UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended January 3, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number: 001-33576
Airvana, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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04-3507654
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification Number)
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19 Alpha Road
Chelmsford, Massachusetts 01824
(Address of Principal Executive Offices) (Zip Code)
(978) 250-3000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of registrants
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.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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The Aggregate market value of voting and non-voting common equity held by non-affiliates
of the registrant as of June 27, 2008, based on the closing price of common stock as reported by
The NASDAQ Global Market on such date, was approximately $109.4 million.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
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No
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The number of shares of the registrants common stock, par value $0.001, outstanding as of
March 4, 2010 was: 63,578,867
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for its 2010 annual meeting of
stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the registrants fiscal year end of January 3, 2010, are incorporated
by reference into this Form 10-K.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED January 3, 2009
Table of Contents
2
Forward Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such forward-looking
statements. The statements contained in this Annual Report on
Form 10-K
that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include expectations regarding the timing of the merger of Airvana with
an entity formed by affiliates of S.A.C. Private Capital Group, LLC, GSO Capital Partners LP,
Sankaty Advisors LLC and ZelnickMedia; statements regarding the ability to complete the merger; any
expectation of earnings, revenues, billings or other financial items; development of femtocell
alliances and shipments; any statements of the plans, strategies and objectives of management for
future operations; factors that may affect our operating results; statements concerning new
products or services; statements related to future capital expenditures; statements related to
future economic conditions or performance; statements as to industry trends and other matters that
do not relate strictly to historical facts or statements of assumptions underlying any of the
foregoing. These statements are often identified by the use of words such as, but not limited to,
anticipate, believe, continue, could, estimate, expect, intend, may, will,
plan, target, continue, and similar expressions or variations intended to identify
forward-looking statements. These statements are based on the beliefs and assumptions of our
management based on information currently available to management. Such forward-looking statements
are subject to risks, uncertainties and other important factors that could cause actual results and
the timing of certain events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below, and those discussed in the section titled Risk
Factors included elsewhere in this Annual Report on
Form 10-K
and in our other filings with the
Securities and Exchange Commission or SEC. Furthermore, such forward-looking statements speak only
as of the date of this report. We undertake no obligation to update any forward-looking statements
to reflect events or circumstances after the date of such statements.
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Part I
Overview
We are a leading provider of network infrastructure products used by wireless operators to
provide mobile broadband services. We specialize in helping operators transform the mobile
experience of users worldwide. Our high performance technology and products, from comprehensive
femtocell solutions to core mobile network infrastructure, enable operators to deliver broadband
services to mobile subscribers, wherever they are. Broadband multimedia services are growing
rapidly as business users and consumers increasingly use mobile devices to work, communicate, play
music and video and access the Internet. By expanding wireless broadband services, operators are
able to increase their data services revenue and mitigate the decline in voice revenue caused by
heightened competition. We expect that the continued capacity expansion of operator networks and
accelerated use of multimedia applications on next-generation smartphones such as the iPhone and
Android phones, will increasingly make mobile broadband networks the primary method for mobile
communications and entertainment.
Our products leverage our expertise in three technologies wireless communications, Internet
Protocol, or IP, and broadband networking. IP technology is the foundation of our solutions. Our
products enable new services and deliver carrier-grade mobility, scalability and reliability with
relatively low operating and capital costs. As a result, our products have advantages over products
based on circuit switching or legacy communication protocols.
Most of our current products are based on a wireless communications standard known as CDMA2000
1xEV-DO, or EV-DO. In 2002, we began delivering commercial infrastructure products based on the
first generation EV-DO standard known as Rev 0. The second generation EV-DO standard is known as
Rev A and supports push-to-talk, voice over IP, or VoIP, and faster Internet services. We delivered
our first Rev A software release in April 2007. Prior to 2008, most of our EV-DO sales were driven
by operator deployments focused on coverage with operators extending their broadband services
across larger portions of their subscriber geographies. Operators in some markets continue to
deploy our products to expand coverage. Data traffic and service revenue growth continues to
outpace voice growth at many major wireless operators around the world. Our EV-DO sales in 2008 and
2009 were driven by capacity growth as operators looked to expand their capacity to accommodate
increased data traffic fueled by greater consumer use of handheld devices, web browsing, and third
generation wireless standards, or 3G, multimedia applications. Over the longer term, we expect our
EV-DO sales to continue to be driven by capacity growth as operators acquire more broadband
subscribers that consume more broadband data.
We have developed a special business model to serve mobile operators and our original
equipment manufacturer, or OEM, customers with embedded software products. Our software is deployed
in an OEMs installed base of wireless networks. These networks are designed to deliver high
quality wireless services to millions of consumers and are built and regularly upgraded over long
periods of time, often 10 to 15 years. A key element of our strategy is to deliver significant
increases in performance and functionality to both our OEM customers and to operators through
software upgrades to these networks. In 2007, we delivered two major EV-DO software releases that
provide for deployment of high-performance multi-media applications by enabling faster downlink and
uplink speeds, supporting push-to-talk services, and adding new proprietary clustering features
that are designed to dramatically improve network scalability. In 2008, we delivered two additional
EV-DO software releases which enable mobile operators to more efficiently increase capacity and
accelerate the roll-out of next-generation multimedia services. In 2009, we delivered one
additional EV-DO software release, which increased the capacity and performance of operators
mobile broadband networks by redistributing the resources within the network to serve smartphone
and data card traffic in an effective manner, optimizes the way network control messages are
transmitted so the existing infrastructure can handle more devices, call activity, and in-session
user mobility, and increases radio network performance, resulting in higher data rates for users in
weak signal areas.
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We are also investing significantly in fixed mobile convergence, or FMC, products that
transform the experience of using mobile devices indoors, providing benefits such as better
coverage, better quality and performance of broadband applications, and lower costs for both users
and operators. Our FMC products enable operators to take advantage of wireline broadband
connections such as cable, digital subscriber line, or DSL, and fiber that already exist in most
offices and homes to connect mobile devices to an operators services. To accomplish this,
operators
can place a personal base station, or what the industry refers to as a femtocell access point,
in the home or office. We have developed femtocell access points to support networks based on
either of the worlds most prevalent wireless standards, code division multiple access, or CDMA,
and universal mobile telephone standard, or UMTS. Currently, there is significant operator interest
in our femtocells as they work with existing handsets and provide indoor coverage for both
residential and enterprise users. Our femtocell products are an important component of our growth
and diversification strategy.
We were founded in March 2000 and sold our first product in the second quarter of fiscal 2002.
Our growth has been driven primarily by sales through our OEM customers to wireless operators
already using our EV-DO products as they increase the capacity and geographic coverage of their
networks and by an increase in the number of wireless operators that deploy our EV-DO products on
their networks. We have sold over 70,000 channel card licenses for use by over 70 operators
worldwide.
Proposed Merger
On December 17, 2009, we entered into an Agreement and Plan of Merger, or the Merger Agreement,
with 72 Mobile Holdings, LLC, a Delaware limited liability company, or Parent, and 72 Mobile
Acquisition Corp, or Merger Sub, a wholly-owned subsidiary of Parent. Parent is a newly formed
entity to be owned, directly and indirectly, by affiliates of S.A.C. Private Capital Group, LLC,
GSO Capital Partners LP, Sankaty Advisors LLC and ZelnickMedia. Under the terms of the Merger
Agreement, upon closing of the merger, Merger Sub will be merged with and into Airvana, with
Airvana continuing as the surviving corporation, or the merger, and the holders of our common stock
will receive $7.65 in cash per share of common stock. Following the closing of the merger, Parent
will own all of the outstanding capital stock of the surviving corporation and we will no longer be
a publicly traded company. We expect to close the merger in the first half of 2010.
Industry Background
Mobile phones and other handheld mobile devices, such as Blackberry devices and smartphones
such as the iPhone and Android phones, have become ubiquitous. Historically, demand for voice
communications has driven the rapid growth in wireless services. The availability of affordable
mobile phones and lower service costs, such as flat-rate pricing, has increased demand for mobile
voice communications. Until recently, mobile phones were used primarily for voice communication.
The continued growth of mobile broadband services and introduction of flat-rate plans which include
both voice and data have driven significant growth in the use of data services. Data revenues
continue to grow rapidly and represent a growing portion of operators wireless services revenues
and, hence, constitute a major growth opportunity for the industry.
The Desire for Mobile Broadband Services
Both consumers and business users have a need for mobile broadband services. For consumers,
mobile broadband presents an opportunity to access wirelessly all of the multimedia services they
normally access from their home or office using their wireline broadband connections. These
services include music downloads, video streaming, gaming, information access (searches, news,
weather, financial data) and electronic commerce. For business professionals, mobile broadband
provides access to high speed wireless email, file downloads and online information through their
mobile phones, smartphones and laptop computers.
Mobile broadband can also help operators increase their revenues and profitability. We believe
that just as wireline broadband created demand for new multimedia services, the availability of
mobile broadband will create demand for new services through wireless networks.
While email and instant messaging are currently among the primary applications for wireless
data, faster and more reliable wireless networks are enabling operators to offer new multimedia
services tailored for mobile users, providing an opportunity for higher revenues. As a result,
wireless operators have joined efforts with media providers to develop content for mobile phones.
This content has led to increased use of multimedia services, such as music downloads, video
streaming, gaming, IP-TV and location-based services.
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The Need for Fixed-Mobile Convergence
As people increasingly use wireless services as their primary means of communication, the
mobile phone is becoming the primary phone for many users. Accordingly, more and more mobile phone
calls are made indoors. However, the experience of using mobile devices indoors is often inferior
to that of landline devices or the use of mobile devices outdoors. At the same time, cheap,
high-capacity broadband services are increasingly available in homes and offices via landline (such
as DSL and cable data technologies) connections.
FMC products allow operators to deliver converged services to mobile phones through a
combination of wide-area mobile and in-building wireless networks. One method utilizes traditional
mobile phones to access an operators voice and data services. When the user is in-building, the
mobile phone communicates with a small, inexpensive personal access point that connects to the
operators network through a broadband Internet connection. The industry calls these femtocell
access points.
Users may benefit from FMC products through improved coverage and quality of wireless service,
greater convenience, and reduced spending on the combination of wireline and wireless services.
Operators may benefit from FMC products by driving more in-building usage of wireless services and
by reducing the cost to provide these services. Wireline operators who are mobile virtual network
operators, or MVNOs, may benefit from FMC products by retaining customers on their fixed networks
when they are at home or in the office.
The Market Opportunity
Traditional circuit-switched networks cannot effectively deliver mobile broadband services.
The delivery of mobile multimedia services requires a technology optimized for the Internet and
capable of transmission at broadband speed. To offer multimedia services, wireless operators have
required a new solution a mobile broadband architecture based on IP technology. This solution has
to be deployable at relatively low cost, sufficiently scalable to support a very large number of
users and capable of delivering carrier-grade reliability. Operators also require scalable FMC
solutions that will enable subscribers to access securely and reliably both a mobile network and
in-building network through a single mobile phone. The development of these solutions requires a
combination of three disciplines: wireless communications, IP and broadband networking.
Our Solution
We were founded to apply broadband and IP technologies to mobile networks. We have developed a
suite of IP-based wireless infrastructure products that allow operators to provide users of mobile
phones, laptop computers and other mobile devices with access to mobile broadband services. We have
been able to develop our products because of our expertise in the three key technologies essential
for mobile broadband wireless communications, IP and broadband networking. Our products offer the
following benefits:
Enable New Service Offerings
Our EV-DO mobile network products enable operators to deliver a broad range of new mobile
broadband services, including:
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Mobile Broadband Internet Access.
Our EV-DO network products allow operators to offer
broadband-quality Internet access anywhere in their networks. Users can access EV-DO-based
networks through their laptop computers and other mobile devices. Mobile broadband networks
offer increased convenience and mobility and wider coverage than wireless local area
technologies such as Wi-Fi. In addition, in some developing markets, EV-DO networks are
being used as a wireless alternative to DSL or cable to provide last-mile broadband Internet
access. Our products have been used to deploy these services in Eastern Europe and Latin
America.
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Multimedia Consumer Services.
Our EV-DO products enable wireless operators to provide
multimedia services, such as video, music downloads, IP-TV and gaming. Broadband speed is
important to users seeking to download or transmit the large files associated with
multimedia services. Reflecting the growth of this market, media companies and wireless
operators are developing content tailored for mobile phones. In 2008,
Juniper Research estimated that global mobile entertainment services revenue, consisting of
user-generated content, gambling, adult and infotainment, would increase three-fold by 2012.
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Enhanced Voice Services.
Our EV-DO products enable the delivery of interactive voice and
video services, such as IP-based push-to-talk, video telephony and VoIP. For example, Sprint
Nextel has announced its intention to deliver push-to-talk over its EV-DO network. In the
future, our technology will enable wireless operators to migrate from separate voice and
data networks to a single IP-based mobile broadband network delivering both voice and data.
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Provide Scalability and Reliability
Our EV-DO products allow the base stations in a mobile network to connect to multiple radio
network controllers in order to increase the reliability of handoffs of mobile users at mobile site
boundaries. Operators can increase the capacity of their base stations simply by installing
additional channel cards. Our clustering software enables wireless operators to scale their
networks incrementally and to react quickly and reliably to increased demand for capacity without
introducing any network boundaries. In addition, our clustering architecture is designed to enable
the clustering of multiple radio network controllers so they appear as one high-capacity virtual
controller. With our architecture, base stations will not be impacted by the failure of a single
controller because they can continue to be served by the other controllers in the cluster.
Reduce Capital and Operating Expenses
Our EV-DO products enable operators to reduce their capital and operating expenses by taking
advantage of efficiencies associated with the use of IP technology. An EV-DO network employing our
IP-based architecture uses high-volume, off-the-shelf components, such as IP routers, and allows
mobile sites to connect to radio network controllers through an IP data network, such as a
lower-cost metropolitan Ethernet network.
Leverage Existing Broadband Infrastructure
We are developing FMC products that will enable operators to take advantage of broadband
connections that already exist in most offices and homes. Customers using our femtocell access
point products will benefit from increased coverage and quality of service and a reduction in
combined spending for wireline and wireless services. Operators will benefit from reduced network
operating costs, increased revenue and greater customer satisfaction.
Our Strategy
Our strategy is to enhance our leadership in the mobile broadband infrastructure market by
growing and expanding our EV-DO and FMC product offerings, acquiring new customers and selected
complementary businesses. Principal elements of our strategy include the following:
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Grow our EV-DO product sales.
We plan to grow sales of our EV-DO products as operators
continue to expand both the coverage and capacity of their wireless networks and increase
their offerings of mobile broadband services. The continued growth of broadband service
revenues for the operators implies a need for capacity expansion. To date, most of our EV-DO
sales have been driven by coverage deployments. We believe that a much greater opportunity
lies in future capacity expansion. We are developing new features to facilitate this growth,
such as technologies that will improve the quality of both VoIP and push-to-talk services.
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Enter the Fixed-Mobile Convergence Market.
We are currently developing femtocell access
point products for in-building deployment in CDMA and UMTS networks. We plan to sell these
FMC products directly to operators and through OEM customers. We have entered into
agreements with Nokia Siemens Networks to market an end-to-end UMTS femtocell solution, as
well as with Thomson and Pirelli Broadband Solutions to integrate our femtocell product into
their residential gateway offerings. In addition, we have entered into agreements with
Motorola and Hitachi to supply CDMA femtocell solutions. We have also been selected by two
major operators, Sprint Nextel and KDDI, to supply CDMA femtocell solutions.
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Develop Products for the GSM/UMTS Markets.
While CDMA is the leading mobile technology
used by operators in North America, GSM/UMTS are the leading standards used elsewhere in the
world. We are currently developing femtocell access point products to address the GSM/UMTS
markets.
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Leverage our Expertise in All-IP Mobile Networks to Develop 4G Technologies.
Third
generation wireless standards enable the delivery of IP data services over mobile networks.
While EV-DO is considered a 3G standard, it is based on an architecture where all multimedia
services, including voice, are carried over a single all-IP wireless network. The fourth
generation wireless standards, known as 4G, are expected to offer faster speeds and carry
all multimedia services over an all-IP wireless network. We believe our expertise in EV-DO
and all-IP wireless network technology positions us well to develop 4G solutions.
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Expand our OEM Sales Channels.
Our OEM relationships have allowed us to reach a broad
end-user market rapidly. By collaborating with our OEM customers to develop specific
functionality to be incorporated into products for their end-customers, we enable our OEM
customers to expand their product offering and achieve faster time to market for innovative
products that enable new operator services. We intend to continue to pursue new OEM
relationships to leverage their extensive operator relationships, industry networks and
global reach.
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Leverage our Operator Relationships.
We have developed direct relationships with leading
wireless operators to understand their needs and create demand for our products. We
collaborate directly with these operators to develop new products and services for their
customers. While our OEM customers represent our primary sales channel, we also offer some
products for sale directly to operators.
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Available Information
Our Internet website address is http://www.airvana.com. Through our website, we make
available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we
electronically file such material with, or furnish to, the Securities and Exchange Commission, or
SEC. These SEC reports can be accessed through the investor relations section of our website. The
information found on our website is not part of this or any other report we file with or furnish to
the SEC.
You may read and copy any materials we file with the SEC at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
that contains reports, proxy and information statements, and other information regarding us and
other issuers that file electronically with the SEC. The SECs Internet website address is
http://www.sec.gov.
Products
We have two categories of products mobile network EV-DO products and FMC products.
Mobile Network EV-DO Products
Our mobile network EV-DO products are IP-based and comply with the CDMA2000 1xEV-DO standard.
A typical mobile radio access network, or RAN, consists of a specific combination of base stations,
radio network controllers, or RNCs, and a network management system. Our mobile network EV-DO
products consist primarily of software for all three RAN elements. These three elements are
designed to work in conjunction with each other and cannot be deployed independently. We also
design and offer base station channel cards and other hardware for use with our software.
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AIRVANA PRODUCTS IN AN EV-DO RADIO ACCESS NETWORK
Base Stations and OEM Base Station Channel Cards
Mobile base stations send and receive signals to mobile phones and other mobile devices
connected to the network. They generally reside immediately beside a mobile tower. OEM base station
channel cards and our software are the primary elements of an EV-DO base station and serve as its
intelligence. Telefon AB L.M. Ericsson, or Ericsson, our largest OEM customer, manufactures Rev A
OEM base station channel cards under license from us.
