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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 JUNE 30, 2007
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 000-51958
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 August 10, 2007, there were 92,614,194 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
i
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXTWAVE WIRELESS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
JUNE 30, DECEMBER 30,
2007 2006
----------- -----------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 167,194 $ 32,980
Short-term investments 189,025 167,705
Accounts receivable, net of allowance for doubtful
accounts of $127 and $321, respectively 21,460 5,056
Inventory 7,697 266
Deferred contract costs 5,011 2,397
Prepaid expenses and other current assets 11,372 7,571
----------- -----------
Total current assets 401,759 215,975
Restricted cash 75,000 75,000
Wireless spectrum licenses, net 571,704 527,998
Goodwill 168,377 32,184
Other intangible assets, net 44,480 18,570
Property and equipment, net 30,483 17,529
Other noncurrent assets 7,584 9,823
----------- -----------
Total assets $ 1,299,387 $ 897,079
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,986 $ 1,630
Accrued expenses 50,612 33,537
Current portion of long-term obligations 6,093 3,065
Deferred revenue 27,302 10,253
Other current liabilities and deferred credits 1,288 1,240
----------- -----------
Total current liabilities 112,281 49,725
----------- -----------
Deferred income tax liabilities 83,404 75,774
Long-term obligations, net of current portion 311,925 298,030
Other long-term obligations, deferred credits and
reserves 4,041 3,324
----------- -----------
Total liabilities 511,651 426,853
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
$361,952 at June 30, 2007 357,988 --
----------- -----------
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; 92,560 and 83,716 issued and outstanding
at June 30, 2007, and December 30, 2006, respectively 93 84
Additional paid-in-capital 695,370 620,423
Accumulated other comprehensive loss (83) (357)
Accumulated deficit (265,632) (150,972)
----------- -----------
Total stockholders' equity 429,748 469,178
----------- -----------
Total liabilities and stockholders' equity $ 1,299,387 $ 897,079
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
1
NEXTWAVE WIRELESS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2007 2006 2007 2006
--------- --------- --------- ---------
Revenues $ 12,832 $ 6,293 $ 20,578 $ 10,198
--------- --------- --------- ---------
Operating expenses:
Cost of revenues 10,549 2,638 14,214 4,445
Engineering, research and development 34,350 13,294 57,397 24,383
General and administrative 21,845 12,140 39,412 20,632
Sales and marketing 5,562 2,539 9,235 4,152
Purchased in-process research and
development costs -- 1,648 860 1,648
--------- --------- --------- ---------
Total operating expenses 72,306 32,259 121,118 55,260
--------- --------- --------- ---------
Loss from operations (59,474) (25,966) (100,540) (45,062)
--------- --------- --------- ---------
Other income (expense)
Interest income 5,444 3,197 7,517 6,384
Interest expense (11,447) (366) (22,586) (674)
Other income and expense, net 298 216 302 124
--------- --------- --------- ---------
Total other income (expense), net (5,705) (3,047) (14,767) 5,834
--------- --------- --------- ---------
Loss before provision for income
taxes and minority interest (65,179) (22,919) (115,307) (39,228)
Income tax benefit (provision) (224) -- (401) 209
Minority interest 138 214 1,048 871
--------- --------- --------- ---------
Net loss (65,265) (22,705) (114,660) (38,148)
Less: Preferred stock dividends (6,730) -- (6,952) --
Accretion of issuance costs on
preferred stock (68) -- (70) --
--------- --------- --------- ---------
Net loss applicable to common
shares $ (72,063) $ (22,705) $(121,682) $ (38,148)
========= ========= ========= =========
Net loss per common share - basic and
diluted $ (0.81) $ (0.28) $ (1.41) $ (0.47)
Weighted average shares used in per
share calculation 88,774 81,720 86,385 81,666
The accompanying notes are an integral part of these
consolidated financial statements
2
NEXTWAVE WIRELESS INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS) (UNAUDITED)
REDEEMABLE
SERIES A SENIOR
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER TOTAL
--------------------- --------------------- PAID-IN COMPREHENSIVE 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 for
business acquisition -- -- 7,651 8 74,514 -- -- 74,522
Shares issued under stock
incentive plans -- -- 523 -- 1,546 -- -- 1,546
Shares issued for
warrants exercised -- -- 670 1 3 -- -- 4
Share-based compensation
expense -- -- -- -- 5,906 -- -- 5,906
Imputed dividends on
Series A Senior
Convertible Preferred
Stock -- 6,952 -- -- (6,952) -- -- (6,952)
Accretion of issuance
costs on Redeemable
Series A Senior
Convertible Preferred
Stock -- 70 -- -- (70) -- -- (70)
Unrealized net gains on
investments -- -- -- -- -- 274 -- 274
Net loss -- -- -- -- -- -- (114,660) (114,660)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2007 355 $ 357,988 92,560 $ 93 $ 695,370 $ (83) $(265,632) $ 429,748
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
3
NEXTWAVE WIRELESS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED
-----------------------------------
JUNE 30, JULY 1,
2007 2006
----------- -----------
OPERATING ACTIVITIES
Net loss $ (114,660) $ (38,148)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 4,443 2,564
Amortization of intangible assets 6,825 2,468
Non-cash share-based compensation 5,906 2,612
In-process research and development 860 1,648
Accretion of interest expense 10,181 636
Minority interest (1,048) (871)
Other non-cash adjustments 743 1,742
Changes in operating assets and liabilities:
Accounts receivable (1,899) (1,434)
Inventory
(2,422) (19)
Prepaid expenses and other current assets (1,779) (2,286)
Other assets 2,197 940
Accounts payable and accrued liabilities 1,863 4,329
Deferred revenue 6,103 2,803
Other current liabilities and deferred credits (33) (190)
----------- -----------
Net cash used in operating activities (82,720) (23,206)
----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale
securities 5,127 132,772
Proceeds from the sale of available-for-sale
securities 622,892 265,355
Purchases of available-for-sale securities (649,064)
Payments for wireless spectrum licenses (34,252) (80,295)
Cash paid for business combinations, net of cash
acquired (59,398) (4,875)
Purchase of property and equipment (14,245) (7,157)
Other, net (1,441) (1,755)
----------- -----------
Net cash used in investing activities (130,381) (38,539)
----------- -----------
FINANCING ACTIVITIES
Proceeds from the sale of Series A Senior
Convertible Preferred Stock, net of costs to issue 351,146 --
Payments on long-term obligations (3,347) (2,139)
Proceeds from the sale of common equity interests
and common stock 1,550 330
Proceeds from investment by joint venture partner -- 1,995
Cash distributions paid to members (2,034) (1,447)
----------- -----------
Net cash provided by (used in) financing
activities 347,315 (1,261)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 134,214 (63,006)
Cash and cash equivalents, beginning of period 32,980 93,649
----------- -----------
Cash and cash equivalents, end of period $ 167,194 $ 30,643
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
4
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 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 the 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 United States Securities and Exchange Commission 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 and six month periods ended June 30, 2007 and July 1, 2006 include 13
and 26 weeks, respectively.
COMPREHENSIVE LOSS
Accumulated other comprehensive loss includes unrealized gains and losses
that are excluded from the consolidated statements of operations and are
reported as a separate component in stockholders' equity. The net unrealized
losses represent those on marketable securities that are classified as
available-for-sale and totaled $0.1 million and $0.4 million at June 30, 2007
and December 30, 2006, respectively. Comprehensive loss consists of the
following:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 30, JULY 1, JUNE 30 JULY 1,
(in thousands) 2007 2006 2007 2006
--------- --------- --------- ---------
Net loss $ (65,265) $ (22,705) $(114,660) $ (38,148)
Other comprehensive income (loss):
Net unrealized gains (losses) on
marketable securities 115 (86) 274 (246)
--------- --------- --------- ---------
Total comprehensive loss $ (65,150) $ (22,791) $(114,386) $ (38,394)
========= ========= ========= =========
NET LOSS PER COMMON SHARE
Basic net loss per common share for the three and six months ended June
30, 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. Basic net loss per common share for the three and six months
ended July 1, 2006 is computed by dividing net loss applicable to common shares
for the period by the weighted average number of limited liability company
membership units outstanding during the respective periods, on a converted basis
as if NextWave's corporate conversion merger occurred on January 1, 2006.
