Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 30, 2006
OR
o
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
(Exact
name of registrant as specified in its charter)
Delaware
|
20-5361630
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or organization)
|
Identification
No.)
|
|
|
12670
High Bluff Drive
|
|
San
Diego, California
|
92130
|
(Address
of principal executive offices)
|
(zip
code)
|
Registrant’s
telephone number, including area code: (858)
480-3100
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange on which registered
|
|
|
|
Common
Stock, par value $0.001 per share
|
|
NASDAQ
Global Market
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes o No
x
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 o
Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. x
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 o Accelerated
Filer o 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 o No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 2006 is not determinable, as shares of the registrant
were not publicly traded as of June 30, 2006. The aggregate market value of
the
voting stock of the registrant on March 21, 2007 held by non-affiliates was
approximately $439,244,442, based on the closing stock price as reported by
the
Nasdaq Global Market.*
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 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
o
As
of
March 21, 2007, there were outstanding 84,470,085 shares of common stock of
the
registrant.
*
Excludes the common stock held by executive officers, directors and holders
of
more than 10% of the common stock outstanding as of March 21, 2007. This
calculation does not reflect a determination that such persons are affiliates
for any other purposes.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information contained in the Proxy Statement for the 2007 Annual Meeting of
Stockholders of the registrant is incorporated by reference into Part III of
this Form 10-K.
NEXTWAVE
WIRELESS INC.
Table
of Contents
Item
|
|
Page
|
|
PART
I
|
|
|
|
|
1
|
BUSINESS
|
|
1A
|
RISK
FACTORS
|
|
1B
|
UNRESOLVED
STAFF COMMENTS
|
|
2
|
PROPERTIES
|
|
3
|
LEGAL
PROCEEDINGS
|
|
4
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
|
|
|
PART
II
|
|
|
|
|
5
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
6
|
SELECTED
FINANCIAL DATA
|
|
7
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
7A
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
9
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
9A
|
CONTROLS
AND PROCEDURES
|
|
9B
|
OTHER
INFORMATION
|
|
|
|
|
|
PART
III
|
|
|
|
|
10
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
|
11
|
EXECUTIVE
COMPENSATION
|
|
12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
|
13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
14
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
|
|
|
|
|
PART
IV
|
|
15
|
EXHIBITS
|
|
|
SIGNATURES
|
|
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K and other reports, documents and materials we will
file with the Securities and Exchange Commission (the “SEC”) contain, or will
contain, disclosures that are forward-looking statements that are subject to
risks and uncertainties. All statements other than statements of historical
facts are forward-looking statements. These statements, which represent our
expectations or beliefs concerning various future events, may contain words
such
as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,”
“estimates,” or other words of similar meaning in connection with any discussion
of the timing and value of future results or future performance. These
forward-looking statements are based on the current plans and expectations
of
our management and are subject to certain risks, uncertainties (some of which
are beyond our control) and assumptions that could cause actual results to
differ materially from historical results or those anticipated. These risks
include, but are not limited to:
|
·
|
our
limited relevant operating history;
|
|
|
|
|
·
|
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;
|
|
·
|
our
ability to manage growth or integrate recent or future
acquisitions;
|
|
·
|
competition
from alternative wireless technologies and other technology
companies;
|
|
·
|
our
ability to develop and commercialize mobile broadband products
and
technologies;
|
|
·
|
the
ability of vendors to manufacture commercial WiMAX equipment and
devices;
|
|
·
|
consumer
acceptance of WiMAX technology;
|
|
·
|
PacketVideo’s
ability to grow its resources to support larger numbers of device
manufacturers and wireless
carriers;
|
|
·
|
changes
in government regulations;
|
|
·
|
changes
in capital requirements;
|
|
·
|
any
loss of our key executive officers;
and
|
|
·
|
the
other risks described under “Risk
Factors.”
|
There
may
also be other factors that cause our actual results to differ materially from
the forward looking statements.
Because
of these factors, we caution you that you should not place any undue reliance
on
any of our forward-looking statements. These forward-looking statements speak
only as of the date of this annual report and you should understand that those
statements are not guarantees of future performance or results. New risks and
uncertainties arise from time to time, and it is impossible for us to predict
those events or how they may affect us. Except as required by law, we have
no
duty to, and do not intend to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
PART I
ITEM 1.
Business
In
this Annual Report on Form 10-K, the words “NextWave”, the “Company”, “we”,
“our”, “ours”, and “us” refer to NextWave Wireless Inc. and, except as otherwise
specified herein, to our subsidiaries. Our fiscal year ended on December 30,
2006.
We
are an
early-stage wireless technology company that develops next-generation mobile
broadband and wireless multimedia products and technologies. Our products
and technologies are designed to make wireless broadband faster, more reliable
and more affordable. At present, our customers include many of the largest
mobile handset and wireless service providers in the world.
We
believe that wireless 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. Our business activities are focused on developing
products, technologies and network solutions that provide consumers and
businesses with affordable, high-speed, mobile access to the information and
multimedia content they want.
Our
wireless broadband products and technologies developed and marketed through
our operating subsidiaries, each of which is focused on specific and critical
links in the global mobile broadband ecosystem:
NextWave
Broadband Inc. - A family of mobile broadband semiconductor products 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 other
converged mobile devices; and
GO
Networks, Inc. - Carrier-class, wide-area, mobile Wi-Fi systems.
NextWave
Broadband Inc.
Our
Advanced Technology Group, a division of NextWave Broadband Inc., 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. In addition, our Advanced Technology Group is developing
wireless network components and a family of handset and media player reference
designs to highlight the features of the Company’s 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:
· |
Improve
the performance of and economics of WiMAX and Wi-Fi 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 hi-fidelity audio,
two-way video telephony and real-time gaming;
|
· |
Improve
the performance, power consumption and cost characteristics of mobile
broadband enabled subscriber terminals; and
|
· |
Improve
the degree of interoperability and integration between Wi-Fi and
WiMAX
systems for both Local Area Networks (LANs) and Wide Area Networks
(WANs);
|
· |
Improve
the efficiencies, costs, performance of video and audio broadcast
applications over WiMAX networks; and
|
· |
Improve
service provider economics and roaming capabilities by enabling WiMAX
networks and WiMAX enabled devices to seamlessly operate across multiple
frequency bands including the use of certain unlicensed
bands.
|
.
Through
our Network Solutions Group, also a division of NextWave Broadband, we
intend to
offer service provider customers a full array of network services, including
RF
and core network design services, network implementation and management
services
and back-office service 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 test site in Henderson,
Nevada. We
intend
to utilize this test site to demonstrate our technical and product capabilities
to wireless service providers, cable operators, Internet service providers
and
media/content companies, who are interested in deploying mobile WiMAX networks
that operate on spectrum owned or leased by the Company in the U.S. and
internationally while utilizing network and device equipment that incorporate
our products and technologies. Our spectrum footprint in the U.S. covers
a
population of over 248 million people, or POPs, and includes many of the
largest
metropolitan areas in the country. In addition, NextWave Wireless has acquired
nationwide spectrum in Germany through its majority-owned company, Inquam
Broadband.
PacketVideo
Corporation.
Through
our PacketVideo subsidiary, we supply device-embedded multimedia software
to
many of the largest wireless handset manufacturers and wireless carriers
in the
world, who use it to transform a mobile phone into a feature-rich multimedia
device that provides people 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 CDMA and GSM. To date, more than 110 million PacketVideo powered
phones have been shipped worldwide by companies such as Motorola, Samsung,
LGE,
Sony Ericsson, and Nokia. PacketVideo
has been contracted by some of the largest carriers in the world, such as
Verizon Wireless, Vodafone, NTT DoCoMo, Orange and T-Mobile to design and
implement the embedded multimedia software capabilities contained in their
handsets.
PacketVideo
has made investments in developing and acquiring a wide range of capabilities
to
provide its customers with solutions to support and accelerate digital media
convergence within the home and office via mobile devices and consumer
electronics that utilize PacketVideo’s device-embedded software and the
communications protocols standardized by the Digital Living Network
AllianceTM
(DLNATM).
An
example is PacketVideo’s network-based PacketVideo ExperienceTM
platform
that provides for content search, discovery, organization and content
delivery/sharing between devices connected to a private IP-based network
on a
one-on-one or one-to-many basis PacketVideo’s patented Digital Rights Management
(DRM) capability, already serving many carriers globally, further provides
for a
flexible solution that protects the multimedia content used or shared by
PacketVideo-enabled devices. We expect that the continued growth in global
shipments of high-end handsets with multimedia capabilities, increasing demand
for home/office digital media convergence, 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 handset and consumer electronic device manufacturers, and service
providers. In addition, we intend to leverage PacketVideo’s established market
presence and unique software expertise to be a leading global provider of
the
next-generation of device-embedded software modules needed for the efficient
capture, transmission and manipulation of multimedia content by fourth
generation (4G) wireless broadband mobile devices.
GO
Networks, Inc.
Through
our GO Networks subsidiary, which we acquired in February 2007, we offer
carrier-class mobile Wi-Fi network systems to commercial and municipal
service
providers worldwide. By utilizing advanced xRF™ adaptive beamforming smart
antenna technology and a cellular-mesh Wi-Fi architecture, the GO Networks
system is designed 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.
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
expect them to provide synergistic value to each other and collectively
drive
accelerated market penetration and share of the wireless broadband market
for
the Company.
Mobile
Broadband Market
The
Internet has evolved into a global system that billions of people depend
on
every day. For many, the Internet has become an essential enabler of their
business and personal lives and is the primary means by which they communicate
and access information. We believe that a major driver of Internet usage is
the
rapidly growing adoption of DSL and cable/satellite broadband services that
enable people to access the Internet at very high data speeds. Due to this
broadband connectivity, dependency on the Internet is increasing rapidly.
Millions of people now use the Internet as a major source for multimedia
content
such as music, movies and television, as a virtual store to purchase products
and services, as a social networking and real-time gaming tool, and to engage
in
real-time, two-way voice, data, and video communications. However, while
dependency on the Internet continues to grow, these types of critical Internet
services and applications become inaccessible to most people whenever they
leave
their home or business. This is because widespread deployment of wireless
networks capable of providing affordable mobile or nomadic wireless broadband
service, with data rates and connection quality comparable to DSL and cable,
has
not yet occurred in the United States and most other
countries.
We
believe that market demand for mobile broadband services 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 mobile broadband will do for the Internet what
cellular technology has done for wireline telephony — extend
high-speed connectivity outside the home or office and enable people to remain
connected to the information and content they need, wherever they go. We call
this “Wireless 2.0”. We are developing our products and technologies to help
make “Wireless 2.0” a reality and to provide people the ability to use a
next-generation mobile wireless device to:
|
·
|
Remain
connected to their favorite music, movies and
television;
|
|
·
|
Participate
in interactive, real-time gaming;
|
|
·
|
Easily
establish high-speed connections to their desired web
content;
|
|
·
|
Remotely
access their personal Digital Video Recorders and watch recorded
television;
|
|
·
|
Remotely
view real-time images from home or office security
cameras;
|
|
·
|
Conduct
two-way video conferences;
|
|
·
|
Capture,
transmit or receive high resolution digital photos or video to
friends,
family members, and business
associates;
|
|
·
|
Engage
in a wide-range of multimedia shopping services customized via
location
based services;
|
|
·
|
Conduct
a broad range of financial transactions;
|
|
·
|
Make
“landline quality”, VoIP telephone calls;
and
|
|
·
|
Participate
in social network activities with portable devices away from
home or
office.
|
While
the
mobile broadband transformation of the wireless communications market is still
in an early stage of development, we believe it is already having a profound
effect on service providers, network infrastructure manufacturers, device
manufacturers and content distributors who will need to adapt their businesses
to an industry model based on delivering mobile broadband services. Such
adaptations will require network operators to make major investments in new
wireless broadband network infrastructure equipment and technologies, will
require the introduction of new classes of mobile broadband handsets, the
development of next-generation device-embedded multimedia software and new
wireless
communication technologies to maximize the use of available spectrum. We
intend to focus our business activities to capitalize on these market
trends.
We
believe that several factors are already beginning to drive global market demand
for fourth generation (4G) mobile broadband services like mobile
WiMAX:
|
·
|
Increasing
global demand by mobile phone users for easy and affordable mobile
access
to the Internet and on-line multimedia content sources on a fully
mobile
basis;
|
|
·
|
A
growing awareness of the limitations of existing third generation
(3G)
wireless networks;
|
|
·
|
Broader
availability of high-quality, multimedia content available for
distribution over wireless
networks;
|
|
·
|
Mandates
by public safety agencies for reliable mobile broadband
services;
|
|
·
|
The
ability of wireless technologies such as WiMAX to serve as a
cost-effective way to deliver broadband to millions of homes in
the U.S.
and abroad with no or limited (e.g., dial-up) Internet connectivity;
and
|
|
·
|
Increasing
market demand for fully integrated wireless local area network
(“LAN”)
and wide
area network (“WAN”)
solutions
that
utilize both Wi-Fi and WiMAX technologies for converged devices,
appliances and consumer
electronics.
|
IEEE
802.16 WiMAX Standard
WiMAX
is
an acronym that stands for Worldwide Interoperability for Microwave Access
and
is a certification mark established by the WiMAX Forum for products that
are
compliant with the Institute of Electrical and Electronics Engineers (“IEEE”)
802.16 set of standards. WiMAX, which has now become synonymous with the
set of
IEEE 802.16 standards, specifies an air interface for wireless Metropolitan
Area
Networks (MANs). Published in April of 2002, the original 802.16 standard
specified equipment operating in the 10-66 GHz frequency band which required
tall transmission towers and line-of-sight connectivity making the standard
most
suitable to provide high-bandwidth wireless backhaul services. Subsequently,
the
IEEE published a series of amendments to the standard to support lower radio
frequencies below 2-11 GHz, to allow non line-of-sight connectivity, and
to
address interoperability issues. In 2004, the IEEE consolidated these amendments
into a new standard called IEEE 802.16-2004 which is often referred to as
IEEE
802.16d.
In
December of 2005, the IEEE published the 802.16e amendment to the standard,
often referred to as mobile WiMAX, which specified a system to support mobile
broadband services via portable devices such as laptops, personal digital
assistants (PDA), mobile phones, and other converged devices. The 802.16e
amendment includes several enhancements to improve mobile system performance
including support for inter-cell handoff, sleep modes to support low-power
mobile devices and support for broadcast/multicast services. In parallel,
in a
coordinated effort with the IEEE and the WiMAX Forum, the Telecommunications
Technology Association (“TTA”)
in Korea
developed WiBro, an 802.16-based standard, which includes support for mobility
based on the 802.16e amendment. Efforts supported by TTA and IEEE 802.16
to
harmonize the WiBro standard with the IEEE 802.16e standard were
successful.
Mobile
WiMAX is one of several wireless air interface technologies that are currently
being deployed or developed to enable the delivery of mobile broadband services
to the market. These alternative technologies include CDMA2000, UMTS (Universal
Mobile Telecommunications System) and 802.20 (Mobile-Fi). Some of these
technologies, such as CDMA 2000 and UMTS, have already been deployed by major
wireless carriers and have achieved significant levels of market penetration.
We
believe that mobile WiMAX will also become a major, global wireless broadband
standard and will achieve a significant level of global adoption for the
following reasons:
|
·
|
Mobile
WiMAX enjoys broad support from wireless industry leaders. Members
of the
WiMAX Forum, an industry organization dedicated to promoting and
certifying WiMAX products, include Alcatel, AT&T, Bell Canada, British
Telecom, Broadcom, Cisco, Deutsche Telekom, Ericsson, Intel, Korea
Telecom, LG Electronics, Lucent, Motorola, NEC, Nokia, Nortel,
Samsung,
Siemens, Sprint Nextel and Texas
Instruments.
|
|
·
|
Companies
such as Intel, who are interested in seeing mobile WiMAX integrated
into
laptops and other mobile computing platforms, are actively working
to
drive the market adoption of WiMAX and the deployment of WiMAX
networks.
|
|
·
|
Domestic
and international support by network operators for WiMAX is growing.
To
date, WiMAX networks have been announced in the U.S. by Sprint-Nextel
and
Clearwire. In addition, numerous WiMAX networks have been announced
by
operators in Europe, Asia, South America, and the Middle East.
Activity is
under way within the ITU to include mobile WiMAX in the family
of IMT-2000
approved standards.
|
|
·
|
Mobile
WiMAX economics, including network construction and operating costs,
are
expected to be competitive with those of alternative mobile broadband
technologies.
|
|
·
|
Mobile
WiMAX incorporates quality of service capabilities that are required
to
efficiently handle quality-of-service dependent applications such
as VoIP
telephony, video conferencing and real-time, interactive
gaming.
|
|
·
|
Mobile
WiMAX network performance, including the ability to handle the
high
volumes of traffic associated with mobile TV, mobile video-on-demand
and
video telephony are expected to be competitive with alternative
mobile
broadband technologies.
|
Competitive
Strengths
A
highly accomplished team of wireless technology
professionals.
Our
technology development efforts are led by a team of highly accomplished
engineering veterans with broad experience in the development of wireless
communications technologies and solutions. Team members have led major
development initiatives at leading technology companies, such as Intel,
Motorola, Nokia, QUALCOMM and Texas Instruments. Together they have been
instrumental in developing some of today’s dominant wireless technologies.
Several members of our team, including our Chief Executive Officer, Allen
Salmasi, played key roles at QUALCOMM in the development and successful
commercialization of the CDMA wireless technology standard used worldwide
today.
Additional support for our technology development efforts if provided by
the
NextWave Technical Development Steering Committee which is comprised of some
of
the most accomplished individuals in the wireless industry, including Dr.
Andrew
Viterbi who co-founded QUALCOMM. In addition, our senior team has extensive
experience in building and operating wireless networks for companies such
as
Airtouch, AT&T Wireless, McCaw Cellular, Nextel and SprintPCS.
Attractive
wireless spectrum portfolio, well-suited to support mobile
broadband.
To
date, we have acquired licensed spectrum and entered into long-term leases
that
provide us with exclusive leasehold access to licensed spectrum throughout
the
U.S. Our spectrum portfolio covers approximately 248.9 million persons,
or POPs,
across the U.S., of which licenses covering 136.4 million POPs are covered
by 20
MHz or more of spectrum, and licenses covering an additional 98.7 million
POPs
are covered by at least 10 MHz of spectrum. In addition, a number of markets,
including much of the New York metropolitan region, are covered by 30 MHz
or
more of spectrum. We believe that this spectrum footprint, which includes
eight
of the top ten Cellular Market Areas (“CMAs”) and 15 of the top 20 CMAs in the
U.S., will be attractive to service providers who wish to offer 4G wireless
broadband services. Our spectrum resides in the 2.3GHz WCS, 2.5GHz BRS/EBS,
and
1.7/2.1 GHz AWS bands and offers propagation and other characteristics
suitable
to support high-capacity, mobile broadband services.
On
December 15, 2006, we acquired 3.5 GHz BWA spectrum in Germany. The
acquisition includes 42MHz of spectrum in all service areas. The licenses
vary
widely in terms of population and geographic coverage, as Koln/Dusseldorf,
Stuttgart/Karlbsruhe, Berlin/Brandenburg, Munster and Rhein/Main.
In
February 2007, Inquam Broadband participated in a
spectrum auction in Switzerland to acquire a nationwide license, consisting
of a
42MHz wide license in the 3.5 GHz frequency band and covering 7.5 million
POPs.
On March 5, 2007, Inquam was advised that it has met the license requirements
and that it will be awarded the license at the end of April at a price
of
$4.63 million, or $.015 per MHz POP.
On
March
2, 2007,
we
acquired WCS spectrum in Canada. The acquisition includes 30MHz of spectrum
in
all service areas. The licenses vary widely in terms of population and
geographic coverage, but include as Montreal, Ottawa, Edmonton, Quebec and
Winnipeg.
Unique
combination of silicon, software, systems engineering and
spectrum.
We have
assembled a unique combination of assets, including a world-class semiconductor
design and wireless technology development team, one of the world’s leading
providers of device-embedded multimedia software, a leading provider of
carrier-class, mobile Wi-Fi network systems, an experienced network design
and
operations team, and an attractive portfolio of licensed spectrum in the
U.S.
and abroad. We believe that the combination of these assets offers us an
advantageous position to develop and deliver our wireless broadband products
and
technologies to customers.
Integrated
business model.
We
believe that each of our operating subsidiaries represents an attractive
standalone business. However, we believe that our business units are highly
complementary to each other and together provide us with the ability to
adapt
our business model and allocate resources to maximize market share in a
rapidly
evolving industry
Well
established industry position.
Our
PacketVideo subsidiary has established strong commercial relationships
with the
wireless industry’s leading device manufacturers and network operators. Its
customers include leading handset manufacturers such as LGE, Motorola,
Nokia,
Sony-Ericsson, and Samsung as well as some of the world’s largest network
operators including NTT DoCoMo, Orange, T-Mobile and Verizon Wireless.
While
some of these customers have developed software solutions that overlap
or
augment certain PacketVideo software products, we believe that these
relationships will be highly valuable as we pursue strategic partnerships
and
begin to market current and future products, technologies and network
solutions.
Extensive
experience in building and operating wireless networks.
Our
senior team has extensive experience in building and operating wireless networks
for companies such as Airtouch, AT&T Wireless, McCaw Cellular, Nextel and
SprintPCS. Members of our Network Solutions Group have extensive experience
in
conducting field trials of numerous wireless broadband technologies and have
led
the development of a next-generation IP core network and back office system
(“BOSS”) designed specifically to enable the delivery of highly-differentiated
mobile broadband network services.
Integrated
WiMAX/Wi-Fi solutions.
Our GO
Networks subsidiary offers carrier-class, mobile Wi-Fi systems specifically
designed for wide-area deployments. We believe that Wi-Fi and WiMAX are
complementary technologies and that the most cost-effective solution to
provide
mobile broadband services on a wide-area basis is to often deploy hybrid
networks that utilize both technologies since
WiFi-enabled devices, including laptops, have been widely adopted by the
mass
consumer market.
In
addition, because GO Networks utilizes a cellular-mesh network architecture,
we
believe that GO Network customers represent opportunities for future Wi-Fi
to
WiMAX upgrades that utilize NextWave’s WiMAX products and technologies.
Business
Strategy
Our
strategy is to deliver a broad suite of technologically advanced wireless
broadband products and solutions to mobile subscriber terminal and wireless
network equipment manufacturers, wireless broadband service providers and
consumer electronic product companies. Our focus includes:
Develop
the key elements of a mobile WiMAX system. We
intend
to develop the key elements of an end-to-end mobile WiMAX/Wi-Fi network solution
that includes a family of WiMAX chipsets and network components. Our development
activities are focused on both sides of the radio connection, which we believe
will enable us to deliver a superior system solution to our customers. To
date,
we have made significant progress in our WiMAX development efforts and we
expect
to begin field testing elements of our chipset product line in 2007. These
field
testing activities will be part of a comprehensive technical field trial
of our
technologies in Henderson, Nevada. We expect to utilize this field trial
to
showcase the capabilities of our WiMAX/Wi-Fi technologies, and believe that
the
trial will be am important step towards successful commercialization of our
family of WiMAX/Wi-Fi products.
Market
our products and technologies to third parties.
We
intend to market our products and technologies worldwide to network equipment
and device manufacturers and to wireless broadband service providers. We
expect
that our marketing efforts will benefit from growing worldwide demand for
fully-mobile access to the Internet and the delivery of rich-media content
to
mobile devices. Similar to other wireless technologies, we believe that the
sale
or licensing of our chipsets, network components, software and device
technologies will generate a long-term, recurring revenue stream for our
company.
Form
strategic relationships with service providers who want to
offer wireless broadband services.
We
intend to make our spectrum available to service providers looking to deploy
next-generation wireless broadband networks that utilize our advanced products
and technologies. Potential service providers include wireless service
providers, cable operators, multimedia content distributors, applications
service providers and Internet service providers. We believe that a model
under
which service providers can utilize our spectrum to offer advanced wireless
broadband services will help accelerate sales of our mobile broadband products
and technologies.
Grow
and extend PacketVideo’s multimedia software business.
We
believe that the number of multimedia enabled smartphones as a percentage
of
global handsets shipped annually will rise significantly over the next
several
years. We will seek to maintain PacketVideo’s strong position in this growing
market through the growth and extension of its existing multimedia software
business. At present, the primary competitors for PacketVideo’s multimedia
software products are the internal multimedia design teams at the OEM
handset
manufacturers to whom PacketVideo markets its products and services.
Furthermore, we believe that the deployment of mobile broadband networks
will
spawn the development of entire new categories of software applications
that can
take full advantage of the distinctive mobility features inherent in
mobile
broadband systems. While we expect the competition from the OEM internal
multimedia design teams and other independent multimedia software providers
to
increase in the next few years, we expect PacketVideo will be able to
leverage
its
PacketVideo Experience platform and DRM capabilities to fortify its position
in
the mobile wireless and converged broadband software business.
Grow
our GO Networks mobile Wi-Fi business.
We
believe that the worldwide market for wide-area, mobile Wi-Fi networks
will
continue to grow and intend to pursue these opportunities by offering
customers
our advanced GO Networks Wi-Fi system. Because the GO Networks system
utilizes a
cellular-type architecture, we believe it can be upgraded to a hybrid
Wi-Fi/WiMAX solution at a total cost of ownership below that of competing
Wi-Fi
network solutions and intend to leverage this advantage in the marketplace.
Identify
and pursue acquisitions and investments to accelerate and improve the
development of our end-to-end wireless broadband
solutions.
We
believe there are a number of companies participating in the WiMAX technology,
wireless broadband and wireless multimedia sectors that could be attractive
acquisition or investment candidates. We continue to monitor these opportunities
and may pursue those which we believe will enhance our capabilities and product
offerings.
Acquire
additional wireless spectrum to complement our existing
portfolio.
We
believe that expanding our spectrum footprint will make our
spectrum more attractive to service providers. As such, we are actively
evaluating spectrum acquisition and leasing opportunities and will pursue
those
which allow us to obtain complementary spectrum at prices that we believe
to be
attractive. We also believe that there may exist opportunities to obtain
additional spectrum internationally which we will continue to
monitor.
Our
Products and Technologies
WiMAX /Wi-Fi
Semiconductors
Based
in
San Diego, California, our Advanced Technology Group (ATG), a division of
our
NextWave Broadband subsidiary, is creating a family of semiconductor products,
based on WiMAX and WiFi technology, to enhance the capabilities and economics
of
fixed and mobile WiMAX/Wi-Fi networks. These low-power, high-performance
semiconductor products are intended to enable fixed and mobile WiMAX/Wi-Fi
networks to more efficiently handle bandwidth-intensive and quality-of-service
dependent applications such as mobile television, VoIP telephony, streaming
audio and video, video conferencing and real-time gaming. While these
semiconductor products will include special features to allow them to fully
utilize NextWave’s licensed spectrum (BRS/EBS, WCS, AWS), they are also being
designed to operate on frequency bands most often allocated for mobile broadband
use on a global basis.
The
Advanced Technology Group is comprised of approximately 238
employees and full-time equivalent contractors and is led by a highly
accomplished team of veteran engineers with broad experience in the development
of advanced wireless communications technologies and products, such as
digital
baseband Application Specific Integrated Circuits (“ASICs”), radio frequency
technologies including multi-band Radio-Frequency Integrated Circuits (“RFICs”),
advanced antenna systems, software defined radios (SDRs), and mobile terminal
designs. Advanced Technology Group team members have led major technology
development initiatives at companies such as Intel, Motorola, Nokia, QUALCOMM
and Texas Instruments and have been instrumental in developing some of
today’s
dominant wireless technologies including CDMA. In addition, several key
members
of our technical team were leading contributors to the 802.16 family of
standards
We
believe that to fully optimize mobile WiMAX for the efficient delivery of
bandwidth-intensive multimedia applications requires a system approach that
encompasses all of the key elements of the WiMAX air interface. By adopting
this
approach, we expect to offer network infrastructure and device manufacturers
a
comprehensive suite of products including low-power WiMAX digital baseband
ASICs
and multi-band RFICs, software defined radio platforms and terminal device
reference designs.
To
develop its semiconductor products, ATG has organized its engineering resources
into several product development groups including: a) RFIC engineering
and
design team; b) digital baseband engineering team; c) systems engineering
team;
and c) BTS radio product group. In addition, ATG has established a large
team of
system engineers to create an end-to-end system that integrates the products
and
technologies developed by its various product teams. These development
activities are designed to produce an integrated platform of paired RF
and
baseband chipset families that will allow mobile device and network equipment
manufacturers to design a variety of products using NextWave silicon products.
· |
Digital
Baseband ASICs:
An ASIC is an integrated circuit or chip customized for a specific
purpose. Our family of WiMAX/Wi-Fi based digital baseband ASICs
under
development represent the core of our system architecture. Our
first
baseband WiMAX ASIC, the NW1100, is currently in the final stages
of
development and the final description of the circuit is expected
to be
sent to manufacture in Q3 2007. This ASIC includes many of the
enhancements that have been developed by ATG engineers and is designed
to
showcase and validate these innovations.. The family of baseband
ASIC that
ATG is developing include a wide array of interfaces to accommodate
a wide
range of device types including mobile handsets, PDAs, mobile PC
cards,
USB devices, and CPE modems. For this reason, ATG is also creating
a
family of device reference designs, including those for handsets
and media
players, that will highlight the features of its WiMAX ASIC
products.
|
· |
Radio
Frequency Integrated Circuits (RFICs):
An RFIC is part of the front-end of a radio system that receives
a radio
frequency signal, converts it to a lower frequency and modifies it
for
further processing. Designed to utilize multiple spectral bands to
improve
performance and flexibility, our RFICs are part of an advanced radio
frequency subsystem that is matched to our family of baseband ASICs
and is
expected to enable a mobile device to operate over a wide range of
operational frequencies without sacrificing overall performance.
We
believe that enabling WiMAX to operate over multiple frequency bands
will
significantly improve the economics of WiMAX network deployments
for the
following reasons:
|
|
-
|
WiMAX
network operators will have the ability to assemble a licensed
spectrum
footprint using multiple frequency bands as opposed to having to
acquire
scarce spectrum in a single frequency
band;
|
|
-
|
carriers
will have the ability to address network coverage and capacity
issues via
the acquisition of low-cost spectrum as opposed to costly cell
splitting;
|
|
-
|
the
ability of frequency-agile WiMAX devices to roam between multiple
WiMAX
networks will be facilitated; and
|
|
-
|
A
single chipset family capable of addressing markets worldwide
will permit
economies of scale and result in lower device costs.
|
Our
initial multi-band RFIC, the NW1200, was sent to manufacture in late
2006.
Sample chips
have undergone successful testing and evaluation. Additional testing
will take
place in combination with our NW1100 baseband WiMAX ACIS when available.
The
NW1200 RFIC operates in the 2.3-2.8 GHz and 3.3-3.8 GHz frequency bands
and is
designed for Time Division Duplexing (“TDD”) operation. The NW 2200 RFIC,
currently under development, is expected to operate in the same frequency
bands
as the NW 1100, but will also support the AWS band (1.7-2.1 GHz) and
will
operate in frequency division duplex (“FDD”) mode. Both RFICs are designed to
support WiMAX and Wi-Fi and are optimized to operate with the NextWave
family of
baseband WiMAX ASICS.
· |
Pico
Base Transceiver Station (BTS): A BTS, also known as a wireless
base
station, includes equipment needed to transmit and receive radio
signals
(transceiver) to and from subscriber devices, antennas, and the
electronics required to communicate with other network elements.
Unlike a
conventional BTS which can provide radio coverage over a radius
of several
miles, a pico BTS is much smaller in size and is intended to provide
low-cost capacity and coverage relief in very small geographic
areas.
NextWave is currently in the design phase of silicon products to
support a
PicoBTS/Access point product family. This design is currently being
implemented in field-programmable gate array (“FPGA”) form and will be
field tested later this year.
|
PacketVideo
Multimedia Software Products
Based
in
San Diego, our PacketVideo subsidiary has approximately 387 employees and
full-time equivalent contractors and is a global provider of embedded multimedia
software products for mobile devices. PacketVideo was formed as a Delaware
corporation in August 1998 and was privately held prior to its acquisition
by
NextWave in July 2005.
PacketVideo’s
software, which it licenses to the world’s leading mobile device manufacturers
and wireless carriers, transforms a mobile phone or other mobile device
into a
feature-rich multimedia device that allows people to stream, download,
and play
video and music, receive live TV, or engage in two way video telephony.
PacketVideo’s innovations and engineering leadership have led to breakthroughs
in content encoding, content delivery systems, and advanced multimedia-enabled
handset development around the world.
For
mobile device manufacturers, shorter product cycles and increasing demand
for
advanced technologies are driving collaboration with third party solution
providers, such as PacketVideo, to aid their product development. We believe
that PacketVideo’s technical capabilities and depth of knowledge are key reasons
why PacketVideo has been chosen by the world’s largest device manufacturers and
wireless carriers to help them quickly develop and introduce new multimedia
enabled handsets and multimedia services to the market. Over one hundred
million
handsets containing PacketVideo software have been shipped worldwide by
device
manufacturers including LGE, Motorola, Nokia and Samsung. In addition,
PacketVideo provides multimedia software solutions to some of the world’s
largest wireless carriers including NTT DoCoMo, Orange, T-Mobile and Verizon
Wireless. According to IDC, high-end mobile phones and converged mobile
devices
represented 20% of all mobile phones shipped in 2005. This percentage is
expected to increase to 45% of the more than one billion handsets forecasted
to
be shipped in 2008. We
believe that this trend, combined with forthcoming software from PacketVideo
that contains major enhancements, will enable PacketVideo to maintain its
strong
market share position.
PacketVideo’s
current suite of device embedded software solutions are based on a modular
architecture to enable rapid integration with the industry’s leading hardware
platforms and operating systems.
PacketVideo
Multimedia Framework.
PacketVideo’s core software product powers the playback of video and music in
millions of mobile phone handsets worldwide. The PacketVideo Multimedia
Framework is an embedded client with modular options to enable the downloading,
streaming, and playback of content files based on all major media formats.
PacketVideo Multimedia Framework codec modules include: WMA 9/10/Pro, WMV
9,
AAC, HE-AAC, HE-AAC V2, AVC/H.264, MPEG-4, Real Audio, Real Video, MP3, MP3
PRO,
AMR and WB-AMR.
PacketVideo
Connect.
PacketVideo Connect is a family of customizable software products that
auto-detect and link popular devices through the home, allowing end-users
to
share and enjoy all kinds of mobile-multimedia content on the devices of
their
choice. The PacketVideo Connect server is certified by the Digital Living
Network Alliance (DLNA), a consortium of more than 300 consumer electronics
and
technology companies. The software is interoperable with hundreds of other
DLNA-certified home electronic and mobile devices.
PacketVideo
Mobile TV Solutions.
PacketVideo’s mobile TV solutions enable mobile broadcast TV. Features include
live streaming TV, video-on-demand, high-performance multimedia codecs,
picture-in-picture, personal video recorder, fast channel changing, and support
for PacketVideo or third-party Electronic Service Guide
PacketVideo
Multimedia Communications.
PacketVideo's two-way video telephony software solution is 324M-compliant
real-time video telephony—for two-way voice and video conversations and video
conferencing. Features include picture-in-picture, call recording option,
Push-to-Talk (VOIP support) and SIP support for push-to-view.
PacketVideo
Imaging Solutions.
PacketVideo's advanced imaging engine renders photos, organizes albums and
edits
pictures, all on the handset. PacketVideo’s imaging technology significantly
improves the user experience with rapid access to images created by the mobile
device’s camera, with the additional benefit of highly optimized memory. In
addition, the software enables users to record their own audio, video and
digital photos directly on the handset.
PacketVideo
Digital Rights Management (“DRM”) Solutions.
A
mobile implementation of content protection and business rules for commercial
media consumption. DRM types supported include: WindowsMedia DRM, OMA 1.0
and
2.0, SDC - Java DRM, and NDSF. In addition, PacketVideo
owns, and is further developing SDC - Java DRM.
PacketVideo
Experience Application.
PacketVideo Experience is a mobile web 2.0 media services application designed
to add value to a mobile operator’s existing content delivery services by
managing and serving data about media content, rather than the media payload.
It
is designed to enable a personalized music entertainment experience for users
based on their personal preferences:
The
introduction of affordable, high-speed Internet service via DSL and cable
broadband provided software developers with a unique opportunity to develop
entire new categories of software applications. Many of these applications
focused on the capture, manipulation, and transmission of multimedia content
such as music, images, and video. Several, such as iTunes, Windows Media
Player,
Google Video, and peer-to-peer applications such as BitTorrent have achieved
extremely high levels of popularity and, in some cases, spawned businesses
with
market valuations that exceed those of the companies that actually provide
broadband connections to end-users. We believe that a similar opportunity
to
develop innovative software applications, optimized for the mobile environment,
exists with the wide scale introduction of affordable mobile broadband
services.
The
emergence of mobile broadband will necessitate the development of new categories
of software applications optimized to take full advantage of the distinctive
mobility features inherent in mobile broadband systems. To be successful,
developers of these new software applications must accommodate the complexities
(e.g., variable connection rates) and unique capabilities (e.g., mobile
positioning) associated with wireless broadband and will need to overcome
mobile
device (e.g., smartphones) design restrictions such as limited memory,
power
limitation and on-board processing capabilities. In addition, mobile application
software developers will need to fully understand underlying 4G wireless
broadband network technologies such as WiMAX to ensure optimal performance
of
their multimedia software applications in a challenging wireless environment.
We
expect that global deployments of mobile broadband networks will create
a unique
opportunity for software developers such as PacketVideo to create innovative
multimedia software applications and server platforms optimized for the
mobile
and converged media environment.
We
believe that PacketVideo is well positioned to help develop these types of
next-generation, mobile broadband software applications for the following
reasons:
|
·
|
PacketVideo
is already a global provider of device embedded, mobile multimedia
software and has broad experience in developing software for memory
and
processor limited mobile devices.
|
|
·
|
As
part of NextWave, PacketVideo will have full access to the company’s
extensive mobile broadband technology development activities and
will be
able to develop new multimedia software applications that take
full
advantage of the unique capabilities we are designing into our
products
and technologies.
|
|
·
|
Unlike
the aforementioned PC software environment, there are no dominant
mobile
device operating systems and, in fact, over two dozen such operating
systems are currently in use by mobile handset manufacturers worldwide.
PacketVideo’s software has been engineered to work with virtually all of
the most popular mobile device operating systems in use today.
By
maintaining this flexible approach, we believe that PacketVideo’s next
generation of mobile broadband software will be well-positioned
to enjoy
continued wide scale industry
adoption.
|
GO
Networks Mobile Broadband Wireless Network Systems
Based
in
Mountain View, CA, with a major technology development center located in
Tel
Aviv, Israel, our GO Networks subsidiary has approximately 67 employees and
provides commercial and municipal service providers with high-performance
mobile
Wi-Fi systems. As noted above, GO Networks, inclusive of these employees,
was
acquired in February 2007.
GO
Networks’ Mobile Broadband Wireless system combines xRFTM
smart-antenna technology with a cellular-mesh Wi-FI architecture to provide
commercial and municipal service providers with a cost-effective solution
to
support bandwidth-intensive mobile broadband services such as video streaming,
real-time gaming, video telephony and other types of multimedia applications.
xRF
Adaptive Beamforming Smart Antenna Technology:
GO
Networks’ xRF adaptive smart-antenna technology is based on a patent-pending
implementation of adaptive beamforming and smart-antenna signal processing
algorithms and is one of the industry’s only smart-antenna implementations
designed for cellular-mesh Wi-Fi solutions.
On
the
receive side, xRF technology is designed to address the challenges of multipath
(where a transmitted signal follows several propagation paths towards the
receiver, causing time delay and delay spread that results in higher bit
error
rates and degraded performance) by constructively combining phase shifted
signals received through reflections, resulting in significant improvements
to
the signal-to-noise ratio (SNR), particularly in multipath-prone
non-line-of-sight (NLOS) scenarios.
On
the
transmit side, xRF technology focuses radio energy towards the Wi-Fi client,
effectively reducing the amount of multipath the client’s receiver is exposed to
and increasing the system’s range and throughput. The xRF technology allows GO
Networks’ Mobile Broadband Wireless base stations to comply with point-to-point
rules and operate at a transmit power much higher than conventional Wi-Fi
systems, resulting in improvements to range, capacity and throughput in
the
coverage area.
GO
Networks’ xRF technology is also one of the industry’s only smart antenna
technology that operates in a multi-channel access solution and supports
both
sectored and omni-directional base stations. xRF technology powers GO Networks’
single access channel pico base station and the multi-channel micro base
station
which transmits and receives over two simultaneous, non-synchronous 802.11
channels.
Cellular-Mesh
Wi-Fi:
GO
Networks Mobile Broadband Wireless cellular-mesh Wi-Fi architecture combines
cellular-style radio and mesh networking architecture. This architecture
uses a
meshed combination of “micro” and “pico” Wi-Fi base stations to provide
cost-effective Wi-Fi coverage. Mobile Broadband Wireless 2000 series micro
base
stations are used to provide top-down micro-cellular Wi-Fi coverage while
Mobile
Broadband Wireless 1000 series pico base stations provide complementary
street-level Wi-Fi coverage. Mesh
networking can significantly reduce the costs associated with operating
wide-area Wi-Fi networks, enable cost-effective street-level coverage,
and
simplify network configuration and reconfiguration.
The
GO
Networks’ Mobile Broadband Wireless system is comprised of the following network
elements:
· |
WLS
2100 Micro Cellular-Mesh Wi-Fi Sector Base Station:
The WLS 2100 is a 120 degree multi-radio sector panel designed for
easy
installation on building sides, rooftops, towers and utility poles.
The
WLS 2100 is equipped with two xRF-enabled 802.11 b/g access radios
and a
separate 802.11a channel for beamformed
user access and high-performance mesh backhaul.
|
· |
WLP
1100 Pico Cellular-Mesh Wi-Fi- Base Station:
The WLP 1100 is an omni-directional multi-radio weather-proof unit
intended for street-level pole/utility pole Wi-Fi applications. The
WLP
1100 is equipped with one xRF-powered 802.11 b/g access radio and
a
separate 802.11a channel for beamformed
user access and high-performance mesh networking and backhaul.
|
· |
MBW
EMS/NMS Platform:
The MBW EMS/NMS platform offers a sophisticated set of management
tools
for element management as well as network-wide performance monitoring
and
management. From the MBW EMS/NMS console, operators can proactively
monitor network and RF performance and dynamically reconfigure their
Wi-Fi
infrastructure, at the access point level or network-wide, to meet
varying
RF environments, network conditions, traffic and user loads.
|
Network
Services & Solutions
Based
in
Henderson, Nevada, our Network Solutions Group, a part of our NextWave
Broadband
subsidiary, intends to offer a full suite of network design and implementation
services to wireless service providers, including RF and core network design
service, network optimization and operation services, and back-office
application services. NSG is currently developing a WiMAX/Wi-Fi field test
in
Henderson, Nevada, to showcase its network support services and the company’s
wireless broadband products and technologies to service providers seeking
to
deploy next-generation networks. We intend to make our spectrum available
to
service providers looking to individually or jointly deploy next-generation
wireless broadband networks that utilize our advanced products and technologies.
Potential service providers include wireless service providers, cable operators,
multimedia content distributors, applications service providers and Internet
service providers. We believe that a model under which service providers
can
utilize our spectrum to offer advanced wireless broadband services will
help
accelerate sales of our mobile broadband products and
technologiesn.
Our
Network Solutions Group intends to offer participating service providers
with
the following network design and implementation services:
|
·
|
Network
operations center implementation;
|
|
·
|
IP
core network including security
integration;
|
|
·
|
Core
network integration;
|
|
·
|
Billing
and operational support systems;
|
|
·
|
Customer
support systems; and
|
|
·
|
Network
operations and maintenance, including Network Management Systems
(NMS).
|
Our
Network Solutions Group has approximately 65 employees and full-time equivalent
contractors with extensive backgrounds in building and operating wireless
networks and in designing and implementing back-office systems. Members
of the
Network Solutions Group have built and operated wireless networks for companies
such as AirTouch, AT&T Wireless, McCaw Cellular, Nextel and SprintPCS. Since
2003, our Network Solutions Group’s engineers have been operating a test-bed
facility in Henderson, Nevada, to evaluate the capabilities of various
wireless
technologies including various Wi-Fi products, 1xEV-DO, TD-CDMA and Flash-OFDM.
These technical evaluations included in-depth assessments of key performance
criteria including link budgets, spectral efficiencies, service quality,
data
rates, connection reliability, mobile capabilities, data link security
and
cost-per-bit economics.
In
parallel to its technology assessment initiatives, our Network Solutions
Group
has designed an advanced IP core network designed to support end-to-end IP
connectivity, reduce IP core network costs, and quickly enable new services.
During the same period, our Network Solutions Group also completed the design
and has begun implementation of an advanced back-office system architecture
consisting of billing, operational support systems (e.g., Mediation, LDAP
and
RADIUS) and customer care systems and has designed a network operations center
that will enable our Network Solutions Group to efficiently monitor the
performance of its managed networks.
Las
Vegas Test Site
To
demonstrate the features and capabilities of our WiMAX and Wi-Fi technologies,
our Network Solutions Group is developing a mobile WiMAX/Wi-Fi test site
in
Henderson, Nevada that will utilize our licensed spectrum and is expected
to
become operational in 2007. We intend to use this test site to demonstrate
the
performance of our integrated WiMAX and Wi-Fi mobile broadband technologies
and
our advanced IP core and back-office systems. We plan to further develop
this
test site with vendor partners and service providers and believe that
the test site will be an important step towards successful commercialization
of
our WiMAX/Wi-Fi products and technologies. In addition, to accelerate industry
development of WiMAX technologies, we intend to make our test site facilities
available to others in the WiMAX industry for the purpose of conducting product
evaluations and compatibility testing.