Radio Network Controllers
A RNC directs and controls many base stations. Our RNC consists of proprietary software and a
carrier-grade, off-the-shelf hardware platform. Our RNC software manages EV-DO mobility as users
move between cell towers. Our RNCs are significantly smaller in size and offer higher capacity than
RNCs used in traditional mobile networks. Our RNCs use IP technology to communicate with our
software running on base station mobile cards. To enhance scalability, we are also developing a
software upgrade that will allow our RNCs to be clustered together to serve as a larger, virtual
RNC. We offer our RNC software on a stand-alone basis or bundled with a hardware platform.
Network Management System
Our AirVista Network Management System is software designed for the remote management of all
of our components in a mobile network deployment. This high-capacity system provides a common
management platform for all of our EV-DO and FMC products. Our AirVista software is used to access
securely, configure and control all of our RAN elements over an IP network.
Fixed-Mobile Convergence Products
Our FMC products under development include femtocell access points, which we expect to make
commercially available in 2010. When deployed in homes and offices, femtocell access points will
allow users to use existing mobile phones in-building with improved coverage and increased
broadband wireless performance. Femtocell products under development include versions to support
UMTS and CDMA. As part of our femtocell solution, we are also developing a Femtocell Service
Manager, which controls the access points.
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Our femtocell solutions will include the following key benefits:
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Improved in-building coverage.
Our femtocell access points are designed to significantly
improve in-building mobile network coverage.
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Improved user experience of mobile services.
Because our femtocell access points will be
shared by a small number of users, they will be able to provide a higher performance voice
and data experience compared to existing mobile network services.
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Compatibility with existing mobile phones.
Our femtocell access points will allow users
to make phone calls and access Internet broadband services through their existing CDMA or
UMTS mobile phones.
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Plug and play installation.
Our femtocell access points are being designed for consumer
installation with minimal user configuration. They will be connected by consumers to their
existing broadband Internet services, such as those provided by DSL, cable or fiber optics.
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AIRVANA FMC PRODUCT PLAN
Technology
Our IP RAN
The distinguishing feature of our mobile broadband network architecture is our proprietary use
of IP technology to deliver the following:
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mechanisms to support subscriber mobility;
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protocols to carry traffic between the various network elements of a RAN in a secure
manner;
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methods to increase the availability of the network in case of a failure in any of its
elements;
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designs that increase the scalability of the network;
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procedures to configure, manage and maintain the RAN; and
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quality-of-service algorithms to allocate dynamically the resources of the RAN to
subscribers and the various applications they use.
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IP Backhaul
Our IP RAN architecture is designed to take advantage of the flexibility of IP networks. Our
EV-DO solutions were among the first commercially deployed radio networks to rely solely on IP for
the transport of packets between nodes. Traditional mobile networks use point-to-point T1/E1
circuits to connect base stations with radio network controllers. Using IP transport between base
stations and radio network controllers allows wireless operators to take advantage of
widely-available IP equipment, such as routers, to terminate T1/E1 circuits or use alternative
low-cost IP transport services such as Metro Ethernet. Our IP backhaul capability reduces the size
and cost of the required radio network controller equipment.
RNC Clustering
Our products eliminate the strict hierarchical relationships between base stations and RNCs.
In traditional circuit-based radio access networks, each base station is controlled by a designated
RNC. In our IP RAN architecture, on the other hand, each base station can be served by multiple
RNCs. This leads to improvements in handling subscriber mobility, increasing the scalability and
reliability of the RAN.
In traditional radio access networks, where each base station is served by a single RNC, base
stations that are served by a given RNC form a geographic zone, called a subnet. When a mobile user
travels outside the subnet, handoffs have to be performed between RNCs. These handoffs are often
the cause of dropped calls and create unnecessary radio traffic. When a mobile user moves along the
subnet boundary, repeated handoffs may occur, further exacerbating the problem.
Because wireless operators want to minimize the frequency of handoffs between RNCs, they often
seek high capacity RNCs to make subnets as large as possible. However, individual RNC capacity is
limited by the state-of-the-art in available microprocessors and memory. The clustering software we
are developing will allow a wireless operator to increase the subnet size by clustering multiple
RNCs and making them behave as if they were a single, much larger, virtual RNC. When a mobile
subscriber requests resources from the RAN, the base station will be able to route this request to
the specific RNC within the cluster using our proprietary algorithms. As a result, subnets will be
able to be made very large and handoff boundaries between RNCs may be reduced.
RNC clustering also can improve the reliability of the RAN. In a traditional radio access
network, when an RNC fails, all base stations that are served by that RNC go out of service. In our
IP RAN architecture, when one RNC fails, the remaining RNCs in the cluster will continue to serve
subscribers.
Multi-Homing
Our IP RAN architecture also supports multi-homing technology, which allows an RNC to continue
to serve a mobile subscriber on an active call when that subscriber moves outside the current
subnet. In traditional radio network architectures, handoffs between RNCs are handled using
so-called inter-RNC handoff procedures, which require signaling and user traffic to flow through
two RNCs. With our multi-homing technology, signaling and user traffic will flow only between the
serving base station and the serving RNC and never have to traverse multiple RNCs. By keeping the
mobile subscriber attached to a given RNC, this technology reduces latency and minimizes the
processing load on RNCs.
IP Quality-of-Service
Quality-of-Service, or QoS, refers to a networks ability to prioritize different kinds of
traffic over others. For example, voice traffic, which is very sensitive to delay, needs priority
over less delay-sensitive web-browsing traffic. All-IP mobile broadband networks need to serve a
variety of traffic with very different QoS requirements. EV-DO standards define sophisticated
methods for the subscribers device to request QoS from the radio network. As these requests are
made, the RAN must then manage its available radio resources to best satisfy the subscribers QoS
requests. Our IP RAN architecture includes proprietary algorithms for controlling the admission of
subscriber applications to the network and uses technologies designed to deal with instances of
network overload in a predictable manner.
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IP Network Management
Our use of IP technologies also extends into our network management systems, which is used by
wireless operators to manage and maintain their networks. Instead of using closed, proprietary
protocols to manage RAN nodes, our management system uses Web-based protocols, such as XML, for
communication between the management system and network elements. This allows our network
management system to offer familiar web browser interfaces to users.
IP RAN Flat Architecture
Mobile broadband RANs serve user traffic in multiple types of nodes. For example, in EV-DO
networks, the base station, the RNC, the packet data serving node, or PDSN, and the mobile IP home
agent all cooperate to serve user traffic. However, having many different nodes in the network can
add latency, increase the capital and maintenance cost of the network and require complex
interactions between the nodes to deliver end-to-end QoS.
Our IP RAN architecture will support flatter architectures, where either the RNC and PDSN, or
the base station, RNC and PDSN, can be combined in a single node. Since there is no strict
one-to-one relationship between base stations and RNCs in our IP RAN, these elements can be
combined in a single node without introducing any handoff or subnet boundaries between the base
stations. Our RNC clustering technology will allow us to integrate PDSN functionality into our RNC,
without reducing the effective base station footprint or subnet size.
As radio networks become more distributed, and base stations and access points are placed
closer to users, as with picocell base stations and femtocell access points, we expect flat
networks will become the preferred architecture for wireless operators.
Distance-Based Paging
Paging is a critical capability in all mobile wireless systems. To preserve battery life,
subscriber devices are programmed to turn off their radio circuitry and periodically wake up to
listen for any incoming calls. RANs alert the subscriber to an incoming call by broadcasting a page
message through all base stations where the subscriber might be located. To facilitate paging, in
traditional RANs, subscriber devices inform the RAN whenever they cross a certain geographic paging
zone. When the RAN wants to page the user, it does so through all the base stations in the paging
zone where the subscriber last reported its location. Such paging mechanisms can create significant
unnecessary signaling traffic if subscribers move back and forth between paging zones.
Our IP RAN architecture includes distance-based paging, which uses dynamically varying
circular paging zones centered on the base station where a subscriber has last reported its
location. This technique avoids the problems caused by unnecessary repeated location updates, but
requires more sophisticated handling in the RNC to keep track of the list of base stations for
paging. Distance-based paging also allows the operator to configure very small paging areas in
order to reduce the amount of radio bandwidth that frequent broadcast pages take away from normal
user traffic. These considerations are especially important in page intensive applications such as
push-to-talk.
Femtocells
Our femtocell technology will consist of:
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a flat network architecture;
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a flexible hardware architecture based on programmable processing elements;
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an extensive software/firmware technology that will implement the radio, networking and
security functions of a femtocell;
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a suite of proprietary algorithms designed to optimize the performance and robustness of
the femtocell system; and
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a scalable service manager to facilitate the management of our femtocells by the network
operator.
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Our flat femtocell network architecture collapses the base station, RNC and packet data nodes
of a macro-cellular RAN into a small femtocell access point. Our network architecture is designed
to provide flexible options to connect to a wireless operators core network, connecting either to
existing circuit-switched core networks, which include mobile switching centers, or
state-of-the-art packet-switched core networks based on the session initiation protocol or the IP
multimedia system.
Our programmable hardware platform is designed to offer the ability to upgrade the software
and firmware running on the femtocell after it has been installed in a users home, the ability to
rapidly evolve our femtocell solution to take advantage of the latest available programmable
processor technology and to rapidly develop low-cost hard-wired
application-specific-integrated-circuits.
We believe that our extensive software and firmware solution for femtocells will implement the
critical modulation and demodulation functions found in the physical layer and the scheduling and
power and rate control functions found in the media access control layer. Our software and firmware
solution will also implement all necessary radio network controller, packet data node and security
functions.
Adapting macro-cellular RAN technology to small femtocells that support a wide range of
existing mobile phones requires sophisticated signal processing and networking algorithms. We are
developing these algorithms in the following technology areas:
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managing interference between femtocells and between femtocell and macro cellular
networks;
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providing seamless handoffs as users cross between femtocell and macro cellular networks;
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limiting access to a femtocell to authorized users;
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acquiring accurate timing, frequency and location information; and
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managing the use of a wireless operators spectrum.
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Finally, our service manager will operate on a scalable server platform and implement unique
methods to facilitate the easy and secure activation and maintenance of thousands of femtocells
from a central location in the network using the public Internet.
Operators Deploying Our Products
We have sold channel card licenses for use by over 70 operators worldwide. These operators
have purchased our products primarily through our OEM customers. Some of the largest deployments to
date include networks operated by the following operators:
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Bell Mobility (Canada)
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China Telecom (China)
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Eurotel (Czech Republic)
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Leap Wireless (USA)
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Pelephone (Israel)
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Sprint Nextel (USA)
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Telefonica (Latin America)
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Verizon Wireless (USA)
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OEM Customers and Strategic Relationships
We have strategic relationships with nine leading global communications equipment
vendors including Ericsson, Nokia Siemens Networks, Thomson, Motorola, Hitachi and Pirelli
Broadband Solutions. We believe these relationships provide several commercial advantages,
including extended sales and marketing reach, reduced accounts receivable concerns and the
mitigation of currency risk arising from the global nature of the network infrastructure business.
Similarly, we believe these vendors benefit from our relationships by leveraging our R&D expertise,
reducing the time-to-market for new products, and realizing incremental revenue from the sale of
complementary hardware, software and services resulting from the incorporation of our technology
into or the interoperatiblity with their products.
Ericsson
On January 14, 2009 Nortel Networks Corporation announced that it, Nortel Networks Limited,
and certain of its other Canadian subsidiaries filed for creditor protection under the Companies
Creditors Arrangement Act in Canada. Also on January 14, 2009, some of Nortel Networks
Corporations U.S. subsidiaries, including Nortel Networks Inc., or Nortel Networks, filed
Chapter 11 voluntary petitions in the State of Delaware. On July 28, 2009, the United States and
Canadian bankruptcy courts approved a bid for Nortel Networks CDMA business by Telefon AB L.M.
Ericsson, or Ericsson, a global wireless network infrastructure provider, subject to satisfaction
of regulatory and other conditions. This acquisition was completed in November 2009. Substantially
all of our current billings and revenue are now derived from Ericsson.
We have sold our EV-DO mobile network solutions since 2001 primarily through Nortel Networks
and, after its acquisition of Nortel Networks CDMA business, Ericsson. Ericsson accounted for 85%
of our revenue and 94% of our billings in fiscal 2009. Nortel Networks accounted for 99% of our
revenue and 93% of our billings in fiscal 2008, and 99% of our revenue and 98% of our billings in
fiscal 2007. We originally entered into our OEM agreement with Nortel Networks for the development
of our proprietary EV-DO Rev 0 technology, including base station channel card hardware and
software, RNC software, and network management system software. This agreement was assigned to
Ericsson as part of Ericssons acquisition of Nortel Networks CDMA business. The agreement is
non-exclusive, contains no minimum purchase commitments, and sets forth the terms and conditions
under which Ericsson licenses our proprietary EV-DO software. In 2005, Nortel Networks exercised
its right under the OEM agreement to license, on a non-exclusive basis, our proprietary Rev A base
station channel card hardware design to enable it to manufacture such hardware and derivatives
thereof. These OEM base station channel cards are inserted into Ericssons CDMA 2000 base stations
and, under our agreement, operate exclusively with our EV-DO software. The term of the OEM
agreement extends through January 1, 2011, with automatic annual renewals, unless either party
gives 12 months prior notice of its intent not to renew. Ericsson also has the right to terminate
the agreement at any time. We have amended the agreement several times, most recently in December
2009 when we agreed to pricing for software products and upgrades that were then under development.
Ericsson has the option, under our agreement, to purchase from us the specification for
communications among base stations, RNCs and network management systems. The specification would
enable Ericsson to develop EV-DO software to work with the base station channel card software
licensed from us and deployed in the networks of Ericssons operator customers. If Ericsson elects
to exercise this option, Ericsson will pay us a fixed fee as well as a significant royalty on sales
of current and future products that incorporate this interface specification. The royalty rate
varies with annual volume but represents a portion of the license fees we currently receive from
our sales to Ericsson. If Ericsson were to exercise the option, Ericsson would receive the current
interface specification at the time of option exercise, updated with any upgrade then under
development, plus one additional upgrade subject to a development agreement within a limited time
after the option exercise for an additional fee. If Ericsson were in the future to develop its own
EV-DO software, it could, by exercising this option, enable its own software to communicate with
the base station channel cards currently installed in its customers networks.
In September 2007, we entered into an agreement with Nortel Networks, amending certain
provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to amend
pricing for our products and services, including the addition of new pricing for software products
and upgrades that were under development at the time and were subsequently delivered in June 2008.
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In November 2008, we entered into another agreement with Nortel Networks, amending certain
provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to
pricing for software products and upgrades that were delivered at that time.
In December 2009, we entered into another agreement with Ericsson, amending certain provisions
of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products,
dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to amend pricing
for our products and services, including the addition of new pricing for software products and
upgrades delivered in 2009.
Other OEM Relationships
In August 2007, we entered into an agreement with Nokia Siemens Networks to certify
interoperability of our UMTS femtocell product with Nokia Siemens Networks femtocell gateway
product. We and Nokia Siemens Networks plan to provide a joint solution to operators, and cooperate
in joint marketing, sales and support programs. The agreement is non-exclusive and sets forth the
terms under which we may use their proprietary interface specifications of their products.
In January 2008, we entered into a global sourcing agreement with Thomson to supply our UMTS
femtocell technology. Pursuant to the agreement, Thomson may use our femtocell products in
conjunction with its own residential gateway offerings. The agreement is non-exclusive and sets
forth the terms and conditions under which Thomson may purchase our femtocell products. The term of
the agreement extends through January 2011, with automatic annual renewals. Either party may
terminate the agreement with 90 days notice.
In February 2008, we entered into a global OEM agreement with Motorola to provide our CDMA
femtocell solution products. The agreement is non-exclusive and sets forth the terms and conditions
under which Motorola may purchase our femtocell and UAG products. The initial term of the agreement
extends through May 2010, with automatic annual renewals. Following the initial term, Motorola may
terminate the agreement with 180 days notice.
In June 2008, we entered into an agreement with Alcatel-Lucent to develop an integrated IP
Multimedia Subsystem, or IMS, femtocell solution for CDMA network operators that combines our
femtocell access point and femtocell network gateway with Alcatel-Lucents IMS core network
infrastructure. The development agreement was terminated by Alcatel-Lucent in the second quarter of
fiscal 2009.
In July 2008, we entered into an agreement with Hitachi to develop a joint CDMA femtocell
solution that integrates our femtocell products with Hitachis core radio access network
infrastructure that Hitachi offers in Japan.
In September 2008, we entered into a supply agreement with Hitachi under which Hitachi will
provide marketing, sales and support activities for our femtocell products. The initial term of the
supply agreement extends through June 2014 and provides for automatic annual renewals, unless
either party gives 180 days notice of its intent not to renew.
In December 2008, we entered into a sourcing agreement with Pirelli Broadband Solutions to add
wireless broadband connectivity to Pirellis portfolio of consumer broadband devices by using our
UMTS femtocell technology. The agreement is non-exclusive and sets forth the terms and conditions
under which Pirelli may purchase our femtocell products. The initial term of the agreement extends
through November 2010, with automatic annual renewals, unless either party gives 90 days notice of
its intent not to renew.
In June 2009, we entered into a global reseller agreement with a multinational infrastructure
provider to supply and support our femtocell service manager and UAG products. The agreement is
non-exclusive and sets forth the terms and conditions under which the customer may purchase our FMC
products. The initial term of the agreement extends through May 2012.
In June 2009, we entered into an agreement with a multinational infrastructure provider for
the licensing and support of our femtocell service manager. The agreement is non-exclusive and sets
forth the terms and conditions
under which the customer may purchase our product. The initial term of the agreement extends
through June 2014, with automatic annual renewals, unless either party gives 90 days notice of its
intent not to renew.
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In June 2009, we entered into a master purchase agreement with Sprint/United Management
Company, or Sprint, to supply and support femtocell products. Under the agreement, we will provide
our HubBub CDMA femtocell for Sprints commercial 3G femtocell service offerings. The agreement is
non-exclusive and sets forth the terms and conditions under which Sprint may purchase our femtocell
product and services. The term of the agreement extends through December 2014.
In January 2010, we entered into a global reseller agreement with a multinational
infrastructure provider to supply and support our UMTS femtocells. The agreement is non-exclusive
and sets forth the terms and conditions under which the customer may purchase our femtocell
products. The initial term of the agreement is five years, with automatic annual renewals, unless
either party gives nine months written notice of its intent not to renew.