Diluted loss per share assumes that outstanding common shares were increased by
shares issuable upon exercise of stock options and warrants for which market
price exceeds the exercise price, less shares which could have been purchased by
NextWave with the related proceeds, unless antidilutive. Diluted loss per share
also considers the impact of the conversion of the redeemable Series A Senior
Convertible Preferred Stock (the "Series A Preferred Stock"), unless
antidilutive. Contingently issuable stock, such as restricted stock or merger
consideration, is also included in the diluted loss per share calculations,
unless antidilutive. For the three and six months ended June 30, 2007 and July
1, 2006, diluted loss per common share is computed on the same basis as basic
loss per common share as the inclusion of potential shares outstanding would be
antidilutive.
5
Following are securities that could potentially dilute earnings per share
in the future that 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 June 30, 2007 was the end of the contingency period for any
contingently issuable shares in accordance with SFAS 128, "Earnings per Share."
THREE MONTHS ENDED SIX MONTHS ENDED
--------------- ---------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
(in thousands) 2007 2006 2007 2006
------ ------ ------ ------
Outstanding stock options 15,557 9,143 14,129 8,208
Common stock warrants 2,436 500 2,564 500
Contingently issuable shares under
advisory contract 833 833 833 833
Restricted stock 199 84 209 68
Contingent merger consideration for
two acquisitions and related
contingent stock bonus plan shares 11,568 -- 6,393 --
Series A Senior Convertible Preferred
Stock 32,153 -- 16,783 --
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 D-98, 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 Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("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 will be reported as the
change in fair value of derivatives in the consolidated statements of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"), effective for NextWave's
fiscal year beginning December 31, 2006. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes," and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. Adoption of this interpretation did not have a material impact on
NextWave's financial statements.
In September 2006, the 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 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 159"). SFAS 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
6
and liabilities measured using another measurement attribute. If elected, SFAS
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 159. NextWave's management is currently evaluating
whether or not to elect the option provided for in this standard.
RECLASSIFICATION
To conform to the current presentation in the consolidated balance sheet
at June 30, 2007, a reclassification of $0.3 million in inventory was made from
prepaid expenses and other current assets to inventory in the consolidated
balance sheet at December 30, 2006. This reclassification had no effect on
reported current assets or net cash used in operating activities.
2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS
SHORT-TERM INVESTMENTS AND RESTRICTED CASH
Short-term investments and restricted cash consist of the following:
JUNE 30, DECEMBER 30,
(in thousands) 2007 2006
--------- ---------
Municipal securities $ 158,209 $ 177,436
Commercial paper 77,167 --
Equity securities 15,335 --
U.S. Treasury and Agency obligations 10,199 39,051
Money market funds 3,115 500
Corporate notes -- 25,694
Cash -- 24
--------- ---------
Total portfolio 264,025 242,705
Less restricted portion (75,000) (75,000)
--------- ---------
Total unrestricted short-term investments $ 189,025 $ 167,705
========= =========
INVENTORY
Inventory consists of the following:
JUNE 30, DECEMBER 30,
(in thousands) 2007 2006
--------- ---------
Raw materials $ 1,105 $ --
Work in process 326 266
Finished goods 6,266 --
--------- ---------
$ 7,697 $ 266
========= =========
WIRELESS LICENSES, GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of the following:
JUNE 30, 2007 DECEMBER 30, 2006
------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE LIFE AVERAGE LIFE
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 15.5 $ 95,060 $ 7,386 14.1 $ 82,385 $ 4,438
Purchased technology 7.0 33,464 4,427 7.0 9,614 1,821
Purchased customer base 8.0 7,480 1,541 8.0 5,960 1,044
Non-compete agreements 4.0 3,740 1,659 4.0 2,800 1,193
Purchased tradenames and
trademarks 6.9 3,634 207 -- -- --
Other 7.7 1,945 349 7.4 2,002 252
-------- -------- -------- --------
$145,323 $ 15,569 $102,761 $ 8,748
======== ======== ======== ========
Intangible assets not
subject to amortization:
Wireless spectrum
licenses $484,030 $450,051
Goodwill 168,377 32,184
Purchased tradenames and
trademarks 2,400 2,504
-------- --------
$654,807 $484,739
======== ========
7
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 $33.8 million of wireless spectrum licenses not subject to amortization. The
assets of the company are comprised almost entirely of wireless spectrum. The
acquisition of 4253311 Canada Inc. was accounted for as an acquisition of assets
rather than as an acquisition of a business based on guidance under EITF 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
$7.6 million in associated deferred tax liabilities as determined in accordance
with EITF 98-11, "Accounting for Acquired Temporary Differences in Certain
Purchase Transactions That Are Not Accounted for as Business Combinations,"
("EITF 98-11").
During the six months ended June 30, 2007, NextWave acquired other
licensed spectrum rights for $2.7 million in cash and $5.2 million through the
assumption of lease liabilities.
The $136.2 million increase in goodwill in the consolidated balance sheets
from December 30, 2006 to June 30, 2007, resulted from $137.0 million from
current year business acquisitions, reduced by $0.8 million for reductions to
accrued liabilities related to 2005 and 2006 acquisitions.
The estimated aggregate amortization expense for amortized intangible
assets owned as of June 30, 2007, is expected to be $8.1 million during the
remainder of 2007 and $15.5 million, $14.4 million, $13.3 million, $12.5 million
and $66.0 million during fiscal years 2008, 2009, 2010, 2011 and thereafter,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
JUNE 30, DECEMBER 30,
(in thousands) 2007 2006
-------- --------
Furniture and equipment $ 20,248 $ 13,626
Purchased software 7,969 7,296
Leasehold improvements 2,941 2,358
Construction in progress 10,376 846
-------- --------
41,534 24,126
Less: Accumulated depreciation (11,051) (6,597)
-------- --------
Total property and equipment, net $ 30,483 $ 17,529
======== ========
Construction in progress at June 30, 2007, includes $9.9 million in
accumulated costs for NextWave's property in Henderson, Nevada. Occupancy
commenced in July 2007, at which time the costs will be capitalized and
depreciation of the assets will commence.
ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30, DECEMBER 30,
(in thousands) 2007 2006
-------- --------
Accrued payroll and related expenses $ 13,838 $ 9,417
Accrued contract losses 13,164 529
Accrued interest 11,184 11,178
Accrued expenses 6,440 4,870
Accrued professional fees 3,386 3,746
Accrued equity distributions payable 80 2,034
Other 2,520 1,763
-------- --------
Total accrued liabilities $ 50,612 $ 33,537
======== ========
8
3. BUSINESS COMBINATIONS
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), allows 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 is 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.
The total cost of the acquisition of $99.6 million includes $25.7 million
in cash and 7.7 million shares of NextWave's common stock, valued at $74.5
million paid for the equity interests, closing costs of $3.2 million, less cash
acquired of $3.8 million. The fair value of the 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 price was preliminarily allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the date of
acquisition in accordance with SFAS No. 141 as follows:
(in thousands)
Accounts receivable $ 13,138
Inventory 4,643
Deferred contract costs 1,687
Prepaid and other current assets 1,623
Property and equipment 1,996
Other noncurrent assets 413
Goodwill 127,885
Accounts payable and other current liabilities (26,843)
Deferred revenue (11,544)
Provision for loss contract (13,440)
--------
Total acquisition cost $ 99,558
========
The excess of the purchase price over the acquired net tangible assets of
$127.9 million 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 third 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.
The results of IPWireless' operations have been included in the
accompanying consolidated financial statements from the date of acquisition.
Additional consideration of up to $135.0 million may be paid 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 $114.0 million of
such additional consideration will be payable in cash or shares of common stock
at NextWave's election and up to approximately $21.0 million of such amounts
will be payable in cash or shares of common stock at the election of the
representative of IPWireless shareholders. Five million dollars of the
consideration paid at closing and $21.0 million of the additional consideration
that may be earned post-closing has or will be placed in escrow for 12 months
from the closing date, which will be available to compensate NextWave for
certain losses, including any losses it may incur as a result of any breach of
the representations and warranties or covenants of IPWireless contained in the
merger agreement. In accordance with SFAS No. 141, "Business Combinations," 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.
NextWave has also adopted the IPWireless, Inc. Employee Stock Bonus Plan
which provides IPWireless employees with shares of NextWave common stock having
an aggregate value of up to $7.0 million, valued at the time of grant,
contingent upon the achievement of certain revenue milestones relating to
IPWireless' public safety business and TDtv business. In accordance with SFAS
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
estimated service period once the achievement of the milestones becomes
9
probable. The probability of achievement of the performance conditions will be
reassessed at each reporting date.
