE HAVE LIMITED RELEVANT OPERATING HISTORY AND A HISTORY OF LOSSES.
We emerged from our reorganization in April 2005 with a new business plan
and have made several significant acquisitions and investments. As a result, we
are at an early stage of our development and have had a limited relevant
operating history and, consequently, limited historical financial information.
Other than through our PacketVideo subsidiary, which we acquired in July 2005,
and our IPWireless subsidiary, which we acquired in May 2007, we have never
generated any material revenues and have limited commercial operations. While
certain of our businesses are currently generating revenues, the revenues are
not yet adequate to cover our operating expenses. In particular, although we
currently anticipate that our second generation NextWave Broadband WiMAX
technologies designed for high volume commercial production will initially be
available in the first half of 2008, we are currently unable to project when our
chipsets, network components and related technology licensing agreements based
on WiMAX and Wi-Fi technologies will be commercially deployed and generated
significant revenue. We, along with the companies we have acquired, have a
history of losses. We will continue to incur significant expenses in advance of
achieving broader commercial distribution of our IPWireless and GO Networks
products and generating revenues from our NextWave Broadband businesses,
particularly from our WiMAX/Wi-Fi semiconductor and network component products.
We are expected to realize significant operating losses for the next few years.
We are therefore subject to risks typically associated with a start-up entity.
If we are not able to successfully implement all key aspects of our
business plan, including selling and/or licensing high volumes of our products
to network operators and to device and network equipment manufacturers, we may
not be able to develop a customer base sufficient to generate adequate revenues.
If we are unable to successfully implement our business plan and grow our
business, either as a result of the risks identified in this section or for any
other reason, we may never achieve profitability, in which event our business
would fail.
WE HAVE IDENTIFIED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING, AND THE IDENTIFICATION OF ANY SIGNIFICANT DEFICIENCIES OR MATERIAL
WEAKNESSES IN THE FUTURE COULD AFFECT OUR ABILITY TO ENSURE TIMELY AND RELIABLE
FINANCIAL REPORTS.
In connection with our close process and the audit of our consolidated
financial statements for the year ended December 30, 2006, our management
concluded that a material weakness existed relating to revenue recognition
pursuant to software contracts at our PacketVideo subsidiary. Our failure to
correctly apply software revenue recognition principles resulted from a lack of
a sufficient number of employees with appropriate levels of knowledge, expertise
and training in the application of generally accepted accounting principles
relevant to software revenue recognition. As a public company, our systems of
internal controls over financial reporting are required to comply with the
standards adopted by the SEC and the Public Company Accounting Oversight Board
(the "PCAOB"). Both regulators currently define a material weakness as a single
deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. We believe we have taken measures to remedy the
material weakness, some of which are still in progress. For a discussion of our
internal control over financial reporting and a description of the identified
material weakness and the related remedial measures, see Item 9A of our Annual
Report on Form 10-K for the year ended December 30, 2006, filed with the U.S.
Securities and Exchange Commission (the "SEC") on March 30, 2007.
34
We will be required to make our first annual certification on our internal
controls over financial reporting in our Annual Report on Form 10-K for the year
ended December 29, 2007. In preparing for such certification, we are presently
evaluating our internal controls for compliance with applicable SEC and PCAOB
requirements. In addition to the material weakness related to revenue
recognition at our PacketVideo subsidiary, we may identify other internal
control processes and procedures that are deficient and, as a result, we may be
required to design enhanced processes and controls to address the control
deficiencies identified. This could result in significant delays and cost to us
and require us to divert substantial resources, including management time, from
other activities. We have commenced a review of our existing internal control
structure and plan to hire additional personnel. Although our review is not
complete, we have taken steps to improve our internal control structure by
hiring dedicated, internal compliance personnel to analyze and improve our
internal controls, to be supplemented periodically with outside consultants as
needed. However, if we fail to achieve and maintain the adequacy of our internal
controls, we may not be able to conclude that we have effective internal
controls over financial reporting as of the end of our fiscal year 2007.
Moreover, although our management will continue to review and evaluate the
effectiveness of our internal controls, we can give you no assurance that there
will be no material weaknesses in our internal control over financial reporting.
We may in the future have material weaknesses or other control deficiencies in
our internal control over financial reporting as a result of our controls
becoming inadequate due to changes in conditions, the degree of compliance with
our internal control policies and procedures deteriorating, or for other
reasons. If we have significant deficiencies or material weaknesses or other
control deficiencies in our internal control over financial reporting, our
ability to record, process, summarize and report financial information within
the time periods specified in the rules and forms of the SEC will be adversely
affected. This failure could materially and adversely impact our business, our
financial condition and the market value of our securities.
IF WE FAIL TO EFFECTIVELY MANAGE GROWTH IN OUR BUSINESS, OUR ABILITY TO DEVELOP
AND COMMERCIALIZE OUR PRODUCTS WILL BE ADVERSELY AFFECTED.
Our business and operations have expanded rapidly since the completion of
our reorganization in April 2005. For example, from April 13, 2005 through
September 29, 2007, the number of our employees increased from 50 to 991 as a
result of organic growth and acquisitions. In addition to various immaterial
acquisitions in 2007 and 2006, we acquired Websky Argentina S.A. in October
2007, a 65% interest in WiMax Telecom AG in July 2007, IPWireless, Inc. in May
2007, GO Networks, Inc. in February 2007, SDC Secure Digital Container AG in
January 2007, CYGNUS Communications, Inc. in February 2006 and PacketVideo
Corporation in July 2005. We are still in the process of integrating WiMax
Telecom, IPWireless and GO Networks.
To support our expanded research and development activities for our
NextWave Broadband business and the anticipated growth in our WiMax Telecom,
IPWireless, PacketVideo and GO Networks businesses, we must continue to
successfully hire, train, motivate and retain our employees. We expect that
further expansion of our operations and employee base will be necessary. Our
recent acquisitions have also expanded the geographic reach of our operations to
countries including Argentina, Israel, Germany, Switzerland, the United Kingdom,
Finland, Slovakia and Croatia. In order to manage the increased complexity of
our expanded operations, we will need to continue to expand our management,
operational and financial controls and strengthen our reporting systems and
procedures. All of these measures will require significant expenditures and will
demand the attention of management. Failure to fulfill any of the foregoing
requirements could result in our failure to successfully manage our intended
growth and development, and successfully integrate our acquired businesses,
which would adversely affect our ability to develop and commercialize our
products and achieve profitability.
WE OPERATE IN AN EXTREMELY COMPETITIVE ENVIRONMENT WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR ABILITY TO WIN MARKET ACCEPTANCE OF OUR PRODUCTS AND
ACHIEVE PROFITABILITY.
We operate in an extremely competitive market and we expect such
competition to increase in the future. Our businesses are developing and selling
products and technologies based on WiMAX, Wi-Fi and UMTS standards. We will be
competing with well established, international companies that are engaged in the
development, manufacture and sale of products and technologies that support the
same technologies, as well as alternative wireless standards such as GSM and
CDMA2000. Companies that support these wireless technologies include well
established industry leaders such as Alcatel, Cisco, Ericsson, Huawei, LGE,
Lucent, Motorola, Nokia, Nortel, QUALCOMM, Samsung and Siemens. In addition, we
also compete with small and medium size companies such as Alvarion, Tropos
Networks, Strix Systems, and Belair Networks.