We
believe that Las Vegas represents an ideal location for testing, developing
and
evaluating a mobile WiMAX/Wi-Fi test site for a number of reasons,
including:
|
·
|
Las
Vegas is one of the fastest growing metropolitan areas in the country,
with demographics that are conducive gauging customer
acceptability;
|
|
·
|
Existing
tower inventory and flexible zoning procedures will reduce the
time
required to deploy a network;
|
|
·
|
As
the current operational headquarters for our Network Service Group,
most
of our network engineering and resources needed to design, build,
and
operate a mobile WiMAX/Wi-Fi network are already located in the
market;
and
|
|
·
|
Las
Vegas represents a highly attractive market
for potential service provider
customers.
|
Spectrum
Portfolio
Domestic
Spectrum Summary
To
date,
we have acquired spectrum and entered into long-term leases that provide
us with
exclusive leasehold access to licensed spectrum throughout the U.S. We
have
compiled a spectrum portfolio covering approximately 248.9 million persons,
or
POPs, across the country, and we will continue to identify and acquire
complementary spectrum to add to our portfolio. We have 20 MHz or more
of
spectrum covering 136.4 million POPs, and 10MHz of spectrum covering an
additional 98.7 million POPs. In a number of markets, including much of
the New
York metropolitan area, we have 30 MHz or more of spectrum. We are focused
on
acquiring authorizations to use licensed spectrum in the top 100 U.S. markets,
which have population densities and demographics most suitable to drive
adoption
of wireless broadband. We also have acquired licenses to use spectrum in
smaller
markets and plan to continue to acquire licenses in these markets to improve
our
overall coverage footprint.
To
date,
we have focused our efforts on obtaining licenses or other rights to use
2.3 GHz
Wireless Communication Service (“WCS”) spectrum, 2.5 GHz Broadband Radio Service
(“BRS”) and 2.5 GHz Educational Broadband Service (“EBS”) spectrum. We also
acquired 154 licenses in the 1.7GHz/2.1GHz band, known as the Advanced Wireless
Service (“AWS”) spectrum. We believe these spectrum bands are suitable for the
deployment of mobile WiMAX networks and we are engineering our products and
technologies to take advantage of the acquired licenses. We believe that
additional spectrum bands also are attractive for the deployment of mobile
WiMAX
networks and, in the future, we may obtain spectrum in those bands and
investigate ways to use unlicensed spectrum alongside our existing spectrum
holdings to strengthen our network operations.
Summary
information about our current spectrum holdings in the United States is set
forth below.
MEA
|
|
MEA
Name
|
POPs
(mm)
|
|
BRS/EBS
|
WCS
|
AWS
|
Top
Covered CMAs within MEA (POP Rank)
|
1
|
|
Boston
|
9.5
|
|
|
x
|
x
|
Boston
(9), Providence (50)
|
2
|
|
New
York City
|
31.9
|
|
x
|
x
|
x
|
New
York (2), Hartford (40)
|
3
|
|
Buffalo
|
1.5
|
|
|
x
|
|
Buffalo
(42), Chautauqua (113)
|
4
|
|
Philadelphia
|
8.8
|
|
x
|
x
|
x
|
Philadelphia
(5), Wilmington (75)
|
5
|
|
Washington
|
0.8
|
|
|
|
x
|
Virginia
10 - Frederick (218)
|
6
|
|
Richmond
|
1.4
|
|
|
|
x
|
Highland
(261), Roanoke (267)
|
7
|
|
Charlotte-Greensboro-Greenville-Raleigh
|
7.0
|
|
|
|
x
|
Greenville
(68), Columbia SC (89)
|
8
|
|
Atlanta
|
4.6
|
|
|
|
x
|
Chattanooga
(107), Augusta (115)
|
9
|
|
Jacksonville
|
2.8
|
|
|
x
|
x
|
Jacksonville
(39), Tallahassee (184)
|
10
|
|
Tampa-St.
Petersburg-Orlando
|
2.1
|
|
|
|
x
|
Florida
4 - Citrus (85), Sarasota (159)
|
11
|
|
Miami
|
1.2
|
|
|
|
x
|
Fort
Myers (99), Florida 1 - Collier
(168)
|
12
|
|
Pittsburgh
|
2.8
|
|
|
|
x
|
Pittsburgh
(22), Johnstown (283)
|
13
|
|
Cincinnati-Dayton
|
1.2
|
|
|
|
x
|
Huntington
(188), Charleston (255)
|
14
|
|
Columbus
|
0.7
|
|
|
|
x
|
Ohio
6 - Morrow (106), Ohio 9 -Ross (259)
|
15
|
|
Cleveland
|
5.2
|
|
|
x
|
x
|
Cleveland
(25), Akron (73)
|
16
|
|
Detroit
|
11.0
|
|
|
x
|
|
Detroit
(7), Grand Rapids (60)
|
17
|
|
Milwaukee
|
5.2
|
|
|
x
|
|
Milwaukee
(33), Madison (117)
|
18
|
|
Chicago
|
14.2
|
|
|
x
|
x
|
Chicago
(3), Gary (80)
|
19
|
|
Indianapolis
|
2.7
|
|
|
|
x
|
Indianapolis
(31), Indiana 6 - Randolph (302)
|
20
|
|
Minneapolis-St.
Paul
|
7.0
|
|
|
x
|
|
Minneapolis
- St. Paul (14), Hubbard (202)
|
21
|
|
Des
Moines-Quad Cities
|
2.9
|
|
|
x
|
|
Des
Moines (108), Davenport (161)
|
22
|
|
Knoxville
|
1.4
|
|
|
|
x
|
Knoxville
(86), Jonson City (110)
|
23
|
|
Louisville-Lexington-Evansville
|
2.0
|
|
|
|
x
|
Louisville
(51), Kentucky 3 - Meade (167)
|
24
|
|
Birmingham
|
0.9
|
|
|
|
x
|
Montgomery
(166), Butler (288)
|
25
|
|
Nashville
|
1.0
|
|
|
|
x
|
Tennessee
3 - Macon (144), Clarksville (311)
|
26
|
|
Memphis-Jackson
|
1.6
|
|
|
|
x
|
Tennessee
5 - Fayette (143), Tenn. 1 - Lake (181)
|
27
|
|
New
Orleans-Baton Rouge
|
2.0
|
|
|
|
x
|
New
Orleans (41), Mobile (91)
|
28
|
|
Little
Rock
|
2.8
|
|
|
|
x
|
Little
Rock (84), Fayetteville (158)
|
29
|
|
Kansas
City
|
3.3
|
|
|
x
|
|
Kansas
City (26), Topeka (317)
|
30
|
|
St.
Louis
|
5.0
|
|
|
x
|
x
|
St.
Louis (18), Illinois 8 - Washington (173)
|
31
|
|
Houston
|
7.3
|
|
|
x
|
x
|
Houston
(6), Louisiana 5 - Beauregard (137)
|
32
|
|
Dallas-Fort
Worth
|
12.8
|
|
x
|
x
|
x
|
Dallas-Fort
Worth (4), Austin (36)
|
33
|
|
Denver
|
5.4
|
|
|
x
|
|
Denver
- Boulder (17), Colorado Springs (87)
|
34
|
|
Omaha
|
1.8
|
|
|
x
|
|
Omaha
(72), Lincoln (228)
|
35
|
|
Wichita
|
1.2
|
|
|
x
|
x
|
Wichita
(94), Kansas 14 - Reno (387)
|
36
|
|
Tulsa
|
1.4
|
|
|
x
|
x
|
Tulsa
(58), Oklahoma 4 - Nowata (309)
|
37
|
|
Oklahoma
City
|
1.9
|
|
|
x
|
x
|
Oklahoma
City (46), Oklahoma 6 - Seminole (289)
|
38
|
|
San
Antonio
|
4.1
|
|
|
x
|
|
San
Antonio (27), McAllen (77)
|
39
|
|
El
Paso-Albuquerque
|
2.7
|
|
x
|
x
|
x
|
EL
Paso (71), Albuquerque (74)
|
40
|
|
Phoenix
|
5.6
|
|
|
x
|
|
Phoenix
(13), Tucson (53)
|
41
|
|
Spokane-Billings
|
2.1
|
|
|
x
|
x
|
Spokane
(120), Idaho 1 - Boundary (212)
|
42
|
|
Salt
Lake City
|
3.5
|
|
|
x
|
x
|
Salt
Lake City (34), Provo (128)
|
43
|
|
San
Francisco-Oakland-San Jose
|
15.0
|
|
|
x
|
x
|
San
Francisco (12), Sacramento (24)
|
44
|
|
Los
Angeles-San Diego
|
24.9
|
|
x
|
x
|
x
|
Los
Angeles (1), San Diego (15)
|
45
|
|
Portland
|
4.0
|
|
|
x
|
x
|
Portland
(23), Salem (147)
|
46
|
|
Seattle
|
5.1
|
|
|
x
|
|
Seattle
(20), Tacoma (69)
|
47
|
|
Alaska
|
0.6
|
|
|
|
x
|
Anchorage
(215), Alaska 2 - Bethel (377)
|
48
|
|
Hawaii
|
1.3
|
|
|
x
|
|
Honolulu
(55), Hawaii 3 - Hawaii (415)
|
49
|
|
Puerto
Rico and U.S. Virgin Islands
|
3.8
|
|
|
|
x
|
San
Juan (21), Puerto Rico 2 - Adjuntas (209)
|
|
|
Total
(excluding overlaps)
|
248.9
(approx)
|
|
x
|
x
|
x
|
|
|
(1)
|
WCS
licenses are assigned by the FCC according to MEAs or REAGs (see
further
explanation below in “WCS Spectrum”). MEAs are named for the largest
metropolitan area contained within the licensed geographic service
area.
An MEA is significantly larger than the metropolitan area for which
it is
named. REAGs are named for the geographic region the license
covers.
|
|
(2)
|
Our
AWS,
WCS and BRS spectrum is held directly through FCC licenses.
Our EBS
spectrum has been leased on a long-term basis from current license
holders.
|
|
(3)
|
AWS
licenses are assigned by the FCC according to REAGs, EAs, or CMAs
(see
further explanation below in “AWS
Spectrum”).
|
|
(4)
|
We
lease EBS spectrum from multiple parties in the greater New York,
NY
metropolitan area, including geographic areas in New York, New
Jersey and
Connecticut. These leases give us access to different amounts of
spectrum
in specific parts of the market area. The term of these leases
range from
20 to up to 60 years when their renewal options are
included.
|
|
(5)
|
We
lease EBS spectrum from The Orange Catholic Foundation in the Los
Angeles,
CA (Orange County) area. This lease has an initial 10 year term
and
contains five renewal options for 10 years each to extend the term
of the
lease.
|
|
|
|
|
(6)
|
The
source for our POP figure is derived from 2006 composite data contained
in
databases managed by Applied Geographic Solutions Inc. of Newbury
Park CA.
Except for Puerto Rico which is derived from 2000 census
figures.
|
WCS
Spectrum
We
have
acquired WCS spectrum from third parties pursuant to privately negotiated
purchase agreements. The 2.3 GHz WCS band is divided into four frequency
blocks,
A through D. Blocks A and B have 10MHz of spectrum each and blocks C and
D have
5 MHz each. We have acquired WCS licenses in the A, B, C and D frequency
blocks.
The WCS A and B blocks are licensed in 52 individual geographic regions covering
the United States, including the Gulf of Mexico, and are called Major Economic
Areas (MEA). The WCS C and D blocks are licensed in six larger geographic
regions, also covering the United States and are called Regional Economic
Area
Groupings (“REAGs”). Both MEAs and REAGs are of various sizes in terms of
population and geographic coverage.
WCS
licenses are allocated by the FCC for “flexible use.” This means that the
spectrum can be used to provide any type of fixed, portable, mobile (except
aeronautical mobile) or radiolocation services to individuals and businesses,
including the wireless broadband services we intend to offer. Any such offerings
are subject to compliance with technical rules in Part 27, Title 47 of the
Code
of Federal Regulations, as well as any applicable border treaties or agreements
governing operations near the Canadian and Mexican borders.
NextWave’s
Canadian WCS licenses are held by our Canadian subsidiary, 4253311 Canada
Inc. The licenses carry a 10 year license term with a renewal expectancy
of an
additional 10 years. Because the licenses were issued by Industry Canada
through
two separate auctions, 63 licenses have an expiration date of November of
2014,
while 25 licenses have an expiration date of April of 2015. The licenses
are
“radiocommunication user” licenses and cannot be used to provide service for
compensation before the licenses are converted to either “radiocommunication
service provider” licenses or “radiocommunication carrier” licenses. Conversion
of the licenses will require compliance with Canadian ownership and control
restrictions. In addition, each Canadian WCS license is subject to a 5 year
usage implementation requirement, demonstrating that the spectrum is being
put
to use at a level that is acceptable to Industry Canada. Again, because the
licenses were issued at two different times, there are two different
implementation deadlines, November of 2009 for 63 licenses, and April of
2010
for the other 25 licenses.
BRS
and EBS Spectrum
We
have
acquired BRS spectrum licenses from third parties pursuant to privately
negotiated purchase agreements. In the future, licenses for vacant BRS spectrum
may also be obtained through third parties and FCC auctions. Rights to lease
and
use EBS spectrum are acquired by commercial interests like us from educational
entities through privately negotiated lease agreements. Our long-term leases
make available to us exclusive leasehold access to the leased EBS spectrum
for a
total period of time ranging from 20 to up to 60 years when renewal options
are
included. 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.
Under
current regulations, after giving effect to an FCC-mandated transition of
the
spectrum to a new band configuration, which must be complete by October 19,
2010
(barring disputes in the transition process), the total spectrum bandwidth
licensed by the FCC for EBS and BRS spectrum is 194 MHz. Approximately 75%
of
this spectrum is licensed for the EBS and 25% is licensed for the BRS. Under
FCC
rules, regulations and policies (“FCC rules”), up to 95% of the spectrum
dedicated to each EBS license can be leased for commercial purposes subject
to
compliance with FCC rules. After transitioning the EBS and BRS spectrum to
the
new band plan, individual channels and channel groups of EBS and BRS spectrum
will range from 5.5 MHz to 23.5 MHz of spectrum. Most, but not all, EBS and
BRS
channel “groups” contain four channels and 23.5 MHz of spectrum.
Until
1996, BRS spectrum was licensed according to Geographic Service Areas with
a
35-mile radius. These “incumbent” licenses continue to exist today. In 1996, the
FCC conducted an auction and assigned licenses for available BRS spectrum
according to Basic Trading Areas or BTAs of various sizes. These BTA licenses
were granted subject to the prior rights of the incumbent BRS license holders.
We have acquired licenses from incumbent BRS licensees, licensed for 35-mile
Geographic Service Areas. We may in the future acquire BRS spectrum licensed
for
BTAs.
EBS
spectrum is licensed only for Geographic Service Areas with a 35-mile radius.
In
the future, vacant EBS spectrum may be assigned by BTAs, or some other licensing
construct chosen by the FCC. EBS spectrum is licensed exclusively 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.
The
FCC’s
rules for BRS and EBS spectrum were substantially revised in 2004 to provide
more flexibility in how the spectrum is licensed and used; proceedings to
revise
the rules continue today. Use of the spectrum has evolved to include fixed
and
mobile, digital, two-way systems capable of providing high-speed, high-capacity
broadband service, including two-way Internet access service via low-power,
cellularized communication systems and single-cell high-power systems. On
April
27, 2006, the FCC released additional orders to reform FCC rules related
to BRS
and EBS spectrum. Although these new, amended rules became effective on July
19,
2006, they are subject to petitions for reconsideration, which seek to modify
some of these amendments. For a more detailed description of these new rules,
see “Government Regulation - BRS/EBS License Conditions.”
AWS
Spectrum
We
acquired 154 AWS licenses in FCC Auction No. 66. The FCC granted AWS spectrum
pursuant to Economic Area (“EA”) licenses, REAG licenses and CMA licenses. The
AWS auction involved a total of 1,122 licenses: 36 REAG licenses, 352 EA
licenses, and 734 CMA licenses. EA, REAG and CMA licenses vary widely in
terms
of population and geographic coverage.
In
terms
of spectral size, the AWS spectrum is divided into six spectrum block, A
through
F. There are three 10 MHz blocks, each consisting of paired 5 MHz channels,
and
three 20 MHz blocks, each consisting of paired 10 MHz channels. We have acquired
both 20 MHz and 10 MHz licenses.
AWS
licenses are allocated by the FCC for “flexible use.” This means that the
spectrum can be used to provide any type of fixed, portable or mobile services
to individuals and businesses, including the wireless broadband services
we
intend to offer. Any such offerings are subject to compliance with technical
rules in Part 27, Title 47 of the Code of Federal Regulations as well as
any
applicable border treaties or agreement governing operations near the Canadian
and Mexican borders.
On
December 15, 2006, we acquired 3.5 GHz BWA spectrum in Germany. The
acquisition includes 42MHz of spectrum in all service areas. The licenses
vary
widely in terms of population and geographic coverage, but include major
cities,
such as Koln/Dusseldorf, Stuttgart/Karlbsruhe, Berlin/Brandenburg, Munster
and
Rhein/Main.
On
March
2, 2007,
we
acquired WCS spectrum in Canada. The acquisition includes 30MHz of spectrum
in
all service areas. The licenses vary widely in terms of population and
geographic coverage, but include major cities, such as Montreal, Ottawa,
Edmonton, Quebec and Winnipeg.
International
Investments
We
have
made international investments to leverage our development activities and
to
potentially serve as a vehicle to market our WiMAX products in international
markets. These investments include a 51% interest in Inquam Broadband,
a joint
venture based in Germany that has acquired nationwide spectrum licenses
in
Germany, and a 33% interest in Hughes Systique, an offshore software development
company located in India. In addition, we have opened a liaison office
in Korea,
the location of the world’s first commercial metropolitan-area wireless
broadband network.
Inquam
Broadband
We
acquired 51% of the equity of Inquam Broadband Limited, a Cayman Islands
corporation, for $1.6 million and have agreed to provide additional funding
up
to 1.4 million Euros ($1.7 million at December 30, 2006), of which $1.1 million
has been funded through December 30, 2006. Inquam Broadband was formed in
January 2006 as a joint venture with Inquam-BMR GP, a private investment
partnership. Through Inquam Broadband, we have broadband telecommunications
assets in Germany and, subject to final regulatory action, Switzerland.
Under a separate note agreement established for the purpose of funding Inquam
Broadband’s bids at wireless spectrum auctions in Germany and Switzerland, we
loaned to a wholly-owned subsidiary of Inquam Broadband up to 17.6 million
Euros
and 7.1 million Swiss Francs ($28.9 million at December 30, 2006), of which
$22.7 million was outstanding at December 30, 2006. Inquam Broadband and
its
subsidiary have not yet conducted any significant operating
activities.
In
connection with the formation of Inquam Broadband, we received an option
to
acquire a 51% equity interest in Inquam Deutschland GmbH for an exercise
price
of 9.7 million Euros ($12.7 million at December 30, 2006), subject to certain
adjustments. Inquam Deutschland, an affiliate of Inquam-BMR GP, holds a
nationwide spectrum award of 2x1.25 MHz from the German telecommunications
regulatory agency. Our option to purchase 51% of Inquam Deutschland expires
on
the later of April 18, 2007 and the 12th
business day following the announcement of the outcome of the Swiss auction
described below. At any time prior to the expiration of our option,
Inquam-BMR GP has the right to purchase an interest between 25% and 49% in
the
note agreement described above, at which time both Inquam-BMR GP’s and
NextWave’s note interests would simultaneously convert into ordinary shares of
Inquam Broadband on a pro rata basis. In lieu of this right and at any time
prior to the expiration of the option, Inquam-BMR GP has the right to require
NextWave to purchase all shares then held by Inquam-BMR GP for 1,000 Euros
per
share ($2.1 million at December 30, 2006). In the event that Inquam-BMR GP
does
not exercise either of these rights prior to the expiration of NextWave’s option
in April 2007, NextWave must elect to either convert the note into shares
of
Inquam Broadband equal to the note amount divided by 1,000 or purchase all
Inquam Broadband shares then held by Inquam-BMR GP for 1,000 Euros per share
($2.1 million at December 30, 2006). Inquam Broadband may implement and operate
a pilot network in Cologne, Germany, together with Netcologne, using the
existing spectrum in Inquam Deutschland.
In
December 2006, Inquam Broadband Holdings Ltd, a subsidiary of Inquam
Broadband was declared the winner of 28 Broadband Wireless Access (BWA)
licenses, covering 100% of the Federal Republic of Germany, with an
estimated population of 83 million, in the BWA spectrum auction conducted
by BNetzA, the German regulatory authority for telecommunications. Inquam
Broadband acquired the 42 MHz wide licenses, located in the 3.5 GHz frequency
band, at a cost of $23.1 million or approximately seven tenths of a cent
per
MHz-POP. In February 2007, Inquam Broadband participated in a spectrum
auction
in Switzerland. We are currently awaiting notification from the Federal
Office
of Communication in Switzerland, which will determine if the license will
be
granted to Inquam Broadband for the minimum concession.
Hughes
Systique
In
October 2005, we acquired a 33% equity interest in Hughes Systique Corporation
(“HSC”) for $4.5 million. The remaining equity is owned by Hughes
Communications, Inc., the parent company of Hughes Network Systems, and
the
employees of HSC. Formed in 2005, HSC is an offshore software development
company that specializes in providing software development services to
the
telecommunications industry using engineers and software developers in
India.
The President and CEO of HSC, Pradeep Kaul, has more than 33 years of experience
in the wireless industry, including as an executive at Hughes Network Systems,
and previously formed a successful offshore development company that was
sold to
Flextronics International. We entered into the relationship with HSC to
facilitate and expedite the development of software modules and applications
required in connection with our broadband development activities. In
October 2005, we also entered into a 24-month service agreement with HSC
pursuant to which we have agreed to contract for a minimum level of programmers
during the term of the agreement. This agreement was amended in December
2006,
extending the term through June 2009.
Korea
Liaison Office
In
January 2006, we obtained the necessary governmental approvals to open a
corporate liaison office in Korea limited to five employees. Our country
manager, Dr. Hyock Jo Kwon, was President and CEO of Shinsegi Telecom Company,
which launched the world’s first commercial wireless network based on CDMA
technology. Our Korea liaison office occupies leased office space in Seoul’s
Korea Stock Exchange Building. The goal of the office is to establish, develop
and pursue mutually beneficial business opportunities and technology
relationships in wireless communications with Korean corporations and research
organizations addressing advance wireless products and services for global
markets.
Korea
has
become a global leader in the wireless broadband industry. Korea Telecom
is
currently deploying the world’s first mobile broadband network based on the
WiBro standard. WiBro, developed by Korea’s Electronics and Telecommunications
Research Institute (ETRI) and Korean wireless equipment manufacturers,
has been
harmonized with the IEEE 802.16e standard. South Korea’s Telecommunications
Technology Association (TTA) was recently named as the world’s second WiMAX
Forum certification laboratory to provide testing and certifying services
for
WiMAX.
Sales
and Marketing
WiMAX /Wi-Fi
Semiconductors and Network Products
We
intend
to market our family of WiMAX/Wi-Fi semiconductors, software, and network
products to network infrastructure and device manufacturers as well as
network
operators worldwide. We plan to utilize a direct sales organization and
third-party outlets to sell our products and will utilize third-party sales
representatives and stocking distributors as additional channels to market
our
chipsets. In addition, we also intend to utilize a direct sales organization
and
third-party outlets to market and/or license our network products and
technologies to network infrastructure manufacturers who intend to market
WiMAX/Wi-Fi network equipment to wireless broadband service
providers.
We
intend
to promote industry awareness of our products and technologies via the
deployment of our Las Vegas test site, and through industry trade shows,
public
relations initiatives, trade advertising and our company web site. In addition,
we intend to actively work with leading trade publications and industry analysts
to educate potential customers on the benefits of our products and
technologies.
WiMAX Network
Services
We
intend
to provide network design and implementation services to service providers
who
will build and operate wireless broadband networks that utilize our technologies
and/or spectrum. Because our network services will be provided in connection
with our product sales, we do not envision the need to develop a separate
sales
channel to market our network services.
Multimedia
Software Products
Our
PacketVideo subsidiary utilizes a team of strategic account managers to market
its multimedia software products to device manufacturers and service provider
customers in North America, Asia and Europe. At present, PacketVideo’s customers
include BenQ-Siemens, Fujitsu, LGE, Mitsubishi, Motorola, NEC, Nokia, Orange,
Panasonic, Samsung, Sanyo, Sony-Ericsson, T-Mobile and Verizon
Wireless.
To
promote its suite of software products and services, PacketVideo exhibits
at
high-profile wireless trade events including 3GSM World Congress, CTIA, and
CTIA
Wireless IT & Entertainment.
Wi-Fi
Network Products
Our
GO
Networks subsidiary markets it products and services to service providers,
carriers, and municipalities through a direct sales force and through local
system integrators on a worldwide basis. At present, GO Networks’ primary
markets are North America, Europe, the Middle East, and Africa. Secondary
markets include the Asia-Pacific, and Central/Latin America. GO Networks
is in
discussions with strategic partners and OEM vendors that would integrate
GO
Networks products into their portfolio of wireless network
solutions.
GO
Networks intends to generate market awareness and promote its products through
print and internet advertising, press and analyst outreach initiatives,
publication of technical, educational and business articles in industry
magazines, and participation in tradeshows, conferences and technology
seminars.
Geographic
Breakdown of Revenues
During
the year ended December 30, 2006, we generated $16.5 million of revenues
(68%)
in the United States, $4.6 million (19%) in Japan, $2.5 million (10%) in
Europe
and $0.7 million (3%) in other regions of the world.
For
the
period from inception (April 13, 2005) to December 31, 2005, we generated
$1.9
million of revenues (45%) in the United States, $1.3 million (32%) in Japan,
$0.6 million (13%) in Europe and $0.4 million (10%) in other regions of the
world.
Competition
Advanced
Technology Group
We
expect
the market for our WiMAX products to be highly competitive and expect that
competition will increase in the future. The principal competitive factors
include:
|
·
|
Industry
adoption of wireless standards that compete with mobile WiMAX;
and
|
|
·
|
Mobile
WiMAX semiconductors and related products offered by our
competitors.
|
Competing
Wireless Broadband Standards
Mobile
WiMAX will compete with third generation (3G), CDMA based wireless technologies
and fourth generation (4G), Orthogonal Frequency Division Multiple Access
(OFDMA) based wireless air-interface technologies that are intended to provide
mobile broadband services to the market. Major alternative wireless broadband
technologies include:
CDMA2000:
CDMA2000 is a registered trademark of the Telecommunications Industry
Association and describes a family of 3G mobile telecommunications standards
based on the 3GPP2 telecommunications specification. CDMA2000 includes the
1xEV-DO standards which have achieved high levels of industry support in
the
United States and abroad, including nationwide deployments by Verizon Wireless
and Sprint Nextel. It is expected that CDMA2000 may be harmonized with the
802.20 Mobile Broadband Wireless Access OFDMA that is currently under
development.
UMTS:
Universal Mobile Telecommunications System (UMTS) is a 3G wireless technology,
based on the 3GPP specification, that uses W-CDMA (Wideband - Code Division
Multiple Access) as its underlying air-interface standard. UMTS has achieved
a
high level of industry acceptance and has the support of some of the largest
GSM
wireless network operators in the world. To enhance network performance,
UMTS
network operators are currently deploying a new WCDMA protocol called High
Speed
Downlink Packet Access (HSDPA) that is expected to significantly improve
downstream network data rates. In the future, it is expected that network
operators will also deploy High Speed Uplink Packet Access (HSUPA) that is
expected to significantly improve upstream network data rates. In addition,
LTE,
or Long Term Evolution, is the trade name for research and development work
that
is underway to identify future OFDMA technologies and capabilities needed
to
help ensure that 3GPP remains a highly competitive technology in the
future.
As
providers of mobile WiMAX product and technologies, we may compete indirectly
with some or all of well-established, international companies that are engaged
in the development, manufacture and sale of products and technologies that
support alternative wireless broadband standards, including Alcatel, Ericsson,
Huawei, LGE, Lucent, Motorola, Nokia, Nortel, QUALCOMM, Samsung and
Siemens.
Competing
WiMAX Products and Technology Providers
We
will
be competing with numerous companies that are developing or marketing WiMAX
products and technologies that will directly compete with our products and
technologies including Beceem, Fujitsu, Intel, Motorola, Nortel, RunCom,
Samsung, Sequans and WaveSat. Some of these companies have significantly
greater
financial, technical development, marketing and other resources than we do,
are
already marketing commercial WiMAX semiconductor products, and have established
a significant time to market advantage. In addition, we expect additional
competition to emerge in the WiMAX semiconductor and components market from
well-established companies, such as Broadcom and Samsung.
Multimedia
Software Products
At
present, the primary competitors for PacketVideo’s multimedia software products
are 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 PacketVideo. As the market for embedded
multimedia software evolves, we anticipate that additional competitors may
emerge including Apple Computer, Real Networks and OpenWave.
Wi-Fi
Network Systems
GO
Networks competition ranges from small and medium size companies such as
Tropos
Networks, Strix Systems, and Belair Networks to large-scale systems suppliers
such as Cisco, Motorola, and Nortel. Some of these companies have significantly
greater financial, technical development, and marketing resources than GO
Networks, are already marketing carrier-class Wi-Fi systems, and have
established a significant time-to-market advantage.
Intellectual
Property
In
order
to protect our proprietary rights in our products and technologies, we rely
primarily upon a combination of patent, trademark, trade secret and copyright
law as well as confidentiality, non-disclosure and assignment of inventions
agreements. We have six U.S. patents, one of which is the subject of extensive
foreign filing. We have fifty-five patent applications pending in the United
States as well as four U.S. provisional patent applications. We have nine
pending intent-to-use U.S. trademark applications as well as four U.S. trademark
registrations and one service mark registration. There are numerous foreign
trademark applications as well as numerous foreign registrations. Due to
the
early development stage of our WiMAX technology development business, our
registered PacketVideo trademark is the only trademark that is currently
material to our business.
In
addition, we have typically entered into nondisclosure, confidentiality and
assignment of inventions agreements with our employees, consultants and with
some of our suppliers and customers who have access to sensitive information.
We
cannot assure you that the steps taken by us to protect our proprietary rights
will be adequate to prevent misappropriation of our technology or independent
development and/or the sale by others of products with features based upon,
or
otherwise similar to, those of our products.
Given
the
rapid pace of technological development in the communications industry,
we also
cannot assure you that our products do not or will not infringe on existing
or
future proprietary rights of others. Specifically, more than 30 companies
have
submitted letters of assurance related to IEEE Standard 802.16 and amendments
stating that they may hold or control patents or patent applications, the
use of
which would be unavoidable to create a compliant implementation of either
mandatory or optional portions of the standard. In such letters, the patent
holder typically asserts that it is prepared to grant a license to its
essential
IP to an unrestricted number of applicants on a worldwide, non-discriminatory
or
“demonstrably free of unfair discrimination” basis and on reasonable terms and
conditions. If any companies asserting that they hold or control patents
or
patent applications necessary to implement mobile WiMAX 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 WiMAX
networks
and the sale of our mobile WiMAX 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 are
required to pay substantial license fees to any company (s) not participating
in
the process defined by 802.16 intellectual property committee for any “finished”
mobile WiMAX products, this could adversely affect the profitability of
these
products.
Although
we believe that our technology has been independently developed and that
none of
our intellectual property infringes on the rights of others, we cannot assure
you that third parties will not assert infringement claims against us or
seek an
injunction on the sale of any of our products in the future. If an infringement
were found to exist, we may attempt to acquire the requisite licenses or
rights
to use such technology or intellectual property. However, we cannot assure
you
that such licenses or rights could be obtained on terms that would not have
a
material adverse effect on us, if at all.
We
license and will continue to seek licenses to certain technologies from
others
for use in connection with some of our products and technologies. While
none of
our current license agreements are material at the time of this 10-K Form,
the
inability to obtain such licenses or loss of these licenses could impair
our
ability to develop and market finished products to end-users. If
we are
unable to obtain or maintain the licenses that we need, we may be unable
to
develop and market our products or processes, or we may need to obtain
substitute technologies of lower quality or performance characteristics
or at
greater cost.
Participation
in the WiMAX Standardization Process
The
standardization of a wireless broadband technology such as WiMAX is driven
by
professional associations consisting of experts employed by companies who
have
an interest in developing the relevant technology. We believe that our
participation in these associations is important in order to influence the
development of standards and in order to keep up to date with the latest
technological developments in our industry.
The
most
important technological standards in our industry are developed by the Institute
of Electrical and Electronics Engineers (IEEE). WiMAX is based on the IEEE
standard 802.16e for broadband wireless access. The 802.16e mobile WiMAX
standard is the latest generation of the IEEE 802.16 Air Interface standard,
which is the state-of-the-art standard for wireless multimedia distribution.
It
was initially designed for multimedia distribution for outdoor fixed broadband
wireless access (BWA) markets where it addresses the “Last Mile” problem for the
extension of fiber, cable and DSL networks. It takes the best features from
earlier proprietary wireless access systems and combines them to provide
a
flexible wireless network solution capable of meeting the most stringent
requirements for reliable multimedia communications.
NextWave
has actively participated in the development of the IEEE 802.16 standard.
Ken
Stanwood, Executive Vice President of Technical and Standards Development,
has
participated in IEEE 802.16 from the very start, and is responsible for
much of
the core Media Access Control (MAC) layer technology in the standard. He
recently finished a three year term as vice chair of IEEE 802.16. In addition,
Dr. Roger Marks, Senior Vice President - Industry Relations of our Advanced
Technology Group, currently serves as chairman of IEEE 802.16. Many additional
NextWave personnel support the process as task group officers and
participants.
Even
with
the development of the IEEE 802.16 standard, the interoperability of wireless
broadband devices and networks is not guaranteed. For example, two vendors
could
pick the same profile but implement it differently. Acknowledging that risk,
the
companies involved in the development of IEEE 802.16 decided to create another
voluntary industry organization, known as the WiMAX Forum that would certify
devices and technologies that meet a uniform standard. In April 2001, the
WiMAX
Forum was established, with Mr. Stanwood as one of the founders. The WiMAX
Forum
creates and monitors the test specifications for wireless broadband systems
and
components based on the IEEE 802.16 standard.
The
WiMAX
Forum now has hundreds of industry participants as members, including AT&T,
Cisco, Intel, Motorola, Nokia, Nortel and Samsung. The WiMAX Forum is in
the
process of certifying fixed WirelessMAN-OFDM systems through independent
laboratory conformance testing and plug-fests. Plug-fests are events at which
participating companies have the opportunity to test and demonstrate the
interoperability of their products based on a set of standards. The WiMAX
Forum
is embarking on test specifications and plug-fests for WirelessMAN-OFDMA
scalable OFDMA mobile systems, commonly referred to as 802.16e
systems.
In
parallel with efforts by the IEEE and the WiMAX Forum, the Telecommunications
Technology Association (TTA) in Korea developed WiBro, an 802.16-based standard,
which emphasizes support for mobility based on the 802.16e amendment. Efforts
supported by TTA and IEEE 802.16 to harmonize the WiBro standard with the
IEEE
802.16e standard were successful. WiBro was converted from a wireless standard
to a service requiring WiMAX certified equipment in the 2.3 GHz
band.
Government
Regulation
Overview
Communications
industry regulation changes rapidly, and such changes could adversely impact
us.
The following discussion describes some of the major communications-related
regulations that affect us, but numerous other substantive areas of regulation
not discussed here also may influence our business.
Communications
services are regulated to varying degrees at the federal level by the Federal
Communications Commission (“FCC”) and at the state level by public utilities
commissions (“PUCs”). NextWave’s suite of wireless broadband products and
services is subject to federal regulation in a number of areas, including
the
licensing and use of spectrum, and the technical parameters, certification,
marketing, operation and disposition of wireless devices. Applicable consumer
protection regulations also are enforced at the federal and state
levels.
The
following summary of applicable regulation does not describe all present
and
proposed federal, state and local legislation and regulations affecting the
communications industry. Some legislation and regulations are the subject
of
ongoing judicial proceedings, proposed legislation 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
matters or their potential impact on our business. See “Risks Relating to
Government Regulation.”
Licensing
and Use of Wireless Spectrum
The
FCC
regulates the licensing, construction, use, renewal, revocation, acquisition
and
sale of our licensed wireless spectrum holdings. Our wireless spectrum holdings
currently include licensed spectrum in the WCS, AWS and BRS bands, and leased
spectrum in the EBS band. We intend to make this spectrum available to
service providers who want to deploy and operate next-generation mobile
broadband networks that utilize our advanced technologies and
spectrum.
Certain
general regulatory requirements apply to all licensed wireless spectrum.
For
example, certain build-out or “substantial service” requirements apply to our
licensed wireless spectrum, which generally must be satisfied as a condition
of
license renewal. The Communications Act and FCC rules also require FCC prior
approval for the acquisition, assignment or transfer of control of FCC licenses.
In addition, FCC rules permit spectrum leasing arrangements for a range of
wireless licenses. Approval from the Federal Trade Commission and the Department
of Justice, as well as state or local regulatory authorities, also may be
required if we sell or acquire spectrum. The FCC Sets rules, regulations
and
policies to, among other things:
|
·
|
grant
licenses in the WCS, AWS, BRS and EBS
bands;
|
|
·
|
regulate
the technical parameters and standards governing wireless services,
the
certification, operation and marketing of radio frequency devices
and the
placement of certain transmitting
facilities;
|
|
·
|
impose
build-out or performance requirements as a condition to license
renewals;
|
|
·
|
approve
applications for license renewals;
|
|
·
|
approve
assignments and transfers of control of FCC
licenses;
|
|
·
|
approve
leases covering use of FCC licenses held by other persons and
organizations;
|
|
·
|
resolve
harmful radiofrequency interference between users of various spectrum
bands;
|
|
·
|
impose
fines, forfeitures and license revocations for violations of FCC
rules;
and
|
|
·
|
impose
other obligations that it determines to be in the public
interest.
|
Additional,
more specific regulatory requirements that apply to WCS, AWS, BRS and EBS
spectrum are described below. Compliance with all of the foregoing regulatory
requirements, and those listed below, increases our cost of doing business.
For
a description of an interference issue which may impact use of WCS, BRS and
EBS
spectrum, see “Risks Relating to Government Regulation-Wireless Devices
utilizing WCS, BRS and EBS Spectrum May Be Susceptible to Interference from
Satellite Digital Audio Radio Services (“SDARS”).”
WCS
License Conditions
WCS
licensees must comply with all applicable legal and technical rules imposed
by
the FCC, including those found in Part 27, Title 47 of the Code of Federal
Regulations. WCS licenses are granted for ten-year license terms, and licensees
are required under applicable Part 27 rules to demonstrate that they are
providing “substantial service” in their license area within the initial license
term. Substantial service is defined as “service which is sound, favorable, and
substantially above a level of mediocre service which just might minimally
warrant renewal.” For WCS licensees, the FCC recently extended the substantial
service build-out deadline until July 21, 2010. Failure to make the substantial
service demonstration by that date, without seeking and obtaining an extension
from the FCC, would result in license forfeiture. Extensions of time to meet
substantial service demonstrations are not routinely granted by the
FCC.
BRS-EBS
License Conditions
Like
WCS
licenses, EBS and BRS licenses are granted for ten-year license terms, and
licensees must comply with all applicable legal and technical rules imposed
by
the FCC, including those found in Part 27, Title 47 of the Code of Federal
Regulations. Unlike WCS licenses, BRS and EBS licenses were granted at different
times and, therefore, do not have a uniform expiration date. BRS and EBS
licensees must also demonstrate that they are providing “substantial service” in
their license areas. On April 27, 2006, the FCC released an order in which
a May
1, 2011 substantial service deadline for EBS and BRS spectrum was
adopted.
From
2004
to 2006, the FCC adopted a number of rule changes which create more flexible
BRS/EBS spectrum rules to facilitate the growth of new and innovative wireless
technologies and services, including fixed and mobile wireless broadband
services. Although the proceedings to reform BRS/EBS rules have largely been
completed, they remain subject to legal challenges and petitions for
reconsideration and, thus, are subject to additional revisions. The FCC ordered
the 2.5 GHz band to be reconfigured into three segments: upper- and lower-band
segments for low-power operations, and a middle-band segment for high-power
operations. The new BRS/EBS band configuration eliminates the use of interleaved
channels by licensees in favor of contiguous channel blocks. By creating
contiguous channel blocks, and grouping high- and low-power users into separate
portions of the BRS/EBS band, the new band plan reduces the likelihood of
interference caused by incompatible uses and creates incentives for the
development of low-power, cellularized broadband operations, which were
inhibited by the prior band plan. The new BRS/EBS band plan will allow licensees
to use the 2496-2690 MHz spectrum in a more economical and efficient manner
and
will support the introduction of next-generation wireless technologies. The
new
rules preserve the operations of existing licensees, including educational
institutions currently offering instructional television programming, but
require that licensees transition to the new band plan by October 19, 2010
(barring disputes in the transition process), which includes relocating
licensees from their current channel assignments to new spectrum designations
in
the band.
For
each
EBS and BRS licensee, the deadline for filing initial plans with the FCC
- the
first step in launching the transition process in a given market - is January
19, 2009. After the initial plan is filed with the FCC, licensees have a
90-day
transition planning period, followed by an additional eighteen months to
complete the transition. We and other parties intend to transition the 2.5
GHz
band to the new configuration on a market-by-market basis. The process may
require several years to complete nationally. When the transition is complete,
which should occur by October 19, 2010, we believe that the 2.5 GHz band
will be
more suitable for providing NextWave’s suite of wireless broadband products and
services. See, “Risks Relating to Government Regulation-We Will Not Have
Complete Control Over our Transition of EBS and BRS Spectrum, Which Could
Impact
Compliance With FCC Rules.”
AWS
License Conditions
AWS
licensees must comply with all applicable legal and technical rules imposed
by
the FCC, including those found in Part 27, Title 47 of the Code of Federal
Regulations. The initial AWS licenses, which include all of our licenses,
are
granted for a fifteen-year license term, with a renewal term of 10-years.
Licensees are required to demonstrate that they are providing “substantial
service” in their license area within the initial fifteen-year license term.
Substantial service is defined as “service which is sound, favorable, and
substantially above a level of mediocre service which just might minimally
warrant renewal.” For our AWS licensees, the renewal deadline and 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. Extensions of time to meet
substantial service demonstrations are not routinely granted by the
FCC.
The
AWS
spectrum includes a large number of incumbent federal government and
non-government operations that must be relocated to other spectrum. AWS
licensees are required to coordinate their operations to avoid interfering
with
these incumbent stations until relocation is complete. A small number of
these
incumbent stations must be protected indefinitely. In certain cases, the
AWS
licensee must pay for the relocation of incumbent stations within the AWS
licensee’s license area. AWS licensees are effectively prohibited from deploying
time division duplex (“TDD”) systems in the AWS spectrum.
Point-to-Point
Microwave License Conditions
We
hold a
number of 18 GHz and 23 GHz point-to-point microwave licenses in Las Vegas
that
we intend to use as part of our network to transmit or “backhaul” wireless
broadband communications traffic to our cell sites and network trial operations
center. These licenses are granted based upon applications that demonstrate
that
the applicant is legally and technically qualified and that the proposed
station
will not cause impermissible interference to other stations or proposed stations
that are entitled to interference protection. These licenses also have license
terms of 10 years, and are subject to satisfying construction deadlines that
occur 18 months after the licenses are granted. Point-to-point microwave
licensees must also comply with certain technical rules contained in Part
101,
Title 47 of the Code of Federal Regulations.
New
Spectrum Opportunities and Spectrum Auctions
Several
FCC proceedings and initiatives are underway that may affect the availability
of
spectrum for commercial wireless services. These proceedings may make more
wireless spectrum available to us and other new wireless competitors. We
believe
that additional spectrum bands may also be attractive for the deployment
of
mobile WiMAX networks, and in the future we may obtain spectrum in those
bands
through secondary markets acquisitions and leases and whatever mechanisms
the
FCC may establish including participation in FCC auctions.
Other
FCC Requirements
Internet
Access Services
Internet
access services are generally considered “information services,” not
“telecommunications services,” and are therefore exempt from common carrier
regulation by the FCC. Such services are not, however, without regulatory
requirements. Providers of facilities-based broadband Internet access services,
and providers of interconnected VoIP services, are required to comply with
the
Communications Assistance for Law Enforcement Act (“CALEA”). Providers of
interconnected VoIP services also are required to comply both with Enhanced
911
(“E911”) regulations, which require routing of 911 calls to geographically
appropriate public safety answering points based on the caller’s location, as
well as certain Universal Service Fund (“USF”) contribution, reporting and
registration obligations. Certain consumer protection regulations also may
apply
at the state and federal levels. The regulatory treatment of other IP-enabled
services, including the remainder of NextWave’s wireless broadband products and
services, is presently under consideration by the FCC.