Sales and Marketing
We market and sell our products both indirectly through our OEM customers and directly to
wireless operator customers. To date, substantially all of our sales have been through our OEM
customers. In addition to our sales and marketing efforts directed towards OEM customers, we
augment the sales efforts of our OEM customers by working with their delivery and operational teams
and assisting in the training and support of their sales personnel. Increasingly, an important part
of our sales effort is creating demand for our products by working directly with operators. We
foster relationships with operators by discussing technology trends, identifying market
requirements, carrying out field support trials of our technologies in conjunction with teams from
our OEM customers and providing training and education related to our technology. Through these
contacts with our end-customers, we believe we are better able to understand their operations,
incorporate feature and product requirements into our solutions and better track the technology
needs of our end-customers.
As of January 3, 2010, we had 33 employees in sales and marketing.
Service and Support
We offer technical support services to our OEM customers and, in some cases, directly to
wireless operators. Our OEM customers are responsible for handling basic first-level customer
support, with our technical support personnel addressing complex issues related to our
technologies.
Our service and support efforts are divided into two main categories: ongoing commercial
network support, and pre-commercial or new network rollout support. Our ongoing customer support
and services include live network product rollout, around-the-clock technical support, software and
hardware maintenance services, emergency outage recovery and service ticket tracking and
management. Pre-commercial support services include deployment optimization services, customer
network engineering and on-site deployment work related to system configuration and integration
with existing infrastructure.
We also provide customer consulting services including network and radio frequency deployment
planning, network optimization and overall performance management. Our products and technology are
sold with a full range of technical documentation, including planning, installation and operation
guides. We also provide standard and customized training targeted at management, operational
support personnel and network planners and engineers.
As of January 3, 2010, we had 43 employees in service and support.
Research and Development
Investment in research and development is at the core of our business strategy. As of January
3, 2010, we had 483 engineers in Chelmsford, Massachusetts, Bangalore, India and Cambridge, United
Kingdom with significant expertise in digital communications, including wireless communications, IP
and broadband networking. Our research and development organization is responsible for designing,
developing and enhancing our software and
hardware products, performing product testing and quality assurance activities, and ensuring
the compatibility of our products with third-party platforms. Our research and development
organization is also responsible for developing new algorithms and concepts for our existing and
future products.
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Manufacturing and Operations
We develop and test our software products in-house and outsource the manufacturing of the
carrier-grade hardware components of our products. We believe that outsourcing the manufacturing of
these hardware components enables us to conserve working capital, better adjust manufacturing
volumes to meet changes in demand and more quickly deliver products.
As of January 3, 2010, we had 13 employees in manufacturing and operations.
Competition
The market for network infrastructure products is highly competitive and rapidly evolving. The
market is subject to changing technology trends, shifting customer needs and expectations and
frequent introduction of new products. We believe we are able to compete successfully primarily on
the basis of our expertise in all-IP wireless communication, the performance and reliability of our
products and our OEM business model.
The nature of our competition varies by product. For our EV-DO products, we face competition
from several of the worlds largest telecommunications equipment providers that offer either a
directly competitive product or a product based on alternative technologies. Our competitors
include Alcatel-Lucent, Hitachi, Huawei, and Samsung.
In our sales to OEM customers, we face the competitive risk that OEMs might seek to develop
in-house alternative solutions to those currently licensed from us. Additionally, OEMs might elect
to source technology from our competitors.
The market for FMC solutions is in its early stages. We expect to encounter competition from
products already on the market, as well as new products to be developed. Our competition includes
several public companies, including Cisco, Ericsson and Samsung, as well as several private
companies, including Huawei.
Our current and potential new competitors may have significantly greater financial, technical,
marketing and other resources than we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. In addition, many of our competitors
have more extensive customer bases and broader customer relationships than we do, including
relationships with our potential customers. Our competitors may therefore be in a stronger position
to respond quickly to new technologies and may be able to market or sell their products more
effectively. Moreover, further consolidation in the communications equipment market could adversely
affect our OEM customer relationships and competitive position. Our products may not continue to
compete favorably and we may not be successful in the face of increasing competition from new
products and enhancements introduced by existing competitors or new companies entering the markets
in which we provide products.
Intellectual Property
We believe that our continued success depends in large part on our proprietary technology, the
skills of our employees and the ability of our employees to continue to innovate and incorporate
advances in wireless communication technology into our products. We regard our products and the
internally-developed software embedded in our products as proprietary. The wireless industry is
dominated by large vendors with significant intellectual property portfolios. To establish and
protect our own intellectual property rights, we rely on a combination of patent, trademark,
copyright and trade secret laws.
As of February 18, 2010, we had been issued 15 patents, with 2 additional patents allowed and
we had over 110 patent applications pending in the United States and in foreign jurisdictions.
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We license our technology pursuant to agreements that impose restrictions on customers
ability to use the technology, such as prohibiting reverse engineering and, in the case of software
products, limiting the use of software copies and restricting access to our source code. We also
seek to avoid disclosure of our intellectual property using contractual obligations, by requiring
employees and consultants with access to our proprietary information to execute nondisclosure,
non-compete and assignment of intellectual property agreements.
Despite our efforts to protect our intellectual property, our means to protect our
intellectual property rights may be inadequate. Unauthorized parties may attempt to copy aspects of
our products, obtain and use information that we regard as proprietary, or even elect to design
around our current intellectual property rights. In addition, the laws of some foreign countries do
not protect our proprietary rights to as great an extent as do the laws of the United States and
many foreign countries do not enforce their intellectual property laws as diligently as
U.S. government agencies and private parties. Litigation and associated expenses may be necessary
to enforce our property rights.
We have licensed from Qualcomm some of its EV-DO technology for use in our products. Our
software also relies on certain application-specific integrated circuit, or ASIC, technology from
Qualcomm used in EV-DO products. An inability to access these ASIC technologies could result in
significant delays in our product releases and could require substantial effort to locate or
develop replacement technology.
Many companies in the wireless industry have significant patent portfolios. These companies
and other parties may claim that our products infringe their proprietary rights. We may become
involved in litigation as a result of allegations that we infringe the intellectual property rights
of others. For example, we have received letters from Wi-LAN Inc. asserting that some of our
products infringe four issued United States patents and an issued Canadian patent relating to
wireless communication technologies. A majority of our revenue to date has been derived from the
allegedly infringing EV-DO products. We have evaluated various matters relating to Wi-LANs
assertion and we do not believe that our products infringe any valid claim of the patents
identified by Wi-LAN. However, we may seek to obtain a license to use the relevant technology from
Wi-LAN. We cannot be certain that Wi-LAN would provide such a license or, if provided, what its
economic terms would be. If we were to seek to obtain such a license, and such license were
available from Wi-LAN, we could be required to make significant payments with respect to past
and/or future sales of our products, and such payments may adversely affect our financial condition
and operating results. If Wi-LAN determines to pursue claims against us for patent infringement, we
might not be able to successfully defend against such claims.
Employees
As of January 3, 2010, we had approximately 600 employees, of which approximately 175 were
located in India, approximately 60 were located in the United Kingdom and most of the remainder
were based in the United States. None of our employees is represented by a union or covered by a
collective bargaining agreement.
Facilities
Our corporate headquarters is located in Chelmsford, Massachusetts, where we lease
approximately 85,000 square feet of office space. This lease expires on April 30, 2012. We also
lease approximately 35,000 square feet of space in Bangalore, India pursuant to a lease which
expires in March 2012 and approximately 10,000 square feet of space in Cambridge, United Kingdom
pursuant to leases which expire in February 2012 and August 2012.
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Our business is subject to numerous risks. We caution you that the following important
factors, among others, could cause our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in filings with the SEC, press releases,
communications with investors and oral statements. Any or all of our forward-looking statements in
this Annual Report on
Form 10-K
and in any other public statements we make may turn out to be
wrong. They may be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in the discussion below will be important in determining
future results. Consequently, no forward-looking statement can be guaranteed. Actual future results
may vary materially from those anticipated in forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
Risks Relating to Our Business
We depend on a single OEM customer, Ericsson, for almost all of our revenue and billings, and a
significant shortfall in sales to Ericsson would significantly harm our business and operating
results.
We derived almost all of our revenue and billings in each of the last several years from sales
to a single OEM customer. Ericsson, which acquired Nortel Networks CDMA business, accounted for
85% of our revenue and 94% of our billings in fiscal 2009. Nortel Networks accounted for 99% of our
revenue and 93% of our billings in fiscal 2008 and 99% of our revenue and 98% of our billings in
fiscal 2007.
Ericsson can terminate our contract at any time and, in any event, the contract does not
contain commitments for future purchases of our products. The rate at which Ericsson purchases
products from us depends on its success in selling to operators its own EV-DO infrastructure
solutions that include our products. There can be no assurance that Ericsson will continue to
devote and invest significant resources and capital to its wireless infrastructure business or that
it will be successful in the future in such business. Ericsson might seek to develop internally, or
acquire from a third party, alternative wireless solutions to those currently purchased from us. We
expect to derive a substantial majority of our revenue, billings and cash flow in fiscal 2010 from
Ericsson, and therefore any adverse change in our relationship with Ericsson, or a significant
decline or shortfall in our sales to Ericsson, would significantly harm our business and operating
results.
If our announced merger is delayed or not completed, our business and the market price of our
common stock could be adversely affected.
On December 17, 2009, we announced our entry into the Merger Agreement with Parent and Merger
Sub. There are a number of risks and uncertainties relating to the proposed merger, including the
possibility that the transaction is delayed or not completed as a result of our failure to obtain
necessary approval of our stockholders, the litigation filed by our shareholders in opposition to
the proposed merger, our failure to obtain or any delay in obtaining necessary regulatory
clearances or our failure to satisfy other closing conditions. We have incurred significant
expenditures related to the merger. Any delay in completing, or failure to complete, the merger
could have a negative impact on our business, our stock price, and our relationships with customers
or employees. In addition, under certain circumstances, if the transaction is terminated, we may
be required to pay a significant termination fee to Parent.
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Because our OEM business model requires us to defer the recognition of most of our revenue from
product and service sales until we deliver specified upgrades, and in some cases to further defer
a portion of our revenue until applicable warranty periods expire, our revenue in any period is
not likely to be indicative of the level of our sales activity in that period.
We recognize revenue from the sale of products and services under our OEM agreements only
after we deliver specified upgrades to those products that were committed at the time of sale. The
period of development of these upgrades can range from 12 to 24 months after the date of
commitment. As a result, most of our revenue in any quarter typically reflects license fees under
our OEM agreements for products and services delivered and invoiced to customers several quarters
earlier. For these products and services, we generally record the amount of the invoice as
deferred revenue and then begin to recognize such deferred revenue as revenue upon delivery of
the committed software upgrades. When we cannot establish vendor specific objective evidence, or
VSOE, of fair value for our maintenance and support services, we recognize a portion of the product
and services revenue based on the portion of the maintenance period that has elapsed when the
revenue first becomes recognizable, and we recognize the remaining portion of that product and
services revenue ratably over the remaining maintenance period. As a result, our revenue is not
likely to be indicative of the level of our sales activity in any period. Due to our OEM business
model, we expect that, for the foreseeable future, any quarter in which we recognize a significant
amount of deferred revenue as a result of our delivery of a previously committed upgrade will be
followed by one or more quarters of insignificant revenue as we defer revenue while we develop
additional upgrades. Investors may encounter difficulties in tracking the performance of our
business because our revenue will not reflect the level of our billings in any period, and these
difficulties could adversely affect the trading price of our common stock.
Our revenue and billings growth may be constrained by our product concentration and lack of
revenue diversification.
Almost all of our revenue and billings to date have been derived from sales of our EV-DO
products, and we expect EV-DO revenues to remain a major contributor to revenue for the foreseeable
future. Continued market acceptance of these products is critical to our future success. The future
demand for our EV-DO products depends, in large part, on the continued expansion of the EV-DO-based
wireless networks currently deployed by operators and determinations by additional operators to
deploy EV-DO-based wireless networks. Demand for our EV-DO products also depends on our ability to
continue to develop and deliver on a timely basis product upgrades to enable operators to enhance
the performance of their networks and implement new mobile broadband services. Any decline in
demand for EV-DO products, or inability on our part to develop and deliver product upgrades that
meet the needs of operators, would adversely affect our business and operating results.
A majority of our current products are based exclusively on the CDMA2000 air interface standard
for wireless communications, and therefore any movement by existing or prospective operator
customers to a different standard could impair our business and operating results.
There are multiple competing air interface standards for wireless communications networks. A
majority of our current products are based exclusively on the CDMA2000 air interface standard,
which handles a majority of wireless subscribers in the United States. Other standards, such as
GSM/UMTS, are currently the primary standards used by wireless operators in mobile networks
worldwide. Our EV-DO products do not operate in networks using the GSM/UMTS standards.
We believe there are a limited number of operators that have not already chosen the air
interface standard to deploy in their 3G wireless networks. Our success will therefore depend, to a
significant degree, on whether operators that have currently deployed CDMA2000-based networks
expand and upgrade their networks and whether additional operators that have not yet deployed 3G
networks select CDMA2000 as their standard. Our business will be harmed if operators currently
utilizing the CDMA2000 standard transition their networks to a competing standard and we have not
at that time developed and begun to offer competitive products that are compatible with that
standard. Our business will also be harmed if operators that have currently deployed both CDMA and
GSM/UMTS networks determine to focus more of their resources on their GSM/UMTS networks.
The introduction of fourth generation wireless technology could reduce spending on our EV-DO
products and therefore harm our operating results.
The standards for mobile broadband solutions are expected to evolve into a fourth generation
of wireless standards, known as 4G. Wireless operators have announced plans to build networks based
on the 4G standard. For example, Verizon Wireless, Bell Mobility and TELUS have each announced its
intent to build 4G networks using the Long Term Evolution, or LTE, standard and Sprint Nextel has
announced its intent to build a 4G network using WiMAX technology. In addition, Bell Mobility and
TELUS each recently announced that it will overlay its CDMA networks with UMTS technology as it
migrates to the LTE standard. The market for our existing EV-DO products is likely to decline if
and when operators begin to delay expenditures for EV-DO products in anticipation of the
availability of new 4G-based products. Our primary OEM customer, Ericsson, has publicly announced
that it is developing 4G-based LTE products. We do not have an agreement to supply Ericsson with
any 4G-based products. We believe that it is likely that Ericsson will choose to enter into
partnerships for 4G-based products with one or more of our competitors or choose to develop these
products internally.
20
Our future success will depend on our ability to develop and market new products compatible
with 4G standards and the acceptance of those products by operators. The development and
introduction of these products will be time consuming and expensive, and we may not be able to
correctly anticipate the market for 4G-compatible products and related business trends. Any
inability to develop successfully 4G-based products could harm significantly our future business
and operating results.
The variable sales and deployment cycles for our EV-DO products are likely to cause our quarterly
billings to fluctuate materially.
The deployment by operators of wireless infrastructure equipment that enables new end-user
services typically occurs in stages, and our quarterly billings will vary significantly depending
on the rate at which such deployments occur. Operators will typically make significant initial
investments for new equipment to assure that new services facilitated by such equipment are
available to end-users throughout the operators network. Operators typically will defer
significant additional purchases of such equipment until end-user usage of the services offered
through such equipment creates demand for increased capacity. Our quarterly billings will typically
increase significantly when an operator either chooses initially to deploy an EV-DO network or
deploys a significant product upgrade introduced by us, and our quarterly billings will decline in
other quarters when those deployments have been completed.
It is difficult to anticipate the rate at which operators will deploy our wireless
infrastructure products, the rate at which the use of new mobile broadband services will create
demand for additional capacity, and the rate at which operators will implement significant product
upgrades. For example, our product and service billings in fiscal 2006 reflected an increase in
sales of software for OEM base station channel cards that support Rev A as operators ramped up
their deployments of EV-DO infrastructure. Our product and service billings for each of the second
half of fiscal 2007 and the first half of fiscal 2008 were less than our product and service
billings for the first half of fiscal 2007. Our product and service billings for the second half of
fiscal 2008 were greater than they were for the first half of fiscal 2008. We believe that several
large operators completed their initial deployments of Rev A software in the first half of fiscal
2007 and then moderated their deployments over the remainder of the year. We believe that several
large operators began their capacity deployments in the second half of 2008. The staged deployments
of wireless infrastructure equipment by customers of both our existing and new OEMs are likely to
continue to cause significant volatility in our quarterly operating results.
If demand for mobile broadband services does not grow as quickly as we anticipate, or develops in
a manner that we do not anticipate, our revenue and billings may decline or fail to grow, which
would adversely affect our operating results.
We derive, and expect to continue to derive, a substantial portion of our revenue and billings
from sales of mobile broadband infrastructure products. We expect demand for mobile broadband
services to continue to be the primary driver for growth and expansion of EV-DO networks. The
market for mobile broadband services is relatively new and still evolving, and it is uncertain
whether these services will achieve and sustain high levels of demand and market acceptance. The
level of demand and continued market acceptance for these services may be adversely affected by
factors that limit or interrupt the supply of mobile phones designed for EV-DO networks. In
addition, the unavailability of EV-DO versions of popular mobile devices, such as the i-Phone that
only work on UMTS technology, could hamper the expansion of EV-DO networks. Another expected driver
for the growth of EV-DO networks is VoIP. The migration of voice traffic to EV-DO networks will
depend on many factors outside of our control. If the demand for VoIP and other mobile broadband
services does not grow, or grows more slowly than expected, the need for our EV-DO products would
be diminished and our operating results would be significantly harmed.
Deployments of our EV-DO products by two large U.S. wireless operators account for a substantial
majority of our revenue and billings, and a decision by these operators to reduce their use of our
products would harm our business and operating results.
A substantial portion of our cumulative billings for fiscal 2007, 2008 and 2009 are
attributable to sales of our EV-DO products to two large wireless operators in North America. Our
sales of EV-DO products currently depend to a significant extent on the rate at which these
operators expand and upgrade their CDMA networks. Our business and operating results would be
harmed if either of these operators were to select a wireless network solution offered by a
competitor or for any other reason were to discontinue or reduce the use of our products or
product upgrades in their networks.
21
If the market for our FMC products does not develop as we expect, or our FMC products do not
achieve sufficient market acceptance, our business will suffer.