We also will be competing with numerous companies that are currently
developing or marketing WiMAX products and technologies including Airspan,
Beceem, Fujitsu, Intel, Motorola, Nortel, RunCom, Samsung, Sequans and WaveSat.
Some of these companies have significantly greater financial, technical
development, and marketing resources than we do, are already marketing
commercial WiMAX semiconductor products, and have established a significant time
to market advantage. These companies are also our potential customers and
partners and may not be available to us if they develop competing products. In
35
addition, we expect additional competition to emerge in the WiMAX semiconductor
and components market including well-established companies such as Samsung and
Broadcom.
In addition, our PacketVideo multimedia software products compete
primarily with the internal multimedia design teams at the OEM handset
manufacturers to whom PacketVideo markets its products and services.
Importantly, these OEMs represent some of PacketVideo's largest customers. In
addition several companies, including Flextronics/Emuzed, Hantro, Nextreaming,
Philips Software, Sasken and Thin Multimedia also currently provide software
products and services that directly or indirectly compete with our PacketVideo
products and our IPWireless TDtv solution. As the market for embedded multimedia
software evolves, we anticipate that additional competitors may emerge including
Apple Computer, Real Networks and OpenWave.
Some of our competitors have significantly greater financial,
technological development, marketing and other resources than we do, are already
marketing commercial products and technologies and have established a
significant time to market advantage. Our ability to generate earnings will
depend, in part, upon our ability to effectively compete with these competitors.
THE SUCCESS OF OUR BUSINESSES DEPENDS ON THE ADOPTION OF DEVELOPING WIRELESS
BROADBAND 4G TECHNOLOGIES, INCLUDING WIMAX AND TD-CDMA.
The success of our businesses depends on the deployment and market
acceptance of fourth generation (4G) wireless broadband technologies, including
WiMAX and TD-CDMA. We plan to generate most of our revenue from the sale of 4G
products and the licensing of 4G technologies. The market for 4G networks and
compatible products and technologies, as well as the technologies themselves,
are in an early stage of development and are continuing to evolve. In
particular, there are currently no mobile WiMAX networks in commercial operation
and there can be no assurance that commercial mobile WiMAX networks will prove
to be commercially viable. In order for 4G technologies to gain significant
market acceptance among customers, network operators and telecommunications
service providers will need to deploy 4G networks. However, many of the largest
wireless telecommunications providers have made significant expenditures in
incumbent technologies and may choose to develop these technologies rather than
utilize 4G technologies. Certification standards for 4G technologies are
controlled by industry groups. Accordingly, standard setting for 4G technologies
is beyond our control. If standards for 4G technologies such as WiMAX and
TD-CDMA, for example, change, the commercial viability of these technologies may
be delayed or impaired and our development efforts may also be delayed or
impaired or become more costly. If our 4G technologies and products do not
receive industry certification, we may not be able to successfully market,
license or sell our products or technologies. The development of 4G networks is
also dependent on the availability of spectrum. Access to spectrum suitable for
4G networks is highly competitive. Future 4G networks may utilize multiple
frequencies and this multi-spectrum approach is technologically challenging and
will require the development of new software, integrated circuits and equipment,
which will be time consuming and expensive and may not be successful. In order
for our business to continue to grow and to become profitable, 4G technology and
related services must gain acceptance among consumers, who tend to be less
technically knowledgeable and more resistant to new technology or unfamiliar
services. If consumers choose not to adopt 4G technologies, we will not be
successful in selling 4G products and technologies and our ability to grow our
business will be limited.
OUR NEXTWAVE BROADBAND WIRELESS BROADBAND PRODUCTS AND TECHNOLOGIES ARE IN THE
EARLY STAGES OF DEVELOPMENT AND WILL REQUIRE A SUBSTANTIAL INVESTMENT BEFORE
THEY MAY BECOME COMMERCIALLY VIABLE.
Many of our wireless broadband products and technologies are in the early
stages of development and will require a substantial investment before they may
become commercially viable. While we have announced the initial availability of
our first generation WiMAX baseband chip-on-a-chip and matched multiband RFIC,
these products are not expected to be commercially distributed or generate
significant revenue. We currently anticipate that our second generation NextWave
Broadband WiMAX technologies designed for high volume commercial production will
initially be available in the first quarter of 2008. However, we may not able to
meet this timeframe and therefore the commercial deployment of these products
could be delayed, which could adversely affect our competitive position as well
as our future profitability. In addition, unexpected expenses and delays in
development could adversely affect our liquidity. Some of our other planned
wireless broadband products and technologies have not been tested, even on a
pre-commercial basis. Even if our new products and technologies function when
tested, they may not produce sufficient performance and economic benefits to
justify full commercial development efforts, or to ultimately attract customers.
Failure to achieve high volume sales of our NextWave Broadband semiconductors
and other wireless broadband products and technologies would adversely affect
our ability to achieve profitability.
OUR CUSTOMER AGREEMENTS DO NOT CONTAIN MINIMUM PURCHASE REQUIREMENTS AND CAN BE
CANCELLED ON TERMS THAT ARE NOT BENEFICIAL TO US.
36
Our customer agreements with network providers and mobile phone and device
manufacturers are not exclusive and many contain no minimum purchase
requirements or flexible pricing terms. Accordingly, mobile phone and device
manufacturers may effectively terminate these agreements by no longer purchasing
our products or reducing the economic benefits of those arrangements. In many
circumstances, we have indemnified these customers from certain claims that our
products and technologies infringes third-party intellectual property rights.
Our customer agreements are generally not exclusive and have a limited term of
one to five years, in some cases with evergreen, or automatic renewal,
provisions upon expiration of the initial term. These agreements set out the
terms of our distribution relationships with the customers but generally do not
obligate the customers to market or distribute any of our products or
applications. In addition, in some cases customers can terminate these
agreements early or at any time, without cause.
WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF NEW OR ENHANCED PRODUCTS,
WHICH COULD RESULT IN REDUCED SALES, UNEXPECTED EXPENSES OR DELAYS IN THE LAUNCH
OF NEW OR ENHANCED PRODUCTS AND IN CERTAIN CASES, PENALTIES UNDER CUSTOMER
AGREEMENTS.
The development of new or enhanced wireless products and technologies is a
complex and uncertain process. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent our development,
introduction, commercialization or marketing of new products or product
enhancements. The difficulties could result in reduced sales, unexpected
expenses or delays in the launch of new or enhanced products, which may
adversely affect our results or operations. In addition, in some cases we are
required to provide liquidated damages and other penalty clauses in our customer
contracts (for, e.g., late delivered product, failure to comply with service
level agreements or defective products). If we are unable to perform in a timely
manner under such customer agreements, we would face financial penalties.
WE DO NOT HAVE ANY MANUFACTURING CAPABILITIES AND DEPEND ON THIRD-PARTY
MANUFACTURERS AND SUPPLIERS TO MANUFACTURE, ASSEMBLE AND PACKAGE OUR PRODUCTS.
NextWave Broadband is currently designing and developing semiconductor
products including digital baseband ASICs and multi-band RFICs. If we are
successful in our design and development activities and a market for these
products develops, these products will need to be manufactured. Due to the
expense and complexity associated with the manufacturer of digital baseband
ASICs and multi-band RFICs, we intend to depend on third-party manufacturers to
manufacture these products. In addition, GO Networks and IPWireless have each
engaged third-party manufacturers to develop and manufacture their products and
technologies, including ASICs, infrastructure equipment and end-user devices.