In connection with the acquisition, NextWave recorded an accrual for a
provision for loss contracts that existed at the time of the acquisition and an
accrual for severance for four IPWireless employees whose employment terminated
as a result of the acquisition. Activity for these liabilities is as follows:
OPENING BALANCE
BALANCE AMOUNT S AT JUNE
SHEET PROVISION PAID IN 30,
(in thousands) ACCRUAL UTILIZED CASH 2007
------- ------- ------- -------
Provision for loss contracts $13,440 $ (334) $ -- $13,106
Accrued severance 552 -- (516) 36
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 is 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.
The total cost of the acquisition of $16.9 million includes cash paid for
the common stock and warrants of $13.4 million, interim funding of $1.9 million,
closing costs of $0.7 million, the assumption of $1.3 million in debt which was
paid at closing, less cash acquired of $0.4 million. Under the purchase method
of accounting, the purchase price was preliminarily allocated to the assets
acquired and liabilities assumed based upon their estimated fair values at the
date of acquisition in accordance with SFAS No. 141 as follows:
(in thousands)
Prepaid and other current assets $ 693
Property and equipment 1,110
Other noncurrent assets 26
Intangible assets 22,180
Accounts payable and accrued liabilities (1,938)
Long-term obligations (5,177)
---------
Total acquisition cost $ 16,894
=========
The purchase price allocation included values assigned to certain specific
identifiable intangible assets aggregating $22.2 million. The fair value
assigned to purchased technology was 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 GO
Networks is relieved of the obligation to pay royalties for the benefits
received from them. The fair value 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. The amount allocated to intangible assets and
their respective amortizable lives is attributed to the following categories:
LIFE
(dollars in thousands) (IN YEARS) AMOUNT
---------- ---------
Purchased technology 7 $ 18,200
Purchased trade names and trademarks 7 2,660
Non-compete agreements 4 840
Purchased customer base 8 480
---------
$ 22,180
The results of GO Network's operations have been included in the
accompanying consolidated financial statements from the date of acquisition.
10
Additional purchase consideration of up to $25.6 million and $0.1 million
may be paid 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 key employees. In accordance with SFAS No. 141,
"Business Combinations," 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 additional
purchase price when the contingency is resolved and the consideration is
determinable and becomes issuable. In accordance with EITF 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.
NextWave also adopted 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 grant, upon the
achievement of specified operational milestones 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
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
estimated 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.
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 is 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. The
total cost of the acquisition was $17.8 million, which includes cash paid for
the registered voting shares of $18.8 million, closing costs of $0.3 million,
less cash acquired of $1.3 million.
NextWave recorded $9.1 million in goodwill in connection with the
acquisition of SDC. The purchase price allocation included values assigned to
certain specific identifiable intangible assets aggregating $8.4 million as
follows:
LIFE
(dollars in thousands) (IN YEARS) AMOUNT
---------- ---------
Purchased technology 7 $ 5,650
Purchased customer base 6 1,040
In-process research and development -- 860
Purchased trade names and trademarks 10 760
Non-compete agreements 2 100
---------
$ 8,410
=========
Purchased in-process research and development costs relate to development
projects 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 date of acquisition. An
experienced technological employee base and operations in a specialized niche in
the wireless industry were among the factors that contributed to a purchase
price resulting in the recognition of goodwill.
The results of SDC's operations have been included in the accompanying
consolidated financial statements from the date of acquisition.
PRO FORMA RESULTS
The following unaudited pro forma financial information assumes that the
acquisitions of IPWireless and GO Networks occurred on December 31, 2006 and
January 1, 2006, respectively. The unaudited pro forma financial information
does not reflect the SDC acquisition, as the effect of the acquisition was not
significant on an individual basis. 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 acquisition occurred on these dates, or of future results of operations. The
unaudited pro forma results for the three and six months ended June 30, 2007 and
July 1, 2006, are as follows:
11
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
(in thousands) 2007 2006 2007 2006
-------- -------- -------- --------
Revenues $ 13,491 $ 6,911 $ 22,862 $ 11,192
Net loss (70,007) (38,488) (140,000) (70,476)
Net loss applicable to common shares (76,805) (38,488) (147,022) (70,476)
Net loss per common share - basic and
diluted $ (0.83) $ (0.43) $ (1.60) $ (0.79)
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.
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:
JUNE 30, 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 $60,506 and
$69,325 at June 30, 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 $ 289,494 $ 280,675
Wireless spectrum leases, weighted average
imputed interest rates of 9.59% and 8.43%
at June 30, 2007 and December 30, 2006,
respectively, scheduled maturities ranging
from 2011 through 2036, net of unamortized
discounts of $19,901 and $9,758 at June 30,
2007 and December 30, 2006, respectively,
with three to five renewal options ranging
from 10 to 15 years each. 23,644 20,091
9.08% note, due June 1, 2009, principal and
interest of $214 payable monthly, net of
unamortized discount of $214, secured by
$24,139 in assets held by GO Networks 4,544 --
Other 336 329
--------- ---------
Total long-term obligations 318,018 301,095
Less current portion (6,093) (3,065)
--------- ---------
Long-term portion $ 311,925 $ 298,030
========= =========
Payments due on these obligations during each of the five years subsequent
to June 30, 2007 are as follows:
(in thousands)
Fiscal Years:
2007 (remaining six months) $ 1,464
2008 6,202
2009 5,214
2010 353,429
2011 3,246
Thereafter 29,084
--------
398,639
Less unamortized discount (80,621)
Less current portion (6,093)
--------
Total long-term obligations $311,925
========
12
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 June 30, 2007, NextWave has become liable for
additional indebtedness totaling $13.9 million.
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 six months ended June 30, 2007, warrants to purchase
0.7 million shares of common stock were exercised and at June 30, 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.
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 United States 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 the three and six months ended June 30, 2007, NextWave's effective tax
rate was 0.37% and 0.36%, respectively. For the three and six months ended June
30, 2007, NextWave recorded a provision for income taxes of $0.2 million and
$0.4 million, respectively.
NextWave adopted Financial Interpretation Number 48, "Accounting for
Uncertainty in Income Taxes," ("FIN 48") on December 31, 2006, the beginning of
its 2007 fiscal year. The adoption of FIN 48 did not have an effect on
NextWave's effective income tax rate for the three and six months ended June 30,
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 48.
Should any unrecognized benefits arise in future, NextWave will determine its
policy for recording interest and penalties on such unrecognized tax benefits at
that time.
NextWave did not generate any unrecognized tax benefits during the three
and six months ended June 30, 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.
As of June 30, 2007, NextWave is not subject to any 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
Pending Business Investments
13
During the three months ended June 30, 2007, NextWave's majority-owned
subsidiary, Inquam Broadband GmbH, loaned to WiMAX Telecom AG a total of $0.9
million, which is included in prepaid and other current assets in the
consolidated balance sheet at June 30, 2007.
Services and Other Agreements
NextWave enters into non-cancelable 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. The services agreements contain
provisions for minimum commitments based on the number of team members and their
respective billing rates. At June 30, 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 six months) $ 9,209
2008 11,310
2009 2,474
2010 2,700
2011 4,361
--------
Total $ 30,054
========
Capital Expenditures
In connection with its acquisition of an office building in Henderson,
Nevada, and its lease facilities in San Diego, California, NextWave entered into
agreements in 2007 for the construction of interior improvements aggregating
$5.2 million, of which $3.1 remains to be paid under these contracts at June 30,
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 in 2012. Future minimum lease payments under noncancellable operating
leases, net of sublease rentals at June 30, 2007, are as follows:
LEASE SUBLEASE
(in thousands) COMMITMENTS RENTALS NET
-------- -------- --------
Fiscal Years:
2007 (remaining six months) $ 4,919 $ (117) $ 4,802
2008 9,261 (198) 9,063
2009 7,934 -- 7,934
2010 6,676 -- 6,676
2011 4,459 -- 4,459
Thereafter 1,782 -- 1,782
-------- -------- --------
$ 35,031 $ (315) $ 34,716
======== ======== ========
14
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. REDEEMABLE 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 92.6
million were issued and outstanding at June 30, 2007, including 0.2 million
restricted shares. At June 30, 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 32,756
Stock options:
Granted and outstanding 17,765
Available for future grants 16,226
Warrants 2,436
Contingently issuable shares under advisory contract 833
--------
70,016
========
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 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 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 2010.
15
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 future strategic acquisitions.