Voice
over Internet Protocol
The
FCC
has and continues to consider the regulatory status of various forms of VoIP
services. In 2004, the FCC issued decisions in which it found that: (i) a
computer-to-computer VoIP service for which no charge is assessed and
conventional telephone numbers are not used, is an unregulated “information
service,” rather than a telecommunications service ; and (ii) long distance
offerings in which calls originate from and terminate to the ordinary public
switched telephone network, using regular telephones, but are transmitted
in
part through the use of IP, are “telecommunications services,” thereby rendering
such services subject to the payment of access charges. The FCC also preempted
states from exercising entry and related economic regulation of VoIP services
that require the use of specialized end user equipment to send/receive calls
over a broadband connection to the Internet, and use North American Numbering
Plan (NANP) numbers as the identification mechanism for the user’s IP address.
This ruling did not address specifically whether this form of VoIP is an
“information service” or a “telecommunications service,” or what regulatory
obligations, such as intercarrier compensation, should apply. In 2005, as
detailed below, the FCC subjected “interconnected VoIP” service providers to
Enhanced 911 and Communications Assistance for Law Enforcement Act obligations.
In 2006 the FCC subjected “interconnected VoIP” service providers to certain USF
contribution, reporting, registration and contribution obligations (discussed
below). Issues surrounding whether or how VoIP offerings should be regulated,
including whether they should pay access charges, along with the regulatory
treatment of other IP-enabled services, is presently under consideration
by the
FCC.
E911
Services
The
FCC
adopted E911 obligations for broadband service providers that offer
interconnected VoIP service to end users. E911 systems route 911 calls to
a
geographically appropriate public safety answering point based on the caller’s
location. Unlike basic 911, which merely connects the caller with public
safety
entities, E911 provides public safety entities with the caller’s call back
number and in many cases location information. The FCC order establishing
this
obligation was not clear as to whether the obligation, which has been effective
since November 28, 2005, applies to both wholesale and retail providers of
interconnected VoIP service. The obligation can be met through contracting
with
third parties or purchasing tariffed E911 services from local exchange carriers.
The FCC also is examining whether to apply a range of additional E911
requirements to interconnected VoIP providers.
CALEA
Requirements
Providers
of interconnected VoIP and facilities-based broadband Internet access providers
are subject to the requirements set forth in CALEA. CALEA requires that our
equipment, facilities and services allow for lawfully authorized electronic
surveillance by law enforcement agencies based on either industry or FCC
standards. In September 2005, the FCC extended CALEA obligations to
facilities-based broadband Internet access providers and to interconnected
VoIP
providers, whether wireline or wireless. These entities must be compliant
with
CALEA’s obligations by May 14, 2007, unless a waiver or extension has been
obtained from the FCC.
Universal
Service Fund
In
2006,
the FCC established USF contribution, reporting and registration obligations
for
providers of interconnected VoIP. The USF contribution obligation is based
upon
the portion of revenues derived from “telecommunications” service and the
end-user telecommunications revenues derived from interstate and international
traffic. The FCC rules provide various mechanisms for determining the
contribution figure. Some aspects of these contribution rules, as applied
to
providers of interconnected VoIP service, are the subject of a pending challenge
in federal court. Interconnected VoIP service providers also will be subject
to
the same USF reporting procedures that apply to all other providers of
interstate and international telecommunications. These reporting procedures
involve quarterly reporting of the gross projected billed and collected end-user
interstate and international revenues as well as annual reporting of actual,
gross, billed and collected end-user interstate and international revenues.
Under the FCC rules, providers of interstate and international
telecommunications whose annual USF contribution are expected to be less
than
$10,000 are not required to contribute to the USF, or file quarterly or annual
USF reports. All interconnected VoIP providers that have not already registered
with the FCC and designated an agent for service of process must complete
certain registration requirements.
Consumer-Related
Regulations
The
FCC
is considering whether Internet access services, regardless of the technology
used, should be subject to FCC consumer protection regulations. Various states
may also exercise authority over terms and conditions of Internet access
services, such as billing practices and other consumer-related matters.
Compliance with additional consumer-related obligations will result in
significant additional costs for us.
Privacy-Related
Regulations
In
providing NextWave’s suite of wireless broadband products and services to
consumers, we may be required to comply with FCC-mandated rules that limit
how
customer proprietary network information, or CPNI, can be used for marketing
purposes, and what we must do to safeguard CPNI. It was recently reported
that
the call detail records of both wireline and wireless telephone customers
are
available from certain Internet-based vendors. Both Congress and state
legislatures are considering legislation to criminalize the sale of call
detail
records and to further restrict the manner in which carriers make such
information available. The FCC is investigating these practices and is examining
whether existing regulations with respect to CPNI require revision or expansion,
which could result in additional costs to us, including administrative or
operational burdens on our customer care, sales, marketing and IT
systems.
Equipment
Certification
Our
equipment must conform to a variety of federal regulations that require
compliance with administrative and technical requirements as a condition
to
marketing devices that emit radio frequency energy.
Tower
Siting
Wireless
systems must comply with various federal, state and local regulations that
govern the siting, marking, lighting and construction of transmitter towers
and
antennas, including regulations promulgated by the FCC and Federal Aviation
Administration, or FAA. FCC rules subject certain tower locations to
environmental and historic preservation statutory requirements. To the extent
governmental agencies impose additional requirements on the tower siting
process, the time and cost to construct and deploy towers could be negatively
impacted. 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 radiofrequency band, which
encompasses virtually all of the BRS/EBS frequency band. If adopted, these
requirements could impose new administrative burdens upon users of BRS/EBS
spectrum.
E-waste
legislation
Electronics
waste laws, also known as “E-waste” laws, went into effect July 1, 2006 in
California, China, Japan and the European Union (“EU”) and require electronics
developers, manufacturers and distributors to eliminate hazardous substances,
such as
lead and mercury, in their products and to participate in, and finance, the
recycling of E-waste. Congress is considering national legislation that would
override state E-waste laws and provide for more consistent application of
E-waste standards.
Employees
As
of
March 21, 2007, we had 662 full-time employees, including 240 in our Advanced
Technology Group, 47 in our Network Solutions Group, 234 in PacketVideo,
67 in
GO Networks and 74 in corporate operations and administration. In addition,
we
had 220 full-time equivalent contractors, including 18 in our Advanced
Technology Group, 18 in our Network Solutions Group, 153 in PacketVideo and
31
in corporate operations and administration. We are not subject to any collective
bargaining agreements and believe that our relationship with our employees
is
good.
Our
History
NextWave
Telecom and the PCS Business
Our
predecessor entity, NextWave Wireless Inc. (later converted to NextWave Wireless
LLC, and referred to in this Annual Report on Form 10-K as “Old NextWave
Wireless”) was formed in 1996 as a wholly owned operating subsidiary of NextWave
Telecom, Inc. (“NTI”). NTI sought to develop a nationwide CDMA-based PCS
network. In 1998, Old NextWave Wireless, together with NTI and its other
subsidiaries (the “NextWave Telecom group”), filed for protection under Chapter
11 of the United States Bankruptcy Code. During the seven-year pendency of
the
Chapter 11 case, Old NextWave Wireless continued its involvement in the
build-out of NTI’s PCS network. Substantially all of the related assets, except
the PCS licenses, were abandoned when NTI was sold to Verizon Wireless as
part
of the plan of reorganization of the NextWave Telecom group described
below.
Wireless
Broadband Development
Although
a commercial wireless broadband business was not developed during the pendency
of the Chapter 11 case, the vision for our company was created at that time.
Beginning in 2003, NTI began to explore opportunities to create the technology
for a broadband wireless network utilizing BRS spectrum in the 2.5 GHz frequency
range. In late 2003, NTI received authority from the Bankruptcy Court to
construct and test a wireless broadband network in the Las Vegas, Nevada
metropolitan area. Old NextWave Wireless acquired the rights to 24 MHz of
BRS
spectrum in Las Vegas and began work on the test network. In 2004, Old NextWave
Wireless acquired preferred stock representing a 50% equity interest in CYGNUS
Communications, Inc., a company engaged in the development of wireless
communications hardware. Among other reasons, to separate the new prospective
BRS spectrum wireless technology business from the PCS business of the rest
of
the NextWave Telecom group, NTI formed a new subsidiary, NextWave Broadband,
to
be the operating company for the BRS business. The capitalization of a new
wireless technology company was discussed with the stakeholders of the NextWave
Telecom group and was made part of the plan of reorganization described
below.
Plan
of Reorganization and Verizon Wireless Transaction
On
March
1, 2005, the Bankruptcy Court confirmed the plan of reorganization of the
NextWave Telecom group, including Old NextWave Wireless. In December 2004,
Old
NextWave Wireless was converted from a corporation to a limited liability
company. The plan of reorganization was funded with the proceeds from the
sale
of NextWave Telecom and its subsidiaries (other than Old NextWave Wireless)
to
Verizon Wireless for $3.0 billion, in addition to previous PCS spectrum sales
to
Cingular Wireless, Verizon Wireless and MetroPCS. The plan of reorganization
provided for the payment in full of all the creditors of the NextWave Telecom
group and the funding of Old NextWave Wireless as a new wireless broadband
technology company to be distributed to equityholders, together with an
aggregate distribution of $2.6 billion in cash and $149 million principal
amount
of our Non-Recourse Secured Notes. Prior to the consummation of the plan
of
reorganization, NTI and its subsidiaries entered into a global settlement
agreement with the FCC resolving all outstanding claims of the FCC.
In
connection with the sale of NextWave Telecom and its subsidiaries to Verizon
Wireless, we agreed to indemnify NextWave Telecom and its subsidiaries against
all pre-closing liabilities of NextWave Telecom and its subsidiaries and
against
any violation of the Bankruptcy Court injunction against persons having claims
against NextWave Telecom and its subsidiaries, with no limit on the amount
of
such indemnity. A total of $165.0 million was held in escrow (the “Escrow
Amount”) in order to secure such indemnity, and to satisfy any amounts due to
Verizon Wireless in the event that the consolidated net loss of the NextWave
Telecom group for the taxable year commencing on January 1, 2005, and ending
on
April 13, 2005 was, subject to certain adjustments, less than $1.362 billion.
On
December 6, 2006, Verizon and AirTouch Cellular, the assignee of Verizon,
entered into an agreement (i) to settle the amounts payable under the Escrow
Account and (ii) to release the Escrow Amount plus accrued interest. As a
result, we received approximately $153.9 million of the proceeds from the
Escrow
Account, including accrued interest. In addition, the FCC received approximately
$16.1 million of funds held in escrow, including approximately $0.8
million held under a separate escrow, pursuant to a December 2004
stipulation entered into between NextWave and the FCC. We are not currently
aware of any other indemnifiable losses that remain following the effective
date
of the sale to Verizon, and Verizon has not made any related claims
therefor.
As
part
of the plan of reorganization, we issued $148.5 million of Non-Recourse Secured
Notes to the former equityholders of NextWave Telecom. The notes were
non-recourse to our assets and we were required to redeem the notes using
the
proceeds of any escrow release, net of payments due to the FCC. Accordingly,
the
full amount of the escrow released to us, $153.9 million, or approximately
103.5% of the face amount of the notes, was paid directly into an escrow
account
to fund the redemption of the notes. The notes were redeemed as of December
21,
2006.
Inception
of a Wireless Technology Company
The
following steps were taken to organize Old NextWave Wireless as a new wireless
technology company as part of the plan of reorganization:
|
·
|
The
NextWave Telecom group abandoned substantially all of its PCS networks,
technology and fixed assets, except the PCS spectrum licenses to
be
acquired by Verizon Wireless.
|
|
·
|
NTI
and its subsidiaries transferred all of their remaining non-PCS
assets to
NextWave Broadband, except cash and the PCS spectrum licenses to
be
acquired by Verizon Wireless. The assets contributed primarily
consisted
of property and equipment not desired by Verizon Wireless, having
a fair
market value of less than $10
million.
|
|
·
|
NextWave
Broadband was transferred to Old NextWave
Wireless.
|
|
·
|
Old
NextWave Wireless retained its investment in CYGNUS preferred stock
and
convertible notes, as well as wireless licenses useful for its
new
technology broadband business with a value of approximately $33.6
million.
|
|
·
|
NTI
and its subsidiaries, including Old NextWave Wireless, obtained
an order
providing a release of claims pursuant to Section 1141 of the Bankruptcy
Code. To the extent that such release did not eliminate all liabilities
of
the NextWave Telecom group, NextWave Wireless assumed and agreed
to
indemnify Verizon Wireless against such
liabilities.
|
|
·
|
NTI
and its subsidiaries (other than Old NextWave Wireless) were sold
to
Verizon Wireless for $3.0 billion.
|
|
·
|
Membership
units of NextWave were distributed to the former stockholders of
NTI,
which distribution was exempt from registration under the Securities
Act
pursuant to Section 1145 of the Bankruptcy Code. Upon this distribution,
on April 13, 2005, Old NextWave Wireless emerged as NextWave
Wireless.
|
|
·
|
Simultaneously
with the distribution, NextWave was capitalized with $550 million
of cash
proceeds from the sale to Verizon Wireless and prior PCS spectrum
license
sales.
|
|
·
|
Pursuant
to the plan, the NTI stockholders received the undivided interests
in the
underlying assets of Old NextWave Wireless as part of their consideration
for the redemption of their NTI shares, which was followed by the
deemed
contribution of these undivided interests to NextWave in return
for
membership interests in NextWave.
|
Our
Recent Acquisitions
Since
our
emergence as a new wireless technology company, we have made several strategic
investments and acquisitions, including most significantly:
|
·
|
In
March 2007, we acquired all of the outstanding shares of common
stock of
4253311 Canada Inc., a Canadian company. The total cost of the
acquisition
was approximately $26.0 million in cash. The assets of the company
are
comprised almost entirely of wireless spectrum covering Canadian
markets.
|
|
·
|
In
February 2007, NextWave acquired all of the outstanding common
stock and
warrants of GO Networks, Inc., for $13.2, million at closing plus
the
assumption of $6.7 million in debt, of which $1.3 million was paid
at
closing. Additional purchase consideration of up to $25.7 million
may be
paid in shares of NextWave common stock, subject to the achievement
of
certain operational milestones in the 18-month period subsequent
to the
closing of the acquisition. NextWave 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 NextWave common stock upon the achievement
of
the operational milestones referred to above.
|
|
|
|
|
·
|
In
January 2007, PacketVideo acquired all of the shares of SDC Secure
Digital Container AG for cash of $19.0 million. The acquisition
will be
accounted for in the first quarter of 2007 using the purchase method
of
accounting whereby the total purchase price, including any transaction
related expenses, will be allocated to tangible and intangible
assets
acquired based upon their respective fair
values.
|
|
·
|
In
December 2006, we were awarded 154 spectrum licenses for an aggregate
bid
of $115.6 million in the AWS auction. These licenses significantly
increased our spectrum portfolio to cover approximately 249 million
persons.
|
|
|
|
|
·
|
Since
our emergence as a wireless technology company, we have consummated
transactions to acquire licensed spectrum rights, including subsequent
lease obligations, for amounts totaling approximately $497 million,
including our recent acquisition of WCS Wireless Inc., which
holds
spectrum covering 188.8 million persons, or POPs, in the Central,
Western,
and Northeastern United States, for $160.5 million.
|
|
|
|
|
·
|
In
July 2005 we acquired all of the outstanding shares of PacketVideo
Corporation for $46.7 million in
cash.
|
Corporate
Conversion Merger
To
enable
our listing on The Nasdaq Global Market, NextWave Wireless LLC’s Board of
Managers and a majority in interest of NextWave Wireless LLC’s members approved
the conversion of the Company from a Delaware limited liability company to
a
Delaware corporation. The corporate conversion was effected on November 13,
2006
through the merger of a wholly owned subsidiary of ours with and into NextWave
Wireless LLC. Our common
stock is now listed on The
Nasdaq Global Market under the ticker symbol “WAVE”.
In the
merger, NextWave Wireless LLC’s equity holders received one share of our common
stock for every six membership interests that they held. No fractional shares
of
our common stock were issued in connection with the corporate conversion
merger.
Instead, holders of LLC interests who would otherwise have been entitled
to a
fraction of a share of common stock were paid cash equal to $1.00 per LLC
interest not exchanged for a whole share of our common stock. Each holder
of
NextWave Wireless LLC’s limited liability interests own the same percentage of
the outstanding equity of the Company before and immediately after the corporate
conversion merger. In addition, we assumed NextWave Wireless LLC’s obligations
under all stock option plans of the Company and its subsidiaries.
Executive
Officers of the Registrant
All
of
our executive officers are elected at the organizational meeting of our Board
of
Directors held annually and serve at the pleasure of the Board of Directors.
The
following table sets forth names, ages and positions of the persons who are
our
executive officers as of March 21, 2007.
Name
|
|
Age
|
|
Position
|
Allen
Salmasi
|
|
52
|
|
Chief
Executive Officer and President
|
George
C. Alex
|
|
47
|
|
Executive
Vice President - Chief Financial Officer
|
Roy
D. Berger
|
|
49
|
|
Executive
Vice President - Corporate Marketing &
Communications
|
Frank
A. Cassou
|
|
50
|
|
Executive
Vice President - Corporate Development and Chief Legal Counsel,
Secretary
|
Kevin
M. Finn
|
|
65
|
|
Executive
Vice President - Chief Compliance Officer
|
Mark
Kelley
|
|
46
|
|
Executive
Vice President - Chief Division Officer (ATG)
|
Richard
Kornfeld
|
|
46
|
|
Executive
Vice President - Chief Strategy Officer
|
Jim
Madsen
|
|
47
|
|
Executive
Vice President - Chief Business Development Officer
|
David
B. Needham
|
|
49
|
|
Executive
Vice President - Chief Division Officer (NSG)
|
R.
Andrew Salony
|
|
54
|
|
Executive
Vice President - Chief Administration Officer
|
Kenneth
Stanwood
|
|
45
|
|
Executive
Vice President - Technical and Standards
Development
|
Allen
Salmasi
has
served as our Chairman of the Board, Chief Executive Officer and President
since
our inception. Previously, Mr. Salmasi served as Chairman and CEO of NTI,
which
he founded in 1995 and subsequently sold to Verizon Wireless in 2005. Prior
to
NTI, Mr. Salmasi was a member of the Board of Directors, President of the
Wireless Telecommunications Division, and Chief Strategic Officer of QUALCOMM
Inc. He joined QUALCOMM in 1988 as a result of the merger of QUALCOMM and
Omninet Corporation, which Mr. Salmasi founded in 1984. He initiated and
led the
development of CDMA technologies, standards and the associated businesses
at
QUALCOMM until 1995. At Omninet, he conceived and led the development of
the
first OmniTRACS system, which provides two-way messaging and position reporting
services to mobile users. From 1979 to 1984, Mr. Salmasi held several technical
and management positions at the National Aeronautics and Space Administration
Jet Propulsion Laboratory. Mr. Salmasi received two B.S. degrees in Electrical
Engineering and Management Economics from Purdue University in 1977. He received
his M.S. degrees in Electrical Engineering from Purdue University in 1979
and
Applied Mathematics from the University of Southern California in 1983,
respectively. He completed his course work at the University of Southern
California towards a Ph.D. degree in Electrical Engineering.
Frank
A. Cassou
is our
Executive Vice President, Corporate Development and Chief Legal Counsel and
our
Secretary. Mr. Cassou held similar positions at NTI, which he joined in 1996.
Mr. Cassou has served as a Director since our inception. Prior to joining
NextWave, Mr. Cassou was a partner at the law firm of Cooley Godward LLP,
where
he practiced corporate law representing telecommunications and technology
companies. He was outside corporate counsel to QUALCOMM from June 1991 through
February 1996, representing the company in its public financing and acquisition
transactions, licensing agreements and the formation of strategic
partnerships.
George
C. Alex
serves
as our Chief Financial Officer. Mr. Alex joined NextWave Telecom in 2001
as
Senior Vice President, Finance. Formerly, he was Chief Financial Officer
of
Network Plus Corp., an integrated communications provider and a Managing
Director of Prudential Securities, where he headed the telecommunications
practice. During his career as an investment banker, Mr. Alex completed
transactions that raised more than $20 billion for his clients and executed
M&A assignments in excess of $6 billion. Mr. Alex earned his B.A. from
Harvard University and his M.B.A. from the Amos Tuck Business School at
Dartmouth College.
Roy
D. Berger
serves
as our Executive Vice President of Corporate Marketing & Communications. Mr.
Berger joined NTI in 1996 as Vice President, Business Planning and subsequently
served in a number of executive marketing and business development positions.
Prior to joining NextWave, Mr. Berger spent ten years at NYNEX, where he
held
senior management positions in both the telecommunications and computer
retailing/distribution divisions, including Vice President-Personal
Communication Services and Vice President-Marketing for NYNEX Mobile
Communications. Before joining NYNEX, Mr. Berger held senior management
positions with several leading companies in the personal computer retailing
industry.
Kevin
M. Finn
serves
as our Chief Compliance Officer and as a Director. Mr. Finn joined NTI in
1995
where he was formerly Senior Vice President, Special Projects. From 1992
until
1995, Mr. Finn served as President of Marin-Finn Industries, Inc. Prior to
that,
he served as Vice President and General Manager of Densitron Technology plc.,
and from 1986 to 1988, Mr. Finn was Executive Vice President of Omninet Inc.
Mr.
Finn was a Vice President of Sony Corporation of America and General Manager
of
its Component Products Division from 1983 to 1987.
Mark
Kelley
serves
as the Chief Division Officer of NextWave Broadband’s Advanced Technology Group.
Mr. Kelley has more than 25 years experience in engineering, communication
systems planning and analysis. Prior to joining NextWave in 2005, Mr. Kelley
was
Chief Technical Officer of Leap Wireless. Formerly, he served as Vice President
of Wireless System Design for QUALCOMM, where he was responsible for all
wireless infrastructure system design activities, including radio and fixed
network system planning, project engineering and the development of QUALCOMM’s
commercial CDMA network planning software product. As a Director of Planning
for
Wireless Design Firm LLC, Mr. Kelley led the design of the world’s first GSM
system in Germany. Earlier in his career, Mr. Kelley developed custom ASICs
at
Hughes Microelectronics. Mr. Kelley holds a Bachelor of Science degree in
Electrical Engineering from San Diego State University.
Richard
Kornfeld
serves
as our Chief Strategy Officer. Before joining us, Mr. Kornfeld was the CEO
of
Staccato Communications, Inc. Prior to this, Mr. Kornfeld was the Vice President
and General Manager of Texas Instruments’ Wireless Center responsible for the
Wireless Chipset Business. He joined Texas Instruments through the acquisition
of Dot Wireless, Inc., which he co-founded and served as the Chairman, CEO
and
President. Prior to founding Dot Wireless, Mr. Kornfeld had been a founding
member of NTI, where he was the Senior Vice President and General Manager
of the
Consumer Products division. Previously, Mr. Kornfeld was Vice President of
Engineering at QUALCOMM, Inc. During his 10-year tenure, he helped QUALCOMM
grow
from a 20-person startup to a world leader in telecommunications, currently
employing more than 7,000 people. Prior to QUALCOMM, Mr. Kornfeld held various
technical positions at M/A-Com Linkabit. Mr. Kornfeld is a graduate from
the
School of Engineering, University of California.
Jim
Madsen
serves
as our Chief Business Development Officer. Formerly, Mr. Madsen held several
executive management positions at NTI which he co-founded in 1995. From 1989
to
1995, at QUALCOMM, Mr. Madsen headed CDMA Business Development where he led
the
company’s PCS business development, marketing and sales initiatives, and also
served as Director of Marketing for OmniTRACS’ satellite data communications
business and was responsible for worldwide VLSI components business development
and marketing. Mr. Madsen earned his S.B. in mechanical engineering from
the
Massachusetts Institute of Technology and his M.B.A. from Stanford
University.
David
B. Needham
serves
as the Chief Division Officer of NextWave Broadband’s Network Solutions Group.
He was formerly the Chief Operating Officer for NTI and has been with NextWave
since 1996. Prior to joining NextWave, Mr. Needham served as President and
Chief
Operating Officer of GE Capital-ResCom. From 1992 to 1994, Mr. Needham served
as
President of MetroCel Cellular Telephone Company, a joint-venture cellular
telecommunications company owned by AT&T Wireless and Airtouch
Communications serving the Dallas-Fort Worth area. While at MetroCel, Mr.
Needham led the development and commercial launch of Voice Touch, the wireless
industry’s first voice-activated switch product, and MetroCel Connect, one of
the first wireless direction and information services. From 1989 to 1991,
Mr.
Needham served as District General Manager for the California Valley and
Nevada
cellular operations of McCaw Cellular Communications. Mr. Needham earned
a
Bachelor of Arts degree from Harvard University and a Masters in Business
Administration from Harvard Business School.
R.
Andrew Salony
is our
Chief Administrative Officer and is responsible for Corporate Planning,
Administration and Human Resources. Since joining NTI in 1996, Mr. Salony
has
served in numerous executive management roles, including Senior Vice President
of Marketing, Strategy, Business Development and Human Resources. Prior to
his
tenure at NextWave, Mr. Salony was a Senior Partner and Managing Director
of the
wireless division at Warren, Morris and Madison Ltd., a leading boutique
executive search firm specializing in telecommunications and entertainment.
He
began his wireless telecommunications career in 1982 with Communication
Industries, where he held executive positions in sales, marketing and general
management in the company’s cellular and paging operations. Mr. Salony remained
with the company—which was sold to US West in 1986—until 1993, serving as
General Manager of the Southern California Region.
Kenneth
Stanwood
serves
as Executive Vice President Technical and Standards Development. Formerly,
Mr.
Stanwood founded and served as Chief Executive Officer of CYGNUS Communications.
Prior to CYGNUS, he was CTO of Ensemble Communications which produced LMDS
equipment and provided key technology to 802.16 and WiMAX. As a representative
of Ensemble, he was one of the founders of the WiMAX Forum and served on
its
board of directors. Ken served as vice-chair of IEEE 802.16 for three years
and
has been involved with 802.16 and ETSI BRAN for over 8 years. He was a
primary
designer of the 802.16 MAC layer. He holds numerous patents related to
broadband
wireless access. He received his MS degree from Stanford
University.
Technology
Development Steering Committee
To
provide additional guidance regarding the company’s technology development
initiatives, we have formed a Technology Development Steering Committee
that
consists of highly accomplished individuals with extensive backgrounds
in radio
technologies, semiconductors, information theory, and signal processing.
The
Committee is comprised of senior level NextWave engineers and outside experts.
Current non-NextWave, outside experts of the Technology Development Steering
Committee are:
Dr.
Andrew J. Viterbi (Committee Chairman)
Dr.
Viterbi serves as president of the Viterbi Group, LLC, which advises and
invests
in early stage companies in the fields of wireless communications and network
infrastructure. In 1985, he co-founded QUALCOMM Corp. where he and his
colleagues developed CDMA (Code Division Multiple Access). Dr. Viterbi is
a
Fellow of the IEEE, a Marconi Fellow, a member of the American Academy of
Arts
and Sciences, and a member of both the National Academy of Engineering and
the
National Academy of Sciences. He sits on the USC School of Engineering Board
of
Councilers, the Burnham Institute Board of Directors and the Scripps Cancer
Center Board of Directors and is a Trustee of the Mathematical Sciences Research
Institute in Berkeley. Dr. Viterbi has received numerous awards for his
contributions to communications theory, including the Institute of Electrical
and Electronics Engineers’ (IEEE) Alexander Graham Bell Medal, the Marconi
International Fellowship Award, the Christopher Columbus Award, and the IEEE’s
Shannon Award and Lecture, considered the highest honor in communication
technology. In 1962 Dr. Viterbi earned one of the first Doctorates in Electrical
Engineering from the University of Southern California and has received honorary
doctorates from universities in the United States, Canada, Italy and Israel.
Dr.
Anantha P. Chandrakasan
Dr.
Anantha Chandrakasan is currently the Joseph F. and Nancy P. Keithly Professor
at the Massachusetts Institute of Technology where he has been a professor
since
1994. His research interests include micro-power digital and mixed-signal
integrated circuit design, wireless microsensor system design, ultra-wideband
radios, and emerging technologies. Dr. Chandrakasan held the Analog Devices
Career Development Chair from 1994 to 1997 and served as technical program
co-chair for the 1997 International Symposium on Low Power Electronics and
Design (ISLPED), VLSI Design 1998, and the 1998 IEEE Workshop on Signal
Processing Systems. He was the Signal Processing Sub-committee Chair for
ISSCC
1999-2001, the Program Vice-Chair for ISSCC 2002, the Program Chair for ISSCC
2003, and the Technology Directions Sub-committee Chair for ISSCC 2004-2006.
He
is the Technology Directions Chair for ISSCC
2007.
He
serves on the SSCS
AdCom
and is
the Committee Chair. He is the Director of the Massachusetts Institute of
Technology Microsystems
Technology Labs.
His
awards include the 1993 IEEE Communications Society's Best Tutorial Paper
Award,
the IEEE Electron Devices Society's 1997 Paul Rappaport Award for Best Paper
in
an EDS publication, the 1999 Design Automation Conference (DAC) Student Design
Contest Award and First Place in the Operational Category of the 2004 DAC/ISSCC
Student Design Contest. He received the NSF Career Development award in
1995, the IBM Faculty Development award in 1995 and the National Semiconductor
Faculty Development award in both 1996 and 1997. Dr. Chandrakasan earned
the
B.S, M.S. and Ph.D. degrees in Electrical Engineering and Computer Sciences
from
the University of California, Berkeley, in 1989, 1990, and 1994 respectively.
Dr.
Ian Galton
Dr.
Galton is a professor of Electrical Engineering at the University of California,
San Diego where he manages the Integrated Signal Processing Group for conducting
research to improve signal processing in mixed-signal (analog and digital)
integrated circuits for highly integrated, low-cost, communication systems.
Prior to his position at UC San Diego he was at UC Irvine with the NASA Jet
Propulsion Laboratory, Acuson, and Mead Data Central where his research has
focused on the creation and implementation of critical communication system
blocks such as data converters, frequency synthesizers, and clock recovery
systems. Dr. Galton consults at several semiconductor companies and teaches
industry-oriented courses on mixed-signal integrated circuit design. He has
served on the Board of Directors and Technical Advisory Boards at a number
of
corporations and has held several positions with the IEEE including
Editor-in-Chief of Transactions on Circuits and Systems II: Analog and Digital
Signal Processing, as a member of the Solid-State Circuits Society
Administrative Committee, the Circuits and Systems Society Board of Governors,
and the International Solid-State Circuits Conference Technical Program
Committee. Dr. Galton earned the Sc.B. degree from Brown University in 1984,
and
the M.S. and Ph.D. degrees in Electrical Engineering from the California
Institute of Technology in 1989 and 1992, respectively.
Dr.
Lawrence E. Larson
Dr.
Larson is Director of the Center for Wireless Communications at University
of
California, San Diego and serves as the inaugural Communications Industry
Chair.
He has been a key figure in the development of ultrahigh frequency compound
semiconductor transistor and integrated circuit technology. During the late
1980's Dr. Larson led a team at Hughes Research Laboratories to develop
high-reliability InP-based HEMT technology for spaceborne low-noise amplifier
applications. His group’s research led to a number of firsts including the
world's fastest room temperature millimeter-wave integrated circuit. Dr.
Larson’s research in the early 1990's led to the development of the first
microwave and mmW applications of microelectronic-mechanical (MEMS)
technologies, including the first MEMS switches for microwave applications.
Dr.
Larson has received 25 US patents, co-authored three books and published
over
150 papers. Dr. Larson earned the B.S. in Electrical Engineering and the
M.
Engineering degrees from Cornell University in 1979 and 1980, respectively,
and
the PhD degree in Electrical Engineering from the University of California,
Los
Angeles in 1986.
Mitch
Trott
Dr.
Mitch
Trott is a Principal Research Scientist at Hewlett-Packard Laboratories where
he
leads research in the fields of wireless communication, information theory
and
video streaming systems. Prior to his work at Hewlett-Packard he was Director
of
Research at ArrayComm, Inc., San Jose, CA from 1997 to 2002. From 1992 to
1998
Dr. Trott served as Assistant then Associate Professor of Electrical Engineering
at Massachusetts Institute of Technology. In the course of his career he
has
been named an inventor or co-inventor on 43 U.S. patents. Dr. Trott earned
a
B.S. and M.S. in Systems Engineering from Case Western University in 1987
and
1988, respectively, and a Ph.D. in Electrical Engineering from Stanford
University in 1992.
Dr.
David Tse
Dr.
Tse
is a professor of Electrical Engineering and Computer Sciences at the University
of California at Berkeley, where he conducts research in the fields of
information theory, wireless communications and networking. Prior to his
position at UC Berkeley, Dr. Tse was a postdoctoral member of the technical
staff at AT&T Bell Laboratories from 1994 to 1995. He was the Technical
Program co-chair of the International Symposium on Information Theory in
2004,
and an Associate Editor of the IEEE Transactions on Information Theory from
2001
to 2003. David Tse earned the B.A.Sc. degree in Systems Design Engineering
from
University of Waterloo, Canada in 1989, and the M.S. and Ph.D. degrees in
Electrical Engineering from Massachusetts Institute of Technology in 1991
and
1994, respectively.
Dr.
Erez Uri
Dr.
Erez
Uri is a lecturer in the Electrical Engineering - Systems Department at Tel
Aviv
University. His research interests are in the fields of information theory
and
digital communication. He has consulted for a number of communications
companies, including Lucent Technologies' Bell Laboratories, Tadiran-Systems
and
Ultracom and was a recipient of the Omicron Delta prize for his presentation
at
the 2000 Israel IEEE Convention. Dr. Uri earned undergraduate degrees in
mathematics and physics in 1996 at Tel Aviv University, and masters and doctoral
degrees in 1999 and 2003, respectively. He completed his postdoctoral studies
at
MIT in 2005, where he specialized in research on problems of coding and
communication.
Dr.
Charles Wheatley
Dr.
Charles (Chuck) E. Wheatley has been involved with Spread Spectrum concepts,
including frequency hopping and direct sequence techniques, for over 40 years.
Until his retirement in January, 2007, he was Senior Vice President of
Technology and a Fellow at QUALCOMM, Inc. where he worked with CDMA as applied
to cellular/personal communications. Dr. Wheatley was a contributor to the
successful commercial deployment of CDMA2000 systems in the U.S., China and
India. Prior to QUALCOMM, Dr. Wheatley worked at Linkabit Corporation where
he
contributed to RF and system design aspects of the Milstar program and at
Rockwell International. Dr. Wheatley has served for six years on the Board
of
Trustees of the Reuben H. Fleet Science Center in San Diego California, acting
as President since November 2006. He is an IEEE fellow and holds over 75
patents
related to the fields of communications and navigation. Dr. Wheatley earned
a
B.S. degree in Physics from the California Institute of Technology in 1956,
a
M.S. degree in Electrical Engineering from the University of Southern California
Angeles in 1958, and a Ph.D. degree in Electrical Engineering from the
University of California (Los Angeles) in 1972.
Dr.
Gregory W. Wornell
Dr.
Gregory W. Wornell is a professor of Electrical Engineering and Computer
Science
at the Massachusetts Institute of Technology where he has been a member of
the
faculty since 1991. He directs the Signals, Information, and Algorithms
Laboratory within the Research Laboratory of Electronics, and co-directs
the
Center for Wireless Networking. He is chair of Graduate Area I (Systems,
Communication, Control, and Signal Processing) within the EECS department's
doctoral program, and is a member of the Massachusetts Institute of Technology’s
Computational and Systems Biology Initiative. He has held visiting appointments
at the Department of Electrical Engineering and Computer Science at the
University of California, Berkeley, CA, in 1999-2000, at Hewlett-Packard
Laboratories, Palo Alto, CA, in 1999, and at AT&T Bell Laboratories in
1992-1993. His research interests and publications are in the areas of signal
processing, digital communication, and information theory, and include
algorithms and architectures for wireless and sensor networks, broadband
systems, and multimedia environments. He has served in a variety of positions
with the Signal Processing and Information Theory societies of the IEEE and
is a
Fellow of the IEEE. Dr.Wornell earned the B.A.Sc. degree (with honors) from
the
University of British Columbia, Canada, in 1985 and the S.M. and Ph.D. degrees
in Electrical Engineering and Computer Science from the Massachusetts Institute
of Technology in 1987 and 1991, respectively.
Investor
Information
We
are a
public company and are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly,
we file periodic reports, proxy statements and other information with the
Securities and Exchange Commission (the “SEC”). Such reports, proxy statements
and other information may be obtained by visiting the Public Reference Room
of
the SEC at 100 F Street NE, Room 1580, Washington, D.C. 20549 or by calling
the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov)
that
contains reports, proxy and information statements and other information
regarding us and other issuers that file electronically.
Our
website address is http://www.nextwave.com.
Our
Code of Business Conduct and Ethics is available free of charge on our website.
The
certifications of our Chief Executive Officer and Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, about the
disclosure contained in this Report are attached hereto.
Item
1A. RISK FACTORS
We
emerged from our reorganization in April 2005 with a new business plan and
have
made several recent 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 business, which we acquired in July 2005, we have never
generated any material revenues and have limited commercial operations. We
are
currently unable to project when our wireless broadband products and
technologies will be commercially deployed and generate revenue. In addition,
we, along with the companies we have acquired, have a history of losses.
Other
than our PacketVideo business, we will not have the benefit of any meaningful
operations, and we will incur significant expenses in advance of generating
significant revenues, particularly from our WiMAX/Wi-Fi semiconductor and
network component products, and are expected to realize significant
operating losses for the next few years. We are therefore subject to all
risks
typically associated with a start-up entity.
We
are in
the early stages of the implementation of our business plan. If we are not
able
to successfully implement all key aspects of our business plan, including
selling and/or licensing, high volumes of our WiMAX/Wi-Fi semiconductor and
network component 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 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.
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 is 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 this
Annual
Report on Form 10-K.
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
30,
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 March
21,
2007, the number of our employees has increased from 50 to 662 as a result
of
organic growth and acquisitions. We acquired GO Networks in February 2007,
CYGNUS Communications in February 2006 and PacketVideo in July 2005 and we
are
still in the process of integrating these businesses. To support our expanded
research and development activities for our mobile broadband business and
the growth in our PacketVideo business, we must continue to successfully
hire,
train, motivate and retain our employees. We expect that significant further
expansion of our operations and employee base will be necessary. In addition,
in
order to manage our expanded operations, we will need to continue to expand
our
management, operational and financial controls and our reporting systems
and
procedures. We will also need to retain management, key employees and business
partners of PacketVideo, GO and CYGNUS. 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 PacketVideo, GO and CYGNUS, 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. Set forth below is a brief description of the
competitive environment for each of our divisions and PacketVideo:
NextWave
Broadband
- As
providers of mobile broadband products and technologies based on WiMAX and
Wi-Fi 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 alternative wireless standards such as GSM,
CDMA2000 and UMTS. Companies that support these alternative wireless
technologies include well-established industry leaders such as Alcatel,
Ericsson, Huawei, LGE, Lucent, Motorola, Nokia, Nortel, QUALCOMM, Samsung
and
Siemens.
In
addition, we will be competing with numerous companies that are currently
developing or marketing WiMAX products and technologies including 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.
PacketVideo
- At
present, the primary competitors for PacketVideo’s multimedia software products
are 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 PacketVideo. As the market for embedded
multimedia software evolves, we anticipate that additional competitors may
emerge including Apple Computer, Real Networks and OpenWave.
GO
Networks
- GO
Networks competition ranges from small and medium size companies such as
Tropos
Networks, Strix Systems, and Belair Networks to large-scale systems suppliers
such as Cisco, Motorola, and Nortel. Many of GO Networks’ competitors have an
established time-to-market advantage and have sales, marketing, manufacturing,
and distribution capabilities that significantly exceed those of GO
Networks.
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.
We
intend to expand our business through additional acquisitions that could
result
in diversion of resources and extra expenses, which could disrupt our business
and increase our expenses.
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 CYGNUS, GO Networks and PacketVideo
acquisitions, we have made investments in a number of companies including
Hughes
Systique and Inquam Broadband, and anticipate future investments in other
companies. The negotiation of potential acquisitions and investments, as
well as
the integration of acquired businesses or technologies, could divert our
management’s time and resources. Acquired businesses and technologies may not be
successfully integrated with our products and operations. In addition, our
investments, particularly minority investments, may not give us access to
new
technologies or provide us with business relationships with the other company.
We may not realize the intended benefit of any acquisition or investment.
Our
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. If acquisitions disrupt our operations or if
our investments are not successful, our business, financial condition and
results of operations may suffer.
If
WiMAX technology fails to gain acceptance, we will not be successful in selling
WiMAX products and technologies.
Our
business plan is reliant on the deployment and market acceptance of mobile
WiMAX
networks and WiMAX enabled handsets and devices. WiMAX and the market for
WiMAX
networks and services have only recently begun to develop and is continuing
to
evolve. We plan to generate most of our revenue from the sale of WiMAX products
and the licensing of mobile WiMAX broadband technologies. 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. Mobile
WiMAX will compete with several third generation (3G) and fourth generation
(4G)
wireless air interface technologies that are currently being deployed or
developed to enable the delivery of mobile broadband services to the market,
including CDMA2000 and UMTS. In order for WiMAX to gain significant market
acceptance among consumers, network operators and telecommunications service
providers will need to deploy WiMAX networks. However, many of the largest
wireless telecommunications providers have made significant expenditures
in
technologies that have the potential to be competitive with WiMAX and may
choose
to continue to develop these technologies rather than utilize WiMAX.
Certification standards for WiMAX are controlled by the WiMAX Forum, an industry
group. Accordingly, standard setting for WiMAX is beyond our control. If
standards for WiMAX change, the commercial viability of mobile WiMAX may
be
delayed or impaired and our development efforts may also be delayed or impaired
or become more costly. The development of mobile WiMAX networks is also
dependent on the availability of spectrum. Access to spectrum suitable for
mobile WiMAX is highly competitive. We currently contemplate using multiple
frequencies for our mobile WiMAX networks. 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, mobile WiMAX 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 mobile WiMAX technology, we will not be successful in selling WiMAX
products and technologies and our ability to grow our business will be
limited.
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.
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. We are currently unable to project when our semiconductors
and other wireless broadband products based on WiMAX and Wi-Fi technologies
will
be commercially deployed and generate revenue. While we intend to continue
to
make substantial investments in development for the foreseeable future, it
is
possible that our development efforts will not be successful and that many
of
our wireless broadband products and technologies will not result in meaningful
revenues. In addition, unexpected expenses and delays in development could
adversely affect our liquidity. Many of our 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 semiconductors and other wireless broadband products
and
technologies will adversely affect our ability to achieve
profitability.
Our
future WiMAX products may not receive the certification we expect, which
may
affect our ability to sell our WiMAX products and
services.
If
our
mobile WiMAX technologies and products do not receive WiMAX industry
certification, we may not be able to successfully market, license or sell
our
mobile WiMAX products or technologies. Our WiMAX-based products may not receive
the necessary certification in the time frame we expect, or at all, and may
therefore not achieve the wide acceptance that we are seeking. In addition,
we
expect industry standards for WiMAX to evolve and if we are not able to adapt
our products and technologies to any such changes, our ability to license
or
sell our products and technologies would be impaired.
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.
The
dependence of our Network Solutions Group business plan is subject to a
number
of risks, including:
|
·
|
the
inability to control the amount and timing of resources that
our potential
service provider customers devote to their network deployment
activities;
|
|
·
|
the
possibility that potential service provider customers could move
forward
and deploy networks without the assistance of
NSG;
|
|
·
|
the
possibility that service provider customers may experience financial
or
technical difficulties;
|
We
may require significant capital to implement our business plan, but we may
not
be able to obtain additional financing on favorable terms or at
all.
While
we
estimate that our working capital will be sufficient to fund our research
and
development activities and our operating losses 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.
We may
also require additional cash resources to pursue investments or acquisitions,
including investments in or acquisitions of other technologies, businesses
or
spectrum licenses. Sources of additional capital may include public or private
debt and equity financings. We have completed a private placement of senior
secured notes that provided us with net cash proceeds of $295.0 million
available for the sole purpose of financing spectrum acquisitions and leases
as
well as a private placement of our Series A Senior Convertible Preferred
Stock,
that provided us with net cash proceeds of $351 million. The entire proceeds
of
our senior secured notes were used for the acquisition of WCS Wireless, Inc.
for
$160.5 million, the acquisition of two new EBS leases for $22.1 million and
for
the majority of the funding for the acquisition of 154 AWS licenses for $115.6
million. The proceeds of our Series A Senior Convertiable Preferred Stock
are
available to fund working capital needs and potential strategic transactions.
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.
Risks
Related to Our PacketVideo Business
Since
our
inception in April 2005, substantially all of our revenues have been generated
by our PacketVideo subsidiary, which we acquired in July 2005, and we believe
that PacketVideo will account for a substantial portion of our revenues until
we
complete the development and commercialization of our wireless broadband
products and technologies. Our PacketVideo business is subject to a number
of
risks, including:
PacketVideo
may be materially and adversely affected by a ban on EVDO phones by the
United
States International Trade Commission.
During
2006, PacketVideo’s revenues from Verizon Wireless accounted for 64% of our
revenues. Our embedded software is shipped by Verizon Wireless exclusively
on
EVDO handsets in connection with its V-Cast offering. Broadcom has alleged
that
QUALCOMM has infringed certain of its patents, including patents implicated
in
EVDO handsets, and filed a compliant in the United States International
Trade
Commission (ITC). Pursuant to the ITC hearing, an administrative law judge
issued an initial determination in which he found infringement on some
claims of
one patent, which includes technology that governs power usage within EVDO
handsets. The ITC has adopted the administrative law judge’s determination on
violation and will issue its decision on remedy on March 8, 2007. The final
determination is then subject to Presidential review. Following the
determination on violation, Broadcom petitioned the ITC for a ban on the
import
of all EVDO phones, and the ITC will hold public hearings to investigate
the
impact on domestic businesses of such a ban. If such a ban were to be adopted,
Verizon Wireless may be unable to sell EVDO handsets. Because PacketVideo
license fees are generally based on a one time royalty when a new handset
is
sold, our revenue would be materially and adversely affected if a ban on
EVDO
handsets were to be enacted.