The dependence on third-parties to manufacture, assemble and package these
products involves a number of risks, including:
o a potential lack of capacity to meet demand;
o reduced control over quality and delivery schedules;
o risks of inadequate manufacturing yield or excessive costs;
o difficulties in selecting and integrating subcontractors;
o limited warranties in products supplied to us;
o price increases; and
o potential misappropriation of our intellectual property.
We may not be able to establish manufacturing relationships on reasonable
terms or at all. The failure to establish these relationships on a timely basis
and on attractive terms could delay our ability to launch these products or
reduce our revenues and profitability.
DEFECTS OR ERRORS IN OUR PRODUCTS AND SERVICES OR IN PRODUCTS MADE BY OUR
SUPPLIERS COULD HARM OUR RELATIONS WITH OUR CUSTOMERS AND EXPOSE US TO
LIABILITY. SIMILAR PROBLEMS RELATED TO THE PRODUCTS OF OUR CUSTOMERS OR
LICENSEES COULD HARM OUR BUSINESS.
Our mobile broadband products and technologies are inherently complex and
may contain defects and errors that are detected only when the products are in
use. Further, because our products and technologies serve as critical functions
in our customers' products and/or networks, such defects or errors could have a
serious impact on our customers, which could damage our reputation, harm our
customer relationships and expose us to liability. Defects in our products and
technologies or those used by our customers or licensees, equipment failures or
other difficulties could adversely affect our ability and that of our customers
and licensees to ship products on a timely basis as well as customer or licensee
demand for our products. Any such shipment delays or declines in demand could
reduce our revenues and harm our ability to achieve or sustain desired levels of
profitability. We and our customers or licensees may also experience component
37
or software failures or defects which could require significant product recalls,
reworks and/or repairs which are not covered by warranty reserves and which
could consume a substantial portion of the capacity of our third-party
manufacturers or those of our customers or licensees. Resolving any defect or
failure related issues could consume financial and/or engineering resources that
could affect future product release schedules. Additionally, a defect or failure
in our products and technologies or the products of our customers or licensees
could harm our reputation and/or adversely affect the growth of the market for
mobile WiMAX, Wi-Fi, TD-CDMA, and other mobile broadband technologies.
WE MAY BE UNABLE TO PROTECT OUR OWN INTELLECTUAL PROPERTY AND COULD BECOME
SUBJECT TO CLAIMS OF INFRINGEMENT, WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR
PRODUCTS AND TECHNOLOGIES AND HARM OUR REPUTATION.
As a technology company, we expect to incur expenditures to create and
protect our intellectual property and, possibly, to assert infringement by
others of our intellectual property. Other companies or entities also may
commence actions or respond to an infringement action that we initiate by
seeking to establish the invalidity or unenforceability of one or more of our
patents or to dispute the patentability of one or more of our pending patent
applications. In the event that one or more of our patents or applications are
challenged, a court may invalidate the patent or determine that the patent is
not enforceable or deny issuance of the application, which could harm our
competitive position. If any of our patent claims are invalidated or deemed
unenforceable, or if the scope of the claims in any of these patents is limited
by court decision, we could be prevented from licensing such patent claims. Even
if such a patent challenge is not successful, it could be expensive and time
consuming to address, divert management attention from our business and harm our
reputation. Effective intellectual property protection may be unavailable or
limited in certain foreign jurisdictions.
We also expect to incur expenditures to defend against claims by other
persons asserting that the technology that is used and sold by our Company
infringes upon the right of such other persons. From time to time we have
received, and expect to continue to receive, notices from our competitors and
others claiming that their proprietary technology is essential to our products
and seeking the payment of a license fee. Any claims, with or without merit,
could be time consuming to address, result in costly litigation and/or the
payment of license fees, divert the efforts of our technical and management
personnel or cause product release or shipment delays, any of which could have a
material adverse effect upon our ability to commercially launch our products and
technologies and on our ability to achieve profitability. If any of our products
were found to infringe on another company's intellectual property rights or if
we were found to have misappropriated technology, we could be required to
redesign our products or license such rights and/or pay damages or other
compensation to such other company. If we were unable to redesign our products
or license such intellectual property rights used in our products, we could be
prohibited from making and selling such products. In any potential dispute
involving other companies' patents or other intellectual property, our customers
and partners could also become the targets of litigation. Any such litigation
could severely disrupt the business of our customers and partners, which in turn
could hurt our relations with them and cause our revenues to decrease.
BECAUSE MOBILE WIMAX AND UMTS BASED TECHNOLOGIES SUCH AS TD-CDMA ARE EMERGING
WIRELESS TECHNOLOGIES THAT ARE NOT FULLY DEVELOPED, THERE IS A RISK THAT STILL
UNKNOWN PERSONS OR COMPANIES MAY ASSERT PROPRIETARY RIGHTS TO THE VARIOUS
TECHNOLOGY COMPONENTS THAT WILL BE NECESSARY TO OPERATE A WIMAX OR UMTS-BASED
WIRELESS BROADBAND NETWORK.
Because mobile WiMAX and UMTS based technologies such as TD-CDMA are
emerging wireless technologies that are not fully developed, there may be a
greater risk that persons or entities unknown to us will assert proprietary
rights to technology components that are necessary to operate WiMAX or
UMTS-based wireless broadband networks or products. Numerous companies have
submitted letters of assurance related to IEEE 802.16 and amendments or various
UMTS based technologies, including TD-CDMA, stating that they may hold or
control patents or patent applications, the use of which would be unavoidable to
create a compliant implementation of either mandatory or optional portions of
the standard. In such letters, the patent holder typically asserts that it is
prepared to grant a license to its essential IP to an unrestricted number of
applicants on a worldwide, non-discriminatory basis and on reasonable terms and
conditions. If any companies asserting that they hold or control patents or
patent applications necessary to implement the relevant technologies do not
submit letters of assurance, or state in such letters that they do not expect to
grant licenses, this could have an adverse effect on the implementation of
mobile broadband networks utilizing such technologies as well as the sale of our
mobile WiMAX or UMTS based products and technologies. In addition, we can not be
certain of the validity of the patents or patent applications asserted in the
letters of assurance submitted to date, or the terms of any licenses which may
be demanded by the holders of such patents or patent applications. If we were
required to pay substantial license fees to implement our mobile WiMAX or
UMTS-based products and technologies, this could adversely affect the
profitability of these products and technologies.
We anticipate that we will develop a patent portfolio related to our WiMAX
and UMTS based products and technologies. However, there is no assurance that we
will be able to obtain patents covering WiMAX or UMTS based products. Litigation
may be required to enforce or protect our intellectual property rights. As a
result of any such litigation, we could lose our proprietary rights or incur
substantial unexpected operating costs. Any action we take to license, protect
or enforce our intellectual property rights could be costly and could absorb
significant management time and attention, which, in turn, could negatively
38
impact our operating results. In addition, failure to protect our trademark
rights could impair our brand identity.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We operate or hold spectrum through various subsidiaries and joint
ventures in Argentina, Austria, Canada, Croatia, Germany, Slovakia and
Switzerland and have additional operations located in Denmark, Finland, Germany,
Israel, South Korea, Switzerland and the United Kingdom. We expect to continue
to expand our international operations and potentially enter new international
markets through acquisitions, joint ventures and strategic alliances. For
example, we recently launched business operations in Latin America, where a new
business unit headquartered in Sao Paulo, Brazil will deliver our mobile
broadband and wireless technology solutions to customers throughout the Latin
American region. Our activities outside the United States operate in different
competitive and regulatory environments than we face in the United States, with
many of our competitors having a dominant incumbent market position and/or
greater operating experience in the specific geographic market. In addition, in
some international markets, foreign governmental authorities may own or control
the incumbent telecommunications companies operating under their jurisdiction.