We are investing significantly in the development of both our EV-DO based and UMTS based FMC
products so that operators may offer mobile broadband services using wireline broadband connections
and mobile networks. We do not expect to have meaningful sales of our CDMA FMC products until the
second half of fiscal 2010, depending on operators deployment plans. However, it is possible that
the market for our FMC products will not develop as we expect. The market for our UMTS FMC products
is developing more slowly than the market for our CDMA products. It is uncertain whether our FMC
products will achieve and sustain high levels of demand, market acceptance and profitability. Our
ability to sell our FMC products will depend, in part, on factors outside our control, such as the
commercial availability and market acceptance of mobile phones designed to support FMC applications
and the market acceptance of femtocell access point products. The market for our FMC products may
be smaller than we expect, the market may develop more slowly than we expect or our competitors may
develop alternative technologies that are more attractive to operators. Our FMC products are an
important component of our growth and diversification strategy and, therefore, if we are unable to
successfully execute on this strategy, our sales, billings and revenues could decrease and our
operating results could be harmed.
Our future sales will depend on our success in generating sales to a limited number of OEM
customers, and any failure to do so would have a significant detrimental effect on our business.
There are a limited number of OEMs that offer EV-DO solutions, several of which have developed
their own EV-DO technology internally and, therefore, do not require solutions from us. We
currently have agreements with two OEM customers. We do not expect to commence significant sales to
one of these OEM customers in the immediate future because the markets for the products that we are
developing for this customer are still developing. The market for our FMC products is still
developing. We currently have agreements with five OEM customers to deliver our UMTS femtocell
product solutions and agreements with five OEM customers and one operator customer to deliver our
CDMA femtocell product solutions, but have not yet had any significant sales to these customers.
Our operating results for the foreseeable future will depend to a significant extent on our ability
to effect sales to our existing CDMA and UMTS OEM customers and to establish new OEM relationships.
Our OEM customers have substantial purchasing power and leverage in negotiating pricing and other
contractual terms with us. In addition, further consolidation in the communications equipment
market could adversely affect our OEM customer relationships. If we fail to generate significant
product and service billings through our existing OEM relationships or if we fail to establish
significant new OEM relationships, we will not be able to achieve our anticipated level of sales
and our results of operations will suffer.
The unpredictability of our future results may adversely affect the trading price of our common
stock.
Our operating results have varied significantly from period to period, and we expect them to
continue to vary significantly from period to period for the foreseeable future due to a number of
factors in addition to the unpredictable purchasing patterns of operators. The following factors,
among others, can contribute to the unpredictability of our operating results:
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the effect of our OEM business model or changes to this model on our revenue recognition;
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the timing of agreements or commitments with our OEM customers for new products or
software upgrades;
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the timing of our delivery of software upgrades;
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the timing of our delivery of maintenance and support sold with products;
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the ability of our customers to pay amounts owed to us as they become due;
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the unpredictable deployment and purchasing patterns of operators;
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fluctuations in demand for products of our OEM customers that are sold together with our
products, and the timing and size of orders for such products of our OEM customers;
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new product introductions and enhancements by our competitors and us;
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the timing and acceptance of software upgrades sold by our OEM customers to their
installed base of operators;
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changes in our pricing policies or the pricing policies of our competitors;
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our ability to develop, introduce and deploy new products and product upgrades that meet
customer requirements in a timely manner;
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adjustments in the reporting of royalties and product sales by our OEM customers
resulting from reviews and audits of such reports;
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our and our OEM customers ability to obtain sufficient supplies of limited source
components or materials;
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our and our OEM customers ability to attain and maintain production volumes and quality
levels for our products; and
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general economic conditions, as well as those specific to the communications, networking,
wireless and related industries.
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Our operating expenses are largely based on our anticipated organizational and product and
service billings growth, especially as we continue to invest significant resources in the
development of future products and expand our international presence. Most of our expenses, such as
employee compensation, are relatively fixed in the short term. As a result, any shortfall in
product and service billings in relation to our expectations could cause significant changes in our
operating results from period to period and could result in negative cash flow from operations.
We believe that comparing our operating results on a period-to-period basis may not be
meaningful. You should not rely on our past results as an indication of our future performance. It
is likely that in some future periods, our revenue, product and service billings, earnings, cash
from operations or other operating results will be below the expectations of securities analysts
and investors. In that event, the price of our common stock may decrease substantially.
We may not be able to achieve profitability for any period in the future or sustain cash flow from
operating activities.
We had a net loss in fiscal 2009. We have only a limited operating history on which you can
base your evaluation of our business, including our ability to continue to grow our revenue and
billings and to sustain cash flow from operating activities and profitability. The amount and
percentage of our operating expenses that are fixed expenses have increased as we have grown our
business. As we continue to expand and develop our business, we will need to generate significant
billings to maintain positive cash flow from operating activities, and we might not sustain
positive cash flow from operating activities for any substantial period of time. We do not expect
to achieve profitability for any fiscal year unless we are able to recognize significant revenue
from our OEM arrangements in that fiscal year. If we are unable to increase our billings and
sustain cash flow from operating activities, the market price of our common stock will likely fall.
23
Claims by other parties that we infringe their proprietary technology could force us to redesign
our products or to incur significant costs.
Many companies in the wireless industry have significant patent portfolios. These companies
and other parties may claim that our products infringe their proprietary rights. We may become
involved in litigation as a result of allegations that we infringe the intellectual property rights
of others. Any party asserting that our products infringe their proprietary rights would force us
to defend ourselves, and possibly our customers, against the alleged infringement. These claims and
any resulting lawsuit, if successful, could subject us to significant liability for damages and
invalidation of our proprietary rights. We also could be forced to do one or more of the following:
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stop selling, incorporating or using our products that use the challenged intellectual
property;
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obtain from the owner of the infringed intellectual property right a license to sell or
use the relevant technology, which license may not be available on reasonable terms, or at
all;
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redesign those products that use any allegedly infringing technology, which may be costly
and time-consuming; or
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refund deposits and other amounts received for allegedly infringing technology or
products.
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For example, in 2006, we received a letter from Wi-LAN Inc. asserting that some of our EV-DO
products infringe two issued United States patents and an issued Canadian patent relating to
wireless communication technologies. A majority of our revenue to date has been derived from the
allegedly infringing EV-DO products. We have evaluated various matters relating to Wi-LANs
assertion and we do not believe that such products infringe any valid claim of the patents
identified by Wi-LAN in that letter. In November 2007, we received an additional letter from Wi-LAN
asserting that some of our other products infringe one of the previously identified United States
patents and that the products identified in the first letter and some of our other products
infringe two other United States patents. We have evaluated Wi-LANs claims related to the products
and patents identified in its November 2007 letter and we do not believe that our products infringe
any valid claim of the patents identified by Wi-LAN in that letter. Under certain circumstances we
may seek to obtain a license to use the relevant technology from Wi-LAN. We cannot be certain that
Wi-LAN would provide such a license or, if provided, what its economic terms would be. If we were
to seek to obtain such a license, and such license were available from Wi-LAN, we could be required
to make significant payments with respect to past and/or future sales of our products, and such
payments may adversely affect our financial condition and operating results. If Wi-LAN determines
to pursue claims against us for patent infringement, we might not be able to successfully defend
against such claims.
Intellectual property litigation can be costly. Even if we prevail, the cost of such
litigation could deplete our financial resources. Litigation is also time consuming and could
divert managements attention and resources away from our business. Furthermore, during the course
of litigation, confidential information may be disclosed in the form of documents or testimony in
connection with discovery requests, depositions or trial testimony. Disclosure of our confidential
information and our involvement in intellectual property litigation could materially adversely
affect our business. Some of our competitors may be able to sustain the costs of complex
intellectual property litigation more effectively than we can because they have substantially
greater resources. In addition, any uncertainties resulting from the initiation and continuation of
any litigation could significantly limit our ability to continue our operations.
If we are not successful in obtaining from third parties licenses to intellectual property that
are required for GSM/UMTS products that we are developing, we may not be able to expand our
business as expected and our business may suffer.
The GSM/UMTS markets are characterized by the presence of many patents held by third parties.
We will need to obtain licenses from third parties for intellectual property associated with our
development of GSM/UMTS products. Any required license might not be available to us on acceptable
terms, or at all. If we succeed in obtaining these licenses, but the payments under these licenses
are higher than we anticipate, our costs for these products would increase and our operating
results would suffer. If we failed to obtain a required license, our ability to develop
GSM/UMTS products would be impaired, we may not be able to expand our business as expected and
our business may suffer.
24
If we do not timely deliver new and enhanced products that respond to customer requirements and
technological changes, operators may not buy our products and our revenue and product and service
billings may decline significantly.
The market for our products is characterized by rapid technological change, frequent new
product introductions and evolving industry standards. To achieve market acceptance for our
products, we must effectively anticipate operator requirements, and we must offer products that
meet changing operator demands in a timely manner. Operators may require product features and
capabilities that our current products do not have. If we fail to develop products that satisfy
operator requirements, our ability to create or increase demand for our products will be harmed.
In developing our wireless infrastructure products, we seek to identify the long-term trends
of wireless operators and their customers. The development cycle for our products and technologies
can take multiple years. The ultimate success of our new products depends, in large part, on the
accuracy of our assessments of the long-term needs of the industry, and it is difficult to change
quickly the design or function of a planned new product if the market need does not develop as we
anticipate.
We may experience difficulties with software development, industry standards, hardware design,
manufacturing or marketing that could delay or prevent our development, introduction or
implementation of new products and enhancements. The introduction of new products by competitors,
including some of our OEM customers, the emergence of new industry standards or the development of
entirely new technologies that replace existing product offerings could render our existing or
future products obsolete. If our products become technologically obsolete, operators may purchase
solutions offered by our competitors and our ability to generate revenue and product and service
billings may be impaired.
Our revenue and product and service billings growth will be limited if our OEM customers are
unable to continue to sell our products to large wireless operators or if we have to discount our
products to support the selling efforts of our OEM customers.
Our future success depends in part on the ability of our OEM customers to sell our products to
large wireless operators operating complex networks that serve large numbers of subscribers and
transport high volumes of traffic. Our OEM customers operate in a highly competitive environment
and may need to reduce the prices they charge for our products in order to maintain or expand their
market share. We may reduce the prices we charge our OEM customers for our products in order to
support their selling efforts. If our OEM customers incur shortfalls in their sales of mobile
broadband solutions to their existing customers or fail to expand their customer base to include
additional operators that deploy our products in large-scale networks serving significant numbers
of subscribers or if we reduce the prices we charge our OEM customers for our products, our
operating results will suffer.
We depend on sole sources for certain components of our products and our business would be harmed
if the supply from our sole sources were disrupted.
We depend on sole sources for certain components of our products and also rely on contract
manufacturers for the production of our hardware products. We have not entered into long-term
agreements with any of our suppliers. We depend on several software vendors for the operating
system and other capabilities used in our products. In addition, we and one of our OEM customers
purchase from Qualcomm the cell site modem chips used in any base station and base station channel
cards. If these cell site modem chips were to become unavailable to us or to our OEM customers, it
would take us a significant period of time to develop alternative solutions and it is likely that
our operating results would be significantly harmed.
The market for network infrastructure products is highly competitive and continually evolving, and
if we are not able to compete effectively, we may not be able to continue to expand our business
as expected and our business may suffer.
The market for network infrastructure products is highly competitive and rapidly evolving. The
market is subject to changing technology trends, shifting customer needs and expectations and
frequent introduction of new products.
25
We expect competition to persist and intensify in the future as the market for network
infrastructure products grows and new and existing competitors devote considerable resources to
introducing and enhancing products. For our EV-DO products, we face competition from several of the
worlds largest telecommunications equipment providers that provide either a directly competitive
product or a product based on alternative technologies, including Alcatel-Lucent, Hitachi, Huawei,
and Samsung. In our sales to OEM customers, we face the competitive risk that OEMs might seek to
develop internally alternative solutions to those currently purchased from us. Additionally, our
OEM customers might elect to purchase technology from our competitors. For our FMC products, our
competition includes several public companies, including Cisco, as well as several private
companies such as Huawei.
Our current and potential competitors may have significantly greater financial, technical,
marketing and other resources than we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. In addition, many of our competitors
have more extensive customer relationships than we do, and, therefore, our competitors may be in a
stronger position to respond quickly to new technologies and may be able to market or sell their
products more effectively. Moreover, further consolidation in the communications equipment market
could adversely affect our OEM customer relationships and competitive position. Our products may
not continue to compete favorably. We may not be successful in the face of increasing competition
from new products and enhancements introduced by existing competitors or new companies entering the
markets in which we provide products. As a result, we may experience price reductions for our
products, order cancellations and increased expenses. Accordingly, our business may not grow as
expected and our business may suffer.
Our agreement with our largest OEM customer, Ericsson, provides Ericsson with an option to license
some of our intellectual property to develop internally products competitive with the products it
currently purchases from us.
Under our OEM agreement with Ericsson, Ericsson has the option to purchase from us the
specification for communications among base stations, radio network controllers and network
management systems. The specification would enable Ericsson to develop EV-DO software to work with
the base station channel card software licensed from us and deployed in the networks of its
wireless operator customers. If Ericsson elects to exercise this option, Ericsson will pay us a
fixed fee as well as a significant royalty on sales of current and future products that incorporate
this specification. The royalty rate varies with annual volume but represents a portion of the
license fees we currently receive from our sales to Ericsson. If Ericsson were to exercise the
option, Ericsson would receive the current interface specification at the time of option exercise,
updated with an upgrade then under development, plus one additional upgrade subject to a
development agreement within a limited time after the option exercise for an additional fee. If
Ericsson were in the future to develop its own EV-DO software, it could, by exercising this option,
enable its own software to communicate with the base station channel cards currently installed in
its customers networks.
Continued adverse conditions in the global economy and disruption of financial and credit markets
could negatively affect our customers, and therefore our performance.
A prolonged economic downturn in the business or geographic areas in which we sell our
products could reduce demand for our products and result in a decline in our revenue and billings.
Volatility and disruption of financial and credit markets could limit customers ability to obtain
adequate financing to maintain operations and invest in network infrastructure and therefore, also
could reduce demand for our products and result in a decline in our revenues and billings.
In addition, during economic downturns, customers may slow the rate at which they pay their vendors
or become unable to pay their debts as they become due. If any of our significant customers do not
pay amounts owed to us in a timely manner or become unable to pay such amounts to us at a time when
we have substantial amounts receivable from such customers, our cash flow and results of operations
may suffer.
26
Because our business depends on the continued strength of the communications industry, our
operating results will suffer if that industry experiences an economic downturn.
We derive most of our revenue and billings from purchases of our products by customers in the
communications industry. Our future success depends upon the continued demand from wireless
operators for communications equipment. The communications industry is cyclical and reactive to
general economic conditions. In the recent past, worldwide economic downturns, pricing pressures,
mergers and deregulation have led to consolidations and reorganizations. These downturns, pricing
pressures and restructurings have caused delays and reductions in capital and operating
expenditures by many wireless operators. These delays and reductions, in turn, have reduced demand
for communications products such as ours. A continuation or recurrence of these industry patterns,
as well as general domestic and foreign economic conditions and other factors that reduce spending
by companies in the communications industry, could harm our operating results in the future.
The success of our business could be jeopardized if we are unable to protect our intellectual
property adequately.
Our success depends to a degree upon the protection of our software, hardware designs and
other proprietary technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, and confidentiality provisions in agreements with employees, contract manufacturers,
consultants, customers and other third parties to protect our intellectual property rights. Other
parties may not comply with the terms of their agreements with us, and we may not be able to
enforce our rights adequately against these parties. In addition, unauthorized parties may attempt
to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. If competitors are able to use our
technology, our ability to compete effectively could be harmed. For example, if a competitor were
to gain use of certain of our proprietary technology, it might be able to develop and manufacture
similarly designed and equipped mobile broadband solutions at a reduced cost, which could result in
a decrease in demand for our products. Furthermore, we have adopted a strategy of seeking limited
patent protection both in the United States and in foreign countries with respect to the
technologies used in or relating to our products. We do not know whether any of our pending patent
applications will result in the issuance of patents or whether the examination process will require
us to narrow our claims, and even if patents are issued, they may be contested, circumvented or
invalidated over the course of our business. Moreover, the rights granted under any issued patents
may not provide us with proprietary protection or competitive advantages, and, as with any
technology, competitors may be able to develop and obtain patents for technologies that are similar
to or superior to our technologies. If that happens, we may need to license these technologies and
we may not be able to obtain licenses on reasonable terms, if at all, thereby causing great harm to
our business. In addition, if we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could become burdensome and expensive, even if we were to prevail.
We may engage in future acquisitions that could disrupt our business, cause dilution to our
stockholders and harm our financial condition and operating results.
We intend to pursue acquisitions of companies or assets in order to enhance our market
position or expand our product portfolio. We may not be able to find suitable acquisition
candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do
complete acquisitions, we cannot be sure that they will ultimately strengthen our competitive
position or that they will not be viewed negatively by customers, securities analysts or investors.
In addition, any acquisitions that we make could lead to difficulties in integrating personnel and
operations from the acquired businesses and in retaining and motivating key personnel from those
businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day
responsibilities, increase our expenses and harm our operating results or financial condition.
Future acquisitions may reduce our cash available for operations and other uses and could result in
an increase in amortization expense related to identifiable assets acquired, potentially dilutive
issuances of equity securities or the incurrence of debt, which could harm our business, financial
condition and operating results.
27
The outcome of an ongoing IRS examination of our tax returns could adversely affect our cash
balance and operating results.
During the first quarter of fiscal 2009, the Internal Revenue Service, or IRS, began an
examination of the our U.S. federal income tax returns for the tax years ended December 31, 2006
and December 30, 2007. The IRS recently completed the field work relating to the audit, and in
January 2010, the IRS issued to us a Form 4549, Consent to Assessment and Collection of Tax, which
details the proposed adjustments to our tax returns and additional tax due by us of $0.3 million.
We executed the Form 4549 and paid the additional tax to stop the accrual of interest thereon. The
case is currently undergoing review within the IRS and is still subject to acceptance by the IRS.
The IRS has indicated that if upon completion of the review no further adjustments are proposed, we
will receive a Form 870 closing the case and assessing interest due.
Future interpretations of existing accounting standards or the application of new standards could
adversely affect our operating results.
GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the
American Institute of Certified Public Accountants, or AICPA, the SEC and various other bodies
formed to promulgate and interpret appropriate accounting principles. A change in these principles
or interpretations could have a significant effect on our reported financial results, and they
could affect the reporting of transactions completed before the announcement of a change.