Reliance
on a limited number of mobile phone and device manufacturers and wireless
carriers
. During
2006, PacketVideo’s revenues from Verizon Wireless accounted for 64% of our
revenues. For the period from our inception (April 13, 2005) through December
31, 2005 PacketVideo’s sales to Verizon Wireless, Fujitsu and Nokia accounted
for 22%, 14% and 11%, respectively, of our revenues. Aggregated accounts
receivable from Verizon Wireless and SEMC accounted for 42% and 11%,
respectively, of total gross accounts receivable at December 30, 2006. We
expect
that our PacketVideo subsidiary will continue to generate a significant portion
of its revenues through a limited number of mobile phone and device
manufacturers and wireless carriers for the foreseeable future, although
these
amounts may vary from period-to-period. If any of these customers decides
not to
embed PacketVideo software into their mobile phones and devices or otherwise
reduces the amount of PacketVideo software they embed in their mobile phones
or
devices generally, our PacketVideo revenues and results of operations could
be
materially adversely affected.
Our
agreements with mobile phone and device manufacturers are not exclusive,
and
many contain no minimum purchase requirements. Accordingly, mobile phone
and
device manufacturers may effectively terminate these agreements by no longer
embedding PacketVideo’s software into their products. In addition, PacketVideo
has indemnified these manufacturers from certain claims that PacketVideo’s
software infringes third-party intellectual property rights. Our carrier
agreements are not exclusive and generally have a limited term of one or
two
years with evergreen, or automatic renewal, provisions upon expiration of
the
initial term. These agreements set out the terms of our distribution
relationships with the carriers but generally do not obligate the carriers
to
market or distribute any of our applications. In addition, the carriers can
terminate these agreements early, and in some instances, at any time, without
cause.
Many
factors outside our control could impair PacketVideo’s ability to generate
revenues from mobile phone and device manufacturers and wireless carriers,
including the following:
|
·
|
a
preference for embedded software licensed by one of PacketVideo’s
competitors;
|
|
·
|
competing
applications;
|
|
·
|
a
decision to discontinue embedding our PacketVideo software, or
mobile
broadband embedded software
altogether;
|
|
·
|
a
carrier’s decision not to provide mobile broadband applications or content
thereby reducing the need for PacketVideo’s
applications;
|
|
·
|
a
carrier’s network encountering technical problems that disrupt the
delivery of content for our
applications;
|
|
·
|
a
manufacturer’s decision to increase the cost of mobile phones and devices
embedded with PacketVideo’s
software;
|
|
·
|
a
manufacturer’s decision to reduce the price it is willing to pay for
embedded software such as PacketVideo’s;
and
|
|
·
|
consolidation
among manufacturers or wireless carriers or the emergence of new
manufacturers or wireless carriers that do not license PacketVideo
software.
|
If
wireless subscribers do not increase their use of their mobile phones to
access
multimedia content, our PacketVideo business may suffer.
Our
PacketVideo business is reliant on the continued and increased use of mobile
phones to access multimedia content by consumers. The market for multimedia
content delivery through mobile phones is relatively new. If the market does
not
continue to develop or develops more slowly than anticipated, mobile phone
manufacturers may cease to embed PacketVideo’s software in their handsets and
wireless carriers may limit or stop the delivery of multimedia content and
the
demand for mobile phones with embedded multimedia software may decline. If
this
occurs, our PacketVideo business would be harmed and our revenues would
decline.
If
we
fail to deliver our PacketVideo applications to correspond with the commercial
introduction of new mobile phone models,
our
sales may suffer.
PacketVideo’s business is tied, in part, to the commercial introduction of new
mobile phones with enhanced features. Many new mobile phone models are released
in the final quarter of the year to coincide with the holiday shopping season.
We cannot control the timing of these mobile phone launches. Our PacketVideo
software must be modified for each new mobile phone model. If we are unable
to
release new versions of our PacketVideo software to coincide with these new
mobile phone launches, our sales of our PacketVideo software may suffer.
In
addition, if new mobile phone launches are delayed or if we miss the key
holiday
selling season, our sales may suffer.
PacketVideo
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.
The
development of new or enhanced embedded multimedia software products 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.
We
do not have any manufacturing capabilities and will depend on third-party
manufacturers and suppliers to manufacture, assemble and package our
semiconductor products.
We
are
currently designing and developing semiconductor products including digital
baseband ASICs and multi-band RFICs. If we are successful in our design and
development activities and a market for these products develops, these products
will need to be manufactured. Due to the expense and complexity associated
with
the manufacturer of digital baseband ASICs and multi-band RFICs, we intend
to
depend on third-party manufacturers to manufacture these products. The
dependence on third-parties to manufacture, assemble and package these products
involves a number of risks, including:
|
·
|
a
potential lack of capacity to meet
demand;
|
|
·
|
reduced
control over quality and delivery
schedules;
|
|
·
|
risks
of inadequate manufacturing yield or excessive
costs;
|
|
·
|
difficulties
in selecting and integrating
subcontractors;
|
|
·
|
limited
warranties in products supplied to
us;
|
|
·
|
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
WiMAX
products and technologies that we are developing will be inherently complex
and
may contain defects and errors that are detected only when the products are
in
use. Further, because our products and technologies that we are developing
will
be responsible for 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 that we are developing or the products of our customers or
licensees could harm our reputation and/or adversely affect the growth of
mobile
WiMAX markets.
Because
mobile WiMAX is an emerging technology that is 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
network.
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. We also expect to incur expenditures to defend against
claims by other persons asserting that the technology that will be used and
sold
by our Company infringes upon the right of such other persons. Because mobile
WiMAX is an emerging technology that is 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 networks
or
products. More than 20 companies have submitted letters of assurance related
to
IEEE 802.16 and amendments stating that they may hold or control patents
or
patent applications, the use of which would be unavoidable to create a compliant
implementation of either mandatory or optional portions of the standard.
In such
letters, the patent holder typically asserts that it is prepared to grant
a
license to its essential IP to an unrestricted number of applicants on a
worldwide, non-discriminatory basis and on reasonable terms and conditions.
If
any companies asserting that they hold or control patents or patent applications
necessary to implement mobile WiMAX 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 WiMAX networks and the sale
of
our mobile WiMAX 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 products and
technologies, this could adversely affect the profitability of these products
and technologies.
As
the
number of competitors in our market increases and the functionality of our
products is enhanced, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. Any claims,
with
or without merit, could be time consuming to address, result in costly
litigation, 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
could also become the targets of litigation. Any such litigation could severely
disrupt the business of our customers, which in turn could hurt our relations
with our customers and cause our revenues to decrease.
We
anticipate that we will develop a patent portfolio related to our WiMAX products
and technologies. However, there is no assurance that we will be able to
obtain
patents covering WiMAX 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.
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 key
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.
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
start-up company, 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 have
employment agreements with our key management personnel and 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
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.
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 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.
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 An Investment in Our Common Stock
Our
derivative securities have the potential to dilute shareholder value and
cause
our stock price to decline
On
March
21, 2007, 84.5 million shares of our common stock were outstanding. Up to
46.2
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.
On
December 30, 2006, we had options outstanding to purchase 10.9 million shares
of
our common stock at a weighted average exercise price of $6.20 per share
and
warrants outstanding to purchase 500,000 shares of our common stock at an
exercise price of $6.00 per share. We also had warrants outstanding at December
30, 2006, to purchase 2.6 million 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 Senior Convertible Preferred
Stock were converted, we would be obligated to issue 32.1 million shares
of our
common stock.
The
exercise of these derivative instruments or the conversion of the convertible
preferred stock into common stock may result in significant dilution to our
current stockholders. In addition, sales of large amounts of common stock
in the
public market upon exercise or conversion could materially adversely affect
the
share price.
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. 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
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:
|
·
|
significant
research and development costs;
|
|
·
|
research
and development issues and delays;
|
|
·
|
the
financial results of our PacketVideo
subsidiary;
|
|
·
|
spectrum
acquisition costs;
|
|
·
|
manufacturing
issues and delays;
|
|
·
|
fluctuating
market demand for WiMAX services;
|
|
·
|
impact
of competitive products, services and
technologies;
|
|
·
|
changes
in the regulatory environment;
|
|
·
|
the
cost and availability of network infrastructure;
and
|
|
·
|
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 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 to decline.
Allen
Salmasi, our executive officers and other members of our Board of Directors
beneficially own or control 48.0% of our common stock, as of March 21,
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 may adversely affect the trading price of our common 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 price of our
common
stock could decline.
The
trading market for our common stock will be influenced by the research and
reports that industry and securities analysts publish about us or our business.
If these 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 could
decline.
The
market price for our common stock may be volatile, which could cause the
value
of your investment to decline.
The
stock
market in general, and the stock prices of technology and wireless
communications companies in particular, have experienced volatility that
often
has been unrelated to the operating performance of any specific public company.
Factors that may have a significant impact on the market price of our common
stock include:
|
·
|
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;
|
|
·
|
receipt
of substantial orders or order cancellations for integrated circuits
and
system software products for mobile WiMAX networks by us or our
competitors;
|
|
·
|
quality
deficiencies in technologies, products or
services;
|
|
·
|
announcements
regarding financial developments or technological
innovations;
|
|
|
|
|
·
|
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;
|
|
·
|
international
developments, such as technology mandates, political developments
or
changes in economic policies;
|
|
·
|
lack
of capital to invest in WiMAX
networks;
|
|
·
|
new
commercial products;
|
|
·
|
changes
in recommendations of securities
analysts;
|
|
·
|
government
regulations, including FCC regulations governing spectrum
licenses;
|
|
·
|
earnings
announcements;
|
|
·
|
proprietary
rights or product or patent
litigation;
|
|
·
|
strategic
transactions, such as acquisitions and divestitures;
or
|
|
·
|
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
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 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:
|
·
|
our
directors serve staggered, three-year terms and accordingly, pursuant
to
Delaware law, can only be removed with
cause;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
any
vacancies on the board of directors would be filled by a majority
vote of
the board;
|
|
·
|
our
board of directors will be authorized to issue preferred stock
without
stockholder approval; and
|
|
·
|
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
may be
limited.
ITEM 1B. Unresolved
Staff Comments
Not
applicable.
ITEM
2. Properties
We
also
lease two locations in Henderson, Nevada. We plan to replace those leased
facilities with an owned 30,000 square foot facility that is currently being
constructed. We expect to occupy this facility in the second quarter of
2007.
We
also
lease a total of approximately 98,500 square feet of aggregate office space
in
Connecticut, Illinois, North Carolina, Mountain View and Las Vegas as well
as
facilities in Japan, India, Korea, France, Finland, Israel and
Canada.
We
believe that our properties are adequate for our business as presently
conducted.
ITEM
3. Legal
Proceedings
On
June
8, 1998, NextWave Personal Communications Inc., NextWave Power Partners Inc.,
NextWave Partners Inc. and Old NextWave Wireless, 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 Old NextWave Wireless, 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 Old NextWave Wireless, and Old NextWave Wireless was capitalized
with $550 million in cash. Through this process, Old NextWave Wireless 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. See “Item 1. Business-Our History”
Other
Litigation
We
are
currently a party to various other legal proceedings that arise in the ordinary
course of our business. While management presently believes that the ultimate
outcome of these 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. For example, we are currently engaged in
a
dispute relating to a lease of EBS spectrum covering approximately 1 million
POPs in the Toms River, New Jersey geographic area. The lessor has claimed
that
we are in breach of the terms of the lease and that the lease has been
terminated. We believe that these claims are without merit, and, in any event,
any adverse resolution would not have a material adverse effect on our business,
results of operations or financial condition.
ITEM 4. Submission
of Matters to a Vote of Security Holders
Not
applicable
PART II
ITEM
5. Market
for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases
of Equity Securities
The
principal market for our common stock is the NASDAQ Global Market, on which
it began trading in the first quarter of 2007. During the pendency of our
application to list our common stock on the NASDAQ Global Market, our common
stock was quoted on the Over-the-Counter Bulletin Board for less than a full
quarterly period.
In
addition, we recently issued Series A Senior
Convertible Preferred Stock, which has priority over our common stock with
regard to the earnings and assets of the Company. For additional information
regarding the Series A Senior Convertible Preferred Stock, please see Item
8B. Other.
The
following table reflects the high and low sales prices, or high and low bid
prices, as applicable, rounded to the nearest penny, of NextWave common stock
as
reported by the Over-the-Counter (“OTC”) Bulletin Board and the NASDAQ Global
Market, as applicable, for each quarterly period in 2006 in which NextWave
common stock was listed thereon, beginning with the listing date. NextWave
common stock traded on the OTC Bulletin Board only for a period between November
16, 2006 and January 2, 2007. Subsequently, NextWave common stock was listed
on
the Nasdaq Global Market, beginning on January 3, 2007 under the “WAVE”
symbol,
where it continues to trade. OTC market quotations reflect inter-dealer
quotations and do not include retail markups, markdowns or commissions and
may
not necessarily represent actual transactions.
|
|
|
|
High
|
|
Low
|
|
2006:
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
|
|
$
|
11.00
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
First
Quarter (through March
21, 2007)
|
|
|
|
|
$
|
12.75
|
|
$
|
9.86
|
|
Dividend
Policy.
We
have
never paid a dividend on our common stock and do not anticipate paying one
in
the foreseeable future. Pursuant to the terms of the Purchase Agreement
governing our 7% Senior Secured Notes, we are restricted from paying
dividends and making distributions. In addition, without the prior written
consent of the holders of at least 75% of the outstanding shares of our Series
A
Senior Convertible Preferred Stock, so long as at least 25% of the issued
shares
remain outstanding, no cash dividends may be paid on our common stock. If
we
were to pay a dividend in cash or any other property on our common stock,
the
holders of our Series A Senior Convertible Preferred Stock will be entitled
to
participate in such dividend on an as-converted basis.
In
the
event we are permitted to pay a dividend on our common stock, the payment
of any
future dividends will be at the discretion of our Board and will depend upon,
among other things, our financial condition and capital needs, legal or
contractual restrictions on the payment of dividends and other factors deemed
pertinent by our Board. For additional information on payment of and
restrictions on dividends, please also see Item
8. Financial Statements
and the
notes thereto.
Repurchases
of Common Stock
We
repurchased 638 shares of our common stock during the year ended December
30,
2006, for $10.69 per share in connection with shares tendered for a stock
option
exercise.
Stock
Performance Chart
The
following performance chart assumes an investment of $100 on November 17,
2006
and compares the change to December 31, 2006 in the market price for our
common
stock with the NASDAQ Composite Index and the NASDAQ Telecom Index.
The
comparisons in the graph below are based on historical data and are not intended
to forecast the possible future performance of our common stock.
As
of
March 29, 2007, there were approximately 980 holders of record of our
common stock.
ITEM
6. Selected Financial Data
The
following selected consolidated statement of operations data for the year ended
December 30, 2006 and for the period from the date of our inception as a new
wireless technology company pursuant to the plan of reorganization of Old
NextWave Wireless described below (April 13, 2005) to December 31, 2005 and
selected consolidated balance sheet data as of December 30, 2006 and December
31, 2005 was derived from our audited consolidated financial statements and
should be read in conjunction with our audited consolidated financial statements
and Management’s Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-K.
(in
thousands, except per share data)
|
|
Year
Ended
December
30, 2006(1)
(2)
|
|
Inception
(April
13, 2005) to December 31, 2005(3)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
Revenues
|
|
$
|
24,284
|
|
$
|
4,144
|
|
Loss
from operations
|
|
|
(98,526
|
)
|
|
(55,687
|
)
|
Net
loss
|
|
|
(105,020
|
)
|
|
(45,952
|
)
|
Basic
and diluted net loss per share
|
|
$
|
(1.28
|
)
|
$
|
—(4
|
)
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
200,685
|
|
$
|
459,231
|
|
Restricted
cash(5)
|
|
|
75,000
|
|
|
—
|
|
Wireless
spectrum licenses, net
|
|
|
527,998(6
|
)
|
|
45,467
|
|
Goodwill
|
|
|
32,184
|
|
|
24,782
|
|
Other
intangible assets, net
|
|
|
18,570
|
|
|
18,100
|
|
Total
assets
|
|
|
897,079
|
|
|
579,774
|
|
Long-term
obligations, net of current portion(5)
|
|
|
298,030
|
|
|
14,934
|
|
Total
shareholders’ equity(1)(7)
|
|
|
469,178
|
|
|
—
|
|
Total
members’ equity(1)
|
|
|
—
|
|
|
539,364
|
|
(1) |
On
November 13, 2006, NextWave completed a corporate conversion merger,
whereby a wholly-owned subsidiary of NextWave Wireless Inc. was merged
with and into NextWave Wireless LLC (“Corporate Conversion Merger”). As a
result of the merger, NextWave Wireless LLC became a wholly-owned
subsidiary of NextWave Wireless Inc. Under the terms of the merger
agreement, NextWave Wireless Inc. issued shares of its common stock
to
holders of NextWave Wireless LLC’s membership units in exchange for all of
the outstanding membership units of NextWave Wireless LLC, with NextWave
Wireless LLC unitholders receiving one share of NextWave Wireless
Inc.
common stock for each six membership units of NextWave Wireless LLC
that
they held.
|
(2) |
Effective
January 1, 2006, we changed our fiscal year end and quarterly reporting
periods from quarterly calendar periods ending on December 31 to
a 52-53
week fiscal year ending on the Saturday nearest to December 31 of
the
current calendar year or the following calendar year.
|
(3) |
On
April 13, 2005, pursuant to the plan of reorganization of the NextWave
Telecom group, our equity securities were distributed to the NTI
equity
holders and we were reconstituted as a company with a new capitalization
and a new wireless technology business plan. A summary of the assets
and
liabilities contributed to us on April 13, 2005 is provided in the
Notes
to Consolidated Financial Statements included elsewhere in this Form
10-K.
For more information on our emergence as a new wireless technology
company, see “Business-Our
History.”
|
(4) |
Loss
per share information is not presented for the period from inception
(April 13, 2005) to December 31, 2005 as it would not be meaningful
due to
the Corporate Conversion Merger.
|
(5) |
On
July 17, 2006, NextWave issued 7% Senior Secured Notes due 2010 (the
“Notes”) in the aggregate principal amount of $350.0 million. The Notes
were issued at a fifteen percent (15%) original issue discount, resulting
in gross proceeds of $297.5 million. NextWave is required to maintain
a
minimum balance of $75.0 million in cash or cash equivalents from
funds
other than the proceeds of the Notes in a restricted collateral account
at
all times while the Notes remain
outstanding.
|
(6) |
The
increase in wireless spectrum licenses, net, during 2006, includes
our
July 2006 acquisition of WCS Wireless, Inc. which resulted in the
addition
of $236.4 million of wireless spectrum licenses. The value assigned
to the
wireless spectrum includes the cash purchase price of $160.5 million,
legal costs of $0.1 million, and $75.8 million in associated deferred
tax.
We also acquired other licensed spectrum rights for $245.0 million
in cash
and $4.0 million through the assumption of lease liabilities. These
additions were reduced by amortization during 2006 of $2.9
million.
|
(7) |
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 million in
net proceeds from the sale of the Series A Preferred Stock.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
In
addition to historical information, the following discussion contains
forward-looking statements that are subject to risks and uncertainties. Our
actual results could differ substantially from those anticipated by such
forward-looking information due to a number of factors, including but not
limited to risks described in the section entitled Risk Factors and elsewhere
in
this Form 10-K. Additionally, the following discussion and analysis should
be
read in conjunction with the consolidated financial statements and the notes
thereto included elsewhere in this Form 10-K.
OVERVIEW
Corporate
Conversion Merger
In
order
to convert NextWave Wireless LLC into a corporate form, the Board of Directors
and a majority in interest of the holders of NextWave Wireless LLC membership
units approved the merger of NextWave Wireless LLC with a wholly owned
subsidiary of a newly formed Delaware corporation, NextWave Wireless Inc. On
November 13, 2006, the corporate conversion merger was completed and NextWave
Wireless LLC became a wholly-owned subsidiary of NextWave Wireless Inc. Under
the terms of the merger agreement, NextWave Wireless Inc. issued shares of
its
common stock to holders of NextWave Wireless LLC’s membership units in exchange
for all of the outstanding membership units of NextWave Wireless LLC, with
NextWave Wireless LLC unitholders receiving one share of NextWave Wireless
Inc.
common stock for every six membership units of NextWave Wireless LLC that they
held. Following the corporate conversion merger, NextWave Wireless LLC’s
obligation to file periodic reports under the Securities Exchange Act of 1934
was suspended, and NextWave Wireless Inc. became the successor to NextWave
Wireless LLC for Securities and Exchange Commission reporting
purposes.
Inception
of NextWave Wireless LLC
NextWave
Wireless Inc. (“Old NextWave Wireless”) was formed in 1996 as a wholly-owned
subsidiary of NextWave Telecom Inc. (“NTI”) which sought to develop a nationwide
CDMA-based personal communication services (“PCS”) network. Pursuant to the plan
of reorganization of NTI and its subsidiaries, NTI and its subsidiaries,
excluding Old NextWave Wireless, were sold to Verizon Wireless for approximately
$3.0 billion. Prior to this sale, on April 13, 2005, the NextWave Telecom Group
abandoned substantially all of its PCS assets other than the spectrum licenses
and all remaining non-PCS assets and liabilities were contributed to Old
NextWave Wireless. Immediately thereafter, membership interests in NextWave
Wireless LLC (together with its subsidiaries, “NextWave”) were distributed to
the NTI equity holders and Old NextWave Wireless was capitalized with $550.0
million in cash. Through this process, Old NextWave Wireless was reconstituted
as a company with a new capitalization and a new wireless technology business
plan.
Our
Business
We
are an
early stage wireless technology company engaged in the development of
next-generation mobile broadband and wireless multimedia products, technologies
and services. During 2006 all of our revenues were derived from the sale of
device-embedded multimedia software solutions by our PacketVideo subsidiary,
which was acquired in July 2005. While we expect to continue to grow and expand
our multimedia software business, we expect that, following the development
of
our WiMAX products and technologies, the majority of our revenues will
ultimately be derived from the sale and licensing, to network infrastructure
and
mobile terminal manufacturers of the chipsets, network components and device
technologies based on WiMAX and Wi-Fi technologies that we are
developing.
Our
revenues for 2006 totaled $24.3 million compared to revenues of $4.1 million
that were recognized during the period from inception (April 13, 2005) to
December 31, 2005. Our net loss for 2006 totaled $105.0 million compared to
our
net loss for the period from inception (April 13, 2005) to December 31, 2005
which totaled $46.0 million. Our net losses for 2006 included $5.2 million
of
total share-based compensation expense, including employee share-based
compensation expense related to the adoption of SFAS 123(R) on January 1, 2006,
compared to $1.1 million in non-employee share-based compensation for the period
from inception (April 13, 2005) to December 31, 2005.
At
present, the majority of our employees are assigned to the Advanced Technology
Group and are directly engaged in the design, development, and commercialization
of a family of semiconductor and network component products, based on WiMAX
and
Wi-Fi technologies including digital baseband ASICs and multi-band RFICs. Our
development team is also focused on developing technologies such as advanced
antenna systems and advanced cognitive radios that we believe will help
stimulate sales of our suite of WiMAX/Wi-Fi products. All of our WiMAX
semiconductor products and technologies are in an early stage of
development.
To
conserve capital we intend to outsource the production of our semiconductors
to
third-party chip manufacturers that can rapidly scale production volumes to
meet
our future needs. We plan to license our reference designs to third party
vendors. By adopting this approach, we will be able to continue investing in
the
research and development needed over the next several years to fully
commercialize our technologies and semiconductor designs. Although we expect
most of our WiMAX semiconductors and products to incorporate the proprietary,
performance improving technologies we are currently developing, we intend our
products to be WiMAX Forum certified to ensure full interoperability with WiMAX
certified products and systems being developed by other companies.
The
success of our WiMAX semiconductor and product business will be reliant on
market acceptance of WiMAX as a competitive wireless broadband technology and
on
our ability to differentiate our WiMAX products from those offered by
competitors. To help accelerate global market adoption of WiMAX and to showcase
the competitive strength of our WiMAX mobile broadband and wireless multimedia
products, we intend to make our significant spectrum holdings available to
Internet service providers, cable operators, satellite television companies,
content developers, existing wireless service providers and other companies
interested in deploying, on individual or joint basis, WiMAX networks
that utilize our mobile broadband and wireless multimedia
technologies.
Our
PacketVideo subsidiary supplies device embedded multimedia software to many
of
the largest manufacturers of high-end mobile phones in the world including
LGE,
Motorola, Nokia, Sony Ericsson, and Samsung. PacketVideo’s software enables
a mobile handset to stream, download, and play video and music, receive live
TV,
or engage in two way video telephony. PacketVideo’s continued growth will be
reliant on its ability to continue offering superior software solutions to
its
customers and on the continued growth of the global market for high-end mobile
phones and other converged devices. PacketVideo’s revenues are currently
generated from royalties associated with the licensing of its software products,
based on units sold, and by providing its customers with customized software
development services on a contract basis. During 2006, 75% of PacketVideo’s
revenues collected were based units shipped by the licensee. We expect this
percentage to increase over time based on the anticipated growth in the global
market for devices having multimedia capabilities.
Change
in Fiscal Year End
Effective
January 1, 2006, we changed our fiscal year end and quarterly reporting periods
from quarterly calendar periods ending on December 31 to 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
2006 is a 52-week year ending on December 30, 2006 and the first 53-week year
will occur in 2009.
Fiscal
Year Ended December 30, 2006 Compared to the Period From Inception (April 13,
2005) to December 31, 2005
Revenues.
Revenues
for 2006 were $24.3 million compared to $4.1 million for the period from
inception (April 13, 2005) to December 31, 2005, an increase of $20.2 million.
The increase in revenue resulted primarily from unit sales growth and market
penetration of mobile subscriber services by PacketVideo’s customer base, which
includes wireless operators and device manufacturers, and from higher contract
revenues from our PacketVideo subsidiary, which resulted from growth in
technology development contracts, addressing an increasing number of wireless
devices in which PacketVideo technology is embedded, in addition to the
inclusion of PacketVideo’s revenues for a full twelve months in 2006.
Additionally, certain revenues reported by PacketVideo licensees during the
period from our acquisition in July 2005 to December 31, 2005, were not
recognizable by us under EITF 01-3, “Accounting in a Business Combination for
Deferred Revenue of an Acquiree,” as these represented customer revenues that
were generated prior to our acquisition of PacketVideo.
In
general, the financial consideration received from wireless carriers and mobile
phone and wireless device manufacturers is derived from a combination of
technology development contracts and royalties.
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
until we complete the development and commercialization of our wireless
broadband products and technologies by the Advanced Technology Group of NextWave
and the mobile Wi-Fi network solutions of GO Networks, Inc. which
we acquired in February 2007. Following the development and commercialization
of
our wireless broadband products and technologies, 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 WiFi and WiMAX
technologies, price increases, subscriber device life cycles, demand for
wireless data services and acquisitions or dispositions of businesses or product
lines.
Operating
Expenses.
(in
millions)
|
|
Year
Ended December 30, 2006
|
|
Inception
(April
13, 2005) to December 31, 2005
|
|
Increase
(Decrease)
|
|
Cost
of revenues
|
|
$
|
12.1
|
|
$
|
4.6
|
|
$
|
7.5
|
|
Engineering,
research and development
|
|
|
52.8
|
|
|
17.3
|
|
|
35.5
|
|
General
and administrative
|
|
|
51.5
|
|
|
15.3
|
|
|
36.2
|
|
Sales
and marketing
|
|
|
10.0
|
|
|
3.0
|
|
|
7.0
|
|
Business
realignment costs
|
|
|
(7.1
|
)
|
|
13.0
|
|
|
(20.1
|
)
|
Purchased
in-process research and development
|
|
|
3.5
|
|
|
6.6
|
|
|
(3.1
|
)
|
Total
operating expenses
|
|
$
|
122.8
|
|
$
|
59.8
|
|
$
|
63.0
|
|
Cost
of Revenues.
The
increase in cost of revenues for our PacketVideo subsidiary during 2006 includes
higher amortization expenses of $0.9 million for the purchase of intangible
assets related to the acquisition of PacketVideo, resulting from a full year
of
amortization in 2006. 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.
Engineering,
Research and Development.
Costs
for the internal and external development of our wireless broadband products
and
technologies, including our chipsets, for 2006 were $41.4 million compared
to
$15.0 million for the period from inception (April 13, 2005) to December 31,
2005, an increase of $26.4 million which is due primarily to the expansion
of
the engineering development organization and inclusion of expenses for a full
twelve months in 2006.
Costs
for
the internal and external development of our PacketVideo software for 2006
were
$11.4 million compared to $2.3 million for the period from inception (April
13,
2005) to December 31, 2005, an increase of $9.1 million, which is due primarily
to the inclusion of expenses for a full twelve months in 2006, additional 2006
acquisitions by PacketVideo and an increase in headcount in the engineering
development organization.
Share-based
compensation for 2006 totaled $2.1 million.
Largely
due to our planned increase in engineering personnel 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.
NextWave
and PacketVideo accounted for $33.2 million and $3.0 million of the increase
in
2006, respectively. These increases, which are affected by the inclusion of
expenses for a full twelve months in 2006, are comprised primarily of increased
spending for compensation and associated costs of general and administrative
personnel of $24.6 million, professional fees of $6.2 million, losses incurred
by our strategic investment of $1.3 million, amortization of intangible assets
of $1.4 million, and share-based compensation of $2.7 million.
We
expect
that general and administrative costs will increase in absolute terms 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.
PacketVideo and NextWave accounted for $4.9 million and $2.1 million of the
increase in 2006, respectively. The increases are comprised primarily of
increased spending for compensation and associated costs for marketing and
sales
personnel of $6.1 million, share-based compensation of $0.3 million, expenses
associated with marketing and promotional activities of $0.3 million, and
amortization expenses related to intangible assets of $0.3 million.
We
expect
sales and marketing expenses to increase in absolute terms with the growth
of
our business in the upcoming year, primarily from our PacketVideo business
and
from our GO Networks business which was acquired in February 2007.
Additionally, as we achieve full commercial deployment of our wireless broadband
technologies and products, we will increase sales and marketing expenses both
in
absolute terms, and as a percentage of revenue at NextWave Broadband,
Inc.
Business
Realignment Costs.
Business
realignment costs for the period from inception (April 13, 2005) to December
31,
2005 were $13.0 million and include non-cash impairment costs of $5.9 million
for certain hardware and service costs deemed to have no value in consideration
of current technology and then-anticipated test site plans in
Henderson, Nevada. The impairment loss recognized was equal to the carrying
value of impaired assets. Additionally, we accrued $7.1 million related to
minimum purchase obligations that we believed we would not utilize due to the
then-anticipated technology and market trial plans in Henderson, Nevada. In
the
fourth quarter of 2006, we renegotiated this minimum purchase obligation with
the vendor and reversed the 2005 accrual to reflect the reduction in the
contractual obligation.
Purchased
In-Process Research and Development Costs.
In
conjunction with our acquisition of CYGNUS in 2006, one of our small
acquisitions during 2006 and our acquisition of PacketVideo in 2005, we
purchased in-process research and development projects valued at $1.9 million,
$1.6 million and $6.6 million, respectively. These amounts were expensed upon
the respective dates of acquisition because the acquired technology had not
yet
reached technological feasibility and had no future alternative
uses.
Interest
Income.
Interest
income for 2006 was $12.5 million compared to $11.1 million for the period
from
inception (April 13, 2005) to December 31, 2005, an increase of $1.4 million,
and consisted of interest earned during the respective periods on our
unrestricted and restricted cash and investment balances, which totaled $275.7
million and $459.2 million at the end of 2006 and 2005,
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
activities.
Interest
Expense.
Interest
expense for 2006 was $20.6 million compared to $1.0 million for the period
from
inception (April 13, 2005) to December 31, 2005, an increase of $19.6 million.
Our issuance of $350.0 million in principal amount of 7% Senior Secured Notes
in
July 2006 accounted for $19.2 million of the increase. The remainder of the
increase of $0.4 million consists primarily of the accretion of discounted
wireless spectrum license lease liabilities acquired in 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.
The
effective income tax rate for 2006 was 0.0%, resulting in no income tax
provision in 2006 on our pre-tax loss of $106.7 million. The effective tax
rate
in 2006 was unfavorably impacted by the recording of $41.3 million of valuation
allowance on the increase in our U.S. net deferred tax asset balance. The
effective income tax rate for the period from inception (April 13, 2005) to
December 31, 2005 was a negative 0.9%, resulting in an income tax provision
of
$0.4 million on our pre-tax loss of $45.7 million. The effective tax rate in
2005 was unfavorably impacted by the recording of $17.1 million of valuation
allowance on the net increase in our U.S. deferred tax asset balance.
Minority
Interest.
Minority
interest for 2006 was $1.6 million compared to $0.1 million for the period
from
inception (April 13, 2005) to December 31, 2005. Minority interest in 2006
primarily represents our minority partner’s share of losses in our Inquam
Broadband joint venture formed in January 2006. Minority interest in 2005
represents minority shareholders’ share of losses in our CYGNUS
subsidiary.
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 $151.0 million at December 30, 2006,
consisting of $122.9 million and $28.1 million from NextWave and PacketVideo,
respectively. 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 and the net proceeds from the issuance
of
our 7% Senior Secured Notes in July 2006 of $295.0 million. Our total cash,
cash
equivalents and short-term investments at December 30, 2006 were $200.7 million.
The
following table presents working capital, cash, cash equivalents and
investments:
(in
millions)
|
|
December
30, 2006
|
|
Decrease
for the Year Ended December 30, 2006
|
|
December
31, 2005
|
|
Increase
(Decrease) for the Period from Inception (April 13, 2005) to December
31,
2005
|
|
Inception
(April
13, 2005)
|
|
Working
capital
|
|
$
|
166.3
|
|
$
|
(290.1
|
)
|
$
|
456.4
|
|
$
|
(96.3
|
)
|
$
|
552.7
|
|
Cash
and cash equivalents
|
|
|
33.0
|
|
|
(60.6
|
)
|
|
93.6
|
|
|
(461.5
|
)
|
|
555.1
|
|
Short-term
investments
|
|
|
167.7
|
|
|
(197.9
|
)
|
|
365.6
|
|
|
365.6
|
|
|
—
|
|
Total
cash, cash equivalents and investments
|
|
$
|
200.7
|
|
$
|
(258.5
|
)
|
$
|
459.2
|
|
$
|
(95.9
|
)
|
$
|
555.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents our utilization of cash, cash equivalents and
short-term investments for the year ended December 30, 2006 compared to the
period from inception (April 13, 2005) to December 31, 2005:
(in
millions)
|
|
Year
Ended December 30, 2006
|
|
Inception
(April
13, 2005)
to
December
31, 2005
|
|
Beginning
cash, cash equivalents and investments
|
|
$
|
459.2
|
|
$
|
555.1
|
|
Cash
paid for acquisition of wireless spectrum licenses and subsequent
lease
obligations
|
|
|
(402.7
|
)
|
|
(18.8
|
)
|
Cash
paid for business combinations, net of cash acquired
|
|
|
(8.4
|
)
|
|
(51.1
|
)
|
Proceeds
from long-term obligations, net of costs to issue
|
|
|
295.0
|
|
|
—
|
|
Net
payments to and changes in restricted investment account securing
long-term obligations
|
|
|
(75.0
|
)
|
|
—
|
|
Cash
used by operating activities
|
|
|
(56.3
|
)
|
|
(18.7
|
)
|
Cash
paid for property and equipment
|
|
|
(13.0
|
)
|
|
(7.3
|
)
|
Other,
net
|
|
|
1.9
|
|
|
—
|
|
Ending
cash, cash equivalents and investments
|
|
$
|
200.7
|
|
$
|
459.2
|
|
The
decrease in cash, cash equivalents and investments of $258.5 million during
2006, primarily reflects $402.7 million paid for wireless spectrum licenses
and
subsequent lease obligations, our payment of $75.0 million into a restricted
cash account to secure our 7% Senior Secured Notes, cash used in operating
activities of $56.3 million, consisting of $57.8 million used by NextWave and
our joint venture which was partially offset by $1.5 million in cash provided
by
PacketVideo operations, $13.0 million in cash paid for capital expenditures
and
$8.4 million paid for business combinations. These uses of cash were partially
offset by the net proceeds from the issuance of our 7% Senior Secured Notes
of
$295.0 million.
The
decrease in cash, cash equivalents and investments of $95.9 million during
the
period from inception (April 13, 2005) to December 31, 2005, primarily reflects
$51.1 million in cash paid for our acquisition of PacketVideo and our joint
venture investment, $18.8 million paid for wireless spectrum licenses and
subsequent lease obligations, cash used in operating activities of $18.7
million, consisting of $15.2 million used by NextWave and our joint venture
and
$3.5 million used by PacketVideo, and $7.3 million in cash paid for capital
expenditures.
In
August
2006, we acquired WCS Wireless Inc., which holds spectrum covering the central,
western, and northeastern United States, for $160.5 million. The $160.5 million
purchase price for WCS was funded with a portion of the proceeds from our
recently completed 7% Senior Secured Notes financing.
In
July
2006, our subsidiary NextWave Wireless LLC issued 7% Senior Secured
Notes due 2010 (the “Notes”) in the aggregate principal amount of $350.0
million. The Notes were issued at a fifteen percent (15%) original issue
discount, resulting in gross proceeds of $297.5 million. We will be obligated
to
pay the Notes at their full face value of $350.0 million on July 17, 2010 and
interest of 7% per annum, or $24.5 million, is payable semiannually in January
and July each year commencing January 15, 2007. The original issue discount
will
provide the note purchasers with a yield that is in addition to the coupon
rate
upon repayment of the Notes. After the payment of transaction related expenses,
we received net proceeds of $295.0 million available for the sole purpose of
financing spectrum acquisitions and leases. The net proceeds from the Notes
were
used to acquire WCS Wireless, Inc. for $160.5 million, 154 spectrum licenses
from the FCC aggregating $115.6 million and two new Educational Broadband
Service (“EBS”) leases for $22.1 million.
The
purchasers of the Notes were investment funds and other institutional investors,
including affiliates of Avenue Capital Group, among others. Robert T. Symington,
a member of our Board of Directors, is a Portfolio Manager at Avenue Capital
Group. Neither Mr. Symington nor Avenue Capital Group or its affiliates received
any compensation in connection with the financing. The Notes are guaranteed
by
certain of our subsidiaries, including NextWave Broadband and PacketVideo.
In
addition, NextWave Wireless Inc. guaranteed the Notes following the corporate
conversion merger in November 2006. No scheduled principal payments will be
due
on the Notes before the maturity date of July 15, 2010. The Notes are
pre-payable at our option at specified premiums to the principal amount that
will decline over the term of the Notes from 105% to 100%, plus a make-whole
amount applicable until July 17, 2008. The obligations under the Notes are
secured by first priority liens on certain pledged equity interests, FCC
licenses, spectrum leases, securities accounts, proceeds from any of the
foregoing as well as proceeds derived in any way from foreign licenses. We
are
required to maintain $75.0 million in cash or cash equivalents from funds other
than the proceeds of the Notes in a restricted collateral account at all times
while the Notes remain outstanding. The purchase agreement contains
representations and warranties, affirmative and negative covenants (including,
without limitation, (i) our obligation to maintain in full force and effect
our
FCC licenses and spectrum leases, (ii) our obligation to use the note proceeds
for the acquisition of spectrum, not to exceed $0.25 per MHz-POP, (iii) our
obligation not to 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
and
(iv) our obligation not to make restricted payments to holders of subordinated
debt or equity securities, including cash dividends, that are customary in
similar types of transactions. The purchase agreement also contains customary
events of default and additional events of default including, the termination,
cancellation or rescission of any FCC license owned or leased by us and
necessary for our operation of a wireless communications system. At December
30,
2006, we were not in compliance with the types of investments required to be
held in our restricted collateral account. This default was subsequently cured
by us on our own accord and no waiver was required.
In
connection with the Notes financing described above, we entered into a warrant
agreement with the purchasers of the Notes whereby on November 13, 2006, we
issued 4.1 million warrants to purchase shares of common stock. The warrants
have an exercise price of $0.01 per share and are exercisable at any time from
the date of issuance until July 15, 2009.
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.
The Series A Preferred Stock was issued in a private placement transaction
exempt from the registration requirements of the Securities Act of 1933. We
received $351 million in net
proceeds from the sale of the Series A Preferred Stock. 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. The purchasers of the Series A Preferred Stock include, in
addition to other investment funds and institutional investors, Navation, Inc.,
an entity owned by Allen Salmasi, our Chairman and Chief Executive Officer,
Manchester Financial Group, L.P., an entity indirectly owned and controlled
by
Douglas F. Manchester, a member of our Board of Directors, and affiliates of
Avenue Capital, of which a member of our Board of Directors, Robert Symington,
is a portfolio manager.
The
Series A Preferred Stock has an initial liquidation preference of $1,000 per
share, subject to increase for accrued dividends as described below. The
liquidation preference would become payable upon redemption, as described below,
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, in which case 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 deemed liquidation
event.
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 the 18-month anniversary of issuance, subject to the trading
price of our common stock reaching $22.10 for a specified period of time,
subject to adjustment. 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.
The
Series A Preferred Stock is entitled to receive quarterly dividends on the
liquidation preference at a rate of 7.5% per annum. Until the fourth anniversary
of issuance, 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 the fourth anniversary of issuance,
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, or certain registration obligations. The dividend
rate is 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.
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, or (iii) consummate asset
sales involving the receipt of gross proceeds of, or the disposition of assets
worth, $500 million or more. 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.
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.
In
2005,
in order to consolidate current operations from two leased facilities into
one
building, we entered into a purchase agreement to acquire a build-to-suit office
building in Henderson, Nevada for $8.2 million, which included an allowance
for
the construction of related interior improvements. In addition, we planned
to
install furniture, fixtures and equipment costing approximately $3.6 million.
This purchase agreement was amended in March 2007, reducing the cost of the
building to $6.9 million (not including interior improvements) as the result
of
construction delay penalties. We expect to pay the $6.9 million in the second
quarter of 2007. A separate agreement was entered into in March 2007 for the
construction of the interior improvements in the amount of $2.6 million and
further agreements will be entered into in the second quarter of 2007 for the
acquisition of furniture, fixtures and equipment for approximately $1.9 million.
Construction is expected to be completed during the second quarter of 2007,
at
which time we expect to occupy the facility and pay the remaining costs
associated with occupancy.
In
September 2006, we were declared the winning bidder for 154 AWS spectrum
licenses for an aggregate bid of $115.6 million. As of December 30, 2006, under
a note agreement, we had loaned Inquam Broadband, our joint venture, $22.7
million to participate in a wireless spectrum auction in Germany. In December
2006, Inquam Broadband was declared the winning bidder for 28 wireless licenses
in Germany for an aggregate cost of $23.1 million. In February 2007, we loaned
Inquam Broadband an additional $5.8 million to participate in a spectrum auction
in Switzerland and are currently awaiting notification from the Federal Office
of Communication in Switzerland, which will determine if the license will be
granted to Inquam Broadband for the minimum concession.
We
also
have the option to acquire a 51% interest in a subsidiary of Inquam-BMR GP,
the
holder of the remaining 49% interest in our Inquam Broadband joint venture,
for
9.7 million Euros ($12.7 million at December 30, 2006). The option price is
subject to adjustment for changes in liabilities or subsequent funding provided
to the subsidiary by Inquam Broadband. The option expires on the later of April
18, 2007 and the 12th business day following the announcement of the outcome
of
the Swiss auction described below. At any time prior to the expiration of the
option in April 2007, Inquam-BMR GP has the right to purchase an interest
between 25% and 49% in the note agreement, at which time both Inquam-BMR GP’s
and our note interests would simultaneously convert into ordinary shares of
Inquam Broadband on a pro rata basis. In lieu of this right and at any time
prior to the expiration of the option, Inquam-BMR GP has the right to require
us
to purchase all Inquam Broadband shares then held by Inquam-BMR GP for 1,000
Euros per share ($2.1 million at December 30, 2006). In the event that
Inquam-BMR GP does not exercise either of these rights prior to the expiration
of our option on the date referenced above, we must elect to either convert
the
note into shares of Inquam Broadband equal to the note amount divided by 1,000
or purchase all Inquam Broadband shares then held by Inquam-BMR GP for 1,000
Euros per share ($2.1 million at December 30, 2006).
In
December 2006, our PacketVideo subsidiary signed a share purchase agreement
to
acquire all of the shares of SDC Secure Digital Container AG for cash of $19.0
million. The acquisition was completed in January 2007.
In
February 2007, NextWave acquired all of the outstanding common stock and
warrants of GO Networks, Inc., for $13.2 million plus the assumption of $6.7
million in debt, of which $1.3 million was paid at closing. Additional purchase
consideration of up to $25.7 million may be paid in shares of NextWave common
stock, subject to the achievement of certain operational milestones in the
18-month period subsequent to the closing of the acquisition. NextWave 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 NextWave common stock
upon the achievement of certain operational milestones in the 18-month period
subsequent to the closing of the acquisition.