Established relationships between government-owned or government-controlled
telecommunications companies and their traditional local telecommunications
providers often limit access of third parties to these markets. In addition,
owning and operating wireless spectrum in overseas jurisdictions may be subject
to a changing regulatory environment. In particular, our ownership of wireless
broadband spectrum in Argentina remains subject to obtaining government
approval. We can not assure you that changes in foreign regulatory guidelines
for the issuance of wireless licenses, foreign ownership of spectrum licenses,
the adoption of wireless standards or the enforcement and licensing of
intellectual property rights will not adversely impact our operating results.
Due to these competitive and regulatory challenges, our activities outside the
United States may require a disproportionate amount of our management and
financial resources, which could disrupt our operations and adversely affect our
business.
THE BUSINESS PLAN OF OUR NETWORK SOLUTIONS GROUP IS DEPENDENT ON ENTERING INTO
OR MAINTAINING NETWORK PARTNER RELATIONSHIPS.
Our Network Solutions Group intends to build and operate WiMAX/Wi-Fi
networks for wireless service providers, cable operators, multimedia content
distributors, applications service providers and Internet service providers. At
present, NSG has not entered into any such arrangements and may not be able to
negotiate such arrangements on acceptable terms, or at all. If we are unable to
establish and maintain these service arrangements, we may have to modify our
plans for the Network Solutions Group.
OUR BUSINESSES WHICH CURRENTLY GENERATE REVENUE ARE DEPENDENT ON A LIMITED
NUMBER OF CUSTOMERS.
Our PacketVideo, GO Networks and IPWireless businesses currently generate
revenue but are dependent on a limited number of customers. For the nine months
ended September 29, 2007, revenues from Verizon Wireless Communications and
T-Mobile International accounted for 44% and 24%, respectively, of our total
revenues. We expect that our PacketVideo subsidiary will continue to generate a
significant portion of its revenues through a limited number of mobile phone and
device manufacturers and wireless carriers for the foreseeable future, although
these amounts may vary from period-to-period. If any of these customers
terminate their relationships with us, our revenues and results of operations
could be materially adversely affected.
WE ARE DEPENDENT ON A SMALL NUMBER OF INDIVIDUALS, AND IF WE LOSE KEY PERSONNEL
UPON WHOM WE ARE DEPENDENT, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
Our future success depends largely upon the continued service of our board
members, executive officers and other key management and technical personnel,
particularly Allen Salmasi, our Chairman and Chief Executive Officer. Mr.
Salmasi has been a prominent executive and investor in the technology industry
for over 20 years, and the Company has benefited from his industry relationships
in attracting key personnel and in implementing acquisitions and strategic
plans. In addition, in order to develop and achieve commercial deployment of our
mobile broadband products and technologies in competition with well-established
companies such as Intel, QUALCOMM and others, we must rely on highly specialized
engineering and other talent. Our key employees represent a significant asset,
and the competition for these employees is intense in the wireless
communications industry. We continue to anticipate significant increases in
human resources, particularly in engineering resources, through 2008. If we are
unable to attract and retain the qualified employees that we need, our business
may be harmed.
As a company without a significant operating history, we may have
particular difficulty attracting and retaining key personnel in periods of poor
operating performance given the significant use of incentive compensation by
well-established competitors. We do not maintain key person life insurance on
any of our personnel. We also have no covenants against competition or
nonsolicitation agreements with certain of our key employees. The loss of one or
39
more of our key employees or our inability to attract, retain and motivate
qualified personnel could negatively impact our ability to design, develop and
commercialize our products and technology.
WE WILL NEED TO SECURE SIGNIFICANT ADDITIONAL CAPITAL IN THE FUTURE TO IMPLEMENT
CHANGES TO, OR EXPANSIONS OF, OUR BUSINESS PLAN AND TO CONTINUE TO FUND OUR
RESEARCH AND DEVELOPMENT ACTIVITIES AN OUR OPERATING LOSSES UNTIL WE BECOME CASH
FLOW POSITIVE AND GENERATE EARNINGS.
We will need to secure significant additional capital in the future to
implement changes to, or expansions of, our business plan and to continue to
fund our research and development activities and our operating losses until we
become cash flow positive and generate earnings. We currently anticipate that
our second generation NextWave Broadband WiMAX technologies designed for high
volume commercial production will initially be available in the first quarter of
2008. However, we may not be able to meet this timeframe and therefore the
commercial deployment of these products could be delayed, which could adversely
affect our competitive position as well as our ability to become cash flow
positive and show future profitability. Unexpected expenses and delays in
development, or delays in the adoption of WiMAX and other 4G technologies by
national telecommunications carriers and equipment manufacturers, could
adversely affect our liquidity.
In addition, part of our strategy is to pursue acquisitions of and
investments in businesses and technologies to expand our business and enhance
our technology development capabilities. In addition to our IPWireless, CYGNUS,
GO Networks, PacketVideo and WiMAX Telecom acquisitions, we have made
investments in a number of companies including Hughes Systique and Inquam
Broadband, and anticipate future investments in other companies or other
technologies, businesses or spectrum licenses. Our recent and future
acquisitions could result in substantial cash expenditures, potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, a decrease in our profit margins and amortization of intangibles
and potential impairment of goodwill. In addition, our investments could result
in substantial cash expenditures, fluctuations in our results of operations
resulting from changes in the value of the investments and diversion of
management's time and attention.
To augment our existing working capital resources in order to satisfy our
cash requirements, we may seek to sell debt securities or additional equity
securities or to obtain a credit facility. Our Senior Secured Notes and our
Series A Senior Convertible Preferred Stock prohibit our incurrence of
additional indebtedness, subject to certain exceptions. The sale of equity
securities or convertible debt securities could result in additional dilution to
our stockholders. The incurrence of additional indebtedness would also result in
additional debt service obligations and the requirement that we comply with
operating and financial covenants that would restrict our operations. In
addition, there can be no assurance that any additional financing will be
available on acceptable terms, if at all.
COVENANTS IN THE INDENTURE GOVERNING OUR SENIOR SECURED NOTE SAND THE TERMS OF
OUR SERIES A PREFERRED STOCK IMPOSE OPERATING AND FINANCIAL RESTRICTIONS ON US.
Covenants in the indenture governing our senior secured notes and the
terms of our Series A Preferred Stock impose operating and financial
restrictions on us. These restrictions prohibit or limit our ability, and the
ability of our subsidiaries, to, among other things:
O pay dividends to our stockholders;
O incur, or cause certain of our subsidiaries to incur, additional
indebtedness;
O permit liens on or conduct sales of any assets pledged as
collateral;
O sell significant amounts of our assets or consolidate or merge with
or into other companies;
O issue shares of our common stock at less than fair market value;
O repay existing indebtedness; and
O engage in transactions with affiliates.