DIVIDEND RIGHTS. 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 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, fails to file a shelf registration statement with the Securities
and Exchange Commission on or prior to July 31, 2007, or fails to cause the
shelf registration statement 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 $6.7 million and $7.0 million in undeclared dividends
during the three and six months ended June 30, 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 June 30, 2007, the
liquidation preference totaled $362.0 million. If all shares of Series A
Preferred Stock were converted at June 30, 2007, NextWave would be obligated to
issue 32.8 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
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
16
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 have been recorded as long-term liabilities in the consolidated balance
sheet, reducing the reported value of the Series A Preferred Stock. At June 30,
2007, the estimated fair values of the embedded derivatives totaled $0.4
million, resulting in a charge to other income and expense of $0.2 million
during the three and six months ended June 30, 2007. Any subsequent changes in
the estimated fair values of the embedded derivative will be reflected in future
statements of operations as other income and expense in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
9. EQUITY COMPENSATION PLANS
During the six months ended June 30, 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 for $6.00
per share was issued for every six options to purchase shares of common stock of
PacketVideo under the PacketVideo 2005 Equity Incentive Plan. The exchange of
1,566,000 options was accounted for as a modification under SFAS 123(R) in which
the fair value of the new options at the date of exchange was less than the fair
value of the options exchanged immediately before the exchange, resulting in no
incremental share-based compensation expense.
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,
performance-based, 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 three separate revenue milestones to be measured at January 1
of each of 2008, 2009 and 2010.
In May 2007, NextWave shareholders 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 June 30, 2007, NextWave may issue up to $5.0 million in shares of
NextWave common stock under the GO plan, $7.0 million in shares of common stock
under the IPWireless plan and an aggregate of 33,991,000 shares of common stock
under its remaining plans, of which 17,765,000 are granted and outstanding
options and 16,226,000 are available for future grants.
The following table summarizes the status of stock options issued under
these plans at June 30, 2007, and activity during the six months ended June 30,
2007:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
(IN PRICE PER
THOUSANDS) SHARE
---------- ---------
Outstanding at December 30, 2006 10,934 $6.20
Granted 5,976 $9.78
Exercised (272) $5.69
PacketVideo options exchanged 1,566 $6.00
Canceled (439) $7.47
------
Outstanding at June 30, 2007 17,765 $7.37
======
Exercisable at June 30, 2007 10,394 $5.96
17
Employee Share-Based Compensation
NextWave recognized employee share-based compensation expense from stock
options of $1.5 million and $2.3 million for the three and six months ended June
30, 2007, respectively, and $1.7 million for the three and six months ended July
1, 2006, under the provisions of SFAS 123(R).
NextWave utilized the Black-Scholes valuation model for estimating the
fair value of NextWave stock awards to employees at the date of grant or
modification, with the following assumptions:
SIX MONTHS ENDED
JUNE 30, JULY 1,
2007 2006
Risk-free interest rate 4.54%-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 $4.01 $2.17
Total compensation cost of options granted to employees that were not yet
vested as of June 30, 2007, was $21.7 million, which is expected to be
recognized over a weighted average period of 3.4 years.
In May 2007, NextWave granted 0.2 million unrestricted bonus shares to
employees as additional compensation in lieu of annual cash bonuses. The fair
value of the shares on the date of grant was $9.22 per share, representing $2.3
million in compensation expense that was recognized during the three months
ended June 30, 2007.
NON-EMPLOYEE SHARE-BASED COMPENSATION
Share-based compensation expense for non-employee options, warrants and
restricted shares totaled $0.5 million and $1.2 million during the three and six
months ended June 30, 2007, respectively, and $0.4 million and $0.7 million
during the three and six months ended July 1, 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 balance sheet
reporting date, using the Black-Scholes option-pricing model based on the
following weighted average assumptions applied during the six months ended June
30, 2007 and July 1, 2006:
RESTRICTED
COMMON
OPTIONS WARRANTS SHARES
------- -------- ------
SIX MONTHS ENDED JUNE 30, 2007:
-------------------------------
Risk-free interest rate 4.56%-5.14% 5.00% 4.48%-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 $5.54 $4.18 $3.96
SIX MONTHS ENDED JULY 1, 2006:
------------------------------
Risk-free interest rate not applicable 5.08%-5.09% not applicable
Expected life (in years) not applicable 3.0-4.0 not applicable
Expected stock price volatility not applicable 50% not applicable
Expected dividend yield not applicable 0% not applicable
Weighted average fair value of awards not applicable $2.50 not applicable
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
$3.1 million at June 30, 2007, and will be charged to results of operations with
an offsetting increase to additional paid-in capital in the consolidated balance
sheet over a weighted average period of two years.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
18
SIX MONTHS ENDED
-------------------
JUNE 30, JULY 1,
(in thousands) 2007 2006
------- -------
Cash paid for income taxes $ 169 $ 55
Cash paid for interest 12,404 --
Noncash investing and financing activities:
Wireless spectrum licenses acquired with lease
obligations 5,222 2,478
Equity interests issued for business acquisitions 74,522 1,558
11. SUBSEQUENT EVENTS
In July 2007, NextWave signed a definitive agreement to acquire all shares
of IPMobile, a Tokyo-based telecommunications company, held by Mori Trust Co.,
Ltd., of Japan for $0.7 million. The transaction closed on August 8, 2007. The
acquired shares represent a 69.2% interest in IPMobile. In October 2007,
IPMobile will be required to pay an annual spectrum usage tax totaling
approximately $5.6 million which is anticipated to be funded by NextWave.
In July 2007, NextWave's majority owned subsidiary Inquam Broadband GmbH
acquired a 65% controlling interest in WiMAX Telecom AG, located in Zurich,
Switzerland, for $11.8 million. WiMAX Telecom AG 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. In connection with the investment, Inquam Broadband GmbH holds an
exclusive and irrevocable call option, which expires in December 2007, to
purchase the shares held by the remaining shareholders for 3.6 million Euros, or
$4.8 million. Conversely, the remaining shareholders of WiMAX Telecom AG hold an
exclusive and irrevocable put option, which expires in December 2007, to sell
their remaining interests to Inquam Broadband GmbH for 3.6 million Euros, or
$4.8 million.
In July 2007, NextWave entered into definitive agreements, subject to
approval of the license transfers from the FCC, to lease spectrum located in
California and Illinois for an aggregate payment of $20.5 million, plus
subsequent lease payments approximating $0.8 million annually through 2017. The
leases expire on various dates through 2017 and each provides for three
consecutive 10-year renewals.
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
SECOND QUARTER OF 2007 HIGHLIGHTS
o Our revenues, net loss and net loss applicable to common shares for
the second quarter of 2007 totaled $12.8 million, $65.3 million and
$72.1 million, or $0.81 per share, respectively, compared to $6.3
million, $22.7 million, $22.7 million, or $0.28 per share,
respectively, for the second quarter of 2006.
o Our revenues, net loss and net loss applicable to common shares for
the first six months of 2007 totaled $20.6 million, $114.7 million
and $121.7 million, or $1.41 per share, respectively, compared to
$10.2 million, $38.1 million, $38.1 million, or $0.47 per share,
respectively for the first six months of 2006.
o On May 11, 2007, we acquired all of the equity interests in
IPWireless, Inc., for $99.6 million, which includes cash and common
shares paid to the equity interests holders totaling $25.7 million
and $74.5 million, respectively, closing costs of $3.2 million, less
cash acquired of $3.8 million. Additional cash and stock
consideration of up to $135.0 million may be payable based upon the
achievement by IPWireless, Inc. of certain revenue milestones
between 2007 and 2009.
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.
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.
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;
20
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
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 are
currently available. 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 Henderson, 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.
21
GO NETWORKS, INC. Through our GO Networks subsidiary 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.
IPWIRELESS, INC. IPWireless, 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.
EFFECT OF RESTATEMENT. On March 23, 2007, we announced that our unaudited
financial statements for the quarterly periods ended April 1, 2006, July 1, 2006
and September 30, 2006 should no longer be relied upon as a result of required
corrections in revenue recognition under certain software contracts of our
PacketVideo subsidiary and in the deferral of certain engineering costs at
PacketVideo. More specifically, we determined that we were incorrectly deferring
engineering design, maintenance and support and royalty revenues on contracts
where post-contract customer support ("PCS") was required and no separate
objective evidence of its fair value, specific to PacketVideo, existed for the
PCS. We also determined that we had incorrectly deferred certain technology
costs prior to achieving technological feasibility. The change has been made to
defer revenue and related costs determined to the PCS portion of the contract
and to expense previously capitalized engineering costs. Subsequently, we
amended our quarterly report filed on Form 10-Q for the quarterly period ended
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. 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 in Item 4 of this Form 10-Q.