In
March
2007, NextWave acquired all of the outstanding shares of common stock of 4253311
Canada Inc., a Canadian company. The total cost of the acquisition is expected
to be approximately $26.0 million in cash. The assets of the company are
comprised almost entirely of wireless spectrum.
As
of
December 30, 2006, we had $200.7 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 $451.9 million. These transactions include our recent
acquisition of Canadian licenses for $19.5 million paid and approximately $6.5
million held in escrow the acquisition of German licenses by Inquam
Broadband for $23.1 million, our acquisitions of 154 AWS spectrum licenses
totaling $115.6 million, the WCS licenses from Bal-Rivgam, LLC for $56.9
million, and WCS Wireless Inc., for $160.5 million. The Bal-Rivgam acquisition
agreement provides that $21.9 million of the proceeds of the purchase would
be
deposited into escrow until January 2008 to cover any liabilities stemming
from
Bal-Rivgam's ownership of the licenses prior to closing, claims resulting from
breaches of representations or warranties and certain claims under the spectrum
licenses.
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.
However, we believe that our current revenues, cash and short-term investments
and financing activities will be sufficient to fund our operating activities
at
least through 2008.
· |
We
plan to fund our wireless broadband technology development
activities with our unrestricted cash and investments and net proceeds
from the sale of preferred stock 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 and technologies are in the early stages of development
and will require a substantial investment before they may become
commercially viable. Our research and development expenses for our
wireless broadband products and technologies, including our chipsets
were
$41.4 million during 2006. Largely due to our planned increase in
engineering personnel, we expect our wireless broadband technology
development expenses to increase by approximately 69% during 2007.
Because
we are adopting a strategy of licensing our technology and selling
chipsets to third party equipment manufacturers, we do not anticipate
that
the license and sale of our products and technologies will require
significant additional capital.
|
· |
Our
network services business is not expected to require significant
additional capital expenditures beyond what is necessary to complete
our
Henderson, Nevada office building and test site. With the exception
of
our test site in Henderson, Nevada, we do not intend to
build-out wireless networks, but will provide our technologies, services
and spectrum to service providers who are engaged in these
activities. In 2007, we expect to expend $4.4 million on the deployment
of
our test site in Henderson, Nevada. If that test site is
successful, we anticipate that we will seek service providers to
expand the trial network to cover most of the Las Vegas metropolitan
region.
|
· |
GO
Networks, Inc., acquired in February 2007, develops high-performance
mobile Wi-Fi systems for commercial and municipal service providers.
GO
Networks’ Mobile Broadband Wireless system combines xRFTM
smart-antenna technology with a cellular-mesh Wi-FI architecture
to
provide commercial and municipal service providers with a cost-effective
solution to support bandwidth-intensive mobile broadband services
such as
video streaming, web browsing, real-time gaming, video telephony and
other types of multimedia applications.
|
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.
The
incurrence of indebtedness would result in 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.
Restatement
of Previously Reported Interim Financial Statements
On
March
23, 2007, we announced the need to adjust our financial results for the
first three quarters of 2006 to reflect a correction in our accounting for
certain revenue contracts and for the incorrect capitalization of certain
engineering costs in our PacketVideo subsidiary. 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 Packet Video, 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 be related to the PCS portion of the contract and to expense
previously capitalized engineering costs.
The
following interim unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the
United States for interim financial information and with the instructions to
SEC
Form 10-Q and Article 10 of SEC Regulation S-X. In our opinion, this information
has been prepared on a basis consistent with that of our audited consolidated
financial statement and all necessary material adjustments, consisting of normal
recurring accruals and adjustments, have been included to present fairly the
unaudited quarterly and year-to-date financial data. Our quarterly results
of
operations for these periods are not necessarily indicative of future results
of
operations. They do not include all of the information and footnotes required
by
generally accepted accounting principles for complete financial statements.
Therefore, these condensed consolidated financial statements should be read
in
conjunction with our audited consolidated financial statements and notes thereto
for the year ended December 30, 2006 included in this Annual Report on Form
10-K.
The
following table presents the impact of the change in revenues and related costs
on our previously reported consolidated statements of operations for the first
three quarters of 2006:
|
|
Three
Months Ended
|
|
|
|
April
1, 2006
|
|
July
1, 2006
|
|
September
30, 2006
|
|
(in
thousands)
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,673
|
|
$
|
(1,768
|
)
|
$
|
3,905
|
|
$
|
8,331
|
|
$
|
(2,038
|
)
|
$
|
6,293
|
|
$
|
8,051
|
|
$
|
(1,381
|
)
|
$
|
6,670
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
2,686
|
|
|
(879
|
)
|
|
1,807
|
|
|
3,198
|
|
|
(560
|
)
|
|
2,638
|
|
|
4,568
|
|
|
(1,062
|
)
|
|
3,506
|
|
Engineering,
research and development
|
|
|
10,233
|
|
|
856
|
|
|
11,089
|
|
|
12,601
|
|
|
693
|
|
|
13,294
|
|
|
11,455
|
|
|
179
|
|
|
11,634
|
|
General
and administrative
|
|
|
8,492
|
|
|
—
|
|
|
8,492
|
|
|
12,140
|
|
|
—
|
|
|
12,140
|
|
|
14,896
|
|
|
—
|
|
|
14,896
|
|
Sales
and marketing
|
|
|
1,613
|
|
|
—
|
|
|
1,613
|
|
|
2,539
|
|
|
—
|
|
|
2,539
|
|
|
2,992
|
|
|
—
|
|
|
2,992
|
|
Purchased
in-process research and development
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,648
|
|
|
—
|
|
|
1,648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
operating expenses
|
|
|
23,024
|
|
|
(23
|
)
|
|
23,001
|
|
|
32,126
|
|
|
133
|
|
|
32,259
|
|
|
33,911
|
|
|
(883
|
)
|
|
33,028
|
|
Loss
from operations
|
|
|
(17,351
|
)
|
|
(1,745
|
)
|
|
(19,096
|
)
|
|
(23,795
|
)
|
|
(2,171
|
)
|
|
(25,966
|
)
|
|
(25,860
|
)
|
|
(498
|
)
|
|
(26,358
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,187
|
|
|
—
|
|
|
3,187
|
|
|
3,197
|
|
|
—
|
|
|
3,197
|
|
|
3,419
|
|
|
—
|
|
|
3,419
|
|
Interest
expense
|
|
|
(308
|
)
|
|
—
|
|
|
(308
|
)
|
|
(366
|
)
|
|
—
|
|
|
(366
|
)
|
|
(9,010
|
)
|
|
—
|
|
|
(9,010
|
)
|
Other
income and expense, net
|
|
|
(92
|
)
|
|
—
|
|
|
(92
|
)
|
|
216
|
|
|
—
|
|
|
216
|
|
|
(26
|
)
|
|
—
|
|
|
(26
|
)
|
Total
other income (expense), net
|
|
|
2,787
|
|
|
—
|
|
|
2,787
|
|
|
3,047
|
|
|
—
|
|
|
3,047
|
|
|
(5,617
|
)
|
|
—
|
|
|
(5,617
|
)
|
Loss
before provision for income taxes and minority interest
|
|
|
(14,564
|
)
|
|
(1,745
|
)
|
|
(16,309
|
)
|
|
(20,748
|
)
|
|
(2,171
|
)
|
|
(22,919
|
)
|
|
(31,477
|
)
|
|
(498
|
)
|
|
(31,975
|
)
|
Income
tax benefit (provision)
|
|
|
209
|
|
|
—
|
|
|
209
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(93
|
)
|
|
—
|
|
|
(93
|
)
|
Minority
interest
|
|
|
657
|
|
|
—
|
|
|
657
|
|
|
214
|
|
|
—
|
|
|
214
|
|
|
265
|
|
|
—
|
|
|
265
|
|
Net
loss
|
|
$
|
(13,698
|
)
|
$
|
(1,745
|
)
|
$
|
(15,443
|
)
|
$
|
(20,534
|
)
|
$
|
(2,171
|
)
|
$
|
(22,705
|
)
|
$
|
(31,305
|
)
|
$
|
(498
|
)
|
$
|
(31,803
|
)
|
The
following table presents the impact of the change in revenues and related costs
on our previously-reported consolidated balance sheets for the first three
interim reporting dates in 2006:
|
|
April
1, 2006
|
|
July
1, 2006
|
|
September
30, 2006
|
|
(in
thousands)
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
99,871
|
|
$
|
—
|
|
$
|
99,871
|
|
$
|
30,643
|
|
$
|
—
|
|
$
|
30,643
|
|
$
|
25,371
|
|
$
|
—
|
|
$
|
25,371
|
|
Short-term
investments
|
|
|
266,716
|
|
|
—
|
|
|
266,716
|
|
|
309,794
|
|
|
—
|
|
|
309,794
|
|
|
196,801
|
|
|
—
|
|
|
196,801
|
|
Accounts
receivable, net
|
|
|
2,235
|
|
|
—
|
|
|
2,235
|
|
|
5,206
|
|
|
—
|
|
|
5,206
|
|
|
5,728
|
|
|
—
|
|
|
5,728
|
|
Deposits
for wireless spectrum bids
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142,866
|
|
|
—
|
|
|
142,866
|
|
Deferred
contract costs
|
|
|
1,456
|
|
|
21
|
|
|
1,477
|
|
|
2,105
|
|
|
(110
|
)
|
|
1,995
|
|
|
2,242
|
|
|
772
|
|
|
3,014
|
|
Prepaid
expenses and other current assets
|
|
|
5,745
|
|
|
—
|
|
|
5,745
|
|
|
8,518
|
|
|
—
|
|
|
8,518
|
|
|
7,252
|
|
|
—
|
|
|
7,252
|
|
Total
current assets
|
|
|
376,023
|
|
|
21
|
|
|
376,044
|
|
|
356,266
|
|
|
(110
|
)
|
|
356,156
|
|
|
380,260
|
|
|
772
|
|
|
381,032
|
|
Restricted
cash
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,792
|
|
|
—
|
|
|
76,792
|
|
Wireless
spectrum licenses, net
|
|
|
130,889
|
|
|
—
|
|
|
130,889
|
|
|
130,374
|
|
|
—
|
|
|
130,374
|
|
|
374,137
|
|
|
—
|
|
|
374,137
|
|
Goodwill
|
|
|
27,001
|
|
|
—
|
|
|
27,001
|
|
|
32,936
|
|
|
—
|
|
|
32,936
|
|
|
32,829
|
|
|
—
|
|
|
32,829
|
|
Other
intangible assets, net
|
|
|
17,449
|
|
|
—
|
|
|
17,449
|
|
|
16,846
|
|
|
—
|
|
|
16,846
|
|
|
16,306
|
|
|
—
|
|
|
16,306
|
|
Property
and equipment, net
|
|
|
15,040
|
|
|
—
|
|
|
15,040
|
|
|
14,632
|
|
|
—
|
|
|
14,632
|
|
|
16,796
|
|
|
—
|
|
|
16,796
|
|
Prepaid
expenses and other noncurrent assets
|
|
|
7,708
|
|
|
—
|
|
|
7,708
|
|
|
6,761
|
|
|
—
|
|
|
6,761
|
|
|
8,279
|
|
|
—
|
|
|
8,279
|
|
Total
assets
|
|
$
|
574,110
|
|
$
|
21
|
|
$
|
574,131
|
|
$
|
557,815
|
|
$
|
(110
|
)
|
$
|
557,705
|
|
$
|
905,399
|
|
$
|
772
|
|
$
|
906,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,488
|
|
$
|
—
|
|
$
|
4,488
|
|
$
|
2,274
|
|
$
|
—
|
|
$
|
2,274
|
|
$
|
2,369
|
|
$
|
—
|
|
$
|
2,369
|
|
Accrued
expenses
|
|
|
7,058
|
|
|
—
|
|
|
7,058
|
|
|
12,104
|
|
|
—
|
|
|
12,104
|
|
|
19,465
|
|
|
—
|
|
|
19,465
|
|
Current
portion of long-term obligations
|
|
|
2,575
|
|
|
—
|
|
|
2,575
|
|
|
2,822
|
|
|
—
|
|
|
2,822
|
|
|
2,681
|
|
|
—
|
|
|
2,681
|
|
Deferred
revenue
|
|
|
4,021
|
|
|
1,766
|
|
|
5,787
|
|
|
3,100
|
|
|
3,806
|
|
|
6,906
|
|
|
2,867
|
|
|
5,186
|
|
|
8,053
|
|
Current
tax liability
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Other
current liabilities and deferred credits
|
|
|
755
|
|
|
—
|
|
|
755
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
961
|
|
|
—
|
|
|
961
|
|
Total
current liabilities
|
|
|
18,897
|
|
|
1,766
|
|
|
20,663
|
|
|
21,309
|
|
|
3,806
|
|
|
25,115
|
|
|
28,383
|
|
|
5,186
|
|
|
33,569
|
|
Deferred
income tax liabilities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67,673
|
|
|
—
|
|
|
67,673
|
|
Long-term
deferred credits and reserves
|
|
|
8,203
|
|
|
—
|
|
|
8,203
|
|
|
8,575
|
|
|
—
|
|
|
8,575
|
|
|
8,243
|
|
|
—
|
|
|
8,243
|
|
Long-term
obligations
|
|
|
15,311
|
|
|
—
|
|
|
15,311
|
|
|
15,661
|
|
|
—
|
|
|
15,661
|
|
|
292,310
|
|
|
—
|
|
|
292,310
|
|
Minority
interest in subsidiary
|
|
|
889
|
|
|
—
|
|
|
889
|
|
|
1,143
|
|
|
—
|
|
|
1,143
|
|
|
884
|
|
|
—
|
|
|
884
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
interests
|
|
|
591,452
|
|
|
—
|
|
|
591,452
|
|
|
592,389
|
|
|
—
|
|
|
592,389
|
|
|
619,966
|
|
|
—
|
|
|
619,966
|
|
Accumulated
other comprehensive loss
|
|
|
(992
|
)
|
|
—
|
|
|
(992
|
)
|
|
(1,078
|
)
|
|
—
|
|
|
(1,078
|
)
|
|
(571
|
)
|
|
—
|
|
|
(571
|
)
|
Accumulated
deficit
|
|
|
(59,650
|
)
|
|
(1,745
|
)
|
|
(61,395
|
)
|
|
(80,184
|
)
|
|
(3,916
|
)
|
|
(84,100
|
)
|
|
(111,489
|
)
|
|
(4,414
|
)
|
|
(115,903
|
)
|
Total
members’ equity
|
|
|
530,810
|
|
|
(1,745
|
)
|
|
529,065
|
|
|
511,127
|
|
|
(3,916
|
)
|
|
507,211
|
|
|
507,906
|
|
|
(4,414
|
)
|
|
503,492
|
|
Total
liabilities and members’ equity
|
|
$
|
574,110
|
|
$
|
21
|
|
$
|
574,131
|
|
$
|
557,815
|
|
$
|
(110
|
)
|
$
|
557,705
|
|
$
|
905,399
|
|
$
|
772
|
|
$
|
906,171
|
|
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities.
On
an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation of intangible assets and investments,
and litigation. We base our estimates on historical and anticipated results
and
trends and on various other assumptions that we believe are reasonable under
the
circumstances, including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. By their nature,
estimates are subject to an inherent degree of uncertainty. Actual results
that
differ from our estimates could have a significant adverse effect on our
operating results and financial position. We believe that the following
significant accounting policies and assumptions may involve a higher degree
of
judgment and complexity than others.
Revenue
Recognition.
We
recognize revenue in accordance with the following authoritative literature:
American Institute of Certified Public Accountants Statement of Position (“SOP”)
No. 97-2, Software
Revenue Recognition; SOP No. 98-9,
Software
Revenue Recognition with Respect to Certain Arrangements;
SOP No. 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts;
and
Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force
(“EITF”) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. We
recognize revenue when there is persuasive evidence of an arrangement, the
fee
is fixed or determinable, the product or services have been delivered and
collectibility is reasonably assured. We derive revenue principally from
contracts to provide embedded multimedia software products for mobile devices
and related royalties.
We
have
arrangements whereby customers pay one contracted amount for multiple products
and services and in some cases, involve a combination of products and
services. Our arrangements generally include a software or technology
license, non-recurring engineering services, and in most situations post
contract customer support (“PCS”). To
date,
we have not been able to establish vendor specific objective evidence (“VSOE”)
for any of the elements included in our revenue arrangements. We have been
unable to establish VSOE for the elements that we sell as part of a
multiple-element arrangement because the products or services have not yet
been
sold separately or a standard price list has not been established. As a result,
once the software or technology is delivered and the only undelivered element
is
services, the entire non-contingent contract value is recognized over the
remaining service period. Costs directly attributable to providing these
services are also deferred in deferred contracts costs and amortized over the
remaining service period of the revenues.
When
we
provide services under non-recurring engineering
contracts
that
are
considered essential to the functionality of the software products and there
is
an undelivered element without VSOE, generally PCS, revenues are deferred until
the engineering services are complete. Revenues are then recognized from the
delivery of the software ratably through the end of the support
period.
Typically,
we earn royalty revenues on licensed embedded multimedia products sold
by our licensees. Generally, royalties are paid by licensees on a per unit
or contingent use basis. The licensees generally report and pay the royalty
in
the quarter subsequent to the period of delivery or usage. When royalty
arrangements also provide for ongoing PCS that does not meet the criteria to
be
accrued on delivery of the software, the royalty is recognized ratably from
the
date the royalty report is received through the stated remaining term of the
PCS
arrangement.
In
limited situations, we have determined that PCS revenue can be
recognized upon delivery of the software. In these situations, we
have determined that PCS is for one year or less, the estimated cost of
providing PCS during the arrangement is insignificant and unspecified upgrades
or enhancements offered during PCS arrangements historically have been and
are
expected to continue to be minimal and infrequently provided. In these limited
situations, we have accrued all the estimated costs of providing the
services, which to date have been insignificant.
Services
sold separately are generally billed on a time-and- materials basis at
agreed-upon billing rates, and revenue is generally recognized as the services
are performed.
Arrangements
generally do not allow for product returns and we have no history of
product returns. Accordingly, no allowance for returns has been provided.
Revenue payable on extended payment terms are recognized in the period the
payment becomes due. If an arrangement includes specified upgrade rights,
revenue is deferred until the specified upgrade has been delivered.
Wireless
Spectrum Licenses.
Wireless licenses that we purchase from third parties or in spectrum auctions
held by the FCC are initially recorded at fair value, which is the purchase
price paid for the license at the time of acquisition plus legal costs incurred
to acquire the intangible asset. We have determined that our Broadband Radio
Service (“BRS”) and Wireless Communication Service (“WCS”) wireless spectrum
licenses meet the definition of indefinite-lived intangible assets under SFAS
No. 142, “Goodwill and Other Intangible Assets”. The wireless spectrum licenses
from the FCC may be renewed every ten years for a nominal fee, provided that
we
continue to meet the service and geographic coverage provisions required by
the
FCC. As of December 30, 2006, indefinite-lived wireless spectrum licenses that
are not subject to amortization totaled $450.1 million.
Wireless
licenses for which we have acquired lease rights from third parties or from
foreign countries where the renewal terms are not yet established are considered
to have finite lives. The asset and related liability are recorded at the
present value of future cash flows using our incremental borrowing rate at
the
time of acquisition. The wireless license asset is amortized over the
contractual life of the lease. Such licenses in the United States are the
Educational Broadband Service (“EBS”) licenses for which we have entered into
long-term leases. As of December 30, 2006, amortized wireless spectrum licenses,
net of accumulated amortization, totaled $77.9 million.
In
cases
where we acquire the stock of an entity whose assets are comprised almost
entirely of wireless spectrum, we account for the acquisition of the company
as
an acquisition of wireless spectrum 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 generally includes the cash purchase price,
associated legal and closing costs and deferred tax liabilities. Deferred tax
liabilities are determined in accordance with EITF 98-11, “Accounting for
Acquired Temporary Differences in Certain Purchase Transactions That Are Not
Accounted for as Business Combinations”. During 2006, we acquired such a
wireless spectrum license for a total cost of $236.4 million, which included
the
cash purchase price of $160.5 million, legal costs of $0.1 million, and $75.8
million in associated deferred tax liabilities.
Valuation
of Intangible Assets and Investments.
In
accordance with Statement of Financial Accounting Standards No. 142, or SFAS
No.
142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill and
certain spectrum licenses. In lieu of amortization, we are required to perform
an annual review for impairment, or more frequently if impairment indicators
arise. Goodwill and intangible assets not subject to amortization are considered
to be impaired if we determine that the carrying value of the asset exceeds
its
fair value.
We
test
goodwill for impairment annually at a reporting unit level using a two-step
process. As of December 30, 2006, we had two reporting units as defined by
SFAS
142 containing goodwill that required testing for impairment. The first step
of
the impairment test involves comparing the fair values of the applicable
reporting units with their aggregate carrying values, including goodwill. If
the
carrying amount of a reporting unit exceeds the reporting unit’s fair value, we
then perform the second step of the goodwill impairment test to determine the
amount of the impairment loss. The second step of the goodwill impairment test
involves comparing the implied fair value of the affected reporting unit’s
goodwill with the carrying value of that goodwill. If the carrying amount of
goodwill exceeds the implied fair value of that goodwill, an impairment loss
is
recognized in an amount equal to that excess.
For
the
goodwill impairment test performed as of October 1, 2006, the discounted cash
flows used to estimate fair value were based on discrete financial forecasts
of
five years for our PacketVideo reporting unit and seven years for our Advanced
Technology Group reporting unit. These forecasts were developed by management
for planning purposes. Cash flows beyond these periods were estimated using
terminal value calculations. The future cash flows were discounted to present
value using a discount rate of 17.7% and a terminal growth rate of 6% for our
PacketVideo reporting unit and 8% for our Advanced Technologies Group reporting
unit. A variance in the discount rate or in management’s forecasts would have a
significant impact on the estimated fair value of the reporting unit and
consequently the amount of identified goodwill impairment. We did not recognize
any goodwill impairment as a result of performing this annual test.
We
test
indefinite-lived intangible assets by making a determination of the fair value
of the intangible asset. If the fair value of the intangible asset is less
than
its carrying value, an impairment loss is recognized in an amount equal to
the
difference. We also evaluate the remaining useful life of our intangible assets
that are not subject to amortization on an annual basis to determine whether
events and circumstances continue to support an indefinite useful life. If
an
intangible asset that is not being amortized is subsequently determined to
have
a finite useful life, that asset is tested for impairment. After recognition
of
the impairment, if any, the asset is amortized prospectively over its estimated
remaining useful life and accounted for in the same manner as other intangible
assets that are subject to amortization. At October 1, 2006, our intangible
assets not subject to amortization were evaluated for impairment and we
determined that no impairment existed at that date.
In
accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” intangible assets subject to amortization were evaluated for
impairment as of December 30, 2006. SFAS 144 requires the recognition of an
impairment loss when the carrying amount of an intangible asset is not
recoverable and its carrying amount exceeds its fair value. We determined that
no impairment existed at our testing date.
Any
required impairment loss would be recorded as a reduction in the carrying value
of the related asset and charged to results of operations.
The
determination of the fair value of certain acquired assets and liabilities
is
subjective in nature and often involves the use of significant estimates and
assumptions. Determining the fair values and useful lives of intangible assets
requires the exercise of judgment. Upon initially recording intangible assets
that are acquired through business combinations we may use an independent
valuation firm to assist us in determining the appropriate values for those
assets. While there are a number of different generally accepted valuation
methods to estimate the value of intangible assets acquired, we primarily use
the undiscounted cash flows expected to result from the use of the assets.
This
method requires significant management judgment to forecast the future operating
results used in the analysis. In addition, other significant estimates are
required such as residual growth rates and discount factors. The estimates
we
use are consistent with the plans and estimates that we use to manage our
business and are based on available historical information and industry
averages.
The
recorded value of goodwill and other intangible assets may become impaired
in
the future. As of December 30, 2006, our goodwill and intangible assets, net
of
accumulated amortization, were $32.2 million and $546.6 million, respectively.
If the estimates of fair values or their related assumptions change in the
future, we may be required to record an impairment charge on all or a portion
of
our goodwill and intangible assets. We also cannot predict the occurrence of
future impairment-triggering events nor the impact such events might have on
our
reported asset values. Future events could cause us to conclude that impairment
indicators exist and that goodwill or other intangible assets associated with
our acquired businesses is impaired. Any resulting impairment loss could have
an
adverse impact on our results of operations.
Share-Based
Payments and Pro forma Share-Based Compensation.
We
grant options and warrants to purchase common stock to our employees, directors,
members of our Technical Developments Steering Committee and other strategic
advisors under our stock option plans and advisory agreements. The benefits
provided by these plans and agreements qualify as share-based compensation
under
the provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123(R)”), which requires us to recognize
compensation expense based on the estimated fair values of the share-based
awards to employees determined on the date of grant for all awards granted,
modified or cancelled as of January 1, 2006 (the effective date).
Prior
to
the effective date, we did not recognize any compensation cost in our statements
of operations for share-based awards granted to employees with an option price
equal to the fair market value of respective common stock on the date of grant
as we accounted for them under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and its related interpretations and adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, “Stock-Based Compensation” (“SFAS 123”). We provided pro forma net loss in
accordance with the disclosure only provision of SFAS 123. The share-based
compensation expense used in these pro forma amounts is based on the minimum
value method option-pricing model. This method required us to use several
assumptions to estimate the fair value including the expected life of the
option.
We
adopted the provisions of SFAS 123(R) using the prospective transition method,
whereby we will continue to account for nonvested equity awards to employees
outstanding at December 31, 2005 using APB 25, and apply SFAS 123(R) to all
awards granted or modified after that date. In accordance with the transition
rules of SFAS 123(R), we no longer provide the pro forma disclosures in reports
issued for periods ending after December 31, 2005 as SFAS 123(R) precludes
companies that use the minimum value method for pro forma disclosure from
continuing to provide those pro forma disclosures for outstanding awards
accounted for under the intrinsic value method of APB 25.
Our
determination of the fair value of share-based payment awards utilizing the
Black-Scholes model is affected by a number of assumptions such as expected
volatility, expected term, risk-free interest rates and expected dividends.
We
base expected volatility on an average of our peer companies’ expected
volatilities due to lack of trading history of our common stock and our
subsidiaries’ shares. As none of the plans have sufficient history for
estimating the term from grant date to full exercise of the option, we consider
expected terms applied, in part, by our peer companies to determine the expected
life of each grant. We base the risk-free interest rates on the implied yield
available on U.S. Treasury constant maturities in effect at the time of the
grant with remaining terms equivalent to the respective expected terms of the
share-based award. Our expected dividend yield of zero is based on the fact
that
we have never paid cash dividends and have no present intention to pay cash
dividends on our common stock. We have assumed an annualized forfeiture rate
of
10% for our options based on a combined review of industry and employee turnover
data, as well as an analytical review performed of historical pre-vesting
forfeitures occurring over the previous year. Under the true-up provisions
of
SFAS 123(R), we record additional expense if the actual forfeiture rate is
lower
than estimated, and will record a recovery of prior expense if the actual
forfeiture rate is higher than estimated.
We
believe it is important for investors to be aware of the high degree of
subjectivity involved when using option pricing models to estimate share-based
compensation under SFAS 123(R). Option-pricing models were developed for use
in
estimating the value of traded options that have no vesting or hedging
restrictions, are fully transferable and do not cause dilution. Because our
share-based payments have characteristics significantly different from those
of
freely traded options, and because changes in the subjective input assumptions
can materially affect our estimates of fair values, in our opinion, existing
valuation models, including the Black-Scholes, may not provide reliable measures
of the fair values of our share-based compensation. Consequently, there is
a
risk that our estimates of the fair values of our share-based compensation
awards on the grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration, early termination or forfeiture of
those
share-based payments in the future. Certain share-based payments, such as
employee stock options, may expire worthless or otherwise result in zero
intrinsic value as compared to the fair values originally estimated on the
grant
date and reported in our financial statements. Alternatively, value may be
realized from these instruments that is significantly in excess of the fair
values originally estimated on the grant date and reported in our financial
statements. There is currently no market-based mechanism or other practical
application to verify the reliability and accuracy of the estimates stemming
from these valuation models, nor is there a means to compare and adjust the
estimates to actual values. Although the fair value of employee share-based
awards is determined in accordance with SFAS 123(R) and the Securities and
Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107) using an
option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer and willing seller market transaction. If factors
change and we employ different assumptions in the application of SFAS 123(R)
in
future periods than those currently applied under SFAS 123(R), the compensation
expense that we record in the future under SFAS 123(R) may differ significantly
from what we have reported during 2006.
The
CYGNUS Communications, Inc. 2004 Stock Option Plan., as amended in February
2006, provided for the conversion of each CYGNUS option, whether issued or
unissued, into the right to purchase .05097 shares of NextWave common stock
upon
the Corporate Conversion Merger. The conversion was accounted for as a
modification resulting from an exchange of options in a business combination
under SFAS 123(R) in which the fair value of the vested portion of the new
options at the date of conversion, valued at $0.9 million, was added to the
purchase price of CYGNUS and the fair value of the unvested portion of the
new
options, valued at $1.2 million, is amortized over the remaining vesting
periods.
For
2006,
we recognized $2.8 million in compensation expense for employee stock options.
At December 30, 2006, there was $8.6 million remaining in unrecognized
compensation cost related to employee stock options which is expected to be
recognized over a weighted average period of 3.4 years.
On
January 3, 2007, concurrent with the listing of NextWave’s common stock on the
Nasdaq Global Market, an option to purchase one share of common stock of
NextWave for $6.00 per share was issued for every six options outstanding under
our PacketVideo 2005 Equity Incentive Plan. The exchange will be accounted
for
as a modification under SFAS 123(R) during fiscal year 2007 and is expected
to
result in additional compensation expense.
Litigation.
We are
currently involved in certain legal proceedings. Although there can be no
assurance that unfavorable outcomes in any of these matters would not have
a
material adverse effect on our operating results, liquidity or financial
position, we believe the claims are without merit and intend to vigorously
defend the actions. We estimate the range of liability related to pending
litigation where the amount and range of loss can be estimated. We record our
best estimate of a loss when the loss is considered probable. Where a liability
is probable and there is a range of estimated loss with no best estimate in
the
range, we record the minimum estimated liability related to the claim. As
additional information becomes available, we assess the potential liability
related to our pending litigation and revise our estimates. We have not recorded
any accrual for contingent liability associated with our legal proceedings
based
on our belief that a liability, while possible, is not probable. Further, any
possible range of loss cannot be estimated at this time. Revisions in our
estimates of the potential liability could materially impact our results of
operations.
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. We believe that adoption of this interpretation will 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 financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years.
NextWave’s management is in the process of evaluating the impact of the adoption
of SFAS No. 157.
Contractual
Obligations
The
following table summarizes our contractual obligations at December 30, 2006,
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
|
|
(in
thousands)
|
|
Total
|
|
2007
|
|
Years
2008-2009
|
|
Years
2010-2011
|
|
Years
2012
and Thereafter
|
|
Long-term
obligations
|
|
$
|
380,178
|
|
$
|
3,066
|
|
$
|
5,744
|
|
$
|
354,929
|
|
$
|
16,439
|
|
Services
and other purchase agreements
|
|
|
12,929
|
|
|
7,535
|
|
|
5,394
|
|
|
—
|
|
|
—
|
|
Pending
business acquisition
|
|
|
19,000
|
|
|
19,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital
expenditures(1)
|
|
|
8,200
|
|
|
8,200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
leases
|
|
|
21,362
|
|
|
7,037
|
|
|
10,879
|
|
|
3,084
|
|
|
362
|
|
Total
|
|
$
|
441,669
|
|
$
|
44,838
|
|
$
|
22,017
|
|
$
|
358,013
|
|
$
|
16,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
contractual obligations entered into subsequent to December 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
redeemable senior convertible preferred stock(2)
|
|
$
|
355,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
355,000
|
|
Business
acquisition(3)
|
|
|
19,863
|
|
|
16,283
|
|
|
3,580
|
|
|
—
|
|
|
—
|
|
Pending
wireless spectrum acquisition(4)
|
|
|
26,015
|
|
|
26,015
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Pending
wireless spectrum leases(5)
|
|
|
23,399
|
|
|
7,523
|
|
|
1,597
|
|
|
1,633
|
|
|
12,646
|
|
Operating
facility lease(6)
|
|
|
17,286
|
|
|
1,238
|
|
|
6,706
|
|
|
7,967
|
|
|
1,375
|
|
(1) |
Our
purchase agreement for an office building in Henderson, Nevada was
amended
in March 2007, reducing the cost of the building to $6.9 million.
The $6.9
million was paid in March 2007. A separate agreement was entered
into in
March 2007 related to the interior construction costs of the building
for
$2.6 million. An additional estimated $1.9 million for non-contracted
fixtures and furniture will also be required to ready the building
for
occupancy. Construction is expected to be completed during the second
quarter of 2007, at which time we expect to occupy the facility and
pay
the remaining costs associated with
occupancy.
|
(2) |
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 million in net proceeds from
the sale of the Series A Preferred Stock.
|
(3) |
In
February 2007, we acquired all of the outstanding common stock and
warrants of GO Networks, Inc., for $13.2 million plus the assumption
of
$6.7 million in debt, of which $1.3 million was paid at closing.
Additional purchase consideration of up to $25.7 million may be paid
in
shares of NextWave common stock, subject to the achievement of certain
operational milestones in the 18-month period subsequent to the closing
of
the acquisition. We 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 upon the achievement
of
certain operational milestones in the 18-month period subsequent
to the
closing of the acquisition.
|
(4) |
In
March 2007, we acquired all of the outstanding shares of common stock
of
4253311 Canada Inc., a Canadian company. The total cost of the acquisition
is expected to be approximately $26.0 million in cash. The assets
of the
company are comprised almost entirely of wireless spectrum.
|
(5) |
During
the first three months of 2007, we entered into three separate wireless
spectrum leases. Approval of one of the license transfer applications
has
been received from the FCC and one is pending. The third application
is
pending with the Swiss Confederated Communications
Commission.
|
(6) |
In
March 2007, we signed a lease agreement for office facilities that
expires
in 2012. The lease requires a $2.5 million letter of credit, which
is
gradually reduced until termination of the lease in
2012.
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Risk
At
December 30, 2006, our investment portfolios included unrestricted and
restricted investment securities with fair values of $200.7 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.
Foreign
Currency Risk
We
conduct our business through subsidiaries in Europe, 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 income.
ITEM
8. FINANCIAL STATEMENTS AND EXHIBITS
Index
to
Consolidated Financial Statements and Financial Statement Schedule
|
|
Page
|
Consolidated
Financial Statements
|
|
|
|
Report
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
|
[
]
|
|
Consolidated
Balance Sheets as of December 30, 2006 and December 31,
2005
|
|
[
]
|
|
Consolidated
Statements of Operations for the Year Ended December 30, 2006 and
for the
Period from Inception (April 13, 2005) to December 31,
2005
|
|
[
]
|
|
Consolidated
Statement of Stockholders’/Members’ Equity for the Year Ended December 30,
2006 and for the Period from Inception (April 13, 2005) to December
31,
2005
|
|
[
]
|
|
Consolidated
Statements of Cash Flows for the Year Ended December 30, 2006 and
for the
Period from Inception (April 13, 2005) to December 31,
2005
|
|
[
]
|
|
Notes
to Consolidated Financial Statements
|
|
[
]
|
|
Schedule
II - Valuation and Qualifying Accounts
|
|
[
]
|
|
Financial
Statement Schedules: Financial statements schedules other than those appearing
on page [ ]are
omitted
as they are not applicable, are not required, or the information is included
in
the Consolidated Financial Statements or the Notes to Consolidated Financial
Statements.
Report
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
The
Board
of Directors and Stockholders
NextWave
Wireless Inc.
We
have
audited the accompanying consolidated balance sheets of NextWave Wireless Inc.
as of December 30, 2006 and December 31, 2005, and the related consolidated
statements of operations, equity and cash flows for the year ended December
30,
2006 and for the period from April 13, 2005 (date of inception) through December
31, 2005. Our audits also included the financial statement schedule listed
in
the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of NextWave Wireless
Inc.
at December 30, 2006 and December 31, 2005, and the consolidated results of
its
operations and its cash flows for the year ended December 30, 2006 and for
the
period from April 13, 2005 (date of inception) through December 31, 2005, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company changed its method of accounting for share-based payments
in accordance with Statement of Financial Accounting Standards No. 123(R),
Share-Based
Payment.
/s/
ERNST
& YOUNG LLP
San
Diego, California
March
26,
2007,
except
for Note 14, as to which the date is
March
29,
2007
NEXTWAVE
WIRELESS INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except par value data)
|
|
December
30,
2006
|
|
December
31,
2005
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,980
|
|
$
|
93,649
|
|
Short-term
investments
|
|
|
167,705
|
|
|
365,582
|
|
Accounts
receivable, net of allowance for doubtful accounts of $321 and $391,
respectively
|
|
|
5,056
|
|
|
3,712
|
|
Deferred
contract costs
|
|
|
2,397
|
|
|
898
|
|
Prepaid
expenses and other current assets
|
|
|
7,837
|
|
|
8,677
|
|
Total
current assets
|
|
|
215,975
|
|
|
472,518
|
|
Restricted
cash
|
|
|
75,000
|
|
|
—
|
|
Wireless
spectrum licenses, net
|
|
|
527,998
|
|
|
45,467
|
|
Goodwill
|
|
|
32,184
|
|
|
24,782
|
|
Other
intangible assets, net
|
|
|
18,570
|
|
|
18,100
|
|
Property
and equipment, net
|
|
|
17,529
|
|
|
11,092
|
|
Other
noncurrent assets
|
|
|
9,823
|
|
|
7,815
|
|
Total
assets
|
|
$
|
897,079
|
|
$
|
579,774
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’/MEMBERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,630
|
|
$
|
3,406
|
|
Accrued
expenses
|
|
|
33,537
|
|
|
5,152
|
|
Current
portion of long-term obligations
|
|
|
3,065
|
|
|
2,200
|
|
Deferred
revenue
|
|
|
10,253
|
|
|
4,103
|
|
Current
tax liability
|
|
|
80
|
|
|
417
|
|
Other
current liabilities and deferred credits
|
|
|
1,160
|
|
|
822
|
|
Total
current liabilities
|
|
|
49,725
|
|
|
16,100
|
|
Deferred
income tax liabilities
|
|
|
75,774
|
|
|
—
|
|
Long-term
deferred credits and reserves
|
|
|
3,324
|
|
|
8,306
|
|
Long-term
obligations, net of current portion
|
|
|
298,030
|
|
|
14,934
|
|
Total
liabilities
|
|
|
426,853
|
|
|
39,340
|
|
Minority
interest in subsidiary
|
|
|
1,048
|
|
|
1,070
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders’/Members’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 25,000 shares authorized; no shares issued
or
outstanding
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.001 par value; 400,000 shares authorized; 83,716 and 83,715
issued and outstanding, respectively, at December 30, 2006
|
|
|
84
|
|
|
—
|
|
Membership
interests; 488,672 interests issued and outstanding as of December
31,
2005
|
|
|
—
|
|
|
589,354
|
|
Additional
paid-in-capital
|
|
|
620,430
|
|
|
—
|
|
Common
stock in treasury, at cost, 1 share at December 30, 2006
|
|
|
(7
|
)
|
|
—
|
|
Accumulated
other comprehensive loss
|
|
|
(357
|
)
|
|
(832
|
)
|
Accumulated
deficit
|
|
|
(150,972
|
)
|
|
(49,158
|
)
|
Total
stockholders’/members’ equity
|
|
|
469,178
|
|
|
539,364
|
|
Total
liabilities and stockholders’/members’ equity
|
|
$
|
897,079
|
|
$
|
579,774
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEXTWAVE
WIRELESS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
|
Year
Ended December 30, 2006
|
|
Inception
(April
13, 2005) to December 31, 2005
|
|
Revenues
|
|
$
|
24,284
|
|
$
|
4,144
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
12,054
|
|
|
4,573
|
|
Engineering,
research and development
|
|
|
52,810
|
|
|
17,349
|
|
General
and administrative
|
|
|
51,537
|
|
|
15,318
|
|
Sales
and marketing
|
|
|
9,992
|
|
|
2,960
|
|
Business
realignment costs (credits)
|
|
|
(7,121
|
)
|
|
13,031
|
|
Purchased
in-process research and development
|
|
|
3,538
|
|
|
6,600
|
|
Total
operating expenses
|
|
|
122,810
|
|
|
59,831
|
|
Loss
from operations
|
|
|
(98,526
|
)
|
|
(55,687
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
income
|
|
|
12,533
|
|
|
11,051
|
|
Interest
expense
|
|
|
(20,647
|
)
|
|
(1,006
|
)
|
Other
income and expense, net
|
|
|
(23
|
)
|
|
(20
|
)
|
Total
other income (expense), net
|
|
|
(8,137
|
)
|
|
10,025
|
|
Loss
before provision for income taxes and minority interest
|
|
|
(106,663
|
)
|
|
(45,662
|
)
|
Income
tax benefit (provision)
|
|
|
35
|
|
|
(417
|
)
|
Minority
interest
|
|
|
1,608
|
|
|
127
|
|
Net
loss
|
|
$
|
(105,020
|
)
|
$
|
(45,952
|
)
|
Net
loss per common share - basic and diluted
|
|
$
|
(1.28
|
)
|
|
N/A
|
|
Weighted
average shares used in per share calculation
|
|
|
81,841
|
|
|
N/A
|
|
See
Note 1 for pro forma net loss per common share
information.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEXTWAVE
WIRELESS INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’/MEMBERS’ EQUITY
(in
thousands)
|
|
|
Common
Stock
|
|
|
Membership
Interests
|
|
|
Additional
Paid-In
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Compre-hensive
|
|
|
Accumulated
|
|
|
Total
Stockholders’/
Members’
|
|
|
Compre-
hensive
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
Loss
|
|
Capital
contributions upon inception (April 13, 2005)
|
|
|
—
|
|
$
|
—
|
|
|
488,672
|
|
$
|
588,279
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
588,279
|
|
|
|
|
Accumulated
deficit of variable interest entity contributed upon inception
(April 13,
2005)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,206
|
)
|
|
(3,206
|
)
|
|
|
|
Share-based
compensation for non-employee advisory services
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,075
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,075
|
|
|
|
|
Unrealized
net losses on investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(832
|
)
|
|
—
|
|
|
(832
|
)
|
$
|
(832
|
)
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(45,952
|
)
|
|
(45,952
|
)
|
|
(45,952
|
)
|
Balance
at December 31, 2005
|
|
|
—
|
|
|
—
|
|
|
488,672
|
|
|
589,354
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(832
|
)
|
|
(49,158
|
)
|
|
539,364
|
|
$
|
(46,784
|
)
|
Units
issued and stock options exchanged in a business
acquisition
|
|
|
—
|
|
|
—
|
|
|
1,558
|
|
|
1,558
|
|
|
904
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,462
|
|
|
|
|
Shares/units
issued for stock/unit options and warrants exercised, net of
repurchases
|
|
|
1,504
|
|
|
2
|
|
|
1,382
|
|
|
1,382
|
|
|
13
|
|
|
(1
|
)
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
1,390
|
|
|
|
|
Sale
of restricted units
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
|
|
Share-based
compensation expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,969
|
|
|
1,187
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,156
|
|
|
|
|
Distributions
to members
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,481
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,481
|
)
|
|
|
|
Accumulated
deficit of variable interest entity eliminated upon acquisition
by
NextWave
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,206
|
|
|
3,206
|
|
|
|
|
Fair
value of warrants issued in connection with the issuance of
7% Senior
Secured Notes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,626
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,626
|
|
|
|
|
Exchange
membership interests for common shares in conjunction with
the Corporate
Conversion
|
|
|
82,212
|
|
|
82
|
|
|
(492,612
|
)
|
|
(618,408
|
)
|
|
618,326
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Unrealized
net gains on investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
475
|
|
|
—
|
|
|
475
|
|
$
|
475
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(105,020
|
)
|
|
(105,020
|
)
|
|
(105,020
|
)
|
Balance
at December 30, 2006
|
|
|
83,716
|
|
$
|
84
|
|
|
—
|
|
$
|
—
|
|
$
|
620,430
|
|
|
(1
|
)
|
$
|
(7
|
)
|
$
|
(357
|
)
|
$
|
(150,972
|
)
|
$
|
469,178
|
|
$
|
(104,545
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEXTWAVE
WIRELESS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Year
Ended December 30, 2006
|
|
Inception
(April
13, 2005) to December 31, 2005
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
Net
loss
|
|
$
|
(105,020
|
)
|
$
|
(45,952
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,081
|
|
|
661
|
|
Amortization
of intangible assets
|
|
|
5,831
|
|
|
2,926
|
|
Non-cash
share-based compensation
|
|
|
5,156
|
|
|
1,075
|
|
Non-cash
business realignment costs (credits)
|
|
|
(7,121
|
)
|
|
13,031
|
|
In-process
research and development
|
|
|
3,538
|
|
|
6,600
|
|
Accretion
of interest expense
|
|
|
9,503
|
|
|
939
|
|
Losses
incurred on strategic investment
|
|
|
1,494
|
|
|
159
|
|
Minority
interest
|
|
|
(1,537
|
)
|
|
—
|
|
Other
non-cash adjustments
|
|
|
848
|
|
|
(614
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,513
|
)
|
|
(406
|
)
|
Deferred
contract costs
|
|
|
(1,499
|
)
|
|
(424
|
)
|
Prepaid
expenses and other current assets
|
|
|
(2,463
|
)
|
|
(3,742
|
)
|
Other
assets
|
|
|
(724
|
)
|
|
205
|
|
Accounts
payable and accrued liabilities
|
|
|
22,819
|
|
|
4,758
|
|
Deferred
revenue
|
|
|
8,599
|
|
|
1,760
|
|
Other
current liabilities and deferred credits
|
|
|
(329
|
)
|
|
350
|
|
Net
cash used in operating activities
|
|
|
(56,337
|
)
|
|
(18,674
|
)
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from maturities of available-for-sale securities
|
|
|
457,985
|
|
|
1,137,962
|
|
Proceeds
from the sale of available-for-sale securities
|
|
|
1,091,844
|
|
|
—
|
|
Purchases
of available-for-sale securities
|
|
|
(1,351,477
|
)
|
|
(1,503,544
|
)
|
Payments
for wireless spectrum licenses
|
|
|
(400,337
|
)
|
|
(18,780
|
)
|
Cash
paid for business combination, net of cash acquired
|
|
|
(8,446
|
)
|
|
(46,621
|
)
|
Payment
for investment in software development company
|
|
|
—
|
|
|
(4,500
|
)
|
Purchase
of property and equipment
|
|
|
(13,036
|
)
|
|
(7,278
|
)
|
Other,
net
|
|
|
(1,909
|
)
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(225,376
|
)
|
|
(442,761
|
)
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from long-term obligations, net of costs to issue
|
|
|
295,018
|
|
|
—
|
|
Payments
on long-term obligations
|
|
|
(2,502
|
)
|
|
(15
|
)
|
Payment
to restricted cash account securing long-term obligations
|
|
|
(75,000
|
)
|
|
—
|
|
Proceeds
from the sale of equity interests, net of repurchases
|
|
|
2,390
|
|
|
—
|
|
Proceeds
from investment by joint venture partner
|
|
|
2,585
|
|
|
—
|
|
Cash
distributions paid to members
|
|
|
(1,447
|
)
|
|
—
|
|
Net
cash provided by (used in) financing activities
|
|
|
221,044
|
|
|
(15
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(60,669
|
)
|
|
(461,450
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
93,649
|
|
|
555,099
|
|
Cash
and cash equivalents, end of period
|
|
$
|
32,980
|
|
$
|
93,649
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEXTWAVE
WIRELESS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NextWave, Summary of Significant Accounting Policies and Significant
Accounts
NextWave
Wireless Inc. (together with its subsidiaries, “NextWave”), the successor to
NextWave Wireless LLC, is an early-stage wireless technology company engaged
in
the development of next-generation mobile broadband and wireless multimedia
products, technologies and services. NextWave is developing proprietary chipsets
and related network and device products based on the IEEE 802.16e WiMAX
standard. A key design objective of its products and technologies is to improve
the ability of mobile WiMAX to cost effectively handle the large volume of
network traffic that it believes Voice Over Internet Protocol (“VoIP”)
telephony, high speed web-surfing and next-generation wireless multimedia
applications such as high resolution mobile TV, high fidelity streaming audio
and interactive real-time gaming will generate. NextWave intends to sell and/or
license its WiMAX certified products and technologies to network infrastructure
and device manufacturers and network operators worldwide. To stimulate demand
for products, NextWave plans to partner with service providers to build and
operate shared mobile WiMAX networks that operate on its licensed spectrum
and
utilize network and device equipment which incorporate its products and
technologies. In addition, through its PacketVideo subsidiary, NextWave is
a
global provider of embedded multimedia software for mobile phones. NextWave
believes that its global deployments of mobile broadband networks and subscriber
solutions, combined with its wireless multimedia software products and its
spectrum assets, will offer wireless service providers, cable operators,
multimedia content distributors, applications service providers and Internet
service providers a platform to provide advanced wireless broadband services
to
their customers.