A breach of any covenants contained in the indenture could result in a
default under our senior secured notes. If we are unable to repay or refinance
those amounts, the holders of our senior secured notes could proceed against the
assets pledged to secure these obligations, which include a substantial portion
of our spectrum assets and substantially all of our other assets.
These restrictions may limit our ability to obtain additional financing,
withstand downturns in our business and take advantage of business
opportunities. Moreover, we may seek additional debt financing on terms that
include more restrictive covenants, may require repayment on an accelerated
schedule or may impose other obligations that limit our ability to grow our
business, acquire needed assets, or take other actions we might otherwise
consider appropriate or desirable.
WE MAY BE LIABLE FOR CERTAIN INDEMNIFICATION PAYMENTS PURSUANT TO THE PLAN OF
REORGANIZATION.
In connection with the sale of NTI and its subsidiaries other than Old
NextWave Wireless to Verizon Wireless, we agreed to indemnify NTI and its
subsidiaries against all pre-closing liabilities of NTI and its subsidiaries and
against any violation of the Bankruptcy Court injunction against persons having
claims against NTI and its subsidiaries, with no limit on the amount of such
indemnity. We are not currently aware of any such liabilities that remain
following the plan of reorganization and Verizon Wireless has not made any
indemnity claims. We have received a decree of final judgment closing the
40
Chapter 11 case, and all claims made in connection with the Chapter 11 case have
been resolved. Nonetheless, to the extent that we are required to fund amounts
under the indemnification, our results of operations and our liquidity and
capital resources could be materially adversely affected. In addition, we may
not have sufficient cash reserves to pay the amounts required under the
indemnification if any amounts were to become due.
RISKS RELATING TO GOVERNMENT REGULATION
GOVERNMENT REGULATION COULD ADVERSELY IMPACT OUR DEVELOPMENT OF WIRELESS
BROADBAND PRODUCTS AND SERVICES, OUR OFFERING OF PRODUCTS AND SERVICES TO
CONSUMERS, AND OUR BUSINESS PROSPECTS.
The regulatory environment in which we operate is subject to significant
change, the results and timing of which are uncertain. The FCC has jurisdiction
over the grant, renewal, lease, assignment and sale of our wireless licenses,
the use of wireless spectrum to provide communications services, and the
resolution of interference between users of various spectrum bands. Other
aspects of our business, including construction and operation of our wireless
systems, and the offering of communications services, are regulated by the FCC
and other federal, state and local governmental authorities. States may exercise
authority over such things as billing practices and consumer-related issues.
Various governmental authorities could adopt regulations or take other
actions that would adversely affect the value of our assets, increase our costs
of doing business, and impact our business prospects. Changes in the regulation
of our activities, including changes in how wireless, mobile, IP enabled
services are regulated, changes in the allocation of available spectrum by the
United States and/or exclusion or limitation of our technology or products by a
government or standards body, could have a material adverse effect on our
business, operating results, liquidity and financial position.
CHANGES IN LEGISLATION OR REGULATIONS MAY AFFECT OUR ABILITY TO CONDUCT OUR
BUSINESS OR REDUCE OUR PROFITABILITY.
Future legislative, judicial or other regulatory actions could have a
negative effect on our business. Some legislation and regulations applicable to
the wireless broadband business, including how IP-enabled services are
regulated, are the subject of ongoing judicial proceedings, legislative hearings
and administrative proceedings that could change the manner in which our
industry is regulated and the manner in which we operate. We cannot predict the
outcome of any of these proceedings or their potential impact on our business.
If, as a result of regulatory changes, we become subject to the general
common carrier rules and regulations applicable to telecommunications service
providers, commercial mobile radio service providers offering certain switched
services on a common carrier basis, and/or enhanced service providers, including
providers of interconnected Voice Over the Internet service, at the federal
level or in individual states, we may incur significant administrative,
litigation and compliance costs, or we may have to restructure our service
offerings, exit certain markets or raise the price of our services, any of which
could cause our services to be less attractive to customers. In addition, future
regulatory developments could increase our cost of doing business and limit our
growth.
WE MAY NOT HAVE COMPLETE CONTROL OVER OUR TRANSITION OF EBS AND BRS SPECTRUM,
WHICH COULD IMPACT COMPLIANCE WITH FCC RULES.
The FCC's rules require transition of EBS and BRS spectrum to the new band
plan on a Basic Trading Area ("BTA") basis. See "Government Regulation-BRS-EBS
License Conditions." We do not hold all of the EBS and BRS spectrum in the BTAs
in which we hold spectrum. Consequently, we will need to coordinate with other
EBS and BRS licensees in order to transition spectrum we hold or lease.
Disagreements with other EBS or BRS licensees about how the spectrum should be
transitioned may delay our efforts to transition spectrum, could result in
increased costs to transition the spectrum, and could impact our efforts to
comply with applicable FCC rules. On April 27, 2006, the FCC implemented new,
amended rules related to transition of the spectrum, and it adopted rules that
will permit us to self-transition to the reconfigured band plan if other
spectrum holders in our BTAs do not timely transition their spectrum.
OUR USE OF EBS SPECTRUM IS SUBJECT TO PRIVATELY NEGOTIATED LEASE AGREEMENTS.
CHANGES IN FCC RULES GOVERNING SUCH LEASE AGREEMENTS, CONTRACTUAL DISPUTES WITH
EBS LICENSEES, OR FAILURES BY EBS LICENSEES TO COMPLY WITH FCC RULES COULD
IMPACT OUR USE OF THE SPECTRUM.
All commercial enterprises are restricted from holding licenses for EBS
spectrum. Eligibility for EBS spectrum is limited to accredited educational
institutions, governmental organizations engaged in the formal education of
enrolled students (e.g., school districts), and nonprofit organizations whose
purposes are educational. Access to EBS spectrum can only be gained by
commercial enterprises through privately-negotiated EBS lease agreements. FCC
regulation of EBS leases, private interpretation of EBS lease terms, private
contractual disputes, and failure of an EBS licensee to comply with FCC
regulations all could impact our use of EBS spectrum and the value of our leased
EBS spectrum. On April 27, 2006, the FCC released new rules governing EBS lease
terms. EBS licensees are now permitted to enter into lease agreements with a
maximum term of 30 years; lease agreements with terms longer than 15 years must
contain a "right of review" by the EBS licensee every five years beginning in
41
year 15. The right of review must afford the EBS licensee with an opportunity to
review its educational use requirements in light of changes in educational
needs, technology, and other relevant factors and to obtain access to such
additional services, capacity, support, and/or equipment as the parties shall
agree upon in the spectrum leasing arrangement to advance the EBS licensee's
educational mission. A spectrum leasing arrangement may include any mutually
agreeable terms designed to accommodate changes in the EBS licensee's
educational use requirements and the commercial lessee's wireless broadband
operations. In addition, the terms of EBS lease agreements are subject to
contract interpretation and disputes could arise with EBS licensees. There can
be no assurance that EBS leases will continue for the full lease term, or be
renewed, or be extended beyond the current term, on terms that are satisfactory
to us. Similarly, since we are not eligible to hold EBS licenses, we must rely
on EBS licensees with whom we contract to comply with FCC rules. The failure of
an EBS licensee from whom we lease spectrum to comply with the terms of their
FCC authorization or FCC rules could result in termination, forfeiture or
non-renewal of their authorization, which would negatively impact the amount of
spectrum available for our use.