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 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 fiscal
2006 comparative periods presented in this Form 10-Q reflect the previously
announced restatement adjustments as reflected in our Form 10-K for the year
ended December 30, 2006.
SECOND QUARTER OF 2007 COMPARED TO THE SECOND QUARTER OF 2006
REVENUES. Revenues for the second quarter of 2007 were $12.8 million
compared to $6.3 million for second quarter of 2006, an increase of $6.5
million. The increase in revenue resulted primarily from revenues from our
infrastructure products sold by IPWireless, which accounted for $5.0 million of
the increase in comparison to the second quarter of 2006. PacketVideo accounted
for the remaining $1.5 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.
Sales to Verizon Wireless Communications and T-Mobile International
accounted for 41% and 36%, respectively, of our revenues during the three months
ended June 30, 2007
22
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. We
believe that PacketVideo will continue to account for a substantial portion of
our revenues in 2007 in addition to our newly acquired subsidiaries, IPWireless
and GO Networks. Following the development and 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.
OPERATING EXPENSES.
THREE MONTHS ENDED
------------------
JUNE 30, JULY 1, INCREASE
(in millions) 2007 2006 (DECREASE)
------- ------- -------
Cost of revenues $ 10.5 $ 2.6 $ 7.9
Engineering, research and development 34.4 13.3 21.1
General and administrative 21.8 12.2 9.6
Sales and marketing 5.6 2.5 3.1
Purchased in-process research and
development -- 1.6 (1.6)
------- ------- -------
Total operating expenses $ 72.3 $ 32.2 $ 40.1
======= ======= =======
COST OF REVENUES. Cost of revenues from our products sold by IPWireless,
which we acquired in May 2007, accounted for $6.6 million of the increase during
the second 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 $1.3 million of the increase during the second quarter of 2007,
includes higher amortization expenses of $0.2 million for the purchase of
intangible assets related to our 2006 business acquisitions. Cost of revenues
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.
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 second quarter of 2007 were $22.8 million compared to $10.5
million for the second quarter of 2006, an increase of $12.3 million which is
due primarily to the expansion of the engineering development organization.
Our acquisitions of our infrastructure products subsidiaries, GO Networks
in February 2007 and IPWireless in May 2007, accounted for $5.5 million of the
increase during the second quarter of 2007.
Costs for the internal and external development of our PacketVideo
software for the second quarter of 2007 were $6.0 million compared to $2.8
million for the second quarter of 2006, an increase of $3.2 million, which is
due primarily to 2006 and 2007 acquisitions by PacketVideo and an increase in
headcount in the engineering development organization.
Share-based compensation expense for the second quarters of 2007 and 2006
totaled $0.9 million and $0.7 million, respectively.
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. Cost of general and administrative expenses
increased $9.6 million during the second quarter of 2007, primarily due to
increased spending for compensation and associated costs of general and
23
administrative personnel of $5.5 million, professional fees of $1.6 million,
amortization of intangible assets of $2.8 million, offset by lower share-based
compensation of $0.3 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.
SALES AND MARKETING. Costs of sales and marketing increased $3.1 million
during the second quarter primarily due to increased spending for compensation
and associated costs for marketing and sales personnel of $2.5 million, expenses
associated with marketing and promotional activities of $0.5 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. In conjunction with
one of our acquisitions during the second quarter of 2006 we purchased
in-process research and development projects valued at $1.6 million which was
expensed upon the completion of the purchased intangible asset valuation as the
acquired technology had not yet reached technological feasibility and had no
future alternative uses.
INTEREST INCOME. Interest income for the second quarter of 2007 was $5.4
million compared to $3.2 million for the second quarter of 2006, an increase of
$2.2 million, and consisted of interest earned during the respective periods on
our unrestricted and restricted cash and investment balances, which totaled
$431.2 million and $340.4 million at June 30, 2007 and July 1, 2006,
respectively.
Interest income in the future will be affected by changes in short-term
interest rates and changes in our cash and investment balances, which may be
materially impacted by development plans, acquisitions and other financial or
equity activities.
INTEREST EXPENSE. Interest expense for the second quarter of 2007 was
$11.4 million compared to $0.4 million for the second quarter of 2006, an
increase of $11.0 million. Our issuance of $350.0 million in principal amount of
7% Senior Secured Notes in July 2006 accounted for $10.7 million of the
increase. The remainder of the increase of $0.3 million consists primarily of
the accretion of discounted wireless spectrum license lease liabilities acquired
during 2007 and 2006.
Our interest expense will increase during 2007 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 and
interest accreted on our newly acquired spectrum lease liabilities. Interest
expense will also increase during 2007 from the assumption of a loan in
connection with the acquisition of GO Networks, Inc.
PROVISION FOR INCOME TAXES. During the second 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
United States subsidiaries in relation to research and development expenses
incurred. An income tax provision of $0.1 million was recorded during the second
quarter of 2007 for these controlled foreign corporations. An income tax
provision of $0.1 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 second quarter of 2007 was
$0.1 million compared to $0.2 million for second quarter of 2006. Minority
interest represents our minority partner's share of losses to the extent of
their capital contributions in our Inquam Broadband joint venture formed in
January 2006.
FIRST SIX MONTHS OF 2007 COMPARED TO THE FIRST SIX MONTHS OF 2006
REVENUES. Revenues for the first six months of 2007 were $20.6 million
compared to $10.2 million for first six months of 2006, an increase of $10.4
million. PacketVideo accounted for $5.3 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
24
infrastructure products by our newly acquired subsidiary, IPWireless, accounted
for the remaining $5.1 million increase in revenues.
Sales to Verizon Wireless Communications and T-Mobile International
accounted for 54% and 22%, respectively, of our revenues during the six months
ended June 30, 2007.
OPERATING EXPENSES.
SIX MONTHS ENDED
-------------------
JUNE 30, JULY 1, INCREASE
(in millions) 2007 2006 (DECREASE)
-------- ------- -------
Cost of revenues $ 14.2 $ 4.5 $ 9.7
Engineering, research and development 57.4 24.4 33.0
General and administrative 39.4 20.6 18.8
Sales and marketing 9.2 4.2 5.0
Purchased in-process research and
development 0.9 1.6 (0.7)
-------- ------- -------
Total operating expenses $ 121.1 $ 55.3 $ 65.8
======== ======= =======
COST OF REVENUES. Cost of revenues from our infrastructure products sold
by IPWireless, which we acquired in May 2007, accounted for $6.7 million of the
increase during the first six months of 2007.
The increase in cost of revenues for our PacketVideo subsidiary accounted
for $3.0 million of the increase during the first six months of 2007 and
includes higher amortization expenses of $0.4 million for the purchase of
intangible assets related to our 2006 business acquisitions.
ENGINEERING, RESEARCH AND DEVELOPMENT. Costs for the internal and external
development of our wireless broadband products and technologies, including our
chipsets, for the first six months of 2007 were $40.5 million compared to $19.2
million for the first six months of 2006, an increase of $21.3 million which is
due primarily to the expansion of the engineering development organization.
Our acquisitions of our infrastructure products subsidiaries, GO Networks
in February 2007 and IPWireless in May 2007, accounted for $6.3 million of the
increase during the first six months of 2007.
Costs for the internal and external development of our PacketVideo
software for the first six months of 2007 were $10.6 million compared to $5.2
million for the first six months of 2006, an increase of $5.4 million, which is
due primarily to 2006 and 2007 acquisitions by PacketVideo and an increase in
headcount in the engineering development organization.
Share-based compensation expense for the first six months of 2007 and 2006
totaled $1.7 million and $0.9 million, respectively.
GENERAL AND ADMINISTRATIVE. Costs of general and administrative expenses
increased $18.8 million during the first six months of 2007 primarily due to
increased spending for compensation and associated costs of general and
administrative personnel of $14.3 million, professional fees of $3.5 million,
amortization of intangible assets of $0.6 million and higher losses in one of
our equity investments of $0.4 million.
SALES AND MARKETING. Costs of sales and marketing increased $5.0 million
during the first six months of 2007 primarily due to increased spending for
compensation and associated costs for marketing and sales personnel of $4.4
million, expenses associated with marketing and promotional activities of $0.5
million and share-based compensation of $0.1 million.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In conjunction with
our acquisition of SDC Secure Digital Container in January 2007 and one of our
acquisitions during the second quarter of 2006 we purchased in-process research
and development projects valued at $0.9 million and $1.6 million, respectively,
which were expensed upon the completion of the respective purchased intangible
asset valuations as the acquired technology had not yet reached technological
feasibility and had no future alternative uses.