For example, we recognize substantially all of our revenue in accordance with the Accounting
Standards Codification, or ASC,
Software Revenue Recognition,
or ASC 985-605. The AICPA and its
Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying
the relevant accounting standards to a wide range of sales contract terms and business arrangements
that are prevalent in software licensing arrangements and arrangements for the sale of hardware
products that contain more than an insignificant amount of software. We collaborate with our OEM
customers to develop and negotiate pricing for specific features for future product releases and
specified software upgrades. Because we do not sell the same products and upgrades to more than one
customer, we are unable to establish fair value for these products and upgrades. As a result, under
ASC 985-605, we are required to defer most of our revenue from sales to our OEM customers until
after we ship specified upgrades that were committed to the OEM customer at the time of sale.
Future interpretations of existing accounting standards, including ASC 985-605, or changes in our
business practices could result in future changes in our revenue recognition accounting policies
that have a material adverse effect on our results of operations.
In August 2008, the SEC decided to seek public comments on the potential mandatory adoption of
International Financial Reporting Standards, or IFRS, by all U.S. issuers. The proposed roadmap
targets potential mandatory adoption of IFRS in the United States beginning in 2014, but lays out
several milestones that would need to be achieved prior to the SEC mandating use of IFRS for all
U.S. issuers. The proposed rule would allow certain qualifying domestic issuers to use IFRS as
early as fiscal years ending on or after December 15, 2009. Should we be required to adopt IFRS,
our operating results for past, current, or future periods may be adversely affected. We have not
yet assessed the impact of potentially applying IFRS.
In December 2008, the FASB and the International Accounting Standards Board issued a
discussion paper which detailed their preliminary views on a single, assets-and liabilities-based
revenue recognition model that they believe will improve financial reporting. If and when a new
revenue recognition model is finalized, it may change the way in which we recognize and record
revenue and could adversely affect our operating results in current or future periods. We have not
yet assessed the impact of this preliminary revenue recognition model.
In September 2009, the Emerging Issues Task Force or EITF finalized two revenue recognition
standards which reduced the number of transactions accounted for under ASC 985-605 and modified the
scope of this standard. We have not yet fully completed our analysis of the new pronouncements,
which will be effective for new or materially modified contracts in fiscal years beginning on or
after June 15, 2010.
28
The loss of key personnel or an inability to attract and retain additional personnel may impair
our ability to grow our business.
We are highly dependent upon the continued service and performance of our senior management
team and key technical and sales personnel, including our President and Chief Executive Officer,
Chief Technical Officer, and Vice President, Femto Business and Corporate Development. None of
these officers is a party to an employment agreement with us, and any of them may terminate
employment with us at any time with no advance notice. The replacement of these officers likely
would involve significant time and costs, and the loss of these officers may significantly delay or
prevent the achievement of our business objectives.
We face intense competition for qualified individuals from numerous technology, software and
manufacturing companies. For example, our competitors may be able to attract and retain a more
qualified engineering team by offering more competitive compensation packages. If we are unable to
attract new engineers and retain our current engineers, we may not be able to develop and service
our products at the same levels as our competitors and we may, therefore, lose potential customers
and sales penetration in certain markets. Our failure to attract and retain suitably qualified
individuals could have an adverse effect on our ability to implement our business plan and, as a
result, our ability to compete effectively in the mobile broadband solutions market could decrease,
our operating results could suffer and our revenues could decrease.
We have incurred, and will continue to incur, significant increased costs as a result of operating
as a public company as compared with our history as a private company, and our management is
required to devote substantial time to public company compliance initiatives. If we are unable to
absorb these increased costs or maintain management focus on development and sales of our product
offerings and services, we may not be able to achieve our business plan.
As a public company, we have incurred, and will continue to incur, significant legal,
accounting and other expenses that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NASDAQ Stock
Market, have imposed a variety of requirements on public companies, including requiring changes in
corporate governance practices. Our management and other personnel have and will continue to devote
a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations
have increased our legal and financial compliance costs and have made some activities more
time-consuming and costly. For example, we believe these new rules and regulations have made it
more difficult and expensive for us to obtain director and officer liability insurance.
We are exposed to potential risks and will continue to incur significant costs as a result of the
internal control testing and evaluation process mandated by Section 404 of the Sarbanes-Oxley Act
of 2002.
We assessed the effectiveness of our internal control over financial reporting as of January
3, 2010 and assessed all deficiencies on both an individual basis and in combination to determine
if, when aggregated, they constitute a material weakness. As a result of this evaluation, no
material weaknesses were identified.
We expect to continue to incur significant costs, including increased accounting fees and
increased staffing levels, in order to maintain compliance with Section 404 of the Sarbanes-Oxley
Act. We continue to monitor our controls for any weaknesses or deficiencies. No evaluation can
provide complete assurance that our internal controls will detect or uncover all failures of
persons within our company to disclose material information otherwise required to be reported. The
effectiveness of our controls and procedures could also be limited by simple errors or faulty
judgments. In addition, as we continue to expand globally, the challenges involved in implementing
appropriate internal controls will increase and will require that we continue to improve our
internal controls over financial reporting.
In the future, if we fail to complete our Sarbanes-Oxley 404 evaluation in a timely manner, or
if our independent registered public accounting firm cannot attest in a timely manner to our
evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our
internal controls which could adversely impact the market price of our common stock. We or our
independent registered public accounting firm may identify material weaknesses in internal controls
over financial reporting which may result in a loss of public confidence in our internal controls
and adversely impact the market price of our common stock. In addition, any failure to implement
required, new or improved controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting obligations.
29
If we are unable to manage our growth and expand our operations successfully, our business and
operating results will be harmed and our reputation may be damaged.
We anticipate that further expansion of our infrastructure and headcount may be required to
achieve planned expansion of our product offerings and planned increases in our customer base. Our
growth has placed, and is expected to continue to place, a significant strain on our administrative
and operational infrastructure. Our ability to manage our operations and growth will require us to
continue to refine our operational, financial and management controls, human resource policies, and
reporting systems and procedures.
We may not be able to implement improvements to our management information and control systems
in an efficient or timely manner and may discover deficiencies in existing systems and controls. If
we are unable to manage future expansion, our ability to provide high quality products and services
could be harmed, which would damage our reputation and brand and substantially harm our business
and results of operations.
We may need additional capital in the future, which may not be available to us, and if it is
available, may dilute our existing stockholders ownership of our common stock.
We may need to raise additional funds through public or private debt or equity financings in
order to:
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fund ongoing operations;
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take advantage of opportunities, including more rapid expansion of our business or the
acquisition of complementary products, technologies or businesses;
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develop new products; or
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respond to competitive pressures.
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Any additional capital raised through the sale of equity may dilute our current stockholders
percentage ownership of our common stock. Capital raised through debt financing would require us to
make periodic interest payments and may impose potentially restrictive covenants on the conduct of
our business. Furthermore, additional financings may not be available on terms favorable to us, or
at all, particularly in the current economic environment. A failure to obtain additional funding
could prevent us from making expenditures that may be required to grow or maintain our operations.
Our ability to sell our products depends in part on the quality of our support and services
offerings, and our failure to offer high quality support and services would have a material
adverse effect on our sales and operating results.
Once our products are deployed within an operators network, the operator and our OEM customer
depend on our support organization to resolve issues relating to our products. A high level of
support is critical for the successful marketing and sale of our products. If we do not effectively
assist operators in deploying our products, succeed in helping operators quickly resolve
post-deployment issues, and provide effective ongoing support it would adversely affect our ability
to sell our products. As a result, our failure to maintain high quality support and services would
have a material adverse effect on our business and operating results.
30
Our products are highly technical and may contain undetected software or hardware errors, which
could cause harm to our reputation and adversely affect our business.
Our products are highly technical and complex and are critical to the operation of many
networks. Our products have contained and are expected to continue to contain one or more
undetected errors, defects or security vulnerabilities. Some errors in our products may only be
discovered after a product has been installed and used by an operator. For example, we have
encountered errors in our software products that have caused operators using our products to
experience a temporary loss of certain network services. Any errors, defects or security
vulnerabilities
discovered in our products after commercial release could result in loss of revenue or delay
in revenue recognition, loss of customers and increased service and warranty cost, any of which
could adversely affect our business, results of operations and financial condition. In addition, we
could face claims for product liability, tort or breach of warranty, including claims related to
changes to our products made by our OEM customers. Our contracts for the sale of our products
contain provisions relating to warranty disclaimers and liability limitations, which in certain
cases may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert
managements attention and adversely affect the markets perception of us and our products. In
addition, if our business liability insurance coverage proves inadequate or future coverage is
unavailable on acceptable terms or at all, our financial condition could be harmed.
Our international operations subject us to additional risks that can adversely affect our
operating results.
We have sales personnel in seven countries worldwide, approximately 175 engineers and support
staff in Bangalore, India and approximately 60 engineers and support staff in Cambridge, United
Kingdom. We expect to continue to add personnel in foreign countries, especially at our Bangalore,
India facility. Our international operations subject us to a variety of risks, including:
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the difficulty of managing and staffing foreign offices and the increased travel,
infrastructure and legal compliance costs associated with multiple international locations;
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difficulties in enforcing contracts, collecting accounts receivable and longer payment
cycles, especially in emerging markets;
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the need to localize our products and licensing programs for international customers;
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tariffs and trade barriers and other regulatory or contractual limitations on our ability
to sell or develop our products in certain foreign markets;
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increased exposure to foreign currency exchange rate risk; and
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reduced protection for intellectual property rights in some countries.
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As we continue to expand our business globally, our success will depend, in large part, on our
ability to anticipate and effectively manage these and other risks associated with our
international operations. Our foreign operations incur expenses in local currencies. Because we
incur a substantial portion of our operating expenses in India and the United Kingdom, we are
subject to currency exchange risks between the U.S. Dollar on the one hand, and the Indian Rupee
and British Pound, on the other. We may derive some of our future revenue from customers in foreign
countries that pay for our products in the form of their local currency, which also would subject
us to currency exchange risks. Our failure to manage any of these risks successfully could harm our
international operations and reduce our international sales, adversely affecting our business,
operating results and financial condition.
If wireless devices pose safety risks, we may be subject to new regulations, and demand for our
products and those of our licensees and customers may decrease.
Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect
of discouraging the use of wireless devices, which would decrease demand for our products and those
of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency emissions from radio
equipment, including wireless phones and other wireless devices. In addition, interest groups have
requested that the FCC investigate claims that wireless communications technologies pose health
concerns and cause interference with airbags, hearing aids and other medical devices. Concerns have
also been expressed over the possibility of safety risks due to a lack of attention associated with
the use of wireless devices while driving. Any legislation that may be adopted in response to these
expressions of concern could reduce demand for our products and those of our licensees and
customers in the United States as well as foreign countries.
31
Risks Relating to Ownership of Our Common Stock
The market price of our common stock may be volatile.
Our common stock has a limited trading history. The trading prices of the securities of
technology companies have been highly volatile. Some of the factors that may cause the market price
of our common stock to fluctuate include:
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fluctuations in our quarterly financial results or the quarterly financial results of
companies perceived to be similar to us;
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fluctuations in our revenue as a result of our revenue recognition policy, even during
periods of significant sales activity;
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changes in estimates of our financial results or recommendations by securities analysts;
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failure of any of our products to achieve or maintain market acceptance;
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any adverse change in our relationship with Ericsson;
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any adverse resolution of the IRS examination of our U.S. federal income tax returns for
the years ended December 31, 2006 and December 30, 2007;
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changes in market valuations of similar companies;
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success of competitive products;
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changes in our capital structure, such as future issuances of securities or the
incurrence of debt;
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announcements by us or our competitors of significant products, contracts, acquisitions
or strategic alliances;
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regulatory developments in the United States, foreign countries or both;
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litigation involving our company, our general industry or both;
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additions or departures of key personnel;
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general perception of the future of CDMA technology;
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investors general perception of us; and
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changes in general economic, industry and market conditions.
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In addition, if the market for technology stocks or the stock market in general experiences a
loss of investor confidence, the trading price of our common stock could decline for reasons
unrelated to our business, financial condition or results of operations. If any of the foregoing
occurs, it could cause our stock price to fall and may expose us to class action lawsuits that,
even if unsuccessful, could be costly to defend and a distraction to management.
If equity research analysts do not publish research or reports about our business or if they issue
unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that
equity research analysts publish about us and our business. We do not control these analysts. The
price of our stock could decline if one or more equity analysts downgrade our stock or if those
analysts issue other unfavorable commentary or cease publishing reports about us or our business.
32
A significant portion of our total outstanding shares may be sold into the public market in the
near future, which could cause the market price of our common stock to drop significantly, even if
our business is doing well.
If our existing stockholders sell a large number of shares of our common stock or the public
market perceives that existing stockholders might sell shares of common stock, the market price of
our common stock could decline significantly.
The holders of a majority of our common stock have rights, subject to some conditions, to
require us to file registration statements under the Securities Act or to include their shares in
registration statements that we may file in the future for ourselves or other stockholders. If we
register their shares of common stock, they could sell those shares in the public market.
Our directors and management may exercise significant control over our company.
Our directors and executive officers and their affiliates beneficially owned a majority of our
outstanding common stock as of January 3, 2010. As a result, these stockholders, if they act
together, will be able to influence our management and affairs and all matters requiring
stockholder approval, including the election of directors and approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying or preventing a
change in control of our company and might affect the market price of our common stock.
Provisions in our certificate of incorporation, our by-laws or Delaware law might discourage,
delay or prevent a change in control of our company or changes in our management and, therefore,
depress the trading price of our common stock.
Provisions of our certificate of incorporation, our by-laws or Delaware law may discourage,
delay or prevent a merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which our stockholders might otherwise receive a premium for
their shares of our common stock. These provisions may also prevent or frustrate attempts by our
stockholders to replace or remove our management. These provisions include:
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limitations on the removal of directors;
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a classified board of directors so that not all members of our board are elected at one
time;
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advance notice requirements for stockholder proposals and nominations;
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the inability of stockholders to act by written consent or to call special meetings;
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the ability of our board of directors to make, alter or repeal our by-laws; and
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the ability of our board of directors to designate the terms of and issue new series of
preferred stock without stockholder approval, which could be used to institute a rights
plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile
acquirer, likely preventing acquisitions that have not been approved by our board of
directors.
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33
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held
Delaware corporation from engaging in a business combination with an interested stockholder,
generally a person which together with its affiliates owns, or within the last three years has
owned, 15% of our voting stock, for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business combination is approved in a
prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price
that investors might be willing to pay in the future for shares of our common stock. They could
also deter potential acquirers of our
company, thereby reducing the likelihood that stockholders could receive a premium for their
common stock in an acquisition.
We do not currently intend to pay dividends on our common stock and, consequently, the ability to
achieve a return on an investment in our common stock will depend on appreciation in the price of
our common stock.
Although we paid a special cash dividend on our capital stock in April 2007, we do not intend
to pay any cash dividends on our common stock for the foreseeable future. We currently intend to
invest our future earnings, if any, to fund our growth. Therefore, stockholders are not likely to
receive any dividends on shares of common stock for the foreseeable future.
34
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Item 1B.
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Unresolved Staff Comments
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None.
We lease approximately 85,000 square feet of office space in Chelmsford, Massachusetts
pursuant to leases that expire in April 2012. We lease approximately 35,000 square feet of office
space in Bangalore, India pursuant to a lease that expires in March 2012. We lease approximately
10,000 square feet of office space in Cambridge, United Kingdom pursuant to leases that expire in
February 2012 and August 2012. We also maintain sales offices in Dallas, Texas; Madrid, Spain;
Darmstadt, Germany; Beijing, China; Singapore; and Tokyo, Japan. We believe that our current
facilities are suitable and adequate to meet our current needs. We intend to add new facilities or
expand existing facilities as we add employees, and we believe that suitable additional or
substitute space will be available as needed to accommodate any such expansion of our operations.
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Item 3.
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Legal Proceedings
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On December 18, 2009, we, our directors, SAC PCG, Parent, GSO, Sankaty Advisors, LLC and
ZelnickMedia, LLC were named as defendants in a putative class action complaint, captioned
Israni v. Airvana, Inc., et al.
, C.A. No. 5153-CC, filed in the Court of Chancery of the State of
Delaware. That action, purportedly brought on behalf of a class of stockholders, alleges that our
directors breached their fiduciary duties in connection with the proposed merger by, among other
things, failing to fully inform themselves of Airvanas market value, maximize stockholder value,
obtain the best financial and other terms, and act in the best interests of public stockholders,
and seeking to benefit themselves improperly. The complaint further alleges that the non-Airvana
defendants aided and abetted the directors purported breaches. The plaintiff seeks injunctive and
other equitable relief, including to enjoin us and Parent from consummating the merger, in addition
to fees and costs. On December 31, 2009, the plaintiff served document requests on us.
On December 31, 2009, a second putative class action complaint was filed against us, our
directors, SAC PCG, Parent, GSO, Sankaty Advisors, LLC and ZelnickMedia, LLC in the Court of
Chancery of the State of Delaware in an action captioned
Gittleson v. Airvana, Inc., et al.
, C.A.
No. 5179-CC. That action, purportedly brought on behalf of a class of stockholders, also alleges
that our directors breached their fiduciary duties in connection with the proposed merger by, among
other things, failing to fully inform themselves of Airvanas market value, maximize shareholder
value, obtain the best financial and other terms, and act in the best interest of public
stockholders, and seeking to benefit themselves improperly. The complaint further alleges that the
non-Airvana defendants aided and abetted the directors purported breaches. The plaintiff seeks
injunctive and other equitable relief, including to enjoin us and Parent from consummating the
merger, in addition to fees and costs.
On January 12, 2010, we, our directors, Dr. Eyuboglu, Merger Sub, 72 Mobile Investors,
LLC, SAC PCG, GSO, Sankaty Advisors, LLC and ZelnickMedia LLC were named as defendants in a third
putative class action complaint, captioned
Willis v. Airvana, Inc. et al.,
C.A. No. 5200, filed in
the Court of Chancery of the State of Delaware. That action, purportedly brought on behalf of a
class of stockholders, alleges that our directors breached their fiduciary duties in connection
with the proposed merger by, among other things, failing to fully inform themselves of our market
value, maximize shareholder value, obtain the best financial and other terms, and act in the best
interest of public stockholders, and seeking to benefit themselves improperly. The complaint
further alleges that the non-Airvana defendants aided and abetted the purported breaches by the
directors and Dr. Eyuboglu. The plaintiff seeks declaratory, injunctive and other equitable relief,
including to enjoin us and affiliates of Parent from consummating the merger, in addition to
unspecified damages, fees and costs.