IF WE DO NOT COMPLY WITH FCC BUILD-OUT REQUIREMENTS RELATING TO OUR SPECTRUM
LICENSES, SUCH LICENSES COULD BE SUBJECT TO FORFEITURE.
Certain build-out or "substantial service" requirements apply to our
licensed wireless spectrum, which generally must be satisfied as a condition of
license renewal. In particular, the renewal deadline and the substantial service
build-out deadline for our WCS spectrum is July 21, 2010; for our BRS and EBS
spectrum, the substantial service build-out deadline is May 1, 2011; and for our
AWS spectrum, the substantial service build-out deadline is December 18, 2021.
Failure to make the substantial service demonstration, without seeking and
obtaining an extension from the FCC, would result in license forfeiture.
WE HAVE NO GUARANTEE THAT THE LICENSES WE HOLD OR LEASE WILL BE RENEWED.
The FCC generally grants wireless licenses for terms of ten or fifteen
years, which are subject to renewal and revocation. FCC rules require all
wireless licensees to comply with applicable FCC rules and policies and the
Communications Act of 1934 in order to retain their licenses. For example,
licensees must meet certain construction requirements, including making
substantial service demonstrations, in order to retain and renew FCC licenses.
Failure to comply with FCC requirements with respect to any license could result
in revocation or non-renewal of a license. In general, most wireless licensees
who meet their construction and/or substantial service requirements are afforded
a "renewal expectancy," however, all FCC license renewals can be challenged in
various ways, irrespective of whether such challenges have any legal merit. Such
challenges, while uncommon, may impact the timing of renewal grants and may
impose legal costs. Accordingly, there is no guarantee that licenses we hold or
lease will remain in full force and effect or be renewed.
INTERFERENCE COULD NEGATIVELY IMPACT OUR USE OF WIRELESS SPECTRUM WE HOLD, LEASE
OR USE.
Under applicable FCC rules, users of wireless spectrum must comply with
technical rules that are intended to eliminate or diminish harmful
radiofrequency interference between wireless users. Licensed spectrum is
generally entitled to interference protection, subject to technical rules
applicable to the radio service, while unlicensed spectrum has no interference
protection rights and must accept interference caused by other users.
WIRELESS DEVICES UTILIZING WCS, BRS AND EBS SPECTRUM MAY BE SUSCEPTIBLE TO
INTERFERENCE FROM SATELLITE DIGITAL AUDIO RADIO SERVICES ("SDARS").
Since 1997, the FCC has considered a proposal to permanently authorize
terrestrial repeaters for SDARS operations adjacent to the C and D blocks of the
WCS band. The FCC has permitted a large number of these SDARS terrestrial
repeaters to operate on a special temporary authorization since 2001.
Permanently authorizing SDARS repeaters adjacent to the WCS band could cause
interference to WCS, BRS and EBS receivers. The extent of the interference from
SDARS repeaters is unclear and is subject to the FCC's final resolution of
pending proceedings. Because WCS C and D block licenses are adjacent to the
SDARS spectrum, the potential for interference to this spectrum is of greatest
concern. There is a lesser magnitude concern regarding interference from SDARS
to WCS A and B block licenses, and EBS and BRS licenses. Central to the FCC's
evaluation of this proposal has been the technical specifications for the
operation of such repeaters. SDARS licensees are seeking rule changes that would
both unfavorably alter WCS technical operating requirements and permit all
existing SDARS repeaters to continue to operate at their current operating
parameters. Through their representative association, the WCS Coalition, the
majority of affected WCS licensees, including NextWave, also have proposed
technical rules for SDARS terrestrial repeaters and WCS operations to the FCC.
Final technical rules will determine the potential interference conditions and
requirements for mitigation. If SDARS repeaters result in interference to our
WCS, BRS or WBS spectrum, our ability to realize value from this spectrum may be
impaired.
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INCREASING REGULATION OF THE TOWER INDUSTRY MAY MAKE IT DIFFICULT TO DEPLOY NEW
TOWERS AND ANTENNA FACILITIES.
The FCC, together with the FAA, regulates tower marking and lighting. In
addition, tower construction and deployment of antenna facilities is impacted by
federal, state and local statutes addressing zoning, environmental protection
and historic preservation. The FCC adopted significant changes to its rules
governing historic preservation review of new tower projects, which makes it
more difficult and expensive to deploy towers and antenna facilities. The FCC
also is considering changes to its rules regarding when routine environmental
evaluations will be required to determine compliance of antenna facilities with
its RF radiation exposure limits. If adopted, these regulations could make it
more difficult to deploy facilities. In addition, the FAA has proposed
modifications to its rules that would impose certain notification requirements
upon entities seeking to (i) construct or modify any tower or transmitting
structure located within certain proximity parameters of any airport or
heliport, and/or (ii) construct or modify transmission facilities using the
2500-2700 MHz radio frequency band, which encompasses virtually all of the
BRS/EBS frequency band. If adopted, these requirements could impose new
administrative burdens upon use of BRS/EBS spectrum.
RISKS RELATING TO OUR PREFERRED STOCK AND COMMON STOCK
OUR DERIVATIVE SECURITIES AND CONTINGENT EARN-OUT PAYMENTS HAVE THE POTENTIAL TO
DILUTE SHAREHOLDER VALUE AND CAUSE THE TRADING PRICE OF OUR COMMON STOCK AND
SERIES A PREFERRED STOCK TO DECLINE.
As of September 29, 2007, 92,665,556 shares of our common stock were
outstanding. In addition, as of September 29, 2007, there were 70,531,742 shares
reserved for future issuance, of which 33,376,841 shares are reserved for future
issuance upon the conversion of the Series A Senior Convertible Preferred Stock,
22,362,471 shares are reserved for issuance upon the exercise of granted and
outstanding options and warrants, 13,959,097 shares are reserved for future
option grants under our existing stock incentive plans and 833,333 shares are
issuable under an advisory contract. In addition, we may issue shares of our
common stock with a value of up to $135.0 million as additional purchase
consideration to former IPWireless shareholders and up to $7.0 million under the
IPWireless Employee Stock Bonus Plan upon the achievement of certain revenue
milestones related to IPWireless's public safety business and TDtv Business. We
may also issue shares of our common stock with a value of up to $25.6 million as
additional purchase consideration to former GO Networks shareholders and up to
$5.0 million under the GO Networks Employee Stock Bonus Plan upon the
achievement of certain milestones relating to customer acceptance of GO
Network's Wi-Fi base station products and the continued employment of certain
key management employees.
In March 2007, we issued 355,000 shares of Series A Senior Convertible
Preferred Stock at a price of $1,000 per share of convertible preferred stock in
a private offering to investment funds and other institutional investors, as
well as existing shareholders, including NextWave Wireless Chairman and CEO,
Allen Salmasi, Douglas Manchester, a member of the NextWave Wireless Board of
Directors, and Avenue Capital Group, of which Robert T. Symington, a member of
the NextWave Board, is a portfolio manager. The Series A Senior Convertible
Preferred Stock is convertible into shares of our common stock upon election of
the holders at any time and at our election under certain circumstances.
Assuming that we do not elect to pay dividends in cash prior to March 2011 and
if all shares of Series A Senior Convertible Preferred Stock were converted at
such time, we would be obligated to issue 43,476,673 million shares of our
common stock.