INTEREST INCOME. Interest income for the first six months of 2007 was $7.5
million compared to $6.4 million for the first six months of 2006, an increase
of $1.1 million, and consisted of interest earned during the respective periods
on our unrestricted and restricted cash and investment balances, which totaled
$431.2 million and $340.4 million at June 30, 2007 and July 1, 2006,
respectively.
INTEREST EXPENSE. Interest expense for the first six months of 2007 was
$22.6 million compared to $0.7 million for the first six months of 2006, an
increase of $21.9 million. Our issuance of $350.0 million in principal amount of
25
7% Senior Secured Notes in July 2006 accounted for $21.3 million of the
increase. The remainder of the increase of $0.6 million consists primarily of
the accretion of discounted wireless spectrum license lease liabilities acquired
during 2007 and 2006.
PROVISION FOR INCOME TAXES. During the first six 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
United States subsidiaries in relation to research and development expenses
incurred. An income tax provision of $0.1 million was recorded during the first
six months of 2007 for these controlled foreign corporations. An income tax
provision of $0.3 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 six months of 2007 was
$1.0 million compared to $0.9 million for the first six months of 2006 and
primarily represents our minority partner's share of losses to the extent of
their capital contributions in our Inquam Broadband joint venture formed in
January 2006.
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 $265.6 million at June
30, 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 $295.0 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 cash, cash equivalents and short-term investments at
June 30, 2007 totaled $356.2 million.
The following table presents working capital, cash, cash equivalents and
investments:
INCREASE INCREASE
(DECREASE) (DECREASE)
FOR THE FOR THE
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, MARCH 31, JUNE 30, DECEMBER JUNE 30,
(in millions) 2007 2007 2007 30, 2006 2007
-------- -------- -------- -------- --------
Working capital $ 289.5 $ 411.8 $ (122.3) $ 166.3 $ 123.2
======== ======== ======== ======== ========
Cash and cash equivalents 167.2 72.9 94.3 33.0 134.2
Short-term investments 189.0 381.0 (192.0) 167.7 21.3
-------- -------- -------- -------- --------
Total cash, cash
equivalents and
investments $ 356.2 $ 453.9 $ (97.7) $ 200.7 $ 155.5
======== ======== ======== ======== ========
The following table presents our utilization of cash, cash equivalents and
short-term investments for the three and six months ended June 30, 2007,
compared to the three and six months ended July 1, 2006:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
(in millions) 2007 2006 2007 2006
-------- -------- -------- --------
Beginning cash, cash
equivalents and investments $ 453.9 $ 366.6 $ 200.7 $ 459.2
Proceeds from the issuance of
Series A Senior Convertible
Preferred Stock, net of
costs to issue -- -- 351.1 --
Cash paid for business
combinations, net of cash
acquired (29.2) (4.8) (59.4) (4.9)
Cash paid for acquisition of
wireless spectrum licenses
and subsequent lease
obligations (6.3) (2.3) (36.9) (82.4)
Cash used by operating
activities (47.0) (16.7) (82.7) (23.2)
Cash paid for property and
equipment (12.4) (1.6) (14.2) (7.2)
Other, net (2.8) (0.8) (2.4) (1.1)
-------- -------- -------- --------
Ending cash, cash equivalents
and investments $ 356.2 $ 340.4 $ 356.2 $ 340.4
======== ======== ======== ========
26
The decrease in cash, cash equivalents and investments of $97.7 million
during the second quarter of 2007 is due to $29.2 million paid for business
combinations, $6.3 million paid for wireless spectrum licenses and subsequent
lease obligations, cash used in operating activities of $47.0 million and $12.4
million in cash paid for capital expenditures.
The increase in cash, cash equivalents and investments of $155.5 million
during the first six months of 2007 is due to the net proceeds of $351.1 million
from the issuance of 355,000 shares of our Series A Senior Convertible Preferred
Stock in March 2007, offset by $59.4 million paid for business combinations,
$36.9 million paid for wireless spectrum licenses and subsequent lease
obligations, cash used in operating activities of $82.7 million and $14.2
million in cash paid for capital expenditures.
INVESTING ACTIVITIES
During the first six months of 2007, we consummated transactions to
acquire licensed spectrum rights totaling $34.3 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 $26.0 million in cash and the acquisitions of spectrum in
Switzerland and Texas for a total of $7.5 million in cash and $4.2 million,
respectively, in future lease obligations.
In January 2007, our PacketVideo subsidiary acquired all of the shares of
SDC Secure Digital Container AG, a Swiss company, for net cash of $17.8 million
which includes cash paid for the registered voting shares of $18.8 million,
closing costs of $0.3 million, less cash acquired of $1.3 million.
In February 2007, we acquired all of the outstanding common stock and
warrants of GO Networks, Inc., for net cash of $16.9 million which includes cash
paid to the shareholders of $13.4 million, interim funding of $1.9 million,
closing costs of $0.7 million, the assumption of $1.3 million in debt which was
paid at closing, less cash acquired of $0.4 million. Additional purchase
consideration of up to $25.6 million and $0.1 million may be paid in shares of
our common stock and cash, respectively, subject to the achievement of certain
operational milestones in February and August 2008. We also adopted the GO
Networks Employee Stock Bonus Plan, whereby certain employees may receive up to
an aggregate of $5.0 million in shares of our common stock, valued at the time
of issuance, upon the achievement of certain operational milestones in February
and August 2008.
In May 2007, we acquired IPWireless, Inc. for $99.6 million which includes
$25.7 million in cash plus 7.7 million in shares of our common stock, valued at
$74.5 million, closing costs of $3.2 million, less cash acquired of $3.8
million. Additional consideration of up to $135.0 million may be payable 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 $114.0 million of such additional
consideration will be payable in cash or shares of common stock at our election
and up to $21.0 million of such amounts will be payable in cash or shares of
common stock at the election of representatives of IPWireless shareholders. We
also adopted the IPWireless, Inc. Employee Stock Bonus Plan which provides
IPWireless employees with shares of our common stock having an aggregate value
of up to $7.0 million, valued at the time of issuance, contingent upon the
achievement of certain revenue milestones relating to IPWireless' public safety
business and TDtv business.
During the three months ended June 30, 2007, our majority-owned
subsidiary, Inquam Broadband GmbH, loaned to WiMAX Telecom AG, located in
Zurich, Switzerland, a total of $0.9 million. In July 2007, Inquam Broadband
GmbH acquired a 65% controlling interest in WiMAX Telecom AG for $11.8 million.
In connection with the investment, Inquam Broadband GmbH holds an exclusive and
irrevocable call option, which expires in December 2007, to purchase the shares
held by the remaining shareholders for 3.6 million Euros, or $4.8 million.
Conversely, the remaining shareholders of WiMAX Telecom AG hold an exclusive and
irrevocable put option, which expires in December 2007, to sell their remaining
interests to Inquam Broadband GmbH for 3.6 million Euros, or $4.8 million.
In April 2007, Inquam-BMR GP, the holder of the remaining 49% interest in
our Inquam Broadband joint venture, exercised its right to require us to
purchase all Inquam Broadband shares held by Inquam-BMR GP for 1,000 Euros per
share or approximately $1.8 million. Inquam Broadband, which is included in our
consolidated financial statements, will be wholly-owned by us after completion
of the purchase, which is expected to close prior to November 2007.
Capital expenditures totaled $14.2 million during the first six months of
2007 and were primarily related to our acquisition of a build-to-suit office
building in Henderson, Nevada and our lease facilities in San Diego, California.
In connection with these two facilities we entered into agreements in 2007 for
the construction of interior improvements aggregating $5.2 million, of which
$3.1 million remains to be paid under these contracts at June 30, 2007.
In July 2007, NextWave signed a definitive agreement to acquire all shares
of IPMobile, a Tokyo-based telecommunications company, held by Mori Trust Co.,
Ltd., of Japan for $0.7 million. The transaction closed on August 8, 2007. The
27
acquired shares represent a 69.2% interest in IPMobile. In October 2007,
IPMobile will be required to pay an annual spectrum usage tax totaling
approximately $5.6 million which is anticipated to be funded by NextWave.
In July 2007, we entered into definitive agreements, subject to approval
of the license transfers from the FCC, to lease spectrum located in California
and Illinois for an aggregate $20.5 million plus subsequent lease payments
approximating $0.8 million annually 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. 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 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 we default in our dividend payment
obligations, fail to file a shelf registration statement with the Securities and
Exchange Commission on or prior to July 31, 2007, or fail to cause the shelf
registration statement 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
$6.7 million and $7.0 million in undeclared dividends during the three and six
months ended June 30, 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 June 30, 2007, the liquidation preference totaled $362.0 million. If all
shares of Series A Preferred Stock were converted at June 30, 2007, we would be
obligated to issue 38.2 million shares of our common stock.