35
The above three actions have been consolidated into a single proceeding captioned
In re
Airvana Shareholders Litigation
. On February 2, 2010, the plaintiffs submitted a consolidated
class action complaint re-alleging the substance of the allegations from the pre-consolidation
complaints and further alleging that the January 14 preliminary proxy omitted material information
concerning the merger. On February 5, 2010, the plaintiffs filed: (i) a motion to enjoin defendants
from consummating the proposed transaction and (ii) a motion for an order directing discovery to
proceed on an expedited basis and scheduling a hearing on plaintiffs motion for a
preliminary injunction. On February 14, 2010, the defendants filed an opposition to the plaintiffs
request for emergency relief. On February 15, 2010, the court denied plaintiffs application for
expedited proceedings and declined to schedule a hearing on plaintiffs motion for a preliminary
injunction.
On December 28, 2009, we, our directors, S.A.C. Private Capital Partners LP (a
nonexistent entity), Parent, GSO, Sankaty Advisors, LLC and ZelnickMedia, LLC were named as
defendants in a putative class action complaint, captioned
Mountney v. Airvana, Inc., et al.
, C.A.
No. 09-5470, filed in the Superior Court, Business Litigation Session, of Suffolk County of the
Commonwealth of Massachusetts. That action, purportedly brought on behalf of a class of
stockholders, alleges that our directors breached their fiduciary duties in connection with the
proposed merger by, among other things, failing to fully inform themselves of Airvanas market
value, maximize shareholder value, obtain the best financial and other terms, and act in the best
interest of public stockholders, and seeking to benefit themselves improperly. The complaint
further alleges that we and the non-Airvana defendants aided and abetted the directors purported
breaches. The plaintiff seeks declaratory, injunctive and other equitable relief, including to
enjoin us and Parent from consummating the merger, in addition to fees and costs.
On January 6, 2010, we, our directors, Parent and Merger Sub were named as defendants in
a separate putative class action complaint, captioned
Short v. Airvana, Inc., et al.,
C.A.
No. 10-0042, filed in the Superior Court, Business Litigation Session, of Suffolk County of the
Commonwealth of Massachusetts. That action, purportedly brought on behalf of a class of
stockholders, alleges that our directors breached their fiduciary duties in connection with the
proposed merger by, among other things, failing to fully inform themselves of our market value,
maximize shareholder value, obtain the best financial and other terms, and act in the best interest
of public stockholders, and seeking to benefit themselves improperly. The complaint further alleges
that we, Parent and Merger Sub aided and abetted the directors purported breaches. The plaintiff
seeks declaratory, injunctive and other equitable relief, including to enjoin us and affiliates of
Parent from consummating the merger, in addition to fees and costs.
On January 28, 2010, the Company and its directors moved to stay the Massachusetts
lawsuits in favor of the consolidated Delaware action. On February 8, 2010 the plaintiffs in the
Short
action served an opposition to the motion to stay. The defendants reply has yet to be
served.
We believe that the claims asserted in these suits are without merit.
36
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Item 5.
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
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Our common stock has traded on the Nasdaq Global Market under the symbol AIRV since our
initial public offering on July 19, 2007. Prior to our initial public offering, there was no public
market for our common stock.
The following table sets forth for the indicated periods the high and low sales prices of our
common stock as reported by the Nasdaq Global Market.
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Fiscal Year Ended December 28, 2008
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High
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Low
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First Quarter
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$
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6.19
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$
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4.00
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Second Quarter
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$
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6.95
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$
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4.82
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Third Quarter
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$
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6.70
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$
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4.85
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Fourth Quarter
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$
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6.00
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$
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3.36
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Fiscal Year Ended January 3, 2010
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High
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Low
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First Quarter
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$
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6.15
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$
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4.34
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Second Quarter
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$
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6.19
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$
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4.84
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Third Quarter
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$
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7.00
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$
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5.84
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Fourth Quarter
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$
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7.65
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$
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5.80
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The
last reported sale price for our common stock on the Nasdaq Global
Market on March 4, 2010 was $7.67 per share.
As
of March 4, 2010, there were 129 stockholders of record of our common stock.
Dividends
In April 2007, prior to our initial public offering, we paid a special cash dividend of $1.333
per share on shares of our capital stock, totaling an aggregate of $72.7 million. We have not
declared any cash dividends since this date. Based on our current financial plans and expected cash
balances, we do not expect to declare any cash dividends for the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Information relating to our equity compensation plans will be included in our proxy statement
in connection with our 2010 Annual Meeting of Stockholders, under the caption Equity Compensation
Plan Information. That portion of our proxy statement is incorporated herein by reference.
37
Recent Sales of Unregistered Securities
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Repurchase Program
On August 8, 2008, our board of directors authorized the repurchase of up to $20.0 million of
our common stock. As part of the authorized share repurchase program, we entered into a written
trading plan in compliance with Rule 10b5-1 under the Securities Exchange Act of 1934 to purchase
up to an aggregate of $20.0 million of our common stock. On February 10, 2009, our board of
directors authorized the repurchase of up to an additional
$20.0 million of our common stock following the completion of the initial stock repurchase
program approved in August 2008.
We did not repurchase any shares of our common stock during the fourth quarter of fiscal 2009.
38
Stock Performance Graph
The following performance graph and related information shall not be deemed soliciting
material or to be filed with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by
reference into such filing.
The comparative stock performance graph below compares the cumulative total stockholder return
(assuming reinvestment of dividends, if any) from investing $100 on July 20, 2007, the date on
which our common stock was first publicly traded, to the close of the last trading day of 2009, in
each of (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the Dow Jones Wilshire 5000
Telecommunications Equipment Index, or DJ Wilshire Telecommunications Index.
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7/07
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9/07
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12/07
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3/08
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6/08
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9/08
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12/08
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3/09
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6/09
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9/09
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1/10
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Airvana Inc
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100.00
|
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84.38
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|
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77.96
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72.94
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74.76
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82.15
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|
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80.89
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|
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81.59
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|
|
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88.84
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94.42
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106.00
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NASDAQ Composite
|
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100.00
|
|
|
|
102.21
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|
|
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100.43
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|
|
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85.91
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|
|
|
86.76
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|
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77.58
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59.50
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57.60
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69.14
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|
|
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80.08
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85.81
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DJ Wilshire Telecommunications
|
|
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100.00
|
|
|
|
101.98
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|
|
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94.99
|
|
|
|
80.78
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|
|
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78.26
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|
|
|
66.59
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|
|
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63.26
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|
|
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58.51
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61.30
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|
|
|
65.20
|
|
|
|
69.84
|
|
|
|
|
*
|
|
$100 invested on 7/20/07 in stock or 6/30/2007 in index-including
reinvestment of dividends. Indexes calculated on month-end basis.
|
39
|
|
Item 6.
|
Selected Financial Data
|
The following selected consolidated financial data should be read in conjunction with our
audited consolidated financial statements and related notes thereto and with Managements
Discussion and Analysis of Financial Condition and Results of Operations which are included
elsewhere in this Annual Report. The historical results are not necessarily indicative of the
results to be expected for any future period. Our fiscal year ends on the Sunday closest to
December 31. The consolidated statement of operations data for the fiscal years ended 2007, 2008
and 2009 and the selected consolidated balance sheet data as of December 28, 2008 and January 3,
2010 are derived from, and are qualified by reference to, the audited consolidated financial
statements included in this Annual Report on Form 10-K. The consolidated statement of operations
data for the fiscal years ended 2005 and 2006, and the consolidated balance sheet data as of
January 1, 2006, December 31, 2006 and December 30, 2007 are derived from audited consolidated
financial statements, which are not included in this Annual Report. In fiscal 2007, we acquired
3-Way Networks Limited. We used the purchase method of accounting in accordance with ASC 805,
Business Combinations
to account for the acquisition. On May 22, 2007, our Board of Directors
approved, and on June 18, 2007, our stockholders approved, a 1-for-1.333 reverse stock split of our
common stock, which was effective on June 29, 2007. All share and per-share data have been
retroactively restated to reflect this stock split for all periods presented.
We recognize revenue from the sale of products and services under our OEM agreements only
after we deliver specified software upgrades that were committed at the time of sale. We further
delay recognition of portions of our revenue when we are unable to establish VSOE of fair value for
maintenance and support services that we sell with our products. We record as deferred revenue the
product and service billings that we are unable to recognize as revenue. This revenue is recognized
later upon delivery of these specified software upgrades. As a result, we believe that our revenue,
taken in isolation, provides limited insight into the performance of our business. Therefore, we
also present in the following tables: product and service billings, which reflects our sales
activity in a period; cost related to product and service billings, which reflects the cost
associated with our product and service billings; gross profit on product and service billings,
which reflects our product and service billings less cost related to product and service billings;
operating income on product and service billings, which represents gross profit on billings less
operating expenses; deferred revenue at the end of the period, which reflects the cumulative
billings that we were unable to recognize under our revenue recognition policy; deferred product
and service cost at the end of a period, which reflects the cost associated with our deferred
revenue; and cash flow from operating activities. We evaluate our performance by assessing our
product and service billings and the cost related to product and service billings, in addition to
other financial metrics presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share amounts)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,347
|
|
|
$
|
170,270
|
|
|
$
|
305,785
|
|
|
$
|
138,173
|
|
|
$
|
64,594
|
|
Cost of revenue
|
|
|
6,533
|
|
|
|
45,295
|
|
|
|
41,904
|
|
|
|
11,462
|
|
|
|
13,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(4,186
|
)
|
|
|
124,975
|
|
|
|
263,881
|
|
|
|
126,711
|
|
|
|
51,025
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,922
|
|
|
|
55,073
|
|
|
|
76,638
|
|
|
|
74,826
|
|
|
|
73,676
|
|
Sales and marketing
|
|
|
5,237
|
|
|
|
7,729
|
|
|
|
12,055
|
|
|
|
14,933
|
|
|
|
16,307
|
|
General and administrative
|
|
|
3,253
|
|
|
|
5,068
|
|
|
|
7,453
|
|
|
|
8,976
|
|
|
|
12,772
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
51,412
|
|
|
|
67,870
|
|
|
|
98,486
|
|
|
|
98,735
|
|
|
|
102,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(55,598
|
)
|
|
|
57,105
|
|
|
|
165,395
|
|
|
|
27,976
|
|
|
|
(51,730
|
)
|
Interest income, net
|
|
|
3,459
|
|
|
|
6,602
|
|
|
|
9,846
|
|
|
|
7,240
|
|
|
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax expense (benefit) and
cumulative effect of change in accounting
principle
|
|
|
(52,139
|
)
|
|
|
63,707
|
|
|
|
175,241
|
|
|
|
35,216
|
|
|
|
(45,037
|
)
|
Income tax expense (benefit)
|
|
|
10,875
|
|
|
|
(10,742
|
)
|
|
|
21,898
|
|
|
|
13,923
|
|
|
|
(20,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before cumulative effect of change
in accounting principle
|
|
|
(63,014
|
)
|
|
|
74,449
|
|
|
|
153,343
|
|
|
|
21,293
|
|
|
|
(24,992
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(63,014
|
)
|
|
$
|
74,119
|
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(5.42
|
)
|
|
$
|
1.21
|
|
|
$
|
2.63
|
|
|
$
|
0.33
|
|
|
$
|
(0.40
|
)
|
Diluted
|
|
$
|
(5.42
|
)
|
|
$
|
1.12
|
|
|
$
|
2.19
|
|
|
$
|
0.30
|
|
|
$
|
(0.40
|
)
|
Shares used in computing net (loss) income per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,959
|
|
|
|
13,542
|
|
|
|
36,238
|
|
|
|
64,278
|
|
|
|
62,499
|
|
Diluted
|
|
|
12,959
|
|
|
|
18,947
|
|
|
|
43,496
|
|
|
|
70,091
|
|
|
|
62,499
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Other GAAP and Non-GAAP Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and service billings (Billings)(1)
|
|
$
|
157,420
|
|
|
$
|
140,564
|
|
|
$
|
142,174
|
|
|
$
|
125,055
|
|
|
$
|
174,167
|
|
Cost related to Billings(2)
|
|
|
45,303
|
|
|
|
12,543
|
|
|
|
8,740
|
|
|
|
13,625
|
|
|
|
19,300
|
|
Gross profit on Billings(3)
|
|
|
112,117
|
|
|
|
128,021
|
|
|
|
133,434
|
|
|
|
111,430
|
|
|
|
154,867
|
|
Operating income on Billings(4)
|
|
|
60,705
|
|
|
|
60,151
|
|
|
|
34,948
|
|
|
|
12,695
|
|
|
|
52,112
|
|
Deferred revenue, at end of period
|
|
|
273,124
|
|
|
|
243,418
|
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
176,433
|
|
Deferred product and service costs, at end of period
|
|
|
66,966
|
|
|
|
34,214
|
|
|
|
1,050
|
|
|
|
3,213
|
|
|
|
8,944
|
|
Cash flow from operating activities
|
|
|
67,390
|
|
|
|
25,138
|
|
|
|
91,771
|
|
|
|
12,569
|
|
|
|
44,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
investments
|
|
$
|
135,470
|
|
|
$
|
160,123
|
|
|
$
|
221,963
|
|
|
$
|
228,366
|
|
|
$
|
263,167
|
|
Working capital
|
|
|
11,225
|
|
|
|
3,253
|
|
|
|
131,886
|
|
|
|
156,532
|
|
|
|
130,161
|
|
Total assets
|
|
|
219,547
|
|
|
|
264,207
|
|
|
|
261,566
|
|
|
|
257,336
|
|
|
|
338,717
|
|
Redeemable convertible preferred
stock
|
|
|
121,714
|
|
|
|
130,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(190,657
|
)
|
|
|
(122,790
|
)
|
|
|
145,175
|
|
|
|
162,882
|
|
|
|
140,023
|
|
|
|
|
(1)
|
|
Billings represents amounts invoiced for products and services
delivered and services to be delivered to our customers for which
payment is expected to be made in accordance with normal payment
terms. For software-only products sold to OEM customers, we invoice
only upon notification of sale by our OEM customers. We use Billings
to assess our business performance and as a critical metric for our
incentive compensation program. We believe Billings is a consistent
measure of our sales activity from period to period. Billings is not a
GAAP measure and does not purport to be an alternative to revenue or
any other performance measure derived in accordance with GAAP. In
fiscal 2008, Billings excludes $21.8 million of outstanding invoices
to Nortel Networks that were subject to Nortel Networks bankruptcy
proceedings. In 2009, Billings includes $21.8 million received from
Ericsson following its acquisition of Nortels CDMA business that we
previously did not recognize because of the uncertainty associated
with Nortels bankruptcy proceedings. The following table reconciles
revenue to Billings:
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
2,347
|
|
|
$
|
170,270
|
|
|
$
|
305,785
|
|
|
$
|
138,173
|
|
|
$
|
64,594
|
|
Deferred revenue, at end of period
|
|
|
273,124
|
|
|
|
243,418
|
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
176,433
|
|
Less: Deferred revenue acquired
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at
beginning of period
|
|
|
(118,051
|
)
|
|
|
(273,124
|
)
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billings
|
|
$
|
157,420
|
|
|
$
|
140,564
|
|
|
$
|
142,174
|
|
|
$
|
125,055
|
|
|
$
|
174,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Cost related to Billings represents the cost directly attributable to
products and services delivered and invoiced to our customers in the
period. We record product and service costs related to Billings as
deferred product and service costs until such time as the related
deferred revenue is recognized upon the delivery of specified software
upgrades. When we recognize revenue, the related deferred product and
service costs are expensed as cost of revenue. We believe that cost
related to Billings is an important measure of our operating
performance. Cost related to Billings is not a GAAP measure and does
not purport to be an alternative to cost of revenue or any other
performance measure derived in accordance with GAAP. The following
table reconciles cost of revenue to cost related to Billings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
6,533
|
|
|
$
|
45,295
|
|
|
$
|
41,904
|
|
|
$
|
11,462
|
|
|
$
|
13,569
|
|
Deferred product and
service costs, at end
of period
|
|
|
66,966
|
|
|
|
34,214
|
|
|
|
1,050
|
|
|
|
3,213
|
|
|
|
8,944
|
|
Less: Deferred product
cost, at beginning of
period
|
|
|
(28,196
|
)
|
|
|
(66,966
|
)
|
|
|
(34,214
|
)
|
|
|
(1,050
|
)
|
|
|
(3,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost related to Billings
|
|
$
|
45,303
|
|
|
$
|
12,543
|
|
|
$
|
8,740
|
|
|
$
|
13,625
|
|
|
$
|
19,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
Gross profit on Billings represents Billings less cost related to
Billings. We believe that gross profit on Billings is an important
measure of our operating performance. Gross profit on Billings is not
a GAAP measure and does not purport to be an alternative to gross
profit or any other performance measure derived in accordance with
GAAP. In fiscal 2008, gross profit on Billings excludes $21.8 million
of outstanding invoices to Nortel Networks that were subject to Nortel
Networks bankruptcy proceedings. In 2009, gross profit on Billings
includes $21.8 million received from Ericsson following its
acquisition of Nortels CDMA business that we previously did not
recognize because of the uncertainty associated with Nortels
bankruptcy proceedings. The following table reconciles gross profit to
gross profit on Billings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Gross (loss) profit
|
|
$
|
(4,186
|
)
|
|
$
|
124,975
|
|
|
$
|
263,881
|
|
|
$
|
126,711
|
|
|
$
|
51,025
|
|
Deferred revenue, at end of period
|
|
|
273,124
|
|
|
|
243,418
|
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
176,433
|
|
Less: Deferred revenue acquired
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at beginning of
period
|
|
|
(118,051
|
)
|
|
|
(273,124
|
)
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
Deferred product and service costs, at
beginning of period
|
|
|
28,196
|
|
|
|
66,966
|
|
|
|
34,214
|
|
|
|
1,050
|
|
|
|
3,213
|
|
Less: Deferred product cost, at end of period
|
|
|
(66,966
|
)
|
|
|
(34,214
|
)
|
|
|
(1,050
|
)
|
|
|
(3,213
|
)
|
|
|
(8,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on Billings
|
|
$
|
112,117
|
|
|
$
|
128,021
|
|
|
$
|
133,434
|
|
|
$
|
111,430
|
|
|
$
|
154,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
(4)
|
|
Operating profit on Billings represents gross profit on Billings less
operating expenses. We believe that operating profit on Billings is an
important measure of our operating performance. Operating profit on
Billings is not a GAAP measure and does not purport to be an
alternative to operating income or any other performance measure
derived in accordance with GAAP. In fiscal 2008, operating profit on
Billings excludes $21.8 million of outstanding invoices to Nortel
Networks that were subject to Nortel Networks bankruptcy proceedings.