The exercise or conversion of these derivative securities into shares of
common stock or the issuance of common stock pursuant to earn-outs may result in
significant dilution to our current stockholders. While the milestones giving
rise to our contingent earn-out payments may never be met or met only in part,
these obligations to issue additional shares of common stock may result in a
significant dilution to our current stockholders. In addition, sales of large
amounts of common stock in the public market upon exercise or conversion of
derivative securities or upon achievement of earn-outs could materially
adversely affect the share price. We have agreed to register the resale of
shares of common stock issuable upon exercise or conversion of our warrants and
Series A Preferred Stock and upon achievement of earn-outs in connection with
the IPWireless and GO Networks transactions. The registration of such resales
could facilitate the sale of such shares into the market.
In addition, we may need to raise additional funds to fund our operations,
to pay for an acquisition or to enter into a strategic alliance, and we might
use equity securities, debt, cash, or a combination of the foregoing to finance
such activities. If we use equity securities, our stockholders may experience
dilution. A significant amount of our common stock coming on the market at any
given time could result in a decline in the price of our common stock or
increased volatility.
OUR COMMON STOCK IS THINLY TRADED AND THUS THE MARKET PRICE OF OUR COMMON STOCK
IS PARTICULARLY SENSITIVE TO TRADING VOLUME AND THE TRADING PRICE OF OUR SERIES
A PREFERRED STOCK MAY BE ADVERSELY AFFECTED.
Our low trading volume has historically resulted in substantial volatility
in the market price of our common stock, and may make it more difficult for us
to sell equity or equity-related securities in the future at a time and price
that we deem appropriate. In addition, due to the relatively low volume of
43
trading in our common stock, stockholders may not be able to purchase or sell
shares, particularly large blocks of shares, as quickly and as inexpensively as
if the trading volume were higher. The sale of a significant position in common
stock by a large shareholder also may lead the price of our stock to decline.
Because our Series A Preferred Stock is convertible into our common stock,
volatility or depressed prices for our common stock could have a similar effect
on the trading prices of our Series A Preferred Stock. More generally, the
market for technology stocks has been extremely volatile, and has from time to
time experienced significant price and volume fluctuations that bear little
relationship or are not proportionate to the past or present operating
performance of those companies.
AN ACTIVE TRADING MARKET FOR OUR SERIES A PREFERRED STOCK MAY NOT DEVELOP, AND
YOU MAY BE UNABLE TO RESELL YOUR SHARES OF SERIES A PREFERRED STOCK AT OR ABOVE
THE PURCHASE PRICE.
We do not intend to list the Series A Preferred Stock on any national
securities exchange or to take any action to make it eligible for any automated
quotation system other than the PortalSM Market. The Series A Preferred Stock is
not currently eligible to trade on the PortalSM Market. Consequently, a liquid
trading market for the Series A Preferred Stock may not develop and the market
price of the Series A Preferred Stock may be volatile. As a result, you may be
unable to sell your shares of Series A Preferred Stock at a price equal to or
greater than that which you paid, if at all.
THE SERIES A PREFERRED STOCK RANKS JUNIOR TO ALL OF OUR LIABILITIES.
The Series A Preferred Stock ranks junior to all of our liabilities and
all liabilities of our subsidiaries and any capital stock of our subsidiaries
held by others. In the event of any bankruptcy, liquidation, dissolution or
winding-up, our assets will be available to pay obligations on the Series A
Preferred Stock, including the liquidation preference of your shares of the
Series A Preferred Stock payable upon liquidation event or deemed liquidation
event, only after all our indebtedness and other liabilities have been paid.
WE MAY NOT HAVE SUFFICIENT EARNINGS AND PROFITS IN ORDER FOR DISTRIBUTIONS ON
THE PREFERRED STOCK TO BE TREATED AS DIVIDENDS.
The dividends paid by us may exceed our current and accumulated earnings
and profits, as calculated for U.S. federal income tax purposes. This would
result in the amount of the dividends that exceeds such earnings and profits
being treated first as a return of capital to the extent of the holder's
adjusted tax basis in the preferred stock, and the excess as capital gain. Such
treatment will generally be unfavorable for corporate holders and may also be
unfavorable for certain other holders.
A HOLDER OF SERIES A PREFERRED STOCK MAY BE TREATED AS RECEIVING DEEMED
DISTRIBUTIONS THAT MAY BE INCLUDIBLE IN INCOME.
If the Series A Preferred Stock is not respected as participating
preferred stock, in accordance with certain provisions of the Internal Revenue
Code and the Treasury Regulations, a holder of such preferred stock, despite the
absence of any actual payment of cash to the holder, may be treated as receiving
constructive distributions over the term of the Series A Preferred Stock or at
the time of any conversion into our common stock. In either such case, the
holder may be required to pay taxes on such constructive distributions in the
same manner as an actual distribution.
WE MAY NOT BE ABLE TO PAY THE LIQUIDATION PREFERENCE PREMIUM OF THE PREFERRED
STOCK UPON A DEEMED LIQUIDATION EVENT OR A MANDATORY REDEMPTION AND WE MAY NOT
BE ABLE TO PAY CASH DIVIDENDS ON THE PREFERRED STOCK WHEN REQUIRED.
In the event of a deemed liquidation event, including events such as a
merger, sale of assets or change in control, you will have the right to receive
an amount per share of Series A Preferred Stock equal to the greater of 120% of
the liquidation preference or the amount that would have been received if such
share was converted into our common stock, unless the holders of shares
representing 75% of the shares of Series A Preferred Stock then outstanding
elect to waive such deemed liquidation event, in which case the Series A
Preferred Stock would remain outstanding or be converted into shares of a
successor entity. We must redeem all outstanding shares of the Series A
Preferred Stock for an amount equal to the liquidation preference on March 28,
2017, up to 50% of all outstanding shares of Series A Preferred Stock for an
amount equal to 130% of the liquidation preference if we elect to convert the
Series A Preferred Stock into shares of our common stock, and up to all
outstanding shares of the Series A Preferred Stock for an amount equal to 120%
of the liquidation preference if we elect to consummate certain asset sales
without the requisite consent of the holders of the Series A Preferred Stock. We
may not have sufficient cash to purchase your shares of preferred stock upon a
deemed liquidation or a redemption event. Also, the terms of our senior secured
notes contain limitations on our ability to pay the liquidation preference in
cash while the senior secured notes remain outstanding.
44
Pursuant to the terms of our senior secured notes, which are due July 14,
2010, we are not permitted to pay cash dividends on the shares of the Series A
Preferred Stock. The terms of the Series A Preferred Stock permit us to add the
per share dividend amount to the liquidation preference of the Series A
Preferred Stock until March 28, 2011, in lieu of paying cash dividends, thereby
increasing the amount of the liquidation preference and the number of shares of
our common stock issuable upon conversion of each share of the Series A
Preferred Stock. From and after March 28, 2011, the Company is obligated to pay
quarterly cash dividends on the Series A Preferred Stock. Terms of our future
indebtedness could restrict the payment of dividends and other obligations
relating to our capital stock in cash. Even if the terms of the instruments
governing our indebtedness at such time allow us to pay cash dividends and to
redeem the preferred stock in cash, we can only make such payments when, as and
if declared by our board of directors from legally available funds. Adequate
funds may not be available to pay cash dividends to you or to redeem your shares
of preferred stock.