Corporate
Conversion Merger
In
order
to convert NextWave Wireless LLC with and into a corporate form, the Board
of
Managers and a majority in interest of the holders of NextWave Wireless LLC
membership units approved the merger of NextWave Wireless LLC with a wholly
owned subsidiary of a newly formed Delaware corporation, NextWave Wireless
Inc.
(“Corporate Conversion Merger”). On November 13, 2006, the Corporate Conversion
Merger was completed and NextWave Wireless LLC became a wholly-owned subsidiary
of NextWave Wireless Inc. Under the terms of the merger agreement, NextWave
Wireless Inc. issued shares of its common stock to holders of NextWave Wireless
LLC’s membership units in exchange for all of the outstanding membership units
of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving
one
share of NextWave Wireless Inc. common stock for every six membership units
of
NextWave Wireless LLC that they held. Additionally, the terms of the CYGNUS
2004
Stock Option Plan, a plan administered by NextWave’s wholly-owned subsidiary,
CYGNUS Communications, Inc. (“CYGNUS”), which was amended in February 2006,
provided for the conversion of each CYGNUS option into .05097 options to
purchase shares of NextWave common stock at the time of the conversion.
Following the Corporate Conversion Merger, NextWave Wireless LLC’s obligation to
file periodic reports under the Securities Exchange Act of 1934 was suspended,
and NextWave Wireless Inc. became the successor to NextWave Wireless LLC for
Securities and Exchange Commission (“SEC”) reporting purposes.
All
references to per unit amounts in the notes to the consolidated financial
statements regarding per unit and stock option information have been restated
to
their equivalent shares based on the conversion of the membership units of
NextWave Wireless LLC into shares of common stock of NextWave Wireless Inc
and
the conversion of stock options of CYGNUS into stock options for shares of
common stock of NextWave Wireless Inc.
Inception
of NextWave Wireless LLC
NextWave
Wireless Inc. (“Old NextWave Wireless”) was formed in 1996 as a wholly-owned
operating subsidiary of NextWave Telecom, Inc. (“NTI”), which sought to develop
a nationwide CDMA-based personal communication services (“PCS”) network. In
1998, Old NextWave Wireless, together with NTI and its other subsidiaries (the
“NextWave Telecom group”), filed for protection under Chapter 11 of the United
States Bankruptcy Code. In December 2004, Old NextWave Wireless was converted
from a corporation to a limited liability company named NextWave Wireless LLC.
On March 1, 2005, the Bankruptcy Court confirmed the plan of reorganization
of
the NextWave Telecom group. The cornerstone of the plan was the sale of NTI
and
its subsidiaries, excluding Old NextWave Wireless, to Verizon Wireless for
approximately $3.0 billion. With the proceeds of the Verizon sale, as well
as
the proceeds of prior PCS spectrum license sales to Cingular Wireless, Verizon
Wireless and MetroPCS, all creditors of the NextWave Telecom group were paid
in
full and the NTI equity holders received an aggregate cash distribution of
approximately $2.6 billion. In addition, the plan provided for the
capitalization and distribution to the NTI equity holders of NextWave Wireless
LLC, a new wireless technology company. Pursuant to the plan, on April 13,
2005,
the NextWave Telecom group abandoned substantially all of its PCS assets other
than the spectrum licenses and all remaining non-PCS assets and liabilities
were
contributed to Old NextWave Wireless. Immediately thereafter limited liability
company interests (“LLC Interests”) in NextWave Wireless LLC were distributed to
the NTI equity holders and NextWave Wireless LLC was capitalized with $550.0
million in cash. Through this process, Old NextWave Wireless was reconstituted
as a company with a new capitalization and a new wireless technology business
plan. The significant underlying assets contributed to NextWave Wireless LLC
included NTI’s residual cash referred to above, the common stock of NextWave
Broadband Inc., the convertible Series A Preferred Stock and notes receivable
from CYGNUS, and wireless spectrum licenses from the Federal Communications
Commission (“FCC”) useful to NextWave or its new wireless technology business.
Pursuant to the plan, the NTI shareholders received undivided interests in
the
underlying assets of NextWave Wireless LLC as part of their consideration for
the redemption of their NTI shares, which was followed by the deemed
contribution of these undivided interests to NextWave Wireless LLC in return
for
unit membership interests.
The
assets and liabilities contributed to NextWave on April 13, 2005, were recorded
at their carryover basis, which NextWave believes approximated fair value,
at
that date and include the assets and liabilities of CYGNUS at their respective
book values, including cash of $5.1 million, which were consolidated in
accordance with Financial Accounting Standards Board Interpretation No. 46
(Revised) (“FIN 46(R)”). A summary of the consolidated assets and liabilities
contributed to NextWave on April 13, 2005 is as follows:
(in
thousands)
|
|
|
|
Cash
|
|
$
|
555,099
|
|
Prepaid
expenses and other current assets
|
|
|
1,240
|
|
Property
and equipment, net
|
|
|
9,706
|
|
Wireless
spectrum licenses
|
|
|
33,597
|
|
Goodwill
|
|
|
4,619
|
|
Deposits
and other noncurrent assets
|
|
|
369
|
|
Lease
obligations for wireless spectrum licenses
|
|
|
(16,107
|
)
|
Accrued
lease liability
|
|
|
(1,260
|
)
|
Accrued
expenses and other current liabilities
|
|
|
(1,120
|
)
|
Minority
interest in variable interest entity
|
|
|
(1,070
|
)
|
Accumulated
deficit of variable interest entity
|
|
|
3,206
|
|
Total
membership interests
|
|
$
|
588,279
|
|
Principles
of Consolidation and Strategic Investments
NextWave’s
consolidated financial statements include the assets, liabilities and operating
results of its wholly-owned and majority-owned subsidiaries as of December
30,
2006 and December 31, 2005. NextWave’s operating results through January 2006
also include those of CYGNUS, of which NextWave was the primary beneficiary
until February 2006, when NextWave acquired all of the remaining ownership
interests of the entity and it became a wholly-owned subsidiary. Minority
interest principally represents minority shareholders’ proportionate share of
the net equity in NextWave’s consolidated subsidiary, Inquam Broadband Holding,
Inc. (“Inquam Broadband”). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Prior
to
CYGNUS becoming a wholly-owned subsidiary of NextWave in January 2006, NextWave
had determined that it was the primary beneficiary of CYGNUS and its
subsidiaries under FIN 46(R) due to its convertible preferred stock ownership
rights, notes receivable with conversion rights, contribution of capital and
debt in relation to total capital and debt, and representation on the board
of
directors. Assets and liabilities of CYGNUS, including loans from NextWave,
totaled $11.2 million and $18.7 million, respectively, at December 31, 2005.
NextWave’s investment, including loans, in CYGNUS totaled $19.9 million at
December 31, 2005.
The
equity method of accounting is used for NextWave’s October 2005 investment in
preferred stock of Hughes Systique, an early stage software development services
company. NextWave’s share
in
the income or loss is determined by applying the equity method of accounting
using the “hypothetical-liquidation-at-book-value” method. Under the
hypothetical-liquidation-at-book-value method, the investor’s share of earnings
or losses is determined based on changes in the investor’s claim in the book
value of the investee. Additionally, the carrying value of investments accounted
for using the equity method of accounting is adjusted downward to reflect any
other-than-temporary declines in value. Losses
of
$1.5 million and $0.2 million are included in general and administrative
expenses in the consolidated statements of operations for the year ended
December 30, 2006 and during the period from inception (April 13, 2005) to
December 31, 2005, respectively, and represents NextWave’s share of losses in
the early stage company since its investment in October 2005. The carrying
value
of this investment at December 30, 2006, totaled $2.8 million, which is reported
in other noncurrent assets in the consolidated balance sheet, represents
NextWave’s maximum remaining exposure to loss.
Change
in Fiscal Year End
Effective
January 1, 2006, NextWave changed its fiscal year end and quarterly reporting
periods from quarterly calendar periods ending on December 31, to 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 2006 is a 52-week year ending on December 30, 2006 and the
first 53-week year will occur in 2009.
Use
of Estimates
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.
Revenues,
Cost of Revenues and Deferred Contract Costs
NextWave
recognizes revenue in accordance with the following authoritative literature:
American Institute of Certified Public Accountants Statement of Position (“SOP”)
No. 97-2, Software
Revenue Recognition; SOP No. 98-9,
Software
Revenue Recognition with Respect to Certain Arrangements;
SOP No. 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts;
Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 104,
Revenue Recognition and
Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force
(“EITF”) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. NextWave
recognizes revenue when there is persuasive evidence of an arrangement, the
fee
is fixed or determinable, the product or services have been delivered and
collectibility is reasonably assured. NextWave derives revenue principally
from
contracts to provide embedded multimedia software products for mobile devices
and related royalties.
NextWave
has arrangements whereby customers pay one contracted amount for multiple
products and services and in some cases, involve a combination of products
and
services. Nextwave’s arrangements generally include a software or technology
license, non-recurring engineering services, and in most situations post
contract customer support (“PCS”). To
date,
NextWave has not been able to establish vendor specific objective evidence
(“VSOE”) for any of the elements included in its revenue arrangements. NextWave
has been unable to establish VSOE for the elements that it sells as part of
a
multiple-element arrangement because the products or services have not yet
been
sold separately or a standard price list has not been established. As a result,
once the software or technology is delivered and the only undelivered element
is
services, the entire non-contingent contract value is recognized over the
remaining service period. Costs directly attributable to providing the services
are also deferred in deferred contracts costs and are amortized over the
remaining service period of the revenues.
When
NextWave provides services under non-recurring engineering
contracts
that
are
considered essential to the functionality of the software products and there
is
an undelivered element without VSOE, generally PCS, revenues are deferred until
the engineering services are complete. Revenues are then recognized from the
delivery of the software ratably through the end of the support
period.
Typically,
NextWave earns royalty revenues on licensed embedded multimedia products sold
by
its licensees. Generally, royalties are paid by licensees on a per unit or
contingent use basis. The licensees generally report and pay the royalty in
the
quarter subsequent to the period of delivery or usage. When royalty arrangements
also provide for ongoing PCS that does not meet the criteria to be accrued
on
delivery of the software, the royalty is recognized ratably from the date the
royalty report is received through the stated remaining term of the PCS
arrangement.
In
limited situations, NextWave has determined that PCS revenue can be recognized
upon delivery of the software. In these situations, NextWave has determined
that
PCS is for one year or less, the estimated cost of providing PCS during the
arrangement is insignificant and unspecified upgrades or enhancements offered
during PCS arrangements historically have been and are expected to continue
to
be minimal and infrequently provided. In these limited situations, NextWave
has
accrued all the estimated costs of providing the services, which to date have
been insignificant.
Services
sold separately are generally billed on a time-and- materials basis at
agreed-upon billing rates, and revenue is generally recognized as the services
are performed. We believe that inflation has not had a material effect on our
results of operations.
Arrangements
generally do not allow for product returns and NextWave has no history of
product returns. Accordingly, no allowance for returns has been provided.
Revenue payable on extended payment terms are recognized in the period the
payment becomes due. If an arrangement includes specified upgrade rights,
revenue is deferred until the specified upgrade has been delivered.
Engineering,
Research and Development
Engineering,
research and development costs are expensed as incurred, except for burdened
direct costs associated with deferred revenue from contract engineering services
performed by NextWave.
NextWave
accounts for research and development costs in accordance with several
accounting pronouncements, including SFAS No. 2, Accounting for Research and
Development Costs, and SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies that
costs incurred internally in researching and developing a software product
should be charged to expense until technological feasibility has been
established for the product. Once technological feasibility is established,
all
software costs should be capitalized until the product is available for general
release to customers. Judgment is required in determining when technological
feasibility of a product is established. NextWave has determined that
technological feasibility is reached when a working model of the software is
completed and has been confirmed by testing, which is generally shortly before
the products are available for general release to customers. Through December
30, 2006, costs incurred after technological feasibility is established are
not
material, and accordingly, NextWave has expensed all research and development
costs when incurred.
Business
Realignment Costs
Business
realignment costs for the period from inception (April 13, 2005) to December
31,
2005 were $13.0 million and include non-cash impairment costs of $5.9 million
for certain hardware and service costs deemed to have no value in consideration
of current technology and marketing trial plans in Henderson, Nevada. The
impairment loss recognized was equal to the carrying value of impaired assets.
Additionally, upon emergence, NextWave assumed certain future purchasing
obligations regarding the procurement of network services, up to a contract
value of $30.0 million, which had a termination liability equal to $9.0 million,
less 30% of the contract value utilized subsequent to emergence and prior to
termination. In October 2005, upon completion of a business review of its
planned market trial plans in Henderson, Nevada and other markets, NextWave
determined that it could not reasonably foresee meeting its minimum purchase
obligations under this agreement. Therefore, an accruable event was deemed
to
have occurred and a $7.1 million impairment loss was recognized in October
2005.
In the fourth quarter of 2006, this reserve was reversed as a result of a
contract renegotiation reducing the contract value to $10.0 million and
extending the term of the agreement to 2016. NextWave is presently contracting
certain network services with this vendor and believes it now will fulfill
its
obligation under the terms of the amended contract.
Income
Taxes
Income
taxes are determined in accordance with SFAS 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts
and
the corresponding tax carrying amounts of assets and liabilities. Deferred
tax
assets are also recognized for tax loss and tax credit carryforwards. A
valuation allowance is recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized based on available
evidence weighted toward evidence that is objectively verifiable. Deferred
taxes
are not provided on the undistributed earnings of subsidiaries as such amounts
are considered to be permanently invested. In accordance with SFAS 142, deferred
tax liabilities arising on assets with an indefinite life are not netted against
deferred tax assets when establishing a valuation allowance. Future realization
of the tax benefit of an existing deductible temporary difference or
carryforward ultimately depends on the existence of sufficient taxable income
of
the appropriate character (for example, ordinary income or capital gain) within
the carryforward period available under the tax law.
Comprehensive
Loss
Accumulated
other comprehensive loss includes unrealized gains and loses that are excluded
from the consolidated statements of operations and are reported as a separate
component in stockholders’/members’ equity. These unrealized gains and losses
represent those on marketable securities that are classified as
available-for-sale.
Net
Loss Per Common Share, Pro Forma Net Loss and Pro Forma Net Loss Per Common
Share Information
Basic
net
loss per share information is computed by dividing net loss for the year ended
December 30, 2006 by the weighted average number of membership units outstanding
prior to the Corporate Conversion Merger, on a converted basis as if the
Corporate Conversion Merger occurred on January 1, 2006, combined with the
weighted average number of shares of common stock outstanding after the
Corporate Conversion Merger. The pro forma basic per share information for
the
period from inception (April 13, 2005) to December 31, 2005 is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period as if the Corporate Conversion Merger occurred
at
the beginning of the period. Diluted earnings per share assumes that outstanding
common shares were increased by shares issuable upon exercise of those 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 anti-dilutive. Contingently issuable stock, such as restricted stock,
is
also included in the diluted loss per share calculations unless anti-dilutive.
For the periods presented below, diluted loss per share is computed on the
same
basis as basic loss per share as the inclusion of potential shares outstanding
would be anti-dilutive.
Due
to
NextWave’s historical net losses from inception, which result in a full
valuation allowance for deferred income tax assets, there is no adjustment
for
income taxes on a pro forma basis. The pro forma net loss assumes that the
Corporate Conversion Merger occurred as of the beginning of the periods
presented and that NextWave was a corporation from the beginning of those
periods.
The
computations for basic and diluted loss per share and pro forma basic and
diluted loss per share are as follows:
(in
thousands, except per share data)
|
|
Year
Ended December 30,
2006
|
|
(Pro
Forma) Inception
(April
13, 2005) to December 31,
2005
|
|
Net
loss
|
|
$
|
(105,020
|
)
|
$
|
(45,952
|
)
|
Basic
and diluted loss per common share
|
|
$
|
(1.28
|
)
|
|
|
|
Pro
forma basic and diluted loss per common share
|
|
|
|
|
$
|
(0.56
|
)
|
Weighted
average shares used in per share calculation
|
|
|
81,841
|
|
|
—
|
|
Pro
forma weighted average shares used in per share
calculation
|
|
|
—
|
|
|
81,445
|
|
Weighted
average securities that could potentially dilute earnings per share
in the
future that are not included above as they are
antidilutive:
|
|
|
|
|
|
|
|
Outstanding
stock options
|
|
|
9,209
|
|
|
—
|
|
Common
stock warrants
|
|
|
2,313
|
|
|
—
|
|
Restricted
stock
|
|
|
149
|
|
|
—
|
|
Pro
forma outstanding stock options
|
|
|
—
|
|
|
5,934
|
|
Pro
forma common stock warrants
|
|
|
—
|
|
|
220
|
|
Cash
and Cash Equivalents, Short-Term Investments and Restricted
Cash
NextWave
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. Cash equivalents at December 30, 2006, consisted
primarily of money market funds. Cash equivalents at December 31, 2005 consisted
primarily of money market funds and commercial paper. The carrying amounts
approximate fair value due to the short maturities of these instruments.
Restricted
cash at December 30, 2006 represents $75.0 million in a restricted collateral
account which is required to be maintained at all times while the 7% Senior
Secured Notes remain outstanding. The cash may be invested in U.S. Treasury
or
agency obligations, municipal securities, commercial paper, certificates of
deposit or bankers’ acceptances, all with maturities less than one year and with
certain minimum credit ratings. The restricted cash is reported as a non-current
asset in the Consolidated Balance Sheet at December 30, 2006, as it secures
NextWave’s 7% Senior Secured Notes, which are non-current.
At
December 30, 2006 and December 31, 2005, all short-term investments have been
categorized as available-for-sale and are reported at fair value. Fair value
is
determined using quoted market prices. Unrealized gains and losses are reported
in other comprehensive income in stockholders’/members’ equity, unless the
decline in value is deemed to be other-than-temporary, in which case the loss
is
charged to expense. Realized gains and losses are included in interest income
in
the Consolidated Statements of Operations. The cost of securities sold is based
on the specific identification method and gross realized gains and losses
related to sales of available-for-sale investments during the year ended
December 30, 2006 totaled $4,000 and $18,000, respectively. There were no gross
realized gains or losses for the period from inception (April 13, 2005) to
December 31, 2005. Gross unrealized gains (losses) are as follows:
|
|
|
|
Gross
Unrealized
|
|
(in
thousands)
|
|
Amortized
Cost
|
|
Gains
|
|
Losses
|
|
Fair
Value
|
|
December
30, 2006
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
177,442
|
|
$
|
—
|
|
$
|
(6
|
)
|
$
|
177,436
|
|
U.S.
Treasury and Agency obligations
|
|
|
39,251
|
|
|
—
|
|
|
(200
|
)
|
|
39,051
|
|
Corporate
notes
|
|
|
25,845
|
|
|
—
|
|
|
(151
|
)
|
|
25,694
|
|
Money
market funds
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Cash
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Total
portfolio
|
|
|
243,062
|
|
|
—
|
|
|
(357
|
)
|
|
242,705
|
|
Less
restricted portion
|
|
|
(75,000
|
)
|
|
—
|
|
|
—
|
|
|
(75,000
|
)
|
Total
unrestricted short-term investments
|
|
$
|
168,062
|
|
$
|
—
|
|
$
|
(357
|
)
|
$
|
167,705
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
$
|
280,767
|
|
$
|
1
|
|
$
|
(34
|
)
|
$
|
280,734
|
|
U.S.
Treasury and Agency obligations
|
|
|
55,117
|
|
|
—
|
|
|
(451
|
)
|
|
54,666
|
|
Corporate
notes
|
|
|
30,524
|
|
|
—
|
|
|
(342
|
)
|
|
30,182
|
|
Total
short-term investments
|
|
$
|
366,408
|
|
$
|
1
|
|
$
|
(827
|
)
|
$
|
365,582
|
|
Contractual
maturities for all investments held at December 30, 2006 are as
follows:
(in
thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Due
in less than one year
|
|
$
|
79,476
|
|
$
|
79,119
|
|
Due
in 1 to 5 years
|
|
|
3,521
|
|
|
3,521
|
|
Due
in greater than 5 to 10 years
|
|
|
7
|
|
|
7
|
|
Due
in greater than 10 years
|
|
|
160,058
|
|
|
160,058
|
|
|
|
$
|
243,062
|
|
$
|
242,705
|
|
NextWave
regularly monitors and evaluates the realizable value of its short-term
investments. When assessing short-term investments for other-than-temporary
declines in value, NextWave considers such factors as, among other things,
how
significant the decline in value is as a percentage of the original cost, how
long the market value of the investment has been less than its original cost,
analyst recommendations, any news that has been released specific to the
investee and the outlook for the overall industry in which the investee
operates. If events and circumstances indicate that a decline in the value
of
these assets has occurred and is other than temporary, NextWave records a charge
to investment expense which is reported in interest income in the statements
of
operations.
Investments
considered to be temporarily impaired at December 30, 2006 are as
follows:
|
|
|
|
Less
than 12 months of Temporary Impairment
|
|
12
months or More of Temporary Impairment
|
|
Total
|
|
(dollars
in thousands)
|
|
Number
of investments
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Municipal
securities
|
|
|
5
|
|
$
|
11,411
|
|
$
|
(6
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
11,411
|
|
$
|
(6
|
)
|
U.S.
Treasury and Agency obligations
|
|
|
3
|
|
|
4,031
|
|
|
(1
|
)
|
|
34,797
|
|
|
(199
|
)
|
|
38,828
|
|
|
(200
|
)
|
Corporate
notes
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
25,141
|
|
|
(151
|
)
|
|
25,141
|
|
|
(151
|
)
|
Total
portfolio
|
|
|
|
|
$
|
15,442
|
|
$
|
(7
|
)
|
$
|
59,938
|
|
$
|
(350
|
)
|
$
|
75,380
|
|
$
|
(357
|
)
|
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded according to contractual agreements. Credit terms for
payment of products and services are extended to customers in the normal course
of business and no collateral is required.
The
allowance for doubtful accounts is estimated based on NextWave’s historical
losses, the existing economic conditions, and the financial stability of its
customers. Receivables are written-off in the period that they are deemed
uncollectible.
At
December 30, 2006, gross accounts receivable consisted of $4.6 million and
$0.8
million in billed and unbilled receivables, respectively. At December 31, 2005,
gross accounts receivable consisted of $4.0 million and $0.1 million in billed
and unbilled receivables, respectively.
Wireless
Licenses, Goodwill and Other Intangible Assets
Wireless
licenses that are purchased from third parties or in spectrum auctions held
by
the FCC are initially recorded at fair value, which is the purchase price paid
for the license at the time of acquisition plus legal costs incurred to acquire
the intangible asset. NextWave has determined that its Broadband Radio Service
(“BRS”) and Wireless Communication Service (“WCS”) wireless spectrum licenses
meet the definition of indefinite-lived intangible assets under SFAS No. 142,
“Goodwill and Other Intangible Assets.” The wireless spectrum licenses from the
FCC may be renewed every ten years for a nominal fee, provided that NextWave
continues to meet the service and geographic coverage provisions required by
the
FCC.
Wireless
licenses for which NextWave has acquired lease rights from third parties or
from
foreign countries where the renewal terms are not yet established are considered
to have finite lives. The asset and related liability are recorded at the
present value of future cash flows using NextWave’s incremental borrowing rate
at the time of acquisition. The wireless license asset is amortized over the
contractual life of the lease. Such licenses in the United States are the
Educational Broadband Service (“EBS”) licenses for which NextWave has entered
into long-term leases.
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired.
Intangible
assets consist of the following:
|
|
December
30, 2006
|
|
December
31, 2005
|
|
(dollars
in thousands)
|
|
Weighted
Average Life
(in
Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Weighted
Average Life
(in
Years)
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
wireless spectrum licenses
|
|
|
14.1
|
|
$
|
82,385
|
|
$
|
4,438
|
|
|
15.0
|
|
$
|
31,347
|
|
$
|
1,510
|
|
Purchased
technology
|
|
|
7.0
|
|
|
9,614
|
|
|
1,821
|
|
|
7.0
|
|
|
8,600
|
|
|
555
|
|
Purchased
customer base
|
|
|
8.0
|
|
|
5,960
|
|
|
1,044
|
|
|
8.0
|
|
|
5,700
|
|
|
321
|
|
Non-compete
agreements
|
|
|
4.0
|
|
|
2,800
|
|
|
1,193
|
|
|
4.0
|
|
|
2,800
|
|
|
537
|
|
Other
|
|
|
7.4
|
|
|
2,002
|
|
|
252
|
|
|
3.0
|
|
|
16
|
|
|
3
|
|
|
|
|
|
|
$
|
102,761
|
|
$
|
8,748
|
|
|
|
|
$
|
48,463
|
|
$
|
2,926
|
|
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
spectrum licenses
|
|
|
|
|
$
|
450,051
|
|
|
|
|
|
|
|
$
|
15,630
|
|
|
|
|
Goodwill
|
|
|
|
|
|
32,184
|
|
|
|
|
|
|
|
|
24,782
|
|
|
|
|
Purchased
tradenames and trademarks
|
|
|
|
|
|
2,504
|
|
|
|
|
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
$
|
484,739
|
|
|
|
|
|
|
|
$
|
42,812
|
|
|
|
|
In
July
2006, NextWave completed its acquisition of WCS Wireless, Inc. which resulted
in
the addition of $236.4 million of wireless spectrum licenses not subject to
amortization. The acquisition of WCS Wireless, 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 $160.5 million, legal
costs of $0.1 million, and $75.8 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.” During the year ended December 30, 2006, NextWave
acquired other licensed spectrum rights for $245.0 million in cash and $4.0
million through the assumption of lease liabilities.
The
$7.4
million increase in goodwill in the consolidated balance sheets from December
31, 2005 to December 30, 2006, resulted from current year business acquisitions.
The
estimated aggregate amortization expense for amortized intangible assets owned
as of December 30, 2006 is expected to be $8.4 million, $8.7 million, $8.3
million, $8.0 million, $7.9 million and $52.7 million during fiscal years 2007,
2008, 2009, 2010, 2011 and thereafter, respectively.
Property
and Equipment
Property
and equipment is recorded at cost and depreciated or amortized using the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the remaining
term of the related lease. Direct external costs of developing software for
internal use are capitalized through implementation of the software.
Maintenance, repairs, and minor renewals and betterments are charged to expense
as incurred.
Upon
the
retirement or disposition of property and equipment, the related cost and
accumulated depreciation or amortization are removed, and a gain or loss is
recorded.
Property
and equipment, net, consists of the following:
(dollars
in thousands)
|
|
Estimated
Useful
Life
(in
years)
|
|
December
30,
2006
|
|
December
31,
2005
|
|
Furniture
and equipment
|
|
|
2-7
|
|
$
|
13,626
|
|
$
|
7,071
|
|
Purchased
software
|
|
|
2-3
|
|
|
7,296
|
|
|
3,459
|
|
Leasehold
improvements
|
|
|
1-5
|
|
|
2,358
|
|
|
879
|
|
Construction
in progress
|
|
|
N/A
|
|
|
846
|
|
|
380
|
|
|
|
|
|
|
|
24,126
|
|
|
11,789
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
(6,597
|
)
|
|
(697
|
)
|
Total
property and equipment, net
|
|
|
|
|
$
|
17,529
|
|
$
|
11,092
|
|
Long-Lived
Assets
In
accordance with Statement of Financial Accounting Standards No. 142, or SFAS
No.
142, “Goodwill and Other Intangible Assets,” NextWave does not amortize goodwill
and certain spectrum licenses. In lieu of amortization, NextWave is required
to
perform an annual review for impairment, or more frequently if impairment
indicators arise. Goodwill and intangible assets not subject to amortization
are
considered to be impaired if NextWave determines that the carrying value of
the
asset exceeds its fair value.
NextWave
tests goodwill for impairment at a reporting unit level using a two-step
process. NextWave has selected October 1, 2006 for its annual impairment test.
As of October 1, 2006, NextWave had two reporting units as defined by SFAS
142
containing goodwill that were tested for impairment. The first step of the
impairment test involves comparing the fair values of the applicable reporting
units with their aggregate carrying values, including goodwill. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, the second
step of the goodwill impairment test is performed to determine the amount of
the
impairment loss. The second step involves comparing the implied fair value
of
the affected reporting unit’s goodwill with the carrying value of that goodwill.
If the carrying amount of goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess.
NextWave
tests indefinite-lived intangible assets by making a determination of the fair
value of the intangible asset. If the fair value of the intangible asset is
less
than its carrying value, an impairment loss is recognized in an amount equal
to
the difference. NextWave also evaluates the remaining useful life of its
intangible assets that are not subject to amortization on an annual basis to
determine whether events and circumstances continue to support an indefinite
useful life. If an intangible asset that is not being amortized is subsequently
determined to have a finite useful life, that asset is tested for impairment.
After recognition of the impairment, if any, the asset is amortized
prospectively over its estimated remaining useful life and accounted for in
the
same manner as other intangible assets that are subject to amortization.
Any
required impairment losses are recorded as a reduction in the carrying value
of
the related asset and charged to results of operations. At October 1, 2006
and
2005, NextWave’s intangible assets not subject to amortization and goodwill were
evaluated for impairment and NextWave determined that no impairment existed
at
that date.
At
December 30, 2006 and December 31, 2005, intangible assets subject to
amortization were evaluated for impairment as required by SFAS No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets,” which requires the
recognition of an impairment loss when the carrying amount of an intangible
asset is not recoverable and its carrying amount exceeds its fair value, and
NextWave determined that no impairment existed at that date.
For
the
period from inception (April 13, 2005) to December 31, 2005, business
realignment costs in the consolidated statement of operations includes
impairment losses of $5.9 million. The impairment loss recognized was equal
to
the carrying value of impaired assets.
Deferred
Financing Costs, Debt Discount and Debt-Related Warrants
Costs
incurred to issue debt are deferred and included in other assets in the
consolidated balance sheet and are amortized over the expected term of the
related debt using the effective interest method. Debt discounts and the fair
value of any warrants issued in conjunction with the debt are recorded as a
reduction to debt balance and accreted over the expected term of the debt to
interest expense using the effective interest method.
Accrued
Expenses
Accrued
expenses consist of the following:
(in
thousands)
|
|
December
30, 2006
|
|
December
31, 2005
|
|
Accrued
interest
|
|
$
|
11,178
|
|
$
|
—
|
|
Accrued
payroll and related expenses
|
|
|
9,417
|
|
|
3,426
|
|
Accrued
professional fees
|
|
|
3,746
|
|
|
720
|
|
Accrued
expenses
|
|
|
4,870
|
|
|
715
|
|
Accrued
equity distributions payable
|
|
|
2,034
|
|
|
—
|
|
Other
|
|
|
2,292
|
|
|
291
|
|
Total
accrued liabilities
|
|
$
|
33,537
|
|
$
|
5,152
|
|
Employee
Share-Based Compensation
NextWave
adopted SFAS 123(R) on January 1, 2006. SFAS 123(R) requires the recognition
of
the fair value of share-based compensation in the statement of operations.
NextWave recognizes share-based compensation expense over the requisite service
period of the individual grants, which generally equals the vesting period.
Compensation expense for awards with graded vesting is recognized on a
straight-line basis with adjustments to at least equal the measured cost of
the
vested tranches. Prior to January 1, 2006, NextWave accounted for employee
equity awards using APB 25 and related interpretations in accounting for
share-based compensation.
NextWave
has adopted the provisions of SFAS 123(R)
using the prospective transition method, whereby it will continue to account
for
nonvested equity awards to employees outstanding at December 31, 2005 using
APB
25, and apply SFAS 123(R) to all awards granted or modified after that date.
In
accordance with the prospective method transition rules of SFAS 123(R), NextWave
no longer provides the pro forma disclosures in reports issued for periods
ending after December 31, 2005 as SFAS 123(R) precludes companies that used
the
minimum value method for pro forma disclosure from continuing to provide those
pro forma disclosures for outstanding awards accounted for under the intrinsic
value method of APB 25.
Under
the
provisions of SFAS 123(R), NextWave recognized $2.8 million in employee
share-based compensation expense for the year ended December 30, 2006. The
CYGNUS plan, as amended in February 2006, provided for the conversion of each
CYGNUS option, whether issued or unissued, into the right to purchase .05097
shares of NextWave common stock upon the Corporate Conversion Merger. The
exchange of 314,000 outstanding options held by 68 employees was accounted
for
as an acquisition of minority interest resulting from an exchange of options
in
a business combination that occurred upon the Corporate Conversion Merger.
The
fair value of the vested portion of the new options, valued at $0.9 million,
was
added to the purchase price of CYGNUS and the fair value of the unvested portion
of the new options, valued at $1.2 million, is amortized over the remaining
vesting periods.
NextWave
utilized the Black-Scholes valuation model for estimating the fair value of
stock awards to employees during the year ended December 30, 2006, at the date
of grant or modification, with the following assumptions for the NextWave
Wireless Inc. 2005 Stock Incentive Plan, the CYGNUS Communications, Inc. 2004
Stock Option Plan, which options were exercisable for shares of common stock
of
CYGNUS Communications, Inc. prior to the Corporate Conversion and were converted
into options exercisable for common shares of NextWave at the date of the
Corporate Conversion and the PacketVideo Corporation 2005 Equity Incentive
Plan,
which options are exercisable for common shares of PacketVideo Corporation,
a
subsidiary of NextWave:
|
|
Options
for
NextWave Wireless Inc |
|
Options
for
NextWave Wireless Inc. Common Stock Issued Upon Conversion
of |
|
Options
for
CYGNUS Communications, Inc. Common |
|
Options
for
PacketVideo |
|
|
|
Common
Stock
|
|
CYGNUS
Plan(1)
|
|
Stock(2)
|
|
Common
Stock
|
|
Risk-free
interest rate
|
|
|
4.36%-5.11
|
%
|
|
4.62%-5.03
|
%
|
|
4.35%-4.39
|
%
|
|
4.36%-5.11
|
%
|
Expected
term (in years)
|
|
|
1.5-5.5
|
|
|
0-4.7
|
|
|
2.5-5.9
|
|
|
2.5-5.5
|
|
Expected
and weighted average stock price volatility
|
|
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Weighted
average grant-date fair value of options granted
|
|
$
|
2.59
|
|
$
|
7.51
|
|
$
|
2.61
|
|
$
|
0.42
|
|
(1) |
Represents
assumptions used as of the conversion date to value options to purchase
common stock of NextWave Wireless Inc. that were issued to holders
of
options to purchase common stock of CYGNUS Communications,
Inc.
|
(2) |
Represents
assumptions used to value options to purchase common stock of CYGNUS
Communications, Inc. prior to the Corporate Conversion Merger, at
converted values.
|
The
risk-free interest rates are based on the implied yield available on U.S.
Treasury constant maturities in effect at the time of the grant with remaining
terms equivalent to the respective expected terms of the options. As none of
the
plans have sufficient history for estimating the term from grant date to full
exercise of the option, NextWave has considered expected terms applied, in
part,
by peer companies to determine the expected life of each grant. Expected
volatility is based on an average of peer companies’ expected volatilities due
to lack of trading history of NextWave common stock or its subsidiaries’ shares.
The dividend yield of zero is based on the fact that NextWave has never paid
cash dividends and has no present intention to pay cash dividends on its common
stock.
NextWave
has assumed an annualized forfeiture rate of 10% for its options based on a
combined review of industry and employee turnover data, as well as an analytical
review performed of historical pre-vesting forfeitures occurring over the
previous year. Under the true-up provisions of SFAS 123(R), NextWave will record
additional expense if the actual forfeiture rate is lower than estimated, and
will record a recovery of prior expense if the actual forfeiture rate is higher
than estimated.
Total
compensation cost of options granted to employees since January 1, 2006 but
not
yet vested, as of December 30, 2006, was $8.6 million, which is expected to
be
recognized over a weighted average period of 3.4 years.
Share-based
compensation expense of $0.6 million was recognized during the year ended
December 30, 2006, for common stock issued to employee shareholders of one
of
the CYGNUS subsidiaries, stemming from a prior acquisition by CYGNUS, for the
attainment of certain product development milestones. The share based payments
were recognized as compensation expense in accordance with EITF 95-8,
“Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination.”
Litigation
NextWave
is currently involved in certain legal proceedings. Although there can be no
assurance that unfavorable outcomes in any of these matters would not have
a
material adverse effect on operating results, liquidity or financial position,
NextWave believes the claims are without merit and intends to vigorously defend
the actions. NextWave estimates the range of liability related to pending
litigation where the amount and range of loss can be estimated. NextWave records
its best estimate of a loss when the loss is considered probable. Where a
liability is probable and there is a range of estimated loss with no best
estimate in the range, NextWave records the minimum estimated liability related
to the claim. As additional information becomes available, NextWave assesses
the
potential liability related to its pending litigation and revises its estimates.
As of December 30, 2006, NextWave has not recorded any accrual for contingent
liabilities associated with its legal proceedings based on its belief that
a
liability, while possible, is not probable. Further, any possible range of
loss
cannot be estimated at this time. Revisions in NextWave’s estimates of the
potential liability could materially impact results of operations.
Foreign
Currency
NextWave’s
foreign subsidiaries use the U.S. dollar as their functional currency.
Accordingly, monetary assets and liabilities are remeasured 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 remeasured at historical rates. Resulting exchange gains
or
losses of these foreign investees are recognized in the consolidated statements
of operations in cost of revenues and other income and expense, net, depending
on the nature of the gain or loss.
Net
foreign currency exchange losses included in NextWave’s consolidated statement
of operations totaled $0.1 million and $20,000 for the year ended December
30,
2006 and for the period from inception (April 13, 2005) to December 31, 2005,
respectively.
Segments
of a Business Enterprise
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”
(“SFAS 131”) provides public business enterprises with standards for reporting
information about operating segments in annual and interim financial reports,
including disclosures of profit or loss and total assets for each reportable
segment. As of December 30, 2006, NextWave operated in one reportable segment,
an early-stage wireless technology business, with PacketVideo, which was
acquired in July 2005, providing nearly all of NextWave revenues during the
period from inception (April 13, 2005) to December 30, 2006.
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 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. NextWave’s management believes that adoption of this
interpretation will not have a material impact on its 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 beginning 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.
Reclassifications
To
conform to the current presentation in the consolidated balance sheet at
December 30, 2006, a reclassification of $0.9 million in deferred contract
costs
was made from prepaid expenses and other current assets to deferred contract
costs in the consolidated balance sheet at December 31, 2005. To conform to
the
current presentation in the consolidated statement of cash flows for the year
ended December 30, 2006, a reclassification of $1.8 million in changes in
deferred revenue was made from changes in deferred credits and reserves in
the
consolidated statement of cash flows for the period from inception (April 13,
2005) to December 31, 2005. These reclassifications had no effect on reported
current assets or net cash used in operating activities.
2.
Business Combinations and Joint Ventures
Acquisition
of CYGNUS
On
February 2, 2006, NextWave acquired all of the outstanding shares of common
stock of CYGNUS and the minority interests of one of its subsidiaries, which
are
already included in the consolidated financial statements as NextWave is deemed
to be the primary beneficiary in accordance with FIN 46(R). The total cost
of
the acquisition was determined as follows:
(in
thousands)
|
|
|
|
Advances
to CYGNUS, including interest
|
|
$
|
18,145
|
|
Accumulated
CYGNUS losses while consolidated in
accordance
with FIN 46R
|
|
|
(8,550
|
)
|
Conversion
of convertible preferred stock into common stock
|
|
|
1,884
|
|
Membership
interests issued
|
|
|
1,558
|
|
Fair
value of stock options exchanged
|
|
|
904
|
|
Cash
paid
|
|
|
53
|
|
Less
cash acquired
|
|
|
(4,190
|
)
|
Total
acquisition cost
|
|
$
|
9,804
|
|
|
|
|
|
|
Under
the
purchase method of accounting, the purchase price was allocated to the assets
acquired and liabilities assumed based upon their estimated fair values at
the
date of acquisition as follows:
(in
thousands)
|
|
|
|
Accounts
receivable
|
|
$
|
196
|
|
Prepaid
expenses and other current assets
|
|
|
511
|
|
Property
and equipment
|
|
|
704
|
|
Goodwill
|
|
|
5,447
|
|
Intangible
assets
|
|
|
3,680
|
|
Deposits
and other noncurrent assets
|
|
|
658
|
|
Accounts
payable, accrued expenses and other current liabilities
|
|
|
(613
|
)
|
Unfavorable
lease liability
|
|
|
(692
|
)
|
Long-term
obligations
|
|
|
(87
|
)
|
Total
acquisition cost
|
|
$
|
9,804
|
|
|
|
|
|
|
The
purchase price allocation included values assigned to certain specific
identifiable intangible assets aggregating $3.7 million. In-process research
and
development was valued by determining future discounted cash flows using the
excess earnings methodology. Purchased technology was valued using the
relief-from-royalty methodology which considers estimated future discounted
cash
flows to be derived from the products that existed at the date of the
acquisition. The purchased tradenames and trademarks were valued using future
discounted cash flows using the relief-from-royalty methodology which assumes
value to the extent that NextWave is relieved of the obligation to pay royalties
for the benefits received from the use of the tradenames and trademarks. A
value
of $5.4 million, representing the difference between the total purchase price
and the aggregate fair values assigned to the net tangible assets acquired
and
liabilities assumed and the identifiable intangible assets acquired, was
assigned to goodwill. The amount allocated to intangible assets and their
respective amortizable lives is as follows:
(dollars
in thousands)
|
|
Life
|
|
Amount
|
|
In-process
research and development
|
|
|
none
|
|
$
|
1,890
|
|
Purchased
technology
|
|
|
7
years
|
|
|
1,680
|
|
Purchased
tradenames and trademarks
|
|
|
5
years
|
|
|
110
|
|
|
|
|
|
|
$
|
3,680
|
|
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 in December 2006, upon completion of the purchased
intangible asset valuation. An experienced technological employee base and
technology that could ultimately provide an underlying infrastructure for
NextWave’s wireless broadband service offerings and accelerate the development
of WiMAX chips were among the factors that contributed to a purchase price
resulting in the recognition of goodwill.