In 2009, operating profit on Billings includes $21.8 million received
from Ericsson following its acquisition of Nortels CDMA business that
we previously did not recognize because of the uncertainty associated
with Nortels bankruptcy proceedings. The following table reconciles
operating profit to operating profit on billings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Operating (loss) profit
|
|
$
|
(55,598
|
)
|
|
$
|
57,105
|
|
|
$
|
165,395
|
|
|
$
|
27,976
|
|
|
$
|
(51,730
|
)
|
Deferred revenue, at end of period
|
|
|
273,124
|
|
|
|
243,418
|
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
176,433
|
|
Less: Deferred revenue acquired
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at
beginning of period
|
|
|
(118,051
|
)
|
|
|
(273,124
|
)
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
Deferred product and service
costs, at beginning of period
|
|
|
28,196
|
|
|
|
66,966
|
|
|
|
34,214
|
|
|
|
1,050
|
|
|
|
3,213
|
|
Less: Deferred product and
service costs, at end of period
|
|
|
(66,966
|
)
|
|
|
(34,214
|
)
|
|
|
(1,050
|
)
|
|
|
(3,213
|
)
|
|
|
(8,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit on billings
|
|
$
|
60,705
|
|
|
$
|
60,151
|
|
|
$
|
34,948
|
|
|
$
|
12,695
|
|
|
$
|
52,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Item 7.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
This Annual Report on
Form 10-K
contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such forward-looking
statements. The statements contained in this Annual Report on
Form 10-K
that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include expectations regarding the timing of the merger of Airvana and
72 Mobile Holdings, LLC; statements regarding the ability to complete the merger; any expectation
of earnings, revenues, billings or other financial items; development of femtocell alliances and
shipments; any statements of the plans, strategies and objectives of management for future
operations; factors that may affect our operating results; statements concerning new products or
services; statements related to future capital expenditures; statements related to future economic
conditions or performance; statements as to industry trends and other matters that do not relate
strictly to historical facts or statements of assumptions underlying any of the foregoing. These
statements are often identified by the use of words such as, but not limited to, anticipate,
believe, continue, could, estimate, expect, intend, may, will, plan, target,
continue, and similar expressions or variations intended to identify forward-looking statements.
These statements are based on the beliefs and assumptions of our management based on information
currently available to management. Such forward-looking statements are subject to risks,
uncertainties and other important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited
to, those identified below, and those discussed in the section titled Risk Factors included
elsewhere in this Annual Report on
Form 10-K
and in our other filings with the SEC. Furthermore,
such forward-looking statements speak only as of the date of this report. We undertake no
obligation to update any forward-looking statements to reflect events or circumstances after the
date of such statements.
Overview
We are a leading provider of network infrastructure products used by wireless operators to
provide mobile broadband services. We specialize in helping operators transform the mobile
experience of users worldwide. Our high performance technology and products, from emerging
comprehensive femtocell solutions to core mobile network infrastructure, enable operators to
deliver broadband services to mobile subscribers, wherever they are.
Most of our current products are based on a wireless communications standard known as CDMA2000
1xEV-DO, or EV-DO. In 2002, we began delivering commercial infrastructure products based on the
first generation EV-DO standard known as Rev 0. The second generation EV-DO standard is known as
Rev A and supports push-to-talk, Voice-over-IP, or VoIP, and faster Internet services. We delivered
our first Rev A software release in April 2007. Prior to 2008, most of our EV-DO sales were driven
by operator deployments focused on coverage with operators extending their broadband services
across larger portions of their subscriber geographies. Data traffic and service revenue growth
continues to outpace voice growth at many major wireless operators around the world. Our EV-DO
sales in 2008 and 2009 were driven by capacity growth as operators looked to expand their capacity
to accommodate increased data traffic fueled by greater consumer use of handheld devices, web
browsing and 3G multimedia applications, although operators in some markets continue to deploy our
products to expand coverage. Over the longer term, we expect our EV-DO sales to continue to be
driven by capacity growth as operators acquire more broadband subscribers that consume more
broadband data.
We have developed a special business model to serve mobile operators and our original
equipment manufacturer, or OEM, customers with embedded software products. Our software is deployed
in an OEMs installed base of wireless networks. These networks are designed to deliver high
quality wireless services to millions of consumers and are built and regularly upgraded over long
periods of time, often 10 to 15 years. A key element of our strategy is to deliver significant
increases in performance and functionality to both our OEM customers and to operators through
software upgrades to these networks. In 2007, we delivered two major EV-DO software releases that
provide for deployment of high-performance multi-media applications by enabling faster downlink and
uplink speeds, supporting push-to-talk services, and adding new proprietary clustering features
that are designed to dramatically improve network scalability. In 2008, we delivered two additional
EV-DO software releases which enable mobile operators to more efficiently increase capacity and
accelerate the roll-out of next-generation multimedia services. In 2009, we delivered one
additional EV-DO software release which increased the capacity and performance of operators mobile
broadband networks by redistributing the resources within the network to serve
smartphone and data card traffic in an effective manner, optimizes the way network control
messages are transmitted so the existing infrastructure can handle more devices, call activity,
and in-session user mobility, and increases radio network performance resulting in higher data
rates for users in weak signal areas.
44
We are also investing significantly in fixed mobile convergence, or FMC, products that
transform the experience of using mobile devices indoors, providing benefits such as better
coverage, better quality and performance of broadband applications, and lower costs for both users
and operators. Our FMC products enable operators to take advantage of wireline broadband
connections such as cable, DSL and fiber that already exist in most offices and homes to connect
mobile devices to an operators services. To accomplish this, operators can place a personal base
station, or what the industry refers to as a femtocell access point, in the home or office. We have
developed femtocell access points to support networks based on either of the worlds most prevalent
wireless standards, code division multiple access, or CDMA, and universal mobile telephone
standard, or UMTS. Currently, there is significant operator interest in our femtocells, as they
work with existing handsets and provide indoor coverage for both residential and enterprise users.
Our femtocell products are an important component of our growth and diversification strategy.
We were founded in March 2000 and sold our first product in the second quarter of fiscal 2002.
Our growth has been driven primarily by sales through our OEM customers to wireless operators
already using our EV-DO products as they increase the capacity and geographic coverage of their
networks, and by an increase in the number of wireless operators that decide to deploy our EV-DO
products on their networks. We have sold over 70,000 channel card licenses for use by over 70
operators worldwide.
In April 2007, we acquired 3Way Networks, a United Kingdom-based provider of femtocell
products and solutions for UMTS networks, for an aggregate purchase price of approximately
$11.0 million in cash and 441,845 shares of common stock. The acquisition furthered our strategy to
address the UMTS market and to deliver FMC and in-building mobile broadband solutions.
In July 2007, we completed our IPO, in which we sold and issued 8.3 million shares of our
common stock at an issue price of $7.00 per share. We raised a total of $58.1 million in gross
proceeds from our IPO, or $50.8 million in net proceeds after deducting underwriting discounts and
commissions of $4.1 million and other offering costs of approximately $3.2 million.
In August 2007, we entered into an agreement with Nokia Siemens Networks to certify
interoperability of our UMTS femtocell product with Nokia Siemens Networks femtocell gateway
product. We and Nokia Siemens Networks plan to provide a joint solution to operators, and cooperate
in joint marketing, sales and support programs. The agreement is non-exclusive and sets forth the
terms under which we may use their proprietary interface specifications of their products.
In September 2007, we entered into an agreement with Nortel Networks, amending certain
provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to
pricing for our products and services, including pricing for software products and upgrades that
were under development at the time and were subsequently delivered in June 2008.
In January 2008, we entered into a global sourcing agreement with Thomson to supply our UMTS
femtocell technology. Pursuant to the agreement, Thomson may use our femtocell products in
conjunction with its own residential gateway offerings. The agreement is non-exclusive and sets
forth the terms and conditions under which Thomson may purchase our femtocell products. The term of
the agreement extends through January 2011, with automatic annual renewals. Either party may
terminate the agreement with 90 days notice.
In February 2008, we entered into a global OEM agreement with Motorola to provide our CDMA
femtocell solution products. The agreement is non-exclusive and sets forth the terms and conditions
under which Motorola may purchase our femtocell and UAG products. The initial term of the agreement
extends through May 2010, with automatic annual renewals. Following the initial term, Motorola may
terminate the agreement with 180 days notice.
In June 2008, we entered into an agreement with Alcatel-Lucent to develop an integrated IP
Multimedia Subsystem, or IMS, femtocell solution for CDMA network operators that combines Airvanas
femtocell access point and femtocell network gateway with Alcatel-Lucents IMS core network
infrastructure. The development agreement was terminated by Alcatel-Lucent in the second quarter of
fiscal 2009.
In July 2008, we entered into an agreement with Hitachi to develop a joint CDMA femtocell
solution that integrates our femtocell products with Hitachis core radio access network
infrastructure that Hitachi offers in Japan.
45
In September 2008, we entered into a supply agreement with Hitachi under which Hitachi will
provide marketing, sales and support activities for our femtocell products. The initial term of the
supply agreement extends through June 2014 and provides for automatic annual renewals, unless
either party gives 180 days notice of its intent not to renew.
In November 2008, we entered into another agreement with Nortel Networks amending certain
provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to
pricing for software products and upgrades that were under development at the time.
In December 2008, we entered into a sourcing agreement with Pirelli Broadband Solutions to add
wireless broadband connectivity to Pirellis portfolio of consumer broadband devices by using our
UMTS femtocell technology. The agreement is non-exclusive and sets forth the terms and conditions
under which Pirelli may purchase our femtocell products. The initial term of the agreement extends
through November 2010, with automatic annual renewals, unless either party gives 90 days notice of
its intent not to renew.
In June 2009, we entered into a global reseller agreement with a multinational infrastructure
provider to supply and support our femtocell service manager and UAG products. The agreement is
non-exclusive and sets forth the terms and conditions under which the customer may purchase our FMC
products. The initial term of the agreement extends through May 2012.
In June 2009, we entered into an agreement with a multinational infrastructure provider for
the licensing and support of our femtocell service manager. The agreement is non-exclusive and sets
forth the terms and conditions under which the customer may purchase our product. The initial term
of the agreement extends through June 2014, with automatic annual renewals, unless either party
gives 90 days notice of its intent not to renew.
In June 2009, we entered into a master purchase agreement with Sprint/United Management
Company, or (Sprint) to supply and support femtocell products. Under the agreement, we will provide
our HubBub CDMA femtocell for Sprints commercial 3G femtocell service offerings. The agreement is
non-exclusive and sets forth the terms and conditions under which Sprint may purchase our femtocell
product and services. The term of the agreement extends through December 2014.
In September 2009, we entered into a supply and licensing agreement with a multinational
infrastructure provider to supply our UMTS and CDMA 2000 Femtocell technology for integration into
its products such as stand alone femtocell access points or residential gateways, and resale of
such products to its customers. The agreement is non-exclusive and sets forth the terms and
conditions under which it may purchase our femtocell products and services. The term of the
agreement extends through September 2012.
On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks Limited,
and certain of its other Canadian subsidiaries filed for creditor protection under the Companies
Creditors Arrangement Act in Canada. Also on January 14, 2009, some of Nortel Networks
Corporations U.S. subsidiaries, including Nortel Networks Inc., filed Chapter 11 voluntary
petitions in the State of Delaware. On July 28, 2009, the United States and Canadian bankruptcy
courts approved a bid for Nortel Networks CDMA business by Ericsson, subject to satisfaction of
regulatory and other conditions. This acquisition was completed in November 2009 and our OEM
agreement with Nortel was assigned to Ericsson.
In December 2009, we entered into another agreement with Ericsson amending certain provisions
of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products,
dated as of October 1, 2001, between us and Ericsson, in which we agreed to pricing for software
products and upgrades that were under development at the time and subsequently delivered in
December 2009.
On December 17, 2009, we entered into an Agreement and Plan of Merger, or the Merger
Agreement, with 72 Mobile Holdings, LLC, a Delaware limited liability company, or Parent, and 72
Mobile Acquisition Corp or Merger Sub, a wholly-owned subsidiary of Parent. Parent is a newly
formed entity to be owned, directly and indirectly, by affiliates of S.A.C. Private Capital Group,
LLC, GSO Capital Partners LP, Sankaty Advisors LLC and ZelnickMedia. Under the terms of the Merger
Agreement, upon closing of the merger, Merger Sub will be merged with and into Airvana, with
Airvana continuing as the surviving corporation or the merger, and the holders of our common stock
will receive $7.65 in cash per share of common stock. Following the closing of the merger, Parent
will own all of the outstanding capital stock of the surviving corporation and we will no
longer be a publicly traded company. We expect to close the merger in the first half of 2010.
46
In January 2010, we entered into a global reseller agreement with a multinational
infrastructure provider to supply and support our UMTS femtocells. The agreement is non-exclusive
and sets forth the terms and conditions under which the customer may purchase our femtocell
products. The initial term of the agreement is five years, with automatic annual renewals, unless
either party gives nine months written notice of its intent not to renew.
Our OEM Business Model
We operate in the highly consolidated and competitive market for mobile broadband equipment.
To compete in this market, we have developed OEM channels, unique products and a business approach
that targets the needs of large equipment vendors and their end customers, wireless operators.
Wireless operators invest significantly in building out large-scale wireless networks, which are
very costly to replace. Equipment vendors compete aggressively to win market share and they retain
their market position by upgrading their installed systems regularly, thereby enabling their
wireless operator customers to deliver new services to their subscribers. These vendors develop
detailed product roadmaps and look to us to design and deliver software upgrades that are
consistent with their roadmaps.
We collaborate with our OEM customers to develop specific features for products that they sell
to their wireless operator customers. We expect to continue to develop, for each OEM customer,
products based on our core technology that are configured specifically to meet the requirements of
each OEM and its customers. We also offer our OEM customers the option to purchase and make
available to their wireless operator customers new products and specified upgrades at prices that
we set prior to general availability of the new product or specified upgrade. We expect that we
will release one or more specified upgrades per year.
Our OEM customers typically are also potential competitors of ours in the markets that they
serve. We face the competitive risk that our OEM customers might develop internally alternative
solutions or purchase alternative products from our competitors. Our future success depends on our
ability to continue to develop products that offer advantages over alternative solutions that our
OEM customers might develop or purchase from others.
Our typical sales arrangements involve multiple elements, including: perpetual licenses for
our software products and specified software upgrades; the sale of hardware, maintenance and
support services; and the sale of professional services, including training. Software is more than
incidental to all of our products and, as a result, we recognize revenue in accordance with
Accounting Standards Codification, or ASC, Topic 985-605,
Software Revenue Recognition
, or ASC
985-065
.
Impact of ASC 985-605, Software Revenue Recognition
To recognize revenue from current product shipments, we must establish vendor specific
objective evidence, or VSOE, of fair value for all undelivered elements of our sales arrangements,
including our specified software upgrades. The best objective evidence of fair value would be to
sell these specified software upgrades separately to multiple customers for the same price.
However, because of our OEM business model, the features and functionality delivered in our
software upgrades are defined in collaboration with our OEMs based on each OEMs particular
requirements. As a result, it is highly unlikely that we will ever be able to sell the same
standalone software upgrade to a different OEM customer and thus establish VSOE of fair value for
such upgrade.
As a result, we defer all revenue from sales to OEMs until all elements without VSOE of fair
value have been delivered. This deferral is required because there is no basis to allocate revenue
between the delivered and undelivered elements of the arrangement without VSOE of fair value. The
revenue deferral is necessary even though (1) our specified software upgrades are not essential to
the standalone functionality of any product currently deployed, (2) the purchase of our upgrades
are based on separate decisions by our OEM customers and generally require separate payment at the
time of delivery and (3) there is no refund liability for payments received on any previously
shipped and installed product in the event we are not able to deliver the specified upgrade.
We recognize deferred revenue from sales to an OEM customer only when we deliver a specified
upgrade that we have previously committed. When we commit to an additional upgrade before we have
delivered a previously committed upgrade, we defer all revenue from product sales after the date of
such commitment until we deliver the additional upgrade. Any revenue that we had deferred prior to
the additional commitment is recognized when the previously committed upgrade is delivered.
47
We anticipate that the revenue recognition related to the our fixed-mobile convergence
products will be complex given that a number of our current arrangements for the development and
supply of these products contain significant customization services, volume discounts, specified
upgrades and multiple elements for new service offerings for which VSOE of fair value does not
currently exist. To date, there have been no material revenues recognized with respect to these
products.
The following diagram presents a hypothetical example of how software product releases and
commitments to specified upgrades affect the relationship between product billings, product revenue
and deferred product revenue under a business model similar to our current EV-DO OEM business
model. The diagram does not reflect the actual timing of any of our software releases, the actual
level of our product and service billings, revenue or deferred revenue in any period, the actual
timing of recognition of our product and service revenues, or the deferral of product revenue that
can result from the inability to establish VSOE of fair value for maintenance and support services.
|
|
|
|
|
Software release A is delivered and related product and service
billings are recognized as revenue because there are no
outstanding commitments for upgrades.
|
|
|
|
Software upgrade B is committed in Period 1 and, therefore,
product and service billings for shipments of software release A
after that point cannot be recognized as revenue before software
upgrade B is delivered.
|
|
|
|
Before software upgrade B is delivered, software upgrade C is
committed in Period 2 and, therefore, product and service billings
for shipments of software release A after that point cannot be
recognized before software upgrade C is delivered.
|
48
|
|
|
|
|
When software upgrade B is delivered in Period 3, all deferred
revenue, which consists of deferred revenue from billings of
software release A, from the time of the commitment of software
upgrade B until the time of the commitment of software upgrade C
is recognized, subject to being able to establish VSOE of fair
value for maintenance and support services.
|
|
|
|
When software upgrade C is delivered in Period 4, all remaining
deferred revenue from the time of the commitment of software
upgrade C, which consists of deferred revenue from billings of
software release A and software upgrade B, is recognized because
no commitments are outstanding, subject to being able to establish
VSOE of fair value for maintenance and support services.
|
As illustrated in this example, we begin to recognize our revenue in periods during which we
deliver specified upgrades. When we have such revenue recognition events, we begin to recognize
revenue from sales invoiced during multiple prior periods. As a result, we believe that our
revenue, taken in isolation, provides limited insight into the performance of our business. We
evaluate our performance by also assessing: product and service billings, which reflects our sales
activity in a period; cost related to product and service billings, which reflects the cost
associated with our product and service billings; deferred revenue at the end of the period, which
reflects the cumulative billings that we were unable to recognize under our revenue recognition
policy; deferred product cost at the end of a period, which reflects the cumulative costs that we
were unable to recognize under our revenue recognition policy associated with our deferred product
revenue; and cash flow from operating activities. We expect this pattern of commitments and
delivery of future specified upgrades and the resulting impact on the timing of revenue recognition
to continue with respect to our OEM business. As we introduce new products, the variability of the
total revenue recognized in any fiscal period may moderate, provided that we are able to establish
VSOE of fair value for these new products or upgrades to these new products, and as sales of these
new products represent a larger percentage of our overall business.