Further, because we are a holding company, our ability to pay the
liquidation preference of the preferred stock for cash or to pay dividends on
the preferred stock may be limited by restrictions on our ability to obtain
funds through dividends from our subsidiaries.
OUR OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL QUARTERLY AND ANNUAL
FLUCTUATIONS AND TO MARKET DOWNTURNS.
We believe that our future operating results over both the short- and
long-term will be subject to annual and quarterly fluctuations due to several
factors, some of which are outside management's control. These factors include:
o significant research and development costs:
o research and development issues and delays;
o the ability of our businesses to generate revenue adequate to cover
their expenses;
o spectrum acquisition costs;
o manufacturing issues and delays;
o the status of plans for the adoption of WiMAX and other 4G
technologies by national telecommunications carriers and equipment
manufacturers;
o impact of competitive products, services and technologies;
o changes in the regulatory environment;
o the cost and availability of network infrastructure; and
o general economic conditions.
These factors affecting our future operating results are difficult to
forecast and could harm our quarterly or annual operating results and the
prevailing market price of our securities. If our operating results fail to meet
the financial guidance we provide to investors or the expectations of investment
analysts or investors in any period, securities class action litigation could be
brought against us and/or the market price of our securities could decline.
IF THE OWNERSHIP OF OUR COMMON STOCK AND SERIES A PREFERRED STOCK CONTINUES TO
BE HIGHLY CONCENTRATED, IT MAY PREVENT YOU AND OTHER STOCKHOLDERS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND MAY RESULT IN CONFLICTS OF
INTEREST THAT COULD CAUSE THE PRICE OF OUR COMMON STOCK AND THE SERIES A
PREFERRED STOCK TO DECLINE.
Allen Salmasi, our executive officers and other members of our Board of
Directors beneficially own or control shares of our common stock and Series A
Preferred Stock representing approximately 36.0% of the voting power of our
capital stock as of September 29, 2007. Accordingly, Mr. Salmasi and the other
members of the Board of Directors will be able to significantly influence
matters that require stockholder approval, including the election of directors,
any merger, consolidation or sale of all or substantially all of our assets or
other significant corporate transactions. Our controlling stockholders may have
interests that differ from your interests and may vote in a way with which you
may disagree and which may be adverse to your interests. Corporate action may be
taken even if other stockholders oppose them. These stockholders may also delay
or prevent a change of control of us, even if that change of control would
benefit our other stockholders, which could deprive our stockholders of the
opportunity to receive a premium for their shares. The significant concentration
of ownership of our common stock and Series A Preferred Stock may adversely
affect the trading price of our common stock and Series A Preferred Stock due to
investors' perception that conflicts of interest may exist or arise.
45
IF SECURITIES OR INDUSTRY ANALYSTS DO NOT PUBLISH RESEARCH OR REPORTS ABOUT OUR
BUSINESS, IF THEY CHANGE THEIR RECOMMENDATIONS REGARDING OUR SHARES ADVERSELY OR
IF OUR OPERATING RESULTS TO NOT MEET THEIR EXPECTATIONS, THE TRADING PRICE OF
OUR COMMONSSTOCK AND SERIES A PREFERRED STOCK COULD DECLINE.
The trading market for our common stock and the trading price of our
Series A Preferred Stock will be influenced by the research and reports that
industry and securities analysts publish about us or our business. Currently, we
have no analysts coverage. If analysts fail to publish reports about us or if
one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the financial markets,
which in turn could cause the price of our common stock to decline. Moreover, if
one or more analysts who cover us downgrade our common stock or if our operating
results do not meet their expectations, the price of our common stock and Series
A Preferred Stock could decline.
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE VOLATILE, WHICH COULD CAUSE THE
VALUE OF YOUR INVESTMENT IN OUR COMMON STOCK OR SERIES A PREFERRED STOCK TO
DECLINE.
The stock market in general, and the stock prices of technology and
wireless communications companies in particular, have experienced volatility
that often has been unrelated to the operating performance of any specific
public company. Factors that may have a significant impact on the market price
of our common stock and accordingly the trading price of our Series A Preferred
Stock include:
o announcements concerning us or our competitors, including the
selection of mobile WiMAX wireless communications technology by
telecommunications providers and the timing of the roll-out of those
systems;
o receipt of substantial orders or order cancellations for integrated
circuits and system software products for mobile WiMAX networks by
us or our competitors;
o quality deficiencies in technologies, products or services;
o announcements regarding financial developments or technological
innovations;
o our ability to remediate the material weakness in internal controls
over financial reporting identified in connection with our
restatement of revenues of our PacketVideo subsidiary;
o international developments, such as technology mandates, political
developments or changes in economic policies;
o lack of capital to invest in WiMAX networks;
o new commercial products;
o changes in recommendations of securities analysts;
o government regulations, including FCC regulations governing spectrum
licenses;
o earnings announcements;
o proprietary rights or product or patent litigation;
o strategic transactions, such as acquisitions and divestitures; or
o rumors or allegations regarding our financial disclosures or
practices.
Our share price may be subject to volatility, particularly on a quarterly
basis. Shortfalls in our revenues or earnings in any given period relative to
the levels expected by securities analysts could immediately, significantly and
adversely affect the trading price of our common stock.
From time to time, we may repurchase our common stock at prices that may
later be higher than the market value of the share on the repurchase date. This
could result in a loss of value for stockholders if new shares are issued at
lower prices.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. Due to changes in the volatility of the price of our common stock,
we may be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources.
46
PROVISIONS OF OUR CHARTER DOCUMENTS COULD DELAY OR PREVENT AN ACQUISITION OF
OUR COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO HOLDERS OF OUR
COMMON STOCK AND SERIES A PREFERRED STOCK, AND COULD MAKE IT MORE DIFFICULT
FOR YOU TO CHANGE MANAGEMENT.
Our Certificate of Incorporation and Bylaws contain provisions that could
depress the trading price of our common stock and Series A Preferred Stock by
acting to discourage, delay or prevent a change of control of our company or
changes in management that holders of our common stock might deem advantageous.
Specific provisions in our Certificate of Incorporation and Bylaws include:
o our directors serve staggered, three-year terms and accordingly,
pursuant to Delaware law, can only be removed with cause;
o no action can be taken by stockholders except at an annual or
special meeting of the stockholders called in accordance with our
bylaws, and stockholders may not act by written consent;
o our board of directors will be expressly authorized to make, alter
or repeal our bylaws, and our stockholders will be able to make,
alter or repeal our bylaws by a vote of 66-2/3% of the issued and
outstanding voting shares;
o any vacancies on the board of directors would be filled by a
majority vote of the board;
o our board of directors will be authorized to issue preferred stock
without stockholder approval; and
o we will indemnify officers and directors against losses that they
may incur in investigations and legal proceedings resulting from
their services to us, which may include services in connection with
takeover defense measures.
As a result of the provisions of our Certificate of Incorporation and
Bylaws, the price investors may be willing to pay in the future for our common
stock or Series A Preferred Stock may be limited.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Allen Salmasi.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for George C. Alex.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Allen Salmasi.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
George C. Alex.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXTWAVE WIRELESS INC.
(Registrant)
November 13, 2007 By: /s/ George C. Alex
----------------------- ----------------------------------
(Date) George C. Alex
Executive Vice President and
Chief Financial Officer
48
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Allen Salmasi.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for George C. Alex.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Allen Salmasi.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
George C. Alex.
49