In
connection with the acquisition, NextWave recorded an unfavorable lease
liability of $0.7 million resulting from the exit of a duplicate facility leased
by CYGNUS. The facility was subsequently subleased, resulting in a $0.4 million
reduction in the liability. Activity for this liability is as
follows:
(in
thousands)
|
|
Opening
Balance
Sheet
Accrual
|
|
Adjustment
to Goodwill
|
|
Interest
Accretion
|
|
Amounts
Paid in Cash
|
|
Balance
at December 30,
2006
|
|
Unfavorable
lease liability
|
|
$
|
692
|
|
$
|
(374
|
)
|
$
|
4
|
|
$
|
(31
|
)
|
$
|
291
|
|
The
CYGNUS Communications, Inc. 2004 Stock Option Plan., as amended in February
2006, provided for the conversion of each CYGNUS option into .05097 shares
of
NextWave common stock upon the Corporate Conversion Merger. NextWave was deemed
to have acquired the CYGNUS stock option plan upon the Corporate Conversion
Merger and, therefore, the fair value of the vested portion of the new options,
valued at $0.9 million, was added to the purchase price of CYGNUS and the fair
value of the unvested portion of the new options, valued at $1.2 million, is
amortized over the remaining vesting periods.
In
connection with the acquisition of the minority interests of one of CYGNUS’
subsidiaries, NextWave agreed to pay $0.4 million and $0.5 million in cash,
and
issue 37,000 and 37,000 in common shares to certain employee shareholders in
December 2006 and December 2007, respectively, or earlier if certain product
development milestones are attained. These payments are amortized as
compensation expense over the period earned in accordance with EITF 95-8,
“Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination.” Compensation expense totaled
$1.2 million during the year ended December 30, 2006. The remaining unamortized
portion of $0.3 million related to the December 2007 cash payment is recorded
as
deferred compensation in prepaid and other current assets in the consolidated
balance sheet at December 30, 2006. The fair value of the common shares will
be
remeasured at the end of each reporting period until issued, when the final
fair
value is determined. Unamortized estimated share-based compensation totaled
$0.2
million at December 30, 2006, and will be charged to the results of operations
with an offsetting increase to additional paid-in-capital in the consolidated
balance sheets over the remaining service periods.
Other
2006 Acquisitions and Investments
During
the year ended December 30, 2006, NextWave completed three acquisitions and
one
joint venture investment. The results of operations have been included in the
consolidated financial statements from the respective dates of the
acquisitions.
The
aggregate cost of the three acquisitions was $9.6 million, consisting of $8.3
million in cash, including acquisition costs of $0.3 million, deferred earnout
payments totaling $0.7 million and the assumption of debt totaling $0.3 million.
The excess of purchase price over the acquired net tangible assets and
liabilities was $9.9 million, of which $6.9 million was assigned to goodwill
and
$3.0 million was assigned to identifiable intangible assets, including $1.6
million that was assigned to in-process research and development costs and
expensed during the year ended December 30, 2006.
In
January 2006, NextWave acquired 51% of the equity securities of newly formed
Inquam Broadband for $1.6 million. NextWave also has the right to designate
three of the five members of the board of directors. The primary reason for
the
investment is to provide NextWave with an entry into the wireless broadband
telecommunications market in Germany and Switzerland. Under the subscription
and
shareholder agreement, NextWave has agreed to provide additional funding up
to
1.4 million Euros ($1.7 million at December 30, 2006), of which $1.1 million
has
been funded through December 30, 2006. Under a separate note agreement
established for the purpose of funding Inquam Broadband’s bids at wireless
spectrum auctions in Germany and Switzerland, NextWave has agreed to loan up
to
17.6 million Euros and 7.1 million Swiss Francs ($28.9 million at December
30,
2006) to a wholly-owned subsidiary of Inquam Broadband, of which $22.7 million
was outstanding at December 30, 2006. The note, which is eliminated in
consolidation, bears interest at 8% per year and is secured by wireless spectrum
licenses with a net book value totaling $23.1 million at December 30,
2006.
NextWave
also has the option to acquire a 51% interest in a subsidiary of Inquam-BMR
GP,
the holder of the remaining 49% interest in Inquam Broadband, for 9.7 million
Euros ($12.7 million at December 30, 2006). The option price is subject to
adjustment for changes in liabilities or subsequent funding provided to the
subsidiary by Inquam Broadband. The option expires in April 2007. At any time
prior to the expiration of the option in April 2007, Inquam-BMR GP has the
right
to purchase an interest between 25% and 49% in the note agreement, at which
time
both Inquam-BMR GP’s s and NextWave’s note interests would simultaneously
convert into ordinary shares of Inquam Broadband on a pro rata basis. In lieu
of
this right and at any time prior to the expiration of the option, Inquam-BMR
GP
has the right to require NextWave to purchase all Inquam Broadband shares then
held by Inquam-BMR GP for 1,000 Euros per share ($2.1 million at December 30,
2006). In the event that Inquam-BMR GP does not exercise either of these rights
prior to the expiration of NextWave’s option in April 2007, NextWave must elect
to either convert the note into shares of Inquam Broadband equal to the note
amount divided by 1,000 or purchase all Inquam Broadband shares then held by
Inquam-BMR GP for 1,000 Euros per share ($2.1 million at December 30, 2006).
Acquisition
of PacketVideo
On
July
19, 2005, NextWave acquired all of the outstanding common and preferred stock
of
PacketVideo Corporation (“PacketVideo”), a provider of multimedia software for
mobile handsets and other converged devices. The primary reason for the
acquisition is intended to accelerate the time-to-market and growth plans for
embedded multimedia software products and services, which fits NextWave’s
overall strategy of rapidly increasing the capability of wireless devices and
affording wireless carriers and subscriber handset manufacturers opportunities
for product differentiation and revenue enhancements.
The
total
cost of the acquisition of $46.7 million included cash paid for common and
preferred stock of $46.5 million and closing costs of $0.5 million, less cash
acquired of $0.3 million. Under the purchase method of accounting, the purchase
price was allocated to the assets acquired and liabilities assumed based upon
their estimated fair values at the date of acquisition in accordance with SFAS
141 as follows:
(in
thousands)
|
|
|
|
Accounts
receivable
|
|
$
|
3,498
|
|
Deferred
contract costs
|
|
|
474
|
|
Prepaid
expenses and other current assets
|
|
|
792
|
|
Property
and equipment
|
|
|
679
|
|
Goodwill
|
|
|
20,238
|
|
Intangible
assets
|
|
|
26,100
|
|
Deposits
and other noncurrent assets
|
|
|
825
|
|
Accounts
payable, accrued expenses and other current liabilities
|
|
|
(3,047
|
)
|
Deferred
revenue
|
|
|
(2,343
|
)
|
Noncurrent
deferred rent
|
|
|
(520
|
)
|
Total
acquisition cost
|
|
$
|
46,696
|
|
The
purchase price allocation included values assigned to certain specific
identifiable intangible assets aggregating $26.1 million. The fair value
assigned to existing technology was determined by estimating the future
discounted cash flows to be derived from the products that existed at the date
of the acquisition. The fair value assigned to certain customer relationships
existing on the acquisition date was based upon an estimate of the future
discounted cash flows that would be derived from those customers. The fair
value
of the in-process research and development was estimated utilizing a discounted
cash flow model and was based on estimates of operating results and capital
expenditures and a risk adjusted discount rate. The non-compete agreements
were
valued based on estimates of the probability of competition and resulting impact
on sales. The purchased trade names were valued using the relief-from-royalty
method which assumes future discounted cash flows to be derived from royalties
received as a result of licensing the PacketVideo name. A value of $20.2
million, representing the difference between the total purchase price and the
aggregate fair values assigned to the net tangible assets acquired and
liabilities assumed and the identifiable intangible assets acquired, was
assigned to goodwill. The amount allocated to intangible assets and their
respective amortizable lives is attributed to the following
categories:
(dollars
in thousands)
|
|
Life
|
|
Amount
|
|
Purchased
technology
|
|
|
7
years
|
|
$
|
8,600
|
|
Customer
relationships
|
|
|
8
years
|
|
|
5,700
|
|
In-process
research and development
|
|
|
none
|
|
|
6,600
|
|
Non-compete
agreements
|
|
|
4
years
|
|
|
2,800
|
|
Purchased
tradenames and trademarks
|
|
|
indefinite
|
|
|
2,400
|
|
|
|
|
|
|
$
|
26,100
|
|
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 PacketVideo’s operations have been included in the accompanying
consolidated financial statements from the date of acquisition.
Pro
Forma Results
The
following unaudited pro forma information assumes that the acquisition of
PacketVideo occurred at inception (April 13, 2005). These unaudited pro forma
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 April 13, 2005, or of future results of operations.
The unaudited pro forma results for the period from inception (April 13, 2005)
to December 31, 2005 are as follows:
(in
thousands) (unaudited)
|
|
|
|
Revenues
|
|
$
|
8,449
|
|
Net
loss(1)
|
|
$
|
(48,659
|
)
|
(1)
Includes a nonrecurring charge of $6.6 million for the write-off of purchased
in-process research and development costs.
3.
Concentrations of Risks and Geographic Areas
Concentration
of Risks
A
significant portion of NextWave’s revenues is concentrated with a limited number
of customers within the wireless telecommunications market. For the year ended
December 30, 2006, PacketVideo’s revenues from Verizon Wireless accounted for
64% of NextWave’s consolidated revenues and for the period from inception (April
13, 2005) to December 31, 2005, PacketVideo’s revenues from Verizon Wireless,
Fujitsu and Nokia accounted for 22%, 14% and 11% respectively, of NextWave’s
consolidated revenues. Aggregated accounts receivable from two customers
accounted for 42% and 11% of total gross accounts receivable at December 30,
2006. No other single customer accounted for 10% or more of revenues during
the
year ended December 30, 2006 or during the period from inception (April 13,
2005) to December 31, 2005 or gross accounts receivable at December 30, 2006.
NextWave
maintains its cash and cash equivalents in accounts which, at times, exceed
federally insured deposit limits. NextWave has not experienced any losses in
these accounts and believes it is not exposed to any significant credit risk
on
these accounts.
Geographic
Areas
Revenues
by geographic area are as follows:
(in
thousands)
|
|
Year
Ended December 30,
2006
|
|
Inception
(April
13, 2005) to December 31,
2005
|
|
Revenues
from customers located in:
|
|
|
|
|
|
United
States
|
|
$
|
16,511
|
|
$
|
1,858
|
|
Japan
|
|
|
4,657
|
|
|
1,324
|
|
Europe
|
|
|
2,459
|
|
|
552
|
|
Rest
of the world
|
|
|
657
|
|
|
410
|
|
Total
revenues
|
|
$
|
24,284
|
|
$
|
4,144
|
|
Long-lived
assets consist of property and equipment, non current deposits and prepaid
assets and an investment in an unconsolidated business and comprised 83%, 12%
and 5% of total long-lived assets in the United States, India and all other
foreign countries, respectively, at December 30, 2006.
4.
Related Party Transactions
On
July
18, 2005, NextWave issued options to purchase 83,000 common shares to Manchester
Financial Group LP ("Manchester Financial") as consideration for services
rendered in connection with NextWave's acquisition of certain licensed spectrum
leases. Douglas Manchester, a member of NextWave’s board of directors, is the
controlling shareholder of the general partner of Manchester Financial. The
options were immediately vested with a one year term at an exercise price of
$6.00 per share and were subsequently exercised in 2006. The fair value of
these
options was estimated at the date of grant to be $108,000 using the “Black
Scholes” method of option pricing with the following assumptions: risk free
interest rate of 3.64%, dividend yield of 0%, expected volatility of 51% and
an
expected life of 1 year. The fair value was recorded to general and
administrative expense at the date of grant.
5.
Long-Term Obligations
Long-term
obligations consist of the following:
(dollars
in thousands)
|
|
December
30,
2006
|
|
December
31,
2005
|
|
7%
Senior Secured Notes, $350,000 due 2010, net of unamortized discount
and
fair value of warrants of $69,325, interest payable semiannually
in
January and July each year, secured by $525,643 in FCC licenses and
spectrum leases and $75,000 in restricted cash
|
|
$
|
280,675
|
|
$
|
—
|
|
Wireless
spectrum leases, weighted average imputed interest of 8.43% at December
30, 2006, scheduled maturities ranging from 2011 through 2019, net
of
unamortized discounts of $9,758 and $9,353, respectively, with three
to
five renewal options ranging from 10 to 15 years each, secured by
$39,194
in wireless spectrum licenses
|
|
|
20,091
|
|
|
17,047
|
|
Other
|
|
|
329
|
|
|
87
|
|
Total
long-term obligations
|
|
|
301,095
|
|
|
17,134
|
|
Less
current portion
|
|
|
(3,065
|
)
|
|
(2,200
|
)
|
Long-term
portion
|
|
$
|
298,030
|
|
$
|
14,934
|
|
Payments
due on these obligations during each of the five years subsequent to December
30, 2006 are as follows:
(in
thousands)
|
|
|
|
Fiscal
Years:
|
|
|
|
2007
|
|
$
|
3,065
|
|
2008
|
|
|
3,070
|
|
2009
|
|
|
2,674
|
|
2010
|
|
|
352,518
|
|
2011
|
|
|
2,411
|
|
Thereafter
|
|
|
16,440
|
|
|
|
|
380,178
|
|
Less
unamortized discount
|
|
|
(79,083
|
)
|
Less
current portion
|
|
|
(3,065
|
)
|
Total
long-term obligations
|
|
$
|
298,030
|
|
On
July
17, 2006, NextWave issued 7% Senior Secured Notes due July 17, 2010 (the
“Notes”) in the aggregate principal amount of $350.0 million. The Notes were
issued at a fifteen percent (15%) original issue discount, resulting in gross
proceeds of $297.5 million. After the payment of transaction related expenses,
NextWave received net proceeds of $295.0 million available for the sole purpose
of financing spectrum acquisitions and leases. Costs incurred to issue the
Notes, which totaled $2.5 million, have been deferred and included in other
assets in the consolidated balance sheet and are amortized over the expected
term of the Notes using the effective interest method. The unamortized balance
of the issuance costs was $2.2 million at December 30, 2006.
The
purchasers of the Notes were investment funds and other institutional investors,
including affiliates of Avenue Capital Group, among others. Robert T. Symington,
a member of NextWave’s Board of Managers, is a Portfolio Manager at Avenue
Capital Group. Neither Mr. Symington nor Avenue Capital Group or its affiliates
received any compensation in connection with the financing. The Notes are
guaranteed by certain of NextWave’s subsidiaries, including NextWave Broadband
and PacketVideo. In addition, after NextWave’s Corporate Conversion Merger, the
Notes are guaranteed by NextWave Wireless Inc. No scheduled principal payments
will be due on the Notes before the maturity date of July 17, 2010. The Notes
are pre-payable at NextWave’s option at specified premiums to the principal
amount that will decline over the term of the Notes from 105% to 100%, plus
a
make-whole amount applicable until July 17, 2008. The obligations under the
Notes are secured by first priority liens on certain pledged equity interests,
FCC licenses, spectrum leases, securities accounts, proceeds from any of the
foregoing as well as proceeds derived in any way from foreign licenses. NextWave
is required to maintain $75.0 million in cash or cash equivalents from funds
other than the proceeds of the Notes in a restricted collateral account at
all
times while the Notes remain outstanding. The purchase agreement contains
representations and warranties, affirmative and negative covenants (including,
without limitation, NextWave’s obligation to (i) maintain in full force and
effect its FCC licenses and spectrum leases, (ii) to use the note proceeds
for
the acquisition of spectrum, not to exceed $0.25 per MHz-POP, (iii) not to
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 and (iv) not make
restricted payments to holders of subordinated debt or equity securities,
including cash dividends, that are customary in similar types of transactions.
The purchase agreement also contains customary events of default and additional
events of default including the termination, cancellation or rescission of
any
FCC license owned or leased by NextWave, necessary for NextWave’s operation of a
wireless communications system. At December 30, 2006, NextWave was not in
compliance with the types of investments required to be held in its restricted
collateral account. This default was subsequently cured by NextWave on its
own
accord and no waiver was required.
The
net
proceeds from the Notes were used to acquire WCS Wireless, Inc. for $160.5
million, 154 spectrum licenses from the FCC aggregating $115.6 million and
two
new EBS leases for $22.1 million.
In
connection with the issuance of the Notes and on the date of the Corporate
Conversion Merger in November 2006, NextWave issued 4.1 million warrants to
the
purchasers of the Notes to purchase common stock at an exercise price of $0.01
per share. The warrants are exercisable at any time from the date of issuance
until July 15, 2009, and have anti-dilution protection provisions. The fair
value of the warrants was determined to be $24.6 million and is being accreted
along with the discount to the note balance and amortized over the expected
term
of the Notes to interest expense using the effective interest method. The fair
value of the warrants was measured using the Black-Scholes option-pricing model
based on the following weighted average assumptions: contractual option term
of
3 years, expected volatility of 50%, expected dividend yield of zero and a
risk-free rate of 5.07%, resulting in a weighted average fair value of $5.99
per
warrant. The remaining unaccreted balance totaled $22.1 million at December
30,
2006. NextWave received $8,000 in cash from the exercise of 1.5 million of
the
warrants during the year ended December 30, 2006. At December 30, 2006, 2.6
million warrants remain outstanding and exercisable.
In
addition to the wireless spectrum lease obligations, beginning in 2007 and
extending through any renewal periods, one of the lease agreements provides
for
the payment of royalties based on 0.25% of gross revenues, subject to a cap
of
100% of the annual rent for years 2007-2020, a cap of 150% of the annual rent
for years 2021-2035 and no cap during any remaining lease years. Beginning
in
2009, a second lease agreement provides for the payment of royalties based
on
.25% of NextWave’s gross revenues, subject to an annual cap of $2.7
million
Additionally,
all agreements require NextWave to construct, operate and maintain wireless
services so as to satisfy the FCC’s substantial service deadline by May 1, 2011.
Certain agreements require NextWave to make network connections available for
the lessor’s use that are equivalent to a specified percentage of the
transmission capacity created by NextWave.
6.
Fair Values of Financial Instruments
The
following methods and assumptions were used by NextWave in estimating its fair
value disclosures for financial instruments:
Cash
and cash equivalents:
The
carrying amount reported in the balance sheet for cash and cash equivalents
approximates its fair value.
Investment
securities:
The
values for marketable debt securities are based on quoted market
prices.
Restricted
cash:
The
values for marketable debt securities included in restricted cash are based
on
quoted market prices.
Long-term
debt:
The fair
values of NextWave’s long-term debt are estimated using discounted cash flow
analysis, based on NextWave’s current incremental borrowing rates for similar
types of borrowing arrangements.
The
carrying amounts and fair values of financial instruments are as
follows:
|
|
December
30, 2006
|
|
December
31, 2005
|
|
(in
thousands)
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,980
|
|
$
|
32,980
|
|
$
|
93,649
|
|
$
|
93,649
|
|
Investment
securities
|
|
|
167,705
|
|
|
167,705
|
|
|
365,582
|
|
|
365,582
|
|
Restricted
cash
|
|
|
75,000
|
|
|
75,000
|
|
|
—
|
|
|
—
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7%
Senior Secured Notes
|
|
|
280,675
|
|
|
280,675
|
|
|
—
|
|
|
—
|
|
Wireless
spectrum leases
|
|
|
20,091
|
|
|
15,785
|
|
|
17,047
|
|
|
17,047
|
|
It
was
not practicable to estimate the fair value of NextWave’s 60% investment in the
preferred stock of another company because of the lack of a quoted market price
and the inability to estimate fair value without incurring excessive costs.
The
$2.8 million carrying amount at December 30, 2006 represents the original cost
of the investment less losses incurred from inception, which management believes
is not impaired. No dividends were received from the period from inception
(April 13, 2005) to December 30, 2006.
7.
Commitments and Contingencies
Business
Acquisition
In
December 2006, PacketVideo signed a share purchase agreement to acquire all
of the shares of SDC Secure Digital Container AG for cash of $19.0 million.
The
acquisition was completed in January 2007 and will be accounted for in the
first
quarter of 2007 using the purchase method of accounting whereby the total
purchase price, including any transaction related expenses, will be allocated
to
tangible and intangible assets acquired based upon their respective fair
values.
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. Amounts paid under these contracts, which expire on various
dates
through 2009, totaled $2.5 million and $2.1 million during the year ended
December 30, 2006 and during the period from inception (April 13, 2005) to
December 31, 2005, respectively. Estimated future minimum payments due under
the
terms of these agreements at December 30, 2006, are as follows:
(in
thousands)
|
|
|
|
Fiscal
Years:
|
|
|
|
|
2007
|
|
$
|
7,535
|
|
2008
|
|
|
4,044
|
|
2009
|
|
|
1,350
|
|
Total
|
|
$
|
12,929
|
|
Capital
Expenditures
In
2005,
in order to consolidate current operations from two leased facilities into
one
building, NextWave entered into a purchase agreement to acquire a build-to-suit
office building in Henderson, Nevada for $8.2 million, which included an
allowance for the construction of related interior improvements. In addition,
NextWave planned to install furniture, fixtures and equipment costing
approximately $3.6 million. This purchase agreement was amended in March 2007,
reducing the cost of the building to $6.9 million (not including interior
improvements) as the result of construction delay penalties. NextWave expects
to
pay the $6.9 million in the second quarter of 2007. A separate agreement was
entered into in March 2007 for the construction of the interior improvements
in
the amount of $2.6 million and further agreements will be entered into in the
second quarter of 2007 for the acquisition of furniture, fixtures and equipment
for approximately $1.9 million. Construction is expected to be completed during
the second quarter of 2007, at which time NextWave expects to occupy the
facility and pay the remaining costs associated with occupancy.
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. NextWave recognizes rent expense on a straight-line basis over
the
respective lease terms. As a result, any differences between recognized rent
expense and required upfront rental payments upon execution that reduce future
rental payments is recorded as unapplied prepaid rent and any difference between
rent expense and rent payments that are reduced by cash or rent abatements
is
recognized as deferred rent. At December 30, 2006, unapplied prepaid rent
totaled $0.4 million and is included in prepaid expenses and other current
assets in the consolidated balance sheet and deferred rent totaled $0.7 million,
of which $0.3 million is included in other current liabilities and $0.4 million
is included in long-term deferred credits and reserves in the consolidated
balance sheet.
Certain
commitments have renewal options extending through the year 2031. Rent expense
under these operating leases was $6.9 million and $2.7 million for the year
ended December 30, 2006 and for the period from inception (April 13, 2005)
through December 31, 2005, respectively. Sublease income totaled $1.7 million
and $0.7 million for the year ended December 30, 2006 and for the period from
inception (April 13, 2005) through December 31, 2005, respectively.
Future
minimum lease payments under noncancellable operating leases, net of sublease
rentals at December 30, 2006, are as follows:
(in
thousands)
|
|
Lease
Commitments
|
|
Sublease
Rentals
|
|
Net
|
|
Fiscal
Years:
|
|
|
|
|
|
|
|
2007
|
|
$
|
7,037
|
|
$
|
(1,099
|
)
|
$
|
5,938
|
|
2008
|
|
|
6,429
|
|
|
(198
|
)
|
|
6,231
|
|
2009
|
|
|
4,450
|
|
|
-
|
|
|
4,450
|
|
2010
|
|
|
2,808
|
|
|
-
|
|
|
2,808
|
|
2011
|
|
|
276
|
|
|
-
|
|
|
276
|
|
Thereafter
|
|
|
362
|
|
|
-
|
|
|
362
|
|
|
|
$
|
21,362
|
|
$
|
(1,297
|
)
|
$
|
20,065
|
|
Indemnification
of NextWave Telecom Inc. and Verizon Wireless Corp.
In
connection with the sale of NTI and its subsidiaries to Verizon Wireless Inc.
(“Verizon”), NextWave 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. NextWave is
not
currently aware of any such liabilities that remain following the plan of
reorganization and Verizon has not made any indemnity claims.
As
part
of the plan of reorganization, NextWave issued $148.5 million of Non-Recourse
Secured Notes (the “Notes”) to the former equity holders of NTI. The Notes were
not recourse against NextWave or its assets; however, they were secured by
a
second priority interest in an indemnification escrow account established by
NextWave and Verizon in connection with the Verizon transaction described above
(the “Verizon Escrow Account”).
A
total
of $165.0 million was deposited into escrow (the “Verizon Escrow Amount”) in
order to satisfy any amounts due to Verizon in the event that the consolidated
net loss (the “CNOL”) of the NextWave Telecom group for the taxable year
commencing on January 1, 2005, and ending on April 13, 2005 was, subject to
certain adjustments, less than $1.362 billion, to cover any tax deficiencies
for
the pre-closing tax period, and to cover other indemnifiable losses relating
to
NTI and its subsidiaries, as described above.
On
December 6, 2006, following the completion of the CNOL review by the Internal
Revenue Service, Verizon and AirTouch Cellular, the assignee of Verizon under
the Verizon transaction, entered into an agreement (the “Settlement Agreement”)
(i) to settle the amounts payable under the Verizon Escrow Account as a result
of the CNOL review, and (ii) to release the Escrow Amount plus accrued interest
on the terms described herein. NextWave is not currently aware of any other
indemnifiable losses that remain following the effective date of the sale to
Verizon, and Verizon has not made any related claims therefore.
Under
the
terms of the Note Indenture, the portion of the Escrow Amount that NextWave
received was applied to redeem, pro rata, the Notes. Accordingly, the full
amount of the face amount of the Notes, was paid directly into an escrow account
that funded the redemption of the Notes.
Legal
Proceedings
NextWave
is currently a party to various legal proceedings that arise in the ordinary
course of its business. While management presently believes that the ultimate
outcome of these 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. For example, NextWave is
currently engaged in a dispute relating to a lease of EBS spectrum covering
the
Toms River, New Jersey geographic area. The lessor has claimed that NextWave
is
in breach of the terms of the lease and that the lease has been terminated.
NextWave believes that these claims are without merit, and, in any event, any
adverse resolution would not have a material adverse effect on its business,
results of operations or financial condition.
8.
Income Taxes
NextWave’s
loss before provision for income taxes and minority interest is as
follows:
(in
thousands)
|
|
Year
Ended December 30,
2006
|
|
Inception
(April
13, 2005) to December 31,
2005
|
|
United
States
|
|
$
|
(103,272
|
)
|
$
|
(43,737
|
)
|
Foreign
|
|
|
(3,391
|
)
|
|
(1,925
|
)
|
|
|
$
|
(106,663
|
)
|
$
|
(45,662
|
)
|
NextWave’s
income tax provision (benefit) is as follows:
(in
thousands)
|
|
Year
Ended December 30,
2006
|
|
Inception
(April
13, 2005) to December 31,
2005
|
|
Current
income tax expense (benefit):
|
|
|
|
|
|
Federal
|
|
$
|
(265
|
)
|
$
|
258
|
|
State
|
|
|
10
|
|
|
7
|
|
Foreign
|
|
|
220
|
|
|
152
|
|
Total
provision (benefit) for taxes
|
|
$
|
(35
|
)
|
$
|
417
|
|
Amounts
are reflected in the preceding table based on the jurisdiction of the taxing
authorities. Changes in enacted rates impact the tax provision in the year
a
rate change is enacted.
Deferred
income taxes are provided for the effects of temporary differences between
the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for income tax purposes. The deferred tax assets
and
liabilities are determined by applying the enacted jurisdictional tax rate
in
the year in which the temporary difference is expected to
reverse.
The
tax
effects of the major items recorded as deferred income tax assets and
liabilities are as follows:
(in
thousands)
|
|
December
30, 2006
|
|
December
31, 2005
|
|
Current
deferred income tax assets:
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
4,777
|
|
$
|
1,709
|
|
Other
current reserves and accruals
|
|
|
1,802
|
|
|
811
|
|
Total
current deferred income tax assets
|
|
|
6,579
|
|
|
2,520
|
|
Noncurrent
deferred income tax assets:
|
|
|
|
|
|
|
|
Net
operating losses
|
|
|
48,453
|
|
|
26,390
|
|
Research
and development and other credit carryforwards
|
|
|
298
|
|
|
2,234
|
|
Capitalized
start-up expenses
|
|
|
24,613
|
|
|
13,635
|
|
Capitalized
research and experimentation expenditures
|
|
|
761
|
|
|
2,544
|
|
Other
noncurrent reserves and accruals
|
|
|
2,532
|
|
|
246
|
|
Total
noncurrent deferred income tax assets
|
|
|
76,657
|
|
|
45,049
|
|
Noncurrent
deferred income tax liabilities:
|
|
|
|
|
|
|
|
Fixed
assets and other intangible assets
|
|
|
(580
|
)
|
|
(6,155
|
)
|
Intangible
assets not subject to amortization
|
|
|
(75,774
|
)
|
|
—
|
|
Total
noncurrent deferred income tax liabilities
|
|
|
(76,354
|
)
|
|
(6,155
|
)
|
Valuation
allowance
|
|
|
(82,656
|
)
|
|
(41,414
|
)
|
Net
deferred income tax liability
|
|
$
|
(75,774
|
)
|
$
|
—
|
|
Reconciliations
of the U.S. statutory income tax rate to the effective tax rate are as
follows:
|
|
Year
Ended December 30, 2006
|
|
Inception
(April
13, 2005) to December 31, 2005
|
|
Federal
statutory rate
|
|
|
(35.0
|
)%
|
|
(35.0
|
)%
|
State
taxes, net of federal effect
|
|
|
0.0
|
|
|
0.0
|
|
Effect
of non-consolidated affiliates
|
|
|
3.2
|
|
|
(1.3
|
)
|
In-process
research and development
|
|
|
1.2
|
|
|
4.1
|
|
Increase
in valuation allowance
|
|
|
30.1
|
|
|
37.6
|
|
Other
|
|
|
0.5
|
|
|
(4.5
|
)
|
Total
provision for taxes
|
|
|
0.0
|
%
|
|
0.9
|
%
|
As
of
December 30, 2006, the NextWave’s U.S. operations are included in a consolidated
federal income tax return. The amount of current and deferred income tax expense
is computed on a separate entity basis for each member of the group based on
applying the principles of SFAS 109. Prior to the corporate conversion
transaction on November 13, 2006, the assets and liabilities of NextWave
Wireless Inc. were recorded on the balance sheet of NextWave Wireless LLC,
which
was classified as a partnership for U.S. federal and state income tax purposes.
Therefore, NextWave Wireless LLC’s income or loss generally was not subject to
federal or state income tax or benefit at the entity level. Accordingly,
NextWave's provision for income taxes consists of the aggregate of income tax
or
benefit generated by its corporate subsidiaries, without including taxes or
benefit on income or loss of NextWave Wireless LLC. Foreign taxes are recorded
on a separate entity level based on applicable jurisdictional income tax
rates.
As
of
December 30, 2006 NextWave had $111.0 million in federal net operating losses
that will begin to expire beginning 2018. As of December 30, 2006, NextWave
had $103.9 million in state net operating loss carryforwards that will begin
to
expire beginning 2010 and $3.7 million in foreign net operating loss
carryforwards, a majority of which will expire in 2007 and
2008. Utilization of certain net operating loss carryforwards are subject
to an annual limitation due to the ownership change limitations provided by
Internal Revenue Code Section 382 and similar state provisions. In addition,
NextWave has a limited history of operations and it is uncertain at this time
whether it will be able to utilize these carryforwards. As of December 30,
2006
NextWave had $0.3 million of foreign investment tax credit carryforwards which
will begin to expire in 2011.
NextWave
increased its federal, state and foreign valuation allowance during 2006 by
$41.3 million, from $41.4 million to $82.7 million, due to the increase in
its
net deferred tax asset balance. The increase consists of $42.6 million related
to the valuation allowance for amounts recorded in income from continuing
operations and $0.1 million related to amounts recorded in other comprehensive
income. The increases are offset by a decrease of $1.4 million related to the
valuation allowance for amounts recorded as goodwill, which relate primarily
to
the Corporate Conversion Merger and acquisition of PacketVideo Corporation.
At
December 30, 2006, the balance of the valuation allowance the reversal of which
would be offset by goodwill equals $22.2 million.
In
2006,
in accordance with SFAS 142, a deferred income tax liability for U.S. and state
and local income taxes of $75.8, related to intangible assets with an indefinite
life, was not netted against deferred tax assets when establishing the above
valuation allowance. The valuation allowances as of December 30, 2006 and
December 31, 2005 are attributable to deferred tax assets related to income
tax
loss carryforwards, mostly in the U.S., including certain states, as well as
other net deferred tax assets, for which it is more likely than not that the
related tax benefits will not be realized. It is NextWave’s policy that the
valuation allowance is decreased or increased in the year management determines
that it is more likely than not that the deferred tax assets will be realized
or
not.
At
December 30, 2006, NextWave had undistributed foreign earnings of
$0.6 million, which it intends to be permanently reinvested and,
accordingly, a deferred income tax liability has not been established on those
earnings.
As
of
December 30, 2006 and December 31, 2005, in accordance with SFAS 5, NextWave
reviewed its tax positions in the U.S. and foreign jurisdictions and determined
that an additional liability for potential assessments is not needed. If any
liability had been recorded, it would have increased NextWave’s effective income
tax rate in 2006 or 2005. The provisions of Financial Interpretation Number
48
(“FIN48”) will be effective for NextWave’s accounting year beginning December
31, 2006 and will supersede the guidance provided in SFAS 5 for measuring and
recording liabilities in the financial statements related to tax positions
taken
or expected to be taken on a tax return. FIN 48 will prescribe revised criteria
for a recognition threshold and measurement process for recording in the
financial statements uncertain tax positions taken or expected to be taken
in a
tax return. NextWave believes that the adoption of FIN 48 will not have a
material effect on its financial statements.
9.
Stockholders’/Members’ Equity
NextWave
Wireless Inc. Preferred and Common Stock
NextWave
has authorized 25 million shares of preferred stock, of which no shares were
issued or outstanding at December 30, 2006. 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 83.7 million were
issued and outstanding at December 30, 2006, including 232,000 restricted shares
and 1,000 shares held in treasury. At December 30, 2006, NextWave had the
following common shares reserved for future issuance upon the exercise or
issuance of the respective equity instruments:
(in
thousands)
|
|
|
|
Stock
options:
|
|
|
|
Granted
and outstanding
|
|
|
10,934
|
|
Available
for future grants
|
|
|
1,747
|
|
Warrants
|
|
|
3,106
|
|
|
|
|
15,787
|
|
NextWave
Wireless LLC Membership Interests
Prior
to
the corporate conversion in November 2006, NextWave was a limited liability
company under the Delaware Limited Liability Company Act (the “Act”) and capital
consisted of LLC interests, of which 488.7 million LLC interests were issued
and
outstanding at December 31, 2005. Distributions to members, as declared by
the
board of managers, were made in accordance with the member’s percentage interest
in NextWave. Distributions to members were made when required to satisfy their
tax liability attributable to allocations of income, gain, loss, deduction
and
credit of NextWave in any calendar year for which an allocation was required.
Because NextWave Wireless LLC was classified as a partnership for federal income
tax purposes, each member was required, in determining its own taxable income,
to take into account its pro rata share of NextWave’s income, loss deduction or
credit, generally with the same character as if realized directly by such
member, regardless of the amount of cash, if any, distributed by NextWave to
such member in such taxable year. Distributions declared during the period
from
January 1, 2006 to the date of the corporate conversion totaled $3.5 million,
of
which $2.0 million was payable as of December 30, 2006. No distributions were
made during the period from inception (April 13, 2005) to December 31,
2005.
10.
Equity Compensation Plans
NextWave
Stock Option Plans
NextWave
has two stock option plans: the NextWave Wireless Inc. 2005 Stock Incentive
Plan
and the CYGNUS Communications, Inc. 2004 Stock Option Plan. These plans provide
for the issuance of nonqualified stock options, or restricted,
performance-based, bonus, phantom or other share-based awards to eligible
employees, directors and consultants to purchase shares of NextWave’s common
stock. The prices, terms and conditions of the options and awards granted under
the 2005 Stock Incentive Plan are established by the compensation committee
of
the board of directors at the time of each grant. All options granted under
this
plan prior to the Corporate Conversion Merger provide for the early exercise
of
unvested options, provided that shares from the exercise of an unvested option
be held in escrow by NextWave subject to right of repurchase conditions as
described in the respective agreement. The prices, terms and conditions of
the
options granted under the 2004 Stock Option Plan are determined by the board
of
directors of CYGNUS at the time of each grant. Outstanding options generally
vest over four years and have a maximum term of 10 years.
In
June
2006, the NextWave Wireless LLC board of managers and members holding a majority
of NextWave Wireless LLC’s membership interests approved an amendment to the
plan to provide the equivalent of an additional 3.3 million common shares for
awards under the 2005 Stock Incentive Plan. The CYGNUS plan, as amended in
February 2006, provided for the conversion of each CYGNUS option, whether issued
or unissued, into the right to purchase .05097 shares of NextWave common stock
upon the Corporate Conversion Merger. The exchange of 314,000 options
outstanding at the time of conversion was accounted for as a modification
resulting from an exchange of options in a business combination under SFAS
123(R). At December 30, 2006, NextWave may issue up to 12,681,000 common shares
under its two plans, of which 10,934,000 are granted and outstanding options
and
1,747,000 are available for future grants.
The
following table summarizes the status of these plans at December 30, 2006 and
activity during the year ended December 30, 2006:
|
|
Options
(in
thousands)
|
|
Weighted
Average Exercise Price per Share
|
|
Weighted
Average Remaining Contractual Term
(in
Years)
|
|
Aggregate
Intrinsic Value
(in
thousands)
|
|
Outstanding
at December 31, 2005
|
|
|
6,611
|
|
$
|
5.78
|
|
|
|
|
|
|
|
Granted
|
|
|
5,283
|
|
$
|
6.43
|
|
|
|
|
|
|
|
Exercised
|
|
|
(267
|
)
|
$
|
5.45
|
|
|
|
|
|
|
|
Cancellation
of awards modified
|
|
|
(314
|
)
|
$
|
2.23
|
|
|
|
|
|
|
|
Canceled
|
|
|
(379
|
)
|
$
|
5.71
|
|
|
|
|
|
|
|
Outstanding
at December 30, 2006
|
|
|
10,934
|
|
$
|
6.20
|
|
|
8.8
|
|
$
|
49,477
|
|
Exercisable
at December 30, 2006
|
|
|
10,132
|
|
$
|
5.91
|
|
|
8.7
|
|
$
|
48,800
|
|
The
following table summarizes the status of unvested options under these two plans
as of December 30, 2006 and changes during the year ended December 30,
2006:
|
|
Options
(in
thousands)
|
|
Weighted
Average Grant Date Fair Value per Share
|
|
Unvested
at December 31, 2005
|
|
|
5,522
|
|
$
|
—(1)
|
|
Granted
|
|
|
5,283
|
|
$
|
3.13
|
|
Vested
|
|
|
(2,907
|
)
|
$
|
1.03(1)
|
|
Effective
cancellation of unvested awards modified
|
|
|
(174
|
)
|
$
|
0.02(1)
|
|
Canceled
|
|
|
(368
|
)
|
$
|
0.35(1)
|
|
Early
exercise of unvested options
|
|
|
(5
|
)
|
$
|
1.14(1)
|
|
Unvested
at December 30, 2006
|
|
|
7,351
|
|
$
|
1.82(1)
|
|
|
|
|
|
|
|
|
|
(1) The
weighted average grant date fair value per share includes options granted prior
to January 1, 2006 which have no grant date fair value assigned as NextWave
has
adopted the provisions of SFAS 123(R) using the prospective transition method,
whereby it continues to account for unvested equity awards to employees
outstanding at December 31, 2005 using APB 25, and apply SFAS 123(R) to all
awards granted or modified after that date.
NextWave
received cash from the exercise of stock options under these plans of $1.5
million and $0.1 million, with no related tax benefits, during the year ended
December 30, 2006 and during the period from inception (April 13, 2005) to
December 31, 2005, respectively. The intrinsic value of options exercised during
the year ended December 30, 2006, and for the period from inception (April
13,
2005) to December 31, 2005, totaled $53,000 and $105,000,
respectively.
PacketVideo
2005 Equity Incentive Plan
The
PacketVideo 2005 Equity Incentive Plan provides for the issuance of stock
options, stock bonuses or restricted stock to employees, directors and
consultants of PacketVideo or its affiliates. Outstanding options generally
vest
over four years, and have a maximum term of 10 years. In September 2006, the
PacketVideo board of directors approved an amendment to the plan to provide
an
additional 1,750,000 shares for awards under the plan. At December 30, 2006,
PacketVideo may issue up to 11,000,000 shares of common stock of PacketVideo
under this plan, of which 9,399,000 are granted and outstanding options and
1,601,000 are available for future grants.
The
following table summarizes the status of the PacketVideo plan at December 30,
2006 and activity during the year ended December 30, 2006:
|
|
Options
(in
thousands)
|
|
Weighted
Average Exercise Price per Share
|
|
Weighted
Average Remaining Contractual Term
(in
Years)
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding
at December 31, 2005
|
|
|
8,225
|
|
$
|
1.00
|
|
|
|
|
|
|
|
Granted
|
|
|
1,459
|
|
$
|
1.00
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(285
|
)
|
$
|
1.00
|
|
|
|
|
|
|
|
Outstanding
at December 30, 2006
|
|
|
9,399
|
|
$
|
1.00
|
|
|
5.7
|
|
$
|
7,426
|
|
Exercisable
at December 30, 2006
|
|
|
2,812
|
|
$
|
1.00
|
|
|
5.6
|
|
$
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the status of PacketVideo’s unvested options as of
December 30, 2006 and changes during the year ended December 30,
2006:
|
|
Options
(in
thousands)
|
|
Weighted
Average Grant Date Fair Value per Share
|
|
Unvested
at December 31, 2005
|
|
|
8,225
|
|
$
|
—(1)
|
|
Granted
|
|
|
1,459
|
|
$
|
0.42
|
|
Vested
|
|
|
(2,815
|
)
|
$
|
—(1)
|
|
Forfeited
|
|
|
(282
|
)
|
$
|
0.04(1)
|
|
Unvested
at December 30, 2006
|
|
|
6,587
|
|
$
|
0.09(1)
|
|
|
|
|
|
|
|
|
|
(1) The
weighted average grant date fair value per share includes options granted prior
to January 1, 2006 which have no grant date
fair
value assigned as NextWave has adopted the provisions of SFAS 123(R) using
the
prospective transition method, whereby it continues to account for unvested
equity awards to employees outstanding at December 31, 2005 using APB 25, and
apply SFAS 123(R) to all awards granted or modified after that
date.
There
were no exercises of stock options under this plan during the year ended
December 30, 2006 or during the period from inception (April 13, 2005) to
December 31, 2005. 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. The exchange will be accounted for as a
modification under SFAS 123(R) during fiscal year 2007 and is expected to result
in additional compensation expense.
Non-Employee
Share-Based Compensation
NextWave
issues options from its 2005 Stock Incentive Plan, warrants and restricted
stock
to members of its Technical Developments Steering Committee and other strategic
advisors. The following table summarizes the status of non-employee options
and
warrants at December 30, 2006 and activity during the year ended December 30,
2006:
|
|
Options
and Warrants
(in
thousands)
|
|
Weighted
Average Exercise Price per Share
|
|
Weighted
Average Remaining Contractual Term
(in
Years)
|
|
Aggregate
Intrinsic Value
(in
thousands)
|
|
Outstanding
at December 31, 2005
|
|
|
500
|
|
$
|
6.00
|
|
|
|
|
|
|
|
Granted
|
|
|
287
|
|
$
|
7.97
|
|
|
|
|
|
|
|
Outstanding
at December 30, 2006
|
|
|
787
|
|
$
|
6.72
|
|
|
5.9
|
|
$
|
3,155
|
|
Exercisable
at December 30, 2006
|
|
|
500
|
|
$
|
6.00
|
|
|
5.6
|
|
$
|
2,365
|
|
The
following table summarizes the status of unvested non-employee options and
warrants as of December 30, 2006 and changes during the year ended December
30,
2006:
|
|
Options
and Warrants
(in
thousands)
|
|
Weighted
Average Fair Value per Share
|
|
Unvested
at December 31, 2005
|
|
|
333
|
|
$
|
2.48
|
|
Granted
|
|
|
287
|
|
$
|
7.24
|
|
Vested
|
|
|
(184
|
)
|
$
|
2.91
|
|
Unvested
at December 30, 2006
|
|
|
436
|
|
$
|
6.84
|
|
Under
a
related Subscription Agreement, the chairman of the Steering Committee purchased
167,000 restricted common shares in July 2006 for $6.00 per share. NextWave
has
the right to repurchase these shares at $6.00 per share. This right lapses
in
equal monthly amounts through July 2010 while the technical advisor continues
to
provide services under the Steering Committee Agreement. At December 30, 2006,
NextWave had the right to repurchase 149,000 of the interests and 18,000 of
the
repurchase rights had lapsed. No restricted shares were repurchased during
the
year ended December 30, 2006.