28
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
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 six months ended June 30, 2007, we paid $12.3 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.
During the six months ended June 30, 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 June 30, 2007, we had $356.2 million of unrestricted cash, cash
equivalents and short-term investments, and $75.0 million in restricted
investments required to be reserved under our Notes financing.
Since our emergence as a wireless technology company, we have consummated
transactions to acquire licensed spectrum rights, including subsequent lease
obligations, for amounts totaling $458.4 million.
We believe that our revenues, existing cash and short-term investments and
financing activities will be sufficient to fund our operating activities and
contractual commitments at least through 2008.
o We plan to fund our wireless broadband technology development
activities with our unrestricted cash and investments until such
point that we begin sales of our chipsets and network component
products and enter into licensing arrangements for our wireless
broadband technologies. Our wireless broadband products, services
and technologies are in the early stages 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 and
network components based on WiMAX and Wi-Fi technologies will be
commercially deployed and generate revenue.
o We do not expect that our PacketVideo subsidiary will require
substantial working capital funding in 2007.
o GO Networks, Inc., acquired in February 2007, develops
high-performance mobile Wi-Fi systems for commercial and municipal
service providers. In 2007, we expect GO Networks will require
working capital funding 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. In 2007, we expect increased investment in working
capital, and research and development with respect to the
commercialization of TDtv, WiMax, and additional public safety
products.
We may need to secure significant additional capital in the future to
implement changes to, or expansions of, our business plan and to 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. If our existing
working capital resources are insufficient to satisfy our cash requirements, we
may seek to sell debt securities or additional equity securities or to obtain a
credit facility. Our 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.
29
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
Our products include hardware and perpetual license software. Our sales
arrangements are multiple-element arrangements involving hardware, software,
maintenance, and support services. We have determined that the software element
of our arrangements is more than incidental to the product. Accordingly, we
recognize revenue in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.
Under SOP 97-2, revenue is recognized for an element at the time
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is probable. For us, persuasive
evidence of an arrangement consists of an executed contract or purchase order.
Delivery occurs upon acceptance of the products by our customer or upon delivery
of the products to a common carrier, if acceptance is not required in the
arrangement. Fees are fixed or determinable and collectibility is probable when
the contract fees and deliverables are not subject to refund or adjustment and
payment terms do not exceed our standard payment terms. Generally it cannot be
concluded that a fee is fixed or determinable at the outset of an arrangement.
Therefore revenue is recognized when all obligations of each contract are
fulfilled.
We allocate a portion of the total arrangement fee (product and service
fees) to maintenance based on vendor-specific objective evidence (VSOE) of fair
value. VSOE is based on the price our customers are charged when renewing
maintenance contracts after the initial term. The revenue allocated to
maintenance is recognized over the term of the maintenance arrangement. Assuming
there are no other undelivered elements of the arrangement, the remaining
portion of the total arrangement fee is allocated to the product and is
recognized upon delivery or customer acceptance provided all other revenue
recognition criteria have been met. For sales of our products through resellers,
revenue is not recognized until software is sold by the reseller to the end-user
customer and provided all other requirements of revenue recognition have been
met.
Deferred revenue includes amounts received from customers or resellers for
which revenue has not been recognized. Our contracts do not anticipate delivery
periods greater than one year. Therefore, costs are classified as current in the
accompanying balance sheets. There is, however, uncertainty regarding whether
these amounts will be recognized within one year due to the application of our
revenue recognition policy.
There were no other significant changes in our critical accounting
policies or estimates from those at December 30, 2006 other than the adoption of
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109." See our discussion below for
additional information on the recent accounting pronouncements impacting our
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN
48"), effective for our fiscal year beginning December 31, 2006. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes," and prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Adoption of this interpretation did not have
a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("SFAS 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 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 159"). SFAS 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
30
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
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 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 June 30,
2007, and 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 $398,639 $ 1,464 $ 11,416 $356,675 $ 29,084
Services and other purchase
agreements 30,054 9,209 13,784 7,061 --
Capital expenditures 3,132 3,132 -- -- --
Operating leases 35,031 4,919 17,195 11,135 1,782
Pending business investments 13,571 13,571 -- -- --
Series A Senior Convertible
Preferred Stock(2) 355,000 -- -- -- 355,000
-------- -------- -------- -------- --------
Total $835,427 $ 32,295 $ 42,395 $374,871 $385,866
======== ======== ======== ======== ========
Significant contractual obligations
entered into subsequent to June 30,
2007:
Pending business investment((3)) $ 650 $ 650 $ -- $ -- $ --
Pending spectrum lease
obligations((4)) 20,541 20,541 -- -- --
------------------------------------------------------------------
(1) Totals presented do not include interest or dividend payments. Please
refer to the Notes to Consolidated Financials Statements for information
on respective interest rates, interest and dividend payment dates.
(2) 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 June 30, 2007, the liquidation
preference totaled $362.0 million. If all shares of Series A Preferred
Stock were converted at June 30, 2007, we would be obligated to issue 38.2
million shares of our common stock.
(3) In July 2007, we signed a definitive agreement to acquire all shares of
IPMobile, a Tokyo-based telecommunications company, held by Mori Trust
Co., Ltd., of Japan for $0.7 million. Upon closing of the transaction, we
will hold a 69.2% interest in IPMobile. The agreement is subject to
required government approvals.
(4) In July 2007, NextWave entered into agreements, subject to approval of the
license transfers from the FCC, to lease spectrum located in California
and Illinois for an aggregate of $20.5 million plus subsequent lease
payments approximating $0.8 million annually 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
INTEREST RATE RISK
At June 30, 2007, our investment portfolios included unrestricted and
restricted investment securities with fair values of $189.0 million and $75.0
million, respectively. These securities are subject to interest rate risk and
will decline in value if interest rates increase. Interest income earned on our
investments is affected by changes in the general level of U.S. interest rates.
These income streams are generally not hedged.
Due to the relatively short duration of our investment portfolio, an
immediate ten percent change in interest rates (e.g. 3.00% to 3.30%) would have
no material impact on our financial condition or results of operations.
31
FOREIGN CURRENCY RISK
We conduct our business through subsidiaries in Europe, Israel,
Asia-Pacific and North America. Substantially all of our sales to customers
located in foreign countries are denominated in U.S. dollars, minimizing foreign
currency risks related to those transactions. Our foreign subsidiaries use the
U.S. dollar as their functional currency. Accordingly, monetary assets and
liabilities are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date. Revenues, expenses, gains and losses associated with
monetary assets and liabilities are translated at the rates of exchange that
approximate the rates in effect at the transaction date. Non-monetary assets and
liabilities and related elements of revenues, expenses, gains and losses are
translated at historical rates. Resulting exchange gains or losses of these
foreign investees are recognized in the consolidated statements of operations.
Changes in currency exchange rates have affected, and will continue to affect
our operating costs and net loss.
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.
In connection with the preparation of our year end 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, the Company amended its 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 the
Company's 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 Company's principal executive officer and principal financial officer
concluded that disclosure controls and procedures were not effective as of June
30, 2007, solely because of the material weakness in the Company's internal
control over financial reporting relating to revenue recognition pursuant to
software contracts of PacketVideo, as described below. As a result of the
restatement of our previously issued unaudited quarterly financial statements
and notwithstanding the material weakness described below, management believes
that the consolidated financial statements included in this Quarterly Report
fairly present, in all material respects, our financial position, results of
operations and cash flows for the periods presented.
The Company has determined that there was a material weakness in its
internal control over financial reporting relating to revenue recognition
pursuant to software contracts of PacketVideo. The Company's 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. The Company will be required to
provide an assessment of the effectiveness of the Company's internal control
structure and procedures for financial reporting when it files its Annual Report
on Form 10-K for the fiscal year ended December 29, 2007. Management has
commenced action to remediate the material weakness described above, including
an evaluation of the accounting management staff, systems and policies relating
to revenue recognition at PacketVideo and has initiated a management review of
sales contracts.
In order to provide our assessment of the effectiveness of our internal
control structure and procedures for financial reporting within the prescribed
period, 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
32
implement a continuous reporting and improvement process for internal control
over financial reporting.
Except as described above, during the three months ended June 30, 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.