Share-based
compensation expense related to these non-employee options, warrants and
restricted shares was measured using the fair value method as prescribed by
SFAS
No. 123(R) and EITF 96-18, “Accounting for Equity Instruments That Are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services,” and totaled $0.8 million and $0.7 million during the year ended
December 30, 2006 and during the period from inception (April 13, 2005) to
December 31, 2005, 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 December 30, 2006, using the Black-Scholes
option-pricing model based on the following weighted average assumptions applied
during the year ended December 30, 2006:
|
|
Options
|
|
Warrants
|
|
Restricted
Common Shares
|
|
Risk-free
interest rate
|
|
|
4.54%-4.79
|
%
|
|
4.58%-4.68
|
%
|
|
4.57%-4.78
|
%
|
Expected
life (in years)
|
|
|
6.0-9.9
|
|
|
3.0-4.0
|
|
|
0.1-3.9
|
|
Expected
stock price volatility
|
|
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Weighted
average fair value of awards
|
|
$
|
7.24
|
|
$
|
4.42
|
|
$
|
5.42
|
|
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 $3.5 million
at December 30, 2006, 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 2.6 years. None of these options or
warrants were exercised during the year ended December 30, 2006 or during the
period from inception (April 13, 2005) to December 31, 2005.
In
connection with the warrants issued, under a related advisory services
agreement, the advisor earned warrant exercise credits of $416,665 in January
2006, and continues to earn $83,333 on the first day of each month thereafter,
through the date of expiration of the agreement in September 2008. As of
December 30, 2006, $1.3 million credits were earned. The warrant exercise
credits may be used only as credits against the exercise price of the warrants.
Expense related to the warrant exercise credits totaled $1.0 million and $0.3
million during the year ended December 30, 2006 and during the period from
inception (April 13, 2005) to December 31, 2005, respectively. Unamortized
expense totaled $1.7 million at December 30, 2006, and will be charged to the
results of operations with an offsetting increase to additional paid in capital
in the consolidated balance sheet over the remaining vesting periods. Under
the
agreement, in the event that the advisor makes a significant contribution to
a
transaction in which NextWave acquires the use of a substantial amount of
certain types of spectrum as specified in the agreement, NextWave would issue
to
the advisor 833,333 shares of common stock upon the completion of such
transaction.
11.
401(k) Savings Plans
NextWave
maintains a defined contribution savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all of the employees of
NextWave Broadband, Inc. NextWave also assumed PacketVideo’s and CYGNUS’ 401(k)
defined contribution plans covering substantially all of the employees of
PacketVideo and CYGNUS, respectively. Employees may make voluntary contributions
to their respective plan as a percent of compensation, but not in excess of
the
maximum amounts allowed under the Internal Revenue Code. Employer contributions
to the respective plans are discretionary and are not required. No employer
contributions were made to these plans during the year ended December 30, 2006
or during the period from inception (April 13, 2005) to December 31,
2005.
12.
Supplemental Cash Flow Information
Supplemental
disclosure of cash flow information for the year ended December 30, 2006 and
for
the period from inception (April 13, 2005) to December 31, 2005 is as
follows:
(in
thousands)
|
|
Year
Ended December 30,
2006
|
|
Inception
(April
13, 2005) to December 31,
2005
|
|
Cash
paid for income taxes
|
|
$
|
124
|
|
$
|
152
|
|
Cash
paid for interest
|
|
|
—
|
|
|
—
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
Fair
value of warrants issued in connection with the issuance of 7% Senior
Secured Notes
|
|
|
24,626
|
|
|
—
|
|
Wireless
spectrum licenses acquired with lease obligations
|
|
|
4,039
|
|
|
—
|
|
Membership
interests issued for business acquisition
|
|
|
1,558
|
|
|
—
|
|
13.
Restatement of Previously Reported Interim Financial Statements and Quarterly
Financial Data (unaudited)
On
March
23, 2007, NextWave announced the need to adjust its financial results
for the first three quarters of 2006 to reflect a correction in its accounting
for certain revenue contracts and for the incorrect capitalization of certain
engineering costs in its PacketVideo subsidiary. Specifically, NextWave
determined that it was 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 Packet Video, existed for the PCS. NextWave also
determined that it had incorrectly deferred certain engineering costs prior
to
achieving technological feasibility. The change has been made to defer
revenue and related costs determined to be related to the PCS portion of the
contract and to expense previously capitalized engineering costs.
The
following interim unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the
United States for interim financial information and with the instructions to
SEC
Form 10-Q and Article 10 of SEC Regulation S-X. In NextWave’s opinion, this
information has been prepared on a basis consistent with that of its audited
consolidated financial statement and all necessary material adjustments,
consisting of normal recurring accruals and adjustments, have been included
to
present fairly the unaudited quarterly and year-to-date financial data.
NextWave’s quarterly results of operations for these periods are not necessarily
indicative of future results of operations. They do not include all of the
information and footnotes required by generally accepted account principles
for
complete financial statements. Therefore, these condensed consolidated financial
statements should be read in conjunction with NextWave’s audited consolidated
financial statements and notes thereto for the year ended December 30, 2006
included in this Annual Report on Form 10-K.
The
following table presents the impact of the change in revenues and related costs
on NextWave’s previously reported consolidated statements of operations for the
first three quarters of 2006:
|
|
Three
Months Ended
|
|
|
|
April
1, 2006
|
|
July
1, 2006
|
|
September
30, 2006
|
|
(in
thousands)
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,673
|
|
$
|
(1,768
|
)
|
$
|
3,905
|
|
$
|
8,331
|
|
$
|
(2,038
|
)
|
$
|
6,293
|
|
$
|
8,051
|
|
$
|
(1,381
|
)
|
$
|
6,670
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
2,686
|
|
|
(879
|
)
|
|
1,807
|
|
|
3,198
|
|
|
(560
|
)
|
|
2,638
|
|
|
4,568
|
|
|
(1,062
|
)
|
|
3,506
|
|
Engineering,
research and development
|
|
|
10,233
|
|
|
856
|
|
|
11,089
|
|
|
12,601
|
|
|
693
|
|
|
13,294
|
|
|
11,455
|
|
|
179
|
|
|
11,634
|
|
General
and administrative
|
|
|
8,492
|
|
|
—
|
|
|
8,492
|
|
|
12,140
|
|
|
—
|
|
|
12,140
|
|
|
14,896
|
|
|
—
|
|
|
14,896
|
|
Sales
and marketing
|
|
|
1,613
|
|
|
—
|
|
|
1,613
|
|
|
2,539
|
|
|
—
|
|
|
2,539
|
|
|
2,992
|
|
|
—
|
|
|
2,992
|
|
Purchased
in-process research and development
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,648
|
|
|
—
|
|
|
1,648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
operating expenses
|
|
|
23,024
|
|
|
(23
|
)
|
|
23,001
|
|
|
32,126
|
|
|
133
|
|
|
32,259
|
|
|
33,911
|
|
|
(883
|
)
|
|
33,028
|
|
Loss
from operations
|
|
|
(17,351
|
)
|
|
(1,745
|
)
|
|
(19,096
|
)
|
|
(23,795
|
)
|
|
(2,171
|
)
|
|
(25,966
|
)
|
|
(25,860
|
)
|
|
(498
|
)
|
|
(26,358
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,187
|
|
|
—
|
|
|
3,187
|
|
|
3,197
|
|
|
—
|
|
|
3,197
|
|
|
3,419
|
|
|
—
|
|
|
3,419
|
|
Interest
expense
|
|
|
(308
|
)
|
|
—
|
|
|
(308
|
)
|
|
(366
|
)
|
|
—
|
|
|
(366
|
)
|
|
(9,010
|
)
|
|
—
|
|
|
(9,010
|
)
|
Other
income and expense, net
|
|
|
(92
|
)
|
|
—
|
|
|
(92
|
)
|
|
216
|
|
|
—
|
|
|
216
|
|
|
(26
|
)
|
|
—
|
|
|
(26
|
)
|
Total
other income (expense), net
|
|
|
2,787
|
|
|
—
|
|
|
2,787
|
|
|
3,047
|
|
|
—
|
|
|
3,047
|
|
|
(5,617
|
)
|
|
—
|
|
|
(5,617
|
)
|
Loss
before provision for income taxes and minority interest
|
|
|
(14,564
|
)
|
|
(1,745
|
)
|
|
(16,309
|
)
|
|
(20,748
|
)
|
|
(2,171
|
)
|
|
(22,919
|
)
|
|
(31,477
|
)
|
|
(498
|
)
|
|
(31,975
|
)
|
Income
tax benefit (provision)
|
|
|
209
|
|
|
—
|
|
|
209
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(93
|
)
|
|
—
|
|
|
(93
|
)
|
Minority
interest
|
|
|
657
|
|
|
—
|
|
|
657
|
|
|
214
|
|
|
—
|
|
|
214
|
|
|
265
|
|
|
—
|
|
|
265
|
|
Net
loss
|
|
$
|
(13,698
|
)
|
$
|
(1,745
|
)
|
$
|
(15,443
|
)
|
$
|
(20,534
|
)
|
$
|
(2,171
|
)
|
$
|
(22,705
|
)
|
$
|
(31,305
|
)
|
$
|
(498
|
)
|
$
|
(31,803
|
)
|
The
following table presents the impact of the change in revenues and related costs
on NextWave’s previously-reported consolidated balance sheets for the first
three interim reporting dates in 2006:
|
|
April
1, 2006
|
|
July
1, 2006
|
|
September
30, 2006
|
|
(in
thousands)
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
99,871
|
|
$
|
—
|
|
$
|
99,871
|
|
$
|
30,643
|
|
$
|
—
|
|
$
|
30,643
|
|
$
|
25,371
|
|
$
|
—
|
|
$
|
25,371
|
|
Short-term
investments
|
|
|
266,716
|
|
|
—
|
|
|
266,716
|
|
|
309,794
|
|
|
—
|
|
|
309,794
|
|
|
196,801
|
|
|
—
|
|
|
196,801
|
|
Accounts
receivable, net
|
|
|
2,235
|
|
|
—
|
|
|
2,235
|
|
|
5,206
|
|
|
—
|
|
|
5,206
|
|
|
5,728
|
|
|
—
|
|
|
5,728
|
|
Deposits
for wireless spectrum bids
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142,866
|
|
|
—
|
|
|
142,866
|
|
Deferred
contract costs
|
|
|
1,456
|
|
|
21
|
|
|
1,477
|
|
|
2,105
|
|
|
(110
|
)
|
|
1,995
|
|
|
2,242
|
|
|
772
|
|
|
3,014
|
|
Prepaid
expenses and other current assets
|
|
|
5,745
|
|
|
—
|
|
|
5,745
|
|
|
8,518
|
|
|
—
|
|
|
8,518
|
|
|
7,252
|
|
|
—
|
|
|
7,252
|
|
Total
current assets
|
|
|
376,023
|
|
|
21
|
|
|
376,044
|
|
|
356,266
|
|
|
(110
|
)
|
|
356,156
|
|
|
380,260
|
|
|
772
|
|
|
381,032
|
|
Restricted
cash
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,792
|
|
|
—
|
|
|
76,792
|
|
Wireless
spectrum licenses, net
|
|
|
130,889
|
|
|
—
|
|
|
130,889
|
|
|
130,374
|
|
|
—
|
|
|
130,374
|
|
|
374,137
|
|
|
—
|
|
|
374,137
|
|
Goodwill
|
|
|
27,001
|
|
|
—
|
|
|
27,001
|
|
|
32,936
|
|
|
—
|
|
|
32,936
|
|
|
32,829
|
|
|
—
|
|
|
32,829
|
|
Other
intangible assets, net
|
|
|
17,449
|
|
|
—
|
|
|
17,449
|
|
|
16,846
|
|
|
—
|
|
|
16,846
|
|
|
16,306
|
|
|
—
|
|
|
16,306
|
|
Property
and equipment, net
|
|
|
15,040
|
|
|
—
|
|
|
15,040
|
|
|
14,632
|
|
|
—
|
|
|
14,632
|
|
|
16,796
|
|
|
—
|
|
|
16,796
|
|
Prepaid
expenses and other noncurrent assets
|
|
|
7,708
|
|
|
—
|
|
|
7,708
|
|
|
6,761
|
|
|
—
|
|
|
6,761
|
|
|
8,279
|
|
|
—
|
|
|
8,279
|
|
Total
assets
|
|
$
|
574,110
|
|
$
|
21
|
|
$
|
574,131
|
|
$
|
557,815
|
|
$
|
(110
|
)
|
$
|
557,705
|
|
$
|
905,399
|
|
$
|
772
|
|
$
|
906,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,488
|
|
$
|
—
|
|
$
|
4,488
|
|
$
|
2,274
|
|
$
|
—
|
|
$
|
2,274
|
|
$
|
2,369
|
|
$
|
—
|
|
$
|
2,369
|
|
Accrued
expenses
|
|
|
7,058
|
|
|
—
|
|
|
7,058
|
|
|
12,104
|
|
|
—
|
|
|
12,104
|
|
|
19,465
|
|
|
—
|
|
|
19,465
|
|
Current
portion of long-term obligations
|
|
|
2,575
|
|
|
—
|
|
|
2,575
|
|
|
2,822
|
|
|
—
|
|
|
2,822
|
|
|
2,681
|
|
|
—
|
|
|
2,681
|
|
Deferred
revenue
|
|
|
4,021
|
|
|
1,766
|
|
|
5,787
|
|
|
3,100
|
|
|
3,806
|
|
|
6,906
|
|
|
2,867
|
|
|
5,186
|
|
|
8,053
|
|
Current
tax liability
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Other
current liabilities and deferred credits
|
|
|
755
|
|
|
—
|
|
|
755
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
961
|
|
|
—
|
|
|
961
|
|
Total
current liabilities
|
|
|
18,897
|
|
|
1,766
|
|
|
20,663
|
|
|
21,309
|
|
|
3,806
|
|
|
25,115
|
|
|
28,383
|
|
|
5,186
|
|
|
33,569
|
|
Deferred
income tax liabilities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67,673
|
|
|
—
|
|
|
67,673
|
|
Long-term
deferred credits and reserves
|
|
|
8,203
|
|
|
—
|
|
|
8,203
|
|
|
8,575
|
|
|
—
|
|
|
8,575
|
|
|
8,243
|
|
|
—
|
|
|
8,243
|
|
Long-term
obligations
|
|
|
15,311
|
|
|
—
|
|
|
15,311
|
|
|
15,661
|
|
|
—
|
|
|
15,661
|
|
|
292,310
|
|
|
—
|
|
|
292,310
|
|
Minority
interest in subsidiary
|
|
|
889
|
|
|
—
|
|
|
889
|
|
|
1,143
|
|
|
—
|
|
|
1,143
|
|
|
884
|
|
|
—
|
|
|
884
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
interests
|
|
|
591,452
|
|
|
—
|
|
|
591,452
|
|
|
592,389
|
|
|
—
|
|
|
592,389
|
|
|
619,966
|
|
|
—
|
|
|
619,966
|
|
Accumulated
other comprehensive loss
|
|
|
(992
|
)
|
|
—
|
|
|
(992
|
)
|
|
(1,078
|
)
|
|
—
|
|
|
(1,078
|
)
|
|
(571
|
)
|
|
—
|
|
|
(571
|
)
|
Accumulated
deficit
|
|
|
(59,650
|
)
|
|
(1,745
|
)
|
|
(61,395
|
)
|
|
(80,184
|
)
|
|
(3,916
|
)
|
|
(84,100
|
)
|
|
(111,489
|
)
|
|
(4,414
|
)
|
|
(115,903
|
)
|
Total
members’ equity
|
|
|
530,810
|
|
|
(1,745
|
)
|
|
529,065
|
|
|
511,127
|
|
|
(3,916
|
)
|
|
507,211
|
|
|
507,906
|
|
|
(4,414
|
)
|
|
503,492
|
|
Total
liabilities and members’ equity
|
|
$
|
574,110
|
|
$
|
21
|
|
$
|
574,131
|
|
$
|
557,815
|
|
$
|
(110
|
)
|
$
|
557,705
|
|
$
|
905,399
|
|
$
|
772
|
|
$
|
906,171
|
|
The
following table summarizes NextWave’s operating results by quarter for the year
ended December 30, 2006, which have been restated for the item discussed above,
and for the period from inception (April 13, 2005) to December 31,
2005:
(in
thousands, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
Year
Ended December 30, 2006(1)(2):
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
Revenues
|
|
$
|
3,905
|
|
$
|
6,293
|
|
$
|
6,670
|
|
$
|
7,416
|
|
$
|
24,284
|
|
Net
loss
|
|
$
|
(15,443
|
)
|
$
|
(22,705
|
)
|
$
|
(31,803
|
)
|
$
|
(35,069
|
)
|
$
|
(105,020
|
)
|
Basic
and diluted net loss per common share(3)
|
|
$
|
(0.19
|
)
|
$
|
(0.28
|
)
|
$
|
(0.39
|
)
|
$
|
(0.43
|
)
|
$
|
(1.28
|
)
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
Period
from Inception (April 13, 2005) to December 31,
2005(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
N/A
|
|
$
|
148
|
|
$
|
1,202
|
|
$
|
2,794
|
|
$
|
4,144
|
|
Net
loss(3)
|
|
|
N/A
|
|
$
|
(2,948
|
)
|
$
|
(16,653
|
)
|
$
|
(26,351
|
)
|
$
|
(45,952
|
)
|
(1) |
Effective
January 1, 2006, NextWave changed its fiscal year end and quarterly
reporting periods from quarterly calendar periods ending on December
31 to
a 52-53 week fiscal year ending on the Saturday nearest to December
31 of
the current calendar year or the following calendar year. Fiscal
year 2006
is a 52-week year ending on December 30, 2006 and each of the four
quarters in 2006 include 13 weeks.
|
(2) |
The
results of operations of PacketVideo Corporation and Inquam Broadband
Holding, Inc. are included as of July 19, 2005 and January 6, 2006,
the
respective dates of the acquisitions, which affects the comparability
of
the Quarterly Financial Data. During 2006, NextWave also completed
other
acquisitions that were not material and their results of operations
have
been included from their respective dates of
acquisition.
|
(3) |
Loss
per share information is not presented for the period from inception
(April 13, 2005) to December 31, 2005 as it would not be meaningful
due to
the Corporate Conversion Merger.
|
14.
Subsequent Events
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 million in
net
proceeds from the sale of the Series A Preferred Stock. 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. The purchasers of the Series A Preferred Stock include, in
addition to other investment funds and institutional investors, 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.
The
Series A Preferred Stock has an initial liquidation preference of $1,000 per
share, subject to increase for accrued dividends as described below. The
liquidation preference would become payable upon redemption, as described below,
upon a liquidation or dissolution of NextWave, or upon deemed liquidation events
including a change in control, merger or sale of all or substantially all
NextWave’s assets, in which case 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 deemed liquidation
event.
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 and is convertible at any time at the option of the holder,
or
at NextWave’s election after the 18-month anniversary of issuance, subject to
the trading price of NextWave’s common stock reaching $22.10 for a specified
period of time, subject to adjustment. 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 issued upon conversion is then
effective or the shares are no longer considered restricted securities under
the
Securities Act.
The
Series A Preferred Stock is entitled to receive quarterly dividends on the
liquidation preference at a rate of 7.5% per annum. Until the fourth anniversary
of issuance, 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 the fourth anniversary
of
issuance, NextWave must declare dividends in cash each quarter, subject to
applicable law. The dividend rate is subject to adjustment to 10% per annum
if
NextWave defaults in its dividend payment obligations, or certain registration
obligations. The dividend rate is 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.
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, or
(iii) consummate asset sales involving the receipt of gross proceeds of, or
the
disposition of assets worth, $500 million or more. 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.
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.
Acquisitions
In
December 2006, PacketVideo signed a share purchase agreement to acquire all
of the shares of SDC Secure Digital Container AG for cash of $19.0 million.
The
acquisition was completed in January 2007 and will be accounted for in the
first
quarter of 2007 using the purchase method of accounting whereby the total
purchase price, including any transaction related expenses, will be allocated
to
tangible and intangible assets acquired based upon their respective fair
values.
In
February 2007, NextWave acquired all of the outstanding common stock and
warrants of GO Networks, Inc., a privately-held company headquartered in
Mountain View, CA with research and development facilities in Tel Aviv, Israel
for $13.2 million plus the assumption of $6.7 million in debt, of which $1.3
million was paid at closing. GO Networks develops advanced mobile Wi-Fi network
solutions for service providers. The primary reason for the acquisition is
intended 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.
Additional purchase consideration of up to $25.7 million may be paid in shares
of NextWave common stock, subject to the achievement of certain operational
milestones in the 18-month period subsequent to the closing of the acquisition.
The acquisition will be accounted for in the first quarter of 2007 using the
purchase method of accounting whereby the total purchase price, including any
transaction related expenses, will be allocated to tangible and intangible
assets acquired based upon their respective fair values. 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 upon the achievement of certain operational milestones in the 18-month
period subsequent to the closing of the acquisition.
In
March
2007, NextWave acquired all of the outstanding shares of common stock of 4253311
Canada Inc., a Canadian company. The total cost of the acquisition is expected
to be approximately $26.0 million in cash. The assets of the company are
comprised almost entirely of wireless spectrum.
NEXTWAVE
WIRELESS INC.
Schedule
II—Valuation and Qualifying Accounts
(in
thousands)
|
|
Balance
at Beginning of Period
|
|
Net
Additions Charged (Credited) to Expense
|
|
Additions
Acquired
from
Business
Combinations
|
|
Deductions(1)
|
|
Balance
at
End
of
Period
|
|
Year
Ended December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
391
|
|
$
|
236
|
|
$
|
—
|
|
$
|
(306
|
)
|
$
|
321
|
|
Reserve
for contract termination fee
|
|
$
|
7,121
|
|
$
|
(7,121
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Unfavorable
lease liability
|
|
$
|
1,037
|
|
$
|
75
|
|
$
|
318
|
|
$
|
(442
|
)
|
$
|
988
|
|
Period
from Inception (April 13, 2005) to December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
—
|
|
$
|
218
|
|
$
|
195
|
|
$
|
(22
|
)
|
$
|
391
|
|
Reserve
for contract termination fee
|
|
$
|
—
|
|
$
|
7,121
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,121
|
|
Unfavorable
lease liability
|
|
$
|
1,260
|
|
$
|
67
|
|
$
|
—
|
|
$
|
(290
|
)
|
$
|
1,037
|
|
(1)
Deduction for allowance for doubtful accounts is for accounts receivable
balances written-off. Deduction for the unfavorable lease liability
represents amounts paid in cash.
ITEM 9.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
ITEM 9A.
Controls
and Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures, as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to provide reasonable assurance
that information required to be disclosed by us in the reports that we file
or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate,
to
allow timely decisions regarding required financial disclosures. Because of
inherent limitations, our disclosure controls and procedures, no matter how
well
designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of such disclosure controls and procedures are
met.
As
of the
end of the period covered by this Report, 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, management identified certain control deficiencies that
represent a material weakness in our internal control over financial reporting,
as more fully 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 Report fairly present, in all material respects,
our
financial position, results of operations and cash flows for the periods
presented.
Management
determined that its unaudited financial statements for the quarterly periods
ended March 31, 2006, June 30, 2006 and September 30, 2006 should no longer
be
relied upon as a result of a required correction in its revenue recognition
under certain software contracts of our PacketVideo Corporation (“PacketVideo”)
subsidiary and the incorrect deferral of certain software development costs
at
PacketVideo.
PacketVideo
recognized revenue from certain software arrangements that provide for ongoing
maintenance and support in the incorrect reporting periods. The contracts
subject to the restatement typically include engineering and development work,
royalty revenue and postcontract customer support (“PCS”). The total revenue
recognized over the term of the arrangements will remain unchanged. The
Company has made an adjustment to the timing of the recognition of
revenue, and the related costs, under software contracts which contain PCS.
The
Company will recognize the revenue and associated costs over the entire PCS
period. In addition, the Company has also adjusted the quarterly results to
expense previously deferred costs, classified as pre-contract development costs,
into engineering, research and development.
Additionally,
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 will promptly take
action to remediate the material weakness described above based on an evaluation
of the accounting staffing, systems, policies and procedures relating to revenue
recognition at PacketVideo.
ITEM 9B.
Other
Information
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 $355 million in gross product from the sale of the Series A
Preferred Stock, which after reduction for financial advisor fees of
approximately $3.4 million and additional fees resulted in $351 million
in
net
proceeds. 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. The purchasers of the Series A Preferred
Stock include, in addition to other investment funds and institutional
investors, Navation, Inc., an entity owned by Allen Salmasi, our Chairman and
Chief Executive Officer, Manchester Financial Group, L.P., an entity indirectly
owned and controlled by Douglas F. Manchester, a member of our Board of
Directors, and affiliates of Avenue Capital, of which a member of our Board
of
Directors, Robert Symington, is a portfolio manager. None of the affiliated
purchasers received any compensation in connection with the financing and all
investors were subject to the same terms and conditions in connection with
the
investment. An independent committee of our Board of Directors reviewed and
approved the Series A Preferred Stock issuance and the participation of the
affiliated investors.
The
Series A Preferred Stock has an initial liquidation preference of $1,000 per
share, subject to increase for accrued dividends as described below. The
liquidation preference would become payable upon redemption, as described below,
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.
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. If all shares of Series A Preferred Stock were to be converted, we
would
be obligated to issue 32,126,696 shares of our common stock. The Series A
Preferred Stock is convertible at any time at the option of the holder, or
at
our election after the 18-month anniversary of issuance, 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 the
third
anniversary of issuance 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.
The
Series A Preferred Stock is entitled to receive quarterly dividends on the
liquidation preference at a rate of 7.5% per annum. Until the fourth anniversary
of issuance, 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 the fourth anniversary of issuance,
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.
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.
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.
The
Series A Preferred Stock was issued in a private placement transaction exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Regulation D thereof, and the shares of Series A Preferred Stock and common
stock issuable upon conversion may not be transferred absent an exemption from
registration or pursuant to an effective registration statement. To establish
the Regulation D exemption, we obtained certifications from each investor to
the
effect that such investor qualified as an “accredited investor” under Regulation
D, and did not engage in any general solicitation in connection with the
placement. In connection with the issuance of the Series A Preferred Stock,
we
entered into a registration rights agreement pursuant to which we agreed to
file
a shelf registration statement for the resale of the Series A Preferred Stock
and common stock issuable upon conversion with the Securities and Exchange
Commission by no later than July 31, 2007.
PART III
ITEM 10.
Directors,
Executive Officers and Corporate Governance
Our
Board
of Directors has adopted a Code of Business Conduct and Ethics that applies
to
our directors, officers and employees. A copy of our Code of Business Conduct
and Ethics is available on our website at www.nextwave.com. We will also provide
a copy of our Code of Business Conduct and Ethics, without charge, to any
stockholder who so requests in writing.
Except
for the information regarding executive officers required by Item 401 of
Regulation S-K, which is included in Part I of this Annual Report on Form 10-K
under Item 10, we incorporate the information required by this by reference
to
our definitive proxy statement for our annual meeting of shareholders presently
scheduled to be held in May 2007. We refer to this proxy statement as the
“2007 Proxy Statement”.
ITEM
11. Executive
Compensation
We
incorporate the information required by this item by reference to the section
entitled “Executive Compensation” in the 2007 Proxy Statement. Nothing in this
report shall be construed to incorporate by reference the Board Compensation
Committee Report on Executive Compensation or the Performance Graph, which
are
contained in the Proxy Statement, but expressly not incorporated
herein.
ITEM
12. Security
Ownership of Certain Beneficial Owners and Management
Securities
Authorized for Issuance Under Equity Compensation Plans
We
incorporate the information required by this item by reference to the section
entitled “Security Ownership of Certain Beneficial Owners and Management” in the
2007 Proxy Statement.
ITEM
13. Certain
Relationships and Related Transactions
We
incorporate the information required by this item by reference to the section
entitled “Corporate Governance and Related Matters - Certain Relationships and
Related Party Transactions” in the 2007 Proxy Statement.
ITEM
14. Principal
Accountant Fees and Services
We
incorporate the information required by this item by reference to the section
entitled “Audit Fees” in the 2007 Proxy Statement.
ITEM 15.
Exhibits
and Financial Statement Schedule
(a) Financial
Statements and Supplementary Data, Financial Statement Schedules and Exhibits.
1.
Financial Statements and Schedules—See Index to Consolidated Financial Schedule
at Item 8 on page [ ] of this report on Form 10-K.
(b)
Exhibits
Exhibits
submitted with this annual report on Form 10-K, as filed with the Securities
and
Exchange Commission and those incorporated by reference to other filings are
listed below.
DESCRIPTION
No.
|
|
2.1
|
Third
Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code
of
NextWave Personal Communications Inc., NextWave Power Partners Inc.,
NextWave Partners Inc., NextWave Wireless Inc. and NextWave Telecom
Inc.,
dated January 21, 2005 (incorporated by reference to Exhibit 2.1
to the
Registration Statement on Form 10 of NextWave Wireless LLC filed
May 1,
2006 (the “Form 10”))
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of NextWave Wireless Inc.,
as
restated on November 6, 2006 (incorporated by reference to Exhibit
3.1 to
the Company’s Registration Statement on Form S-4/A filed November 7,
2006)
|
|
|
3.2
|
Amended
and Restated By-laws of NextWave Wireless Inc., adopted on September
12,
2006 (incorporated by reference to Exhibit 3.2 to the Company’s
Registration Statement on Form S-4/A filed November 7,
2006)
|
|
|
4.1
|
Specimen
common stock certificate (incorporated by reference to Exhibit 4.1
to the
Company’s Registration Statement on Form S-4/A filed November 7,
2006)
|
|
|
4.2
|
Form
of Station 4, LLC Warrant (incorporated by reference to Exhibit 4.2
to the
Registration Statement on Form 10 of NextWave Wireless LLC filed
May 1,
2006 (the “Form 10”))
|
|
|
4.3
|
Warrant
Agreement, dated as of July 17, 2006, among NextWave Wireless Inc.
and the
Holders listed on Schedule I thereto (incorporated by reference to
Exhibit
4.2 to the Current Report on Form 8-K of NextWave Wireless LLC filed
July
21, 2006 (the "July 21, 2006 Form 8-K"))
|
|
|
4.4
|
Certificate
of Designations for NextWave Wireless Inc.'s Series A Senior Convertible
Preferred Stock.
|
|
|
10.1
|
Agreement
and Plan of Merger, dated November 7, 2006, by and among NextWave
Wireless
Inc., NextWave Wireless LLC and NextWave Merger LLC (incorporated
by
reference to Exhibit 2.1 to the Current Report on Form 8-K of NextWave
Wireless Inc. filed November 7, 2006)
|
|
|
10.2
|
Agreement
and Plan of Merger, dated as of December 31, 2006, by and among NextWave
Wireless Inc., Go Acquisition Corp., GO Networks, Inc. and Nechemia
J.
Peres, as Stockholder Representative (incorporated by reference to
Exhibit
2.1 to the Current Report on Form 8-K of NextWave Wireless Inc. filed
January 3, 2007).
|
|
|
10.3
|
Agreement
and Plan of Merger, dated as of May 24, 2005, by and among NextWave
Wireless LLC, PVC Acquisition Corp., PacketVideo Corporation and
William
D. Cvengros, as the Stockholder Representative (incorporated by reference
to Exhibit 2.2 to Amendment #1 to the Registration Statement on Form
10 of
NextWave Wireless LLC filed June 29, 2006 (“Amendment #1 to Form 10”)).
|
|
|
10.4
|
Purchase
Agreement, dated as of July 17, 2006, among NextWave Wireless LLC,
as
issuer, NextWave Broadband Inc., NW Spectrum Co., AWS Wireless Inc.,
and
PacketVideo Corporation, as subsidiary guarantors, the note purchasers
party thereto and The Bank of New York, as collateral agent (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K/A of
NextWave Wireless LLC filed September 8, 2006)
|
|
|
10.5
|
Registration
Rights Agreement, dated as of July 17, 2006, among NextWave Wireless
Inc.
and the Purchasers listed on Schedule I thereto (incorporated by
reference
to Exhibit 4.3 to the July 21, 2006 Form 8-K)
|
|
|
10.6
|
NextWave
Wireless Inc. 2005 Stock Incentive Plan (incorporated by reference
to
Exhibit 99.1 to the Company’s Post-Effective Amendment No. 1 on Form S-8
filed January 19, 2007)
|
|
|
10.7
|
CYGNUS
Communications, Inc. 2004 Stock Option Plan (incorporated by reference
to
Exhibit 10.3 to the Form 10)
|
|
|
10.8
|
PacketVideo
Corporation 2005 Equity Incentive Plan (incorporated by reference
to
Exhibit 10.2 to the Company’s Registration Statement on Form 10 filed on
May 1, 2006)
|
10.9
|
NextWave
Wireless Inc. 2005 Stock Incentive Plan Award Agreement (incorporated
by
reference to Exhibit 99.3 to the Company’s Registration Statement on Form
S-8 filed December 7, 2006)
|
|
|
10.10
|
Acquisition
Agreement by and among NextWave Telecom Inc., Cellco Partnership
D/B/A
Verizon Wireless and VZW Corp., dated as of November 4, 2004 (incorporated
by reference to Exhibit 10.4 to the Form 10)
|
|
|
10.11
|
Acquisition
Agreement, dated as of May 9, 2006, by and among (i) NextWave Wireless
LLC, (ii) NW Spectrum Co., (iii) WCS Wireless, Inc., (iv) Columbia
WCS
III, Inc., (v) TKH Corp., (vi) Columbia Capital Equity Partners III
(Cayman), L.P., the sole stockholder of Columbia WCS III, Inc., (vii)
each
of the stockholders of TKH Corp., namely, Aspen Partners Series A,
Series
of Aspen Capital Partners, L.P., Oak Foundation USA, Inc., Enteraspen
Limited, and The Reed Institute dba Reed College and (viii) Columbia
Capital, LLC, as the Stockholder Representative (incorporated by
reference
to Exhibit 10.7 to Amendment #1 of the Form 10)
|
|
|
10.12
|
Spectrum
Acquisition Agreement, dated as of October 13, 2005, between NextWave
Broadband Inc. and Bal-Rivgam, LLC (incorporated by reference to
Exhibit
10.8 to Amendment #1 of the Form 10)
|
10.13
|
Guaranty,
dated as of July 17, 2006, by and among NextWave Broadband, Inc.,
NW
Spectrum Co., AWS Wireless Inc., PacketVideo Corporation and The
Bank of
New York, as Collateral Agent (incorporated by reference to Exhibit
10.1
to the July 21, 2006 Form 8-K)
|
10.14
|
Parent
Guaranty, dated as of July 17, 2006, between NextWave Wireless Inc.
and
The Bank of New York, as Collateral Agent (incorporated by reference
to
Exhibit 10.2 to the July 21, 2006 Form 8-K)
|
|
|
10.16
|
Pledge
and Security Agreement, dated as of July 17, 2006, by and among NextWave
Wireless LLC, the undersigned direct and indirect subsidiaries of
NextWave
Wireless LLC, each additional Grantor that may become a party thereto
and
The Bank of New York, as Collateral Agent (incorporated by reference
to
Exhibit 10.3 to the July 21, 2006 Form 8-K)
|
|
|
10.17
|
NextWave
Wireless Inc. 2007 New Employee Stock Incentive Plan(1)
|
|
|
10.18
|
GO
Networks, Inc. Stock Bonus Plan(1)
|
|
|
10.19
|
Securities
Purchase Agreement, dated March 28, 2007, by and among NextWave Wireless
Inc. and the Purchasers listed on Schedule I (the “Purchasers”)
thereto(1)
|
|
|
10.20
|
Registration
Rights Agreement, dated March 28, 2007, among NextWave Wireless Inc.
and
the Purchasers(1)
|
|
|
14.1
|
NextWave
Wireless Inc. Code of Business Conduct and Ethics (available on the
Company’s website at http://www.nextwave.com)
|
|
|
21.1
|
Subsidiaries
of the Registrant
|
|
|
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm(1)
|
|
|
24.1
|
Power
of Attorney (included in signature page)
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Allen Salmasi, Chief Executive
Officer(1)
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of George C. Alex, Chief Financial
Officer(1)
|
|
|
32.1
|
Section 1350
Certification of Allen Salmasi, Chief Executive Officer(1)
|
|
|
32.2
|
Section
1350 Certification of George C. Alex, Chief Financial
Officer(1)
|
____________
(3) (1)
FILED
HEREWITH
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) 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 on March 30, 2007.
|
|
|
|
NEXTWAVE
WIRELESS
INC. |
|
|
|
|
By: |
/s/
Allen Salmasi
|
|
Allen
Salmasi
Chief
Executive Officer
and
President
|
|
|
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each of the undersigned constitutes and appoints
each of Frank A. Cassou, George C. Alex and Roseann Rustici, or any of them,
each acting alone, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for such person and in his name,
place
and stead, in any and all capacities, to sign this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
that
any such attorney-in-fact and agent, or his/her substitute or substitutes,
may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Allen
Salmasi
|
|
Chairman
of the Board of Directors, Chief Executive Officer and
President
(Principal
Executive Officer)
|
|
March
30, 2007
|
Allen
Salmasi
|
|
|
|
|
|
|
|
|
|
/s/
George
C. Alex
|
|
Executive
Vice President - Chief Financial Officer
(Principal Financial Officer)
|
|
March
30, 2007
|
George
C. Alex
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Vice President - Corporate Controller (Principal
Accounting Officer)
|
|
March
30, 2007
|
Fran
J. Harding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
|
|
Director
|
|
March
30, 2007
|
Frank
A. Cassou
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Kevin
M. Finn
|
|
Director
|
|
March
30, 2007
|
Kevin
M. Finn
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
30, 2007
|
Douglas
Manchester
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jack
Rosen
|
|
Director |
|
March
30, 2007
|
Jack
Rosen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
30, 2007
|
Robert
T. Symington
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
30, 2007
|
William
H. Webster
|
|
|
|
|
INDEX
TO EXHIBITS
|
|
2.1
|
Third
Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code
of
NextWave Personal Communications Inc., NextWave Power Partners Inc.,
NextWave Partners Inc., NextWave Wireless Inc. and NextWave Telecom
Inc.,
dated January 21, 2005 (incorporated by reference to Exhibit 2.1
to the
Registration Statement on Form 10 of NextWave Wireless LLC filed
May 1,
2006 (the “Form 10”))
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of NextWave Wireless Inc.,
as
restated on November 6, 2006 (incorporated by reference to Exhibit
3.1 to
the Company’s Registration Statement on Form S-4/A filed November 7,
2006)
|
|
|
3.2
|
Amended
and Restated By-laws of NextWave Wireless Inc., adopted on September
12,
2006 (incorporated by reference to Exhibit 3.2 to the Company’s
Registration Statement on Form S-4/A filed November 7,
2006)
|
|
|
4.1
|
Specimen
common stock certificate (incorporated by reference to Exhibit 4.1
to the
Company’s Registration Statement on Form S-4/A filed November 7,
2006)
|
|
|
4.2
|
Form
of Station 4, LLC Warrant (incorporated by reference to Exhibit 4.2
to the
Registration Statement on Form 10 of NextWave Wireless LLC filed
May 1,
2006 (the “Form 10”))
|
|
|
4.3
|
Warrant
Agreement, dated as of July 17, 2006, among NextWave Wireless Inc.
and the
Holders listed on Schedule I thereto (incorporated by reference to
Exhibit
4.2 to the Current Report on Form 8-K of NextWave Wireless LLC filed
July
21, 2006 (the "July 21, 2006 Form 8-K"))
|
|
|
4.4
|
Certificate
of Designations for NextWave Wireless Inc.'s Series A Senior Convertible
Preferred Stock.
|
|
|
10.1
|
Agreement
and Plan of Merger, dated November 7, 2006, by and among NextWave
Wireless
Inc., NextWave Wireless LLC and NextWave Merger LLC (incorporated
by
reference to Exhibit 2.1 to the Current Report on Form 8-K of NextWave
Wireless Inc. filed November 7, 2006)
|
|
|
10.2
|
Agreement
and Plan of Merger, dated as of December 31, 2006, by and among NextWave
Wireless Inc., Go Acquisition Corp., GO Networks, Inc. and Nechemia
J.
Peres, as Stockholder Representative (incorporated by reference to
Exhibit
2.1 to the Current Report on Form 8-K of NextWave Wireless Inc. filed
January 3, 2007).
|
|
|
10.3
|
Agreement
and Plan of Merger, dated as of May 24, 2005, by and among NextWave
Wireless LLC, PVC Acquisition Corp., PacketVideo Corporation and
William
D. Cvengros, as the Stockholder Representative (incorporated by reference
to Exhibit 2.2 to Amendment #1 to the Registration Statement on Form
10 of
NextWave Wireless LLC filed June 29, 2006 (“Amendment #1 to Form 10”)).
|
|
|
10.4
|
Purchase
Agreement, dated as of July 17, 2006, among NextWave Wireless LLC,
as
issuer, NextWave Broadband Inc., NW Spectrum Co., AWS Wireless Inc.,
and
PacketVideo Corporation, as subsidiary guarantors, the note purchasers
party thereto and The Bank of New York, as collateral agent (incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K/A of
NextWave Wireless LLC filed September 8, 2006)
|
|
|
10.5
|
Registration
Rights Agreement, dated as of July 17, 2006, among NextWave Wireless
Inc.
and the Purchasers listed on Schedule I thereto (incorporated by
reference
to Exhibit 4.3 to the July 21, 2006 Form 8-K)
|
|
|
10.6
|
NextWave
Wireless Inc. 2005 Stock Incentive Plan (incorporated by reference
to
Exhibit 99.1 to the Company’s Post-Effective Amendment No. 1 on Form S-8
filed January 19, 2007)
|
|
|
10.7
|
CYGNUS
Communications, Inc. 2004 Stock Option Plan (incorporated by reference
to
Exhibit 10.3 to the Form 10)
|
|
|
10.8
|
PacketVideo
Corporation 2005 Equity Incentive Plan (incorporated by reference
to
Exhibit 10.2 to the Company’s Registration Statement on Form 10 filed on
May 1, 2006)
|
10.9
|
NextWave
Wireless Inc. 2005 Stock Incentive Plan Award Agreement (incorporated
by
reference to Exhibit 99.3 to the Company’s Registration Statement on Form
S-8 filed December 7, 2006)
|
|
|
10.10
|
Acquisition
Agreement by and among NextWave Telecom Inc., Cellco Partnership
D/B/A
Verizon Wireless and VZW Corp., dated as of November 4, 2004 (incorporated
by reference to Exhibit 10.4 to the Form 10)
|
|
|
10.11
|
Acquisition
Agreement, dated as of May 9, 2006, by and among (i) NextWave Wireless
LLC, (ii) NW Spectrum Co., (iii) WCS Wireless, Inc., (iv) Columbia
WCS
III, Inc., (v) TKH Corp., (vi) Columbia Capital Equity Partners III
(Cayman), L.P., the sole stockholder of Columbia WCS III, Inc., (vii)
each
of the stockholders of TKH Corp., namely, Aspen Partners Series A,
Series
of Aspen Capital Partners, L.P., Oak Foundation USA, Inc., Enteraspen
Limited, and The Reed Institute dba Reed College and (viii) Columbia
Capital, LLC, as the Stockholder Representative (incorporated by
reference
to Exhibit 10.7 to Amendment #1 of the Form 10)
|
|
|
10.12
|
Spectrum
Acquisition Agreement, dated as of October 13, 2005, between NextWave
Broadband Inc. and Bal-Rivgam, LLC (incorporated by reference to
Exhibit
10.8 to Amendment #1 of the Form 10)
|
|
|
10.13
|
Guaranty,
dated as of July 17, 2006, by and among NextWave Broadband, Inc.,
NW
Spectrum Co., AWS Wireless Inc., PacketVideo Corporation and The
Bank of
New York, as Collateral Agent (incorporated by reference to Exhibit
10.1
to the July 21, 2006 Form 8-K)
|
|
|
10.14
|
Parent
Guaranty, dated as of July 17, 2006, between NextWave Wireless Inc.
and
The Bank of New York, as Collateral Agent (incorporated by reference
to
Exhibit 10.2 to the July 21, 2006 Form 8-K)
|
|
|
10.16
|
Pledge
and Security Agreement, dated as of July 17, 2006, by and among NextWave
Wireless LLC, the undersigned direct and indirect subsidiaries of
NextWave
Wireless LLC, each additional Grantor that may become a party thereto
and
The Bank of New York, as Collateral Agent (incorporated by reference
to
Exhibit 10.3 to the July 21, 2006 Form 8-K)
|
|
|
10.17
|
NextWave
Wireless Inc. 2007 New Employee Stock Incentive Plan(1)
|
|
|
10.18
|
GO
Networks, Inc. Stock Bonus Plan(1)
|
|
|
10.19
|
Securities
Purchase Agreement, dated March 28, 2007, by and among NextWave Wireless
Inc. and the Purchasers listed on Schedule I (the “Purchasers”)
thereto(1)
|
|
|
10.20
|
Registration
Rights Agreement, dated March 28, 2007, among NextWave Wireless Inc.
and
the Purchasers(1)
|
|
|
14.1
|
NextWave
Wireless Inc. Code of Business Conduct and Ethics (available on the
Company’s website at http://www.nextwave.com)
|
|
|
21.1
|
Subsidiaries
of the Registrant
|
|
|
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm(1)
|
|
|
24.1
|
Power
of Attorney (included in signature page)
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Allen Salmasi, Chief Executive
Officer(1)
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of George C. Alex, Chief Financial
Officer(1)
|
|
|
32.1
|
Section 1350
Certification of Allen Salmasi, Chief Executive Officer(1)
|
|
|
32.2
|
Section
1350 Certification of George C. Alex, Chief Financial
Officer(1)
|
____________
(1)
FILED
HEREWITH