33
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 Sates 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
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, the wireless
broadband products and technologies being developed by NextWave Broadband are
not expected to be commercially deployed or generate significant revenue prior
to fiscal 2008. 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 the 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 of PacketVideo. The Company's failure to
correctly apply software revenue recognition principles resulted from a lack of
34
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, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. 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
in our Annual Report on Form 10-K, filed with the SEC on March 30, 2007.
We will be required to make our first annual certification on our internal
controls over financial reporting in our Annual Report for the fiscal 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. We have identified that a material weakness exists related to
revenue recognition in our PacketVideo subsidiary. We also may identify
additional areas requiring improvement and may be required to design enhanced
processes and controls to address issues identified through this review. 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 June
30, 2007, the number of our employees has increased from 50 to 824 as a result
of organic growth and acquisitions. We acquired IPWireless in May 2007, GO
Networks in February 2007, CYGNUS Communications in February 2006 and
PacketVideo in July 2005 and we are still in the process of integrating
IPWireless and GO Networks. In addition, our PacketVideo subsidiary acquired SDC
Secure Digital Container AG in January 2007 and consummated two other
acquisitions in 2006.
To support our expanded research and development activities for our
NextWave Broadband business and the anticipated growth in our 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
Israel, Germany, Switzerland, the United Kingdom, Finland, Japan, 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
35
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
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
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 half of 2008. However, we may not able to
36
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 BENEFICIALLY TO US.
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 infringe 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 manufacture 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
37
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
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.
38
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 intellectual property 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
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 Canada, Croatia, Germany, Japan, Switzerland and Slovakia and have
additional operations located in Finland, Germany, Israel, Japan, 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. In addition, 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. 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.
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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 six months
ended June 30, 2007, PacketVideo's sales to Verizon Wireless Communications and
IPWireless' sales to T-Mobile International accounted for 54% and 22%,
respectively, of our revenues. We expect that these businesses will continue to
generate a significant portion of their 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
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 INTEND TO EXPAND OUR BUSINESS THROUGH ADDITIONAL ACQUISITIONS AND INVESTMENTS
FOR WHICH WE MAY REQUIRE SIGNIFICANT ADDITIONAL CAPITAL, BUT WE MAY NOT BE ABLE
TO OBTAIN ADDITIONAL FINANCING ON FAVORABLE TERMS OR AT ALL.
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 and
PacketVideo acquisitions, we have made investments in a number of companies
including Hughes Systique, Inquam Broadband, WiMAX Telecom and IPMobile 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. While we
estimate that our revenues, existing cash and short-term investments and
financing activities will be sufficient to fund our operating activities aand
contractual commitments at least through 2008, we may need to secure significant
additional capital in the future to implement changes to, or expansions of, our
business plan and to become cash flow positive. Sources of additional capital
may include public or private debt and equity financings. To the extent that
other attractive opportunities to acquire complimentary businesses or additional
spectrum arise, we may need to raise additional funds to capitalize on such
opportunities. Covenants in the indenture governing our senior secured notes
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;
40
O sell all or substantially all of our assets or consolidate or merge
with or into other companies;
O repay existing indebtedness; and
O engage in transactions with affiliates.
A breach of any of these covenants 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
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 rules and
regulations applicable to telecommunications providers, commercial mobile
service providers or common carriers 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
41
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
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. There is no guarantee that licenses
we hold or lease will remain in full force and effect or be renewed.
42
NEW FCC CONCEPTS IMPACTING SPECTRUM USE COULD AFFECT OUR USE OF WIRELESS
SPECTRUM.
The FCC has initiated a number of proceedings to evaluate its rules and
policies regarding spectrum licensing and usage. For example, it is considering
new concepts that might permit unlicensed users to "share" our licensed spectrum
to the extent the FCC believes harmful interference will not occur. These new
uses could adversely impact our utilization of our licensed spectrum and our
operational costs.
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 specification 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. 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.
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
At June 30, 2007, 92.6 million shares of our common stock were
outstanding. Up to 53.0 million additional shares of our common stock may be
issued upon the exercise or conversion of warrants, options, and shares of our
Series A Senior Convertible Preferred Stock that have been issued or granted. In
addition, up to $142 million of our common stock may be issued as additional
consideration to former IPWireless shareholders and under the IPWireless
Employee Stock Bonus Plan upon the achievement of certain revenue milestones
relating to IPWireless' public safety business and TDtv business and up to $30.6
million of our common stock may be issued as additional consideration to former
GO Network shareholders and under the GO Networks Employee Stock Bonus Plan upon
the achievement of certain revenue milestones relating to the sales of GO
Network's Wi-Fi base station products. At June 30, 2007, we had options
outstanding to purchase 17.8 million shares of our common stock at a weighted
average exercise price of $7.37 per share and warrants outstanding to purchase
0.5 million shares of our common stock at an exercise price of $6.00 per share.
We also had warrants outstanding at June 30, 2007, to purchase 1.9 million
43
shares of our common stock for $0.01 per share pursuant to the Warrant
Agreement, dated July 17, 2006, among the Company and the initial purchasers of
our senior notes. In addition, 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 shareholders of the Company, including
NextWave Wireless Chairman and CEO, Allen Salmasi, and from 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. If all shares of Series A Preferred Stock
were converted at June 30, 2007, NextWave would be obligated to issue 32.8
million shares of its common stock. Assuming that we do not elect to pay
dividends in cash prior to March 2011, if all shares of Series A Senior
Convertible Preferred Stock were converted at such time, we would be obligated
to issue 43.5 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 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
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 our Series A Preferred Stock on any national
securities exchange or automated quotation system. The Series A Preferred Stock
is not currently eligible for trading in the PortalSM Market of the Nasdaq Stock
Market, Inc. and there can be no assurance at this time that we will obtain such
eligibility. 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
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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 Notes
contain limitations on our ability to pay the liquidation preference in cash
while the Senior Notes remain outstanding.
Pursuant to the terms of our Senior 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 our Series A Preferred Stock for cash or to pay dividends
on the Series A 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;
45
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 fluctuating market demand for WiMAX services:
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 common stock and Series A
Preferred Stock representing approximately 40.0% of the voting power of our
capital stock as of June 30, 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.
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 COMMON STOCK 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, no
analysts cover our Company. 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
46
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.
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:
47
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
(a) The Company's current report on Form 8-K filed on April 12, 2007
contains a description of the Agreement and Plan of Merger by and among
NextWave, IPWireless, Inc., IPW, LLC and J. Taylor Crandall, pursuant to which
the Company agreed to distribute unregistered shares of its common stock to
former stockholders of IPWireless, Inc. upon the consummation of the Company's
acquisition of IPWireless, Inc. The Company's current report on Form 8-K, dated
filed on May 17, 2007, contains a description of the distribution of
unregistered shares of its common stock to former stockholders of IPWireless,
Inc. in connection with the consummation of the IPWireless acquisition by the
Company on May 11, 2007.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 17, 2007.
(b) See (c) below.
(c) PROPOSAL I. The following members of the Board of Directors
were elected:
TOTAL VOTES TOTAL VOTES
FOR WITHHELD
----------- -----------
James C. Brailean 103,017,676 1,529,180
William H. Webster 102,833,773 1,713,249
PROPOSAL II. A proposal to amend the NextWave Wireless Inc. 2005
Stock Incentive Plan to increase the number of shares of common stock available
for issuance thereunder from 12,500,000 to 27,500,000 shares was approved by
78,205,377 affirmative votes vs. 7,544,458 negative votes, with 2,449,321
abstentions.
48
PROPOSAL III. A proposal to ratify the selection of Ernst and Young
LLP as independent registered public accounting firm to audit the consolidated
financial statements of NextWave and its subsidiaries for the year ended
December 29, 2007 was approved by 104,518,064 affirmative votes vs. 14,516
negative votes with 15,099 abstentions.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
10.1 Agreement and Plan of Merger, dated as of April 6, 2007, by
and among NextWave Wireless Inc., IPW, LLC, IPWireless, Inc.
and J. Taylor Crandall, as Stockholder Representative
(incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K of NextWave Wireless Inc. filed April 12,
2007)
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
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)
August 14, 2007 By: /s/ George C. Alex
-----------------------------------
(Date) George C. Alex
Executive Vice President and
Chief Financial Officer
50
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
------------ --------------------------------------------------------------
10.1 Agreement and Plan of Merger, dated as of April 6, 2007, by
and among NextWave Wireless Inc., IPW, LLC, IPWireless, Inc.
and J. Taylor Crandall, as Stockholder Representative
(incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K of NextWave Wireless Inc. filed April 12,
2007)
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.
51