Key Elements of Financial Performance
Revenue
Our revenue consists of product revenue and service revenue from sales through our OEM
customers and directly to our end customers.
Product Revenue.
Our product revenue is principally currently derived from the sale of our
EV-DO mobile network products that are used by wireless operators to provide mobile broadband
services. These products include four major components: base stations or OEM base station channel
cards; radio network controllers; network management systems; and software upgrades to the OEMs
installed base. We have sold OEM base station channel cards both as hardware/software combinations
and as software licenses when the OEM customer chooses to have the hardware manufactured for it by
a third party. RNCs and network management systems are usually sold as software licenses as the OEM
customer procures off-the-shelf hardware from third party suppliers. Almost all of our revenue and
product and service billings to date have been derived from sales of our EV-DO products through our
OEM agreement with Ericsson, formerly Nortel Networks. Revenue from our FMC products has not been
material to date.
We first derived revenue and product and service billings in fiscal 2002 from the sale of
first generation EV-DO mobile network products based on the Rev 0 version of the standard. Prior to
the third quarter of fiscal 2006, we sold Rev 0-based base station channel cards, which were
manufactured for us by a third party, and licensed Rev 0 software for these OEM base station
channel cards, as well as for RNCs and network management systems. In connection with the
transition to products based on the Rev A version of the standard, Nortel Networks exercised its
right to license our hardware design in order to manufacture the OEM base station channel cards
that support Rev A instead of purchasing this hardware from us. As a result, beginning in the third
quarter of fiscal 2006, our product sales to Nortel Networks are derived solely from the license of
software for OEM base station channel cards, RNCs, network management systems and system upgrades.
Under our revenue recognition policy described above, we begin to recognize revenue from sales
to an OEM customer only after we deliver a specified upgrade to which we have previously committed.
When we commit to an additional upgrade before we have delivered an upgrade to which we previously
committed, we defer all revenue from product sales after the date of such commitment until we
deliver the additional upgrade.
49
Our product revenue in fiscal 2007 consisted primarily of software license fees and hardware
shipments to our primary OEM customer from April 2005 through May 2007 and was recognized upon the
delivery of two specified upgrades during fiscal 2007. Our April 2005 specified upgrade, or
software version 4.0, was delivered in the second quarter of fiscal 2007 and as a result, we
recognized product revenue of $141.5 million that consisted primarily of software license fees and
hardware shipments to our primary OEM customer from April 2005 through September 2006, which is
when we made another commitment for a specified future software upgrade. Our September 2006
specified upgrade or software version 5.0 was delivered in the fourth quarter of fiscal 2007 and as
a result, we recognized product revenue of $137.4 million that consisted primarily of billings from
software license fees to our primary OEM customer from September 2006 through June 2007 at which
time we made another commitment for a specified software upgrade.
Our product revenue in fiscal 2008 consisted primarily of software license fees billed to our
primary OEM customer from June 2007 through July 2008 and was recognized upon the delivery of two
additional specified upgrades during fiscal 2008. Our June 2007 specified upgrade or software
version 6.0, was delivered in the second quarter of fiscal 2008 and as a result, we recognized
product revenue of $59.0 million that consisted primarily of billings from software license fees to
our primary OEM customer from June 2007 through December 2007, when we made another commitment for
a specified future software upgrade. Our December 2007 specified upgrade or software version 7.0,
was delivered in the fourth quarter of fiscal 2008 and as a result, we recognized product revenue
of $57.1 million that consisted primarily of billings from software license fees to our primary OEM
customer from December 2007 through July 2008, when we made another commitment for a specified
future software upgrade.
Our product revenue in fiscal 2009 consisted primarily of software license fees billed to our
primary OEM customer from July 2008 through October 2008 and was recognized upon the delivery of a
specified software upgrade, software version 8.0, in the fourth quarter of fiscal 2009. As a
result, we recognized product revenue of $36.4 million in fiscal 2009.
In October 2008, we made an additional commitment to a specified software upgrade, which we
refer to as the October 2008 specified upgrade or software version 8.1. In May 2009, we made
another commitment for a specified software upgrade, which we refer to as the May 2009 specified
upgrade or software version 8.2. In December 2009, we made another commitment for a specified
software upgrade, which we refer to as the December 2009 specified upgrade. As of January 3, 2010,
there were three specified software upgrades that we had not yet delivered, software version 8.1,
which we expect to deliver in the first half of fiscal 2010, software version 8.2, which we
expect to deliver in the first half of fiscal 2010 and the December 2009 specified upgrade,
which we expect to deliver in the second half of fiscal 2010.
Service Revenue.
Our service revenue is derived from support and maintenance services, which
we refer to as post-contract customer support, or PCS, for our EV-DO products and other
professional services, including training. Our support and maintenance services consist of the
repair or replacement of defective hardware, around-the-clock help desk support, technical support
and the correction of bugs in our software. Our annual support and maintenance fees are based on a
fixed-dollar amount associated with, or a percentage of the initial sales price for, the applicable
hardware and software products. Included in the price for the product, we provide maintenance and
support during our product warranty period, which is two years for our base station channel cards
and one year for our software products.
As discussed above, we defer all revenue, including revenue related to maintenance and support
services, until all specified upgrades outstanding at the time of shipment have been delivered.
When VSOE of fair value for PCS does not exist, all revenue related to product sales and
software-only license fees, including bundled PCS, is deferred until all specified software
upgrades outstanding at the time of shipment are delivered. At the time of the delivery of all such
upgrades, we recognize a proportionate amount of all such revenue previously deferred based on the
portion of the applicable warranty period that has elapsed at the time of such delivery. The
unearned revenue is recognized ratably over the remainder of the applicable warranty period. When
VSOE of fair value for PCS exists, we allocate a portion of the initial product revenue and
software-only license fees to the bundled PCS based on the fees we charge for annual PCS when sold
separately. When all specified software upgrades outstanding at the time of shipment are delivered,
under the residual method, we recognize the previously deferred product revenue and software-only
license fees, as well as the earned PCS revenue, based on the portion of the applicable warranty
period that has elapsed. The unearned PCS revenue is recognized ratably over the remainder the
applicable warranty period. Notwithstanding our inability to establish VSOE of fair value of
maintenance and support services to Ericsson under ASC 985-605 for revenue recognition purposes, we
are permitted to present product revenue and service revenue separately on our consolidated
statements of operations based on historical maintenance and support services renewal rates at the
time of sale, which we believe are substantive rates.
50
Our support and maintenance arrangements for our EV-DO products are typically renewable for
one-year periods. We invoice our support and maintenance fees in advance of the applicable
maintenance period, and we recognize revenue from maintenance and support services ratably over the
term of the applicable maintenance and support period as services are delivered.
We also offer professional services such as deployment optimization, network engineering and
radio frequency deployment planning, and provide training for network planners and engineers. We
generally recognize revenue for these services as the services are performed.
Product and Service Billings
Product and service billings, which is a non-GAAP measure, represents the amount invoiced for
products and services that are delivered and services that are to be delivered to our end customers
directly or through our OEM channels for which we expect payment will be made in accordance with
normal payment terms. Software-only product sales under our OEM agreements are invoiced monthly
upon notification of sale by the OEM customer. We present the product and service billings metric
because we believe it provides a consistent basis for understanding our sales activity and our OEM
channel sales from period to period. We use product and service billings as a measure to assess our
business performance and as a key factor in our incentive compensation program.
Wireless operators generally purchase communications equipment in stages driven first by
coverage and later by capacity. The initial stage involves deploying new services in selected parts
of their networks, often those geographic regions with the highest concentration of customers.
Wireless operators then typically expand coverage throughout their network. Later purchases are
driven by a desire to expand capacity as the usage of new services grows. Initial purchases usually
occur around the time that we and our OEM customers offer products that substantially improve the
performance of the network. Subsequent purchases to expand the geographic coverage and capacity of
an operators wireless network are difficult to predict because they are typically related to
consumer demand for mobile broadband services. As a result, our product and service billings have
fluctuated significantly from period to period and we expect them to continue to fluctuate
significantly from period to period for the foreseeable future.
On January 14, 2009, Nortel Networks announced that it had filed for bankruptcy protection. At
the time of that filing, we had outstanding invoices to Nortel Networks in the amount of
$21.8 million from the quarter and year ended December 28, 2008. Since the collection of these
amounts was subject to Nortel Networks bankruptcy proceedings, they were accounted for on a cash
basis and excluded from billings in fiscal 2008. This $21.8 million was included in billings in
fiscal 2009 after being collected in the fourth quarter of fiscal 2009.
Our product and service billings were $142.2 million in fiscal 2007, $125.1 million in fiscal
2008 and $174.2 million in fiscal 2009. Product and service billings to Nortel Networks were 98%
of billings in fiscal 2007 and 93% of billings in fiscal 2008. Product and service billings to
Ericsson were 94% of billings in fiscal 2009.
The following table reconciles revenue to product and service billings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Revenue
|
|
$
|
305,785
|
|
|
$
|
138,173
|
|
|
$
|
64,594
|
|
Deferred revenue, at end of period
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
176,433
|
|
Less: Deferred revenue acquired
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
|
|
|
|
|
|
|
|
|
|
Product and service billings
|
|
$
|
142,174
|
|
|
$
|
125,055
|
|
|
$
|
174,167
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
Product and service billings for invoiced shipments and software license fees, and related
maintenance services, as well as non-recurring engineering and other development services for which
revenue is not recognized in the current period are recorded as deferred revenue. Deferred revenue
increases each fiscal period by the amount of product and service billings that are deferred in the
period and decreases by the amount of revenue recognized in the period. We classify deferred
revenue that we expect to recognize during the next twelve months as current deferred revenue on
our balance sheet and the remainder as long-term deferred revenue. As of January 3, 2010,
$167.4 million of deferred revenue is included in current liabilities and $9.0 million of deferred
revenue is included in long-term liabilities.
51
Under our revenue recognition policy described above, we recognize revenue from sales to an
OEM customer only when we deliver a specified upgrade to which we had previously committed. When we
commit to an additional upgrade before we have delivered an upgrade to which we previously
committed, we defer all revenue from product sales after the date of such commitment until we
deliver the additional upgrade.
We committed to a specified future software upgrade in April 2005, which we refer to as our
April 2005 specified upgrade. We delivered the April 2005 specified upgrade in April 2007. We
committed to a subsequent specified upgrade in September 2006, which we refer to as our September
2006 specified upgrade. We delivered the September 2006 specified upgrade in November 2007. We
committed to an additional subsequent specified upgrade in June 2007, which we refer as our June
2007 specified upgrade. We delivered the June 2007 specified upgrade in June 2008. We committed to
an additional subsequent specified upgrade in December 2007, which we refer to as our December 2007
specified upgrade. We delivered the December 2007 specified upgrade in the fourth quarter of fiscal
2008. We committed to an additional subsequent specified upgrade in July 2008, which we refer to as
our July 2008 specified upgrade. We delivered the July 2008 specified upgrade in the fourth quarter
of fiscal 2009. We had outstanding commitments for additional specified upgrades committed to in
October 2008, May 2009 and December 2009, which we refer to as our October 2008 specified upgrade,
our May 2009 specified upgrade and our December 2009 specified upgrade, respectively. We expect to
deliver the October 2008, May 2009 and December 2009 specified upgrades in 2010.
At December 28, 2008 and January 3, 2010, other deferred revenue primarily related to sales
and development services for our new fixed-mobile convergence related products.
Deferred revenue and deferred product and service costs at December 28, 2008 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
Deferred revenue related to December 2007 specified upgrade
|
|
$
|
7,397
|
|
|
$
|
|
|
|
$
|
7,397
|
|
Deferred revenue related to July 2008 specified upgrade
|
|
|
37,775
|
|
|
|
|
|
|
|
37,775
|
|
Deferred revenue related to October 2008 specified upgrade
|
|
|
13,663
|
|
|
|
|
|
|
|
13,663
|
|
Other deferred revenue
|
|
|
2,475
|
|
|
|
5,550
|
|
|
|
8,025
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
61,310
|
|
|
$
|
5,550
|
|
|
$
|
66,860
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product cost related to December 2007 specified upgrade
|
|
$
|
79
|
|
|
$
|
|
|
|
$
|
79
|
|
Deferred product cost related to July 2008 specified upgrade
|
|
|
742
|
|
|
|
|
|
|
|
742
|
|
Deferred product cost related to October 2008 specified upgrade
|
|
|
566
|
|
|
|
|
|
|
|
566
|
|
Other deferred product and service costs
|
|
|
526
|
|
|
|
1,300
|
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product and service costs
|
|
$
|
1,913
|
|
|
$
|
1,300
|
|
|
$
|
3,213
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and deferred product and service costs at January 3, 2010 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
Deferred revenue related to October 2008 specified upgrade
|
|
$
|
83,346
|
|
|
$
|
|
|
|
$
|
83,346
|
|
Deferred revenue related to May 2009 specified upgrade
|
|
|
69,866
|
|
|
|
|
|
|
|
69,866
|
|
Deferred revenue related to December 2009 specified upgrade
|
|
|
12,768
|
|
|
|
|
|
|
|
12,768
|
|
Other deferred revenue
|
|
|
1,410
|
|
|
|
9,043
|
|
|
|
10,453
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
167,390
|
|
|
$
|
9,043
|
|
|
$
|
176,433
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product cost related to October 2008 specified upgrade
|
|
$
|
1,707
|
|
|
$
|
|
|
|
$
|
1,707
|
|
Deferred product cost related to May 2009 specified upgrade
|
|
|
1,229
|
|
|
|
|
|
|
|
1,229
|
|
Deferred product cost related to December 2009 specified upgrade
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
Other deferred product and service costs
|
|
|
307
|
|
|
|
5,565
|
|
|
|
5,872
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product and service costs
|
|
$
|
3,379
|
|
|
$
|
5,565
|
|
|
$
|
8,944
|
|
|
|
|
|
|
|
|
|
|
|
52
Cost of Revenue
Cost of product revenue consists primarily of:
|
|
|
cost for channel card hardware provided by contract manufacturers;
|
|
|
|
|
cost of hardware for our RNCs and network management systems;
|
|
|
|
|
license fees for third-party software and other intellectual property used in our
products; and
|
|
|
|
|
other related overhead costs.
|
Cost of service revenue consists primarily of salaries, benefits and stock-based compensation
for employees that provide support services to customers and manage the supply chain.
Some of the technology that we incorporate into our EV-DO products and sell to Ericsson is
licensed from Qualcomm. In the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009,
Qualcomm undertook an audit of the royalties that we paid to Qualcomm in respect of the EV-DO
products that we sold between 2003 and 2007. Qualcomm determined that we do not owe them any
additional royalties beyond the amounts we had accrued.
Cost Related to Product and Service Billings
Cost related to product and service billings, which is a non-GAAP measure, includes the cost
of products delivered and invoiced to our customers, the cost directly attributable to the sale of
software-only products by our OEM partners and the cost of services in the current period. Cost
related to product billings is recorded as deferred product and service cost until such time as the
related deferred revenue is recognized as revenue. At the time of revenue recognition, we expense
the related deferred product and service costs in our income statement as cost of revenue.
Deferred Product and Service Costs
Cost related to product billings for invoiced shipments and software-only license fees for
which revenue is not recognized in the current period is recorded as deferred product cost. In
addition, when we perform development services that are essential to the functionality of the
initial delivery of a new product where the associated revenues have been deferred due to the fact
that they do not qualify as units of accounting separate from the delivery of the software, we
defer direct and incremental development costs
.
The costs deferred consist of employee
compensation and benefits for those employees directly involved with performing the development, as
well as other direct and incremental costs. All costs incurred in excess of the related revenues
are expensed as incurred. Deferred product and service costs increases each fiscal period by the
amount of product and service costs associated with product and service billings that are deferred
in the period and decreases by the amount of product and service costs associated with revenue
recognized in the period. We classify deferred product cost that we expect to recognize during the
next twelve months as current deferred product and service costs on our balance sheet. As of
January 3, 2010, $3.4 million of deferred product cost was included in current assets and
$5.6 million of deferred service cost was included in long-term assets.
Gross Profit
Our gross profit represents revenue recognized during the period less related cost and is
primarily attributable to OEM product shipments and software license fees. Our gross profit varies
from period to period according to the mix of revenue from hardware products, software products and
services.
53
Gross Profit on Billings
Our gross profit on billings, a non-GAAP measure, represents product and service billings
during the period less cost related to product and service billings and is primarily attributable
to OEM product shipments and software license fees. Our gross profit on billings varies from period
to period according to our mix of billings from hardware products, software products and services.
Due to the Nortel Networks bankruptcy filing on January 14, 2009, we excluded the
$21.8 million of pre-bankruptcy filing outstanding invoices to Nortel Networks from billings for
the year ended December 28, 2008. As a result, our gross profit on billings was reduced by the same
amount for the year ended December 28, 2008. This $21.8 million of pre-bankruptcy filing
outstanding invoices was included in billings and gross profit on billings for the year ended
January 3, 2010 after being collected in the fourth quarter of fiscal 2009.
Operating Expenses
Research and Development.
Research and development expense consists primarily of:
|
|
|
salaries, benefits and stock-based compensation related to our engineers;
|
|
|
|
|
cost of prototypes and test equipment relating to the development of new products and the
enhancement of existing products;
|
|
|
|
|
payments to suppliers for design and consulting services; and
|
|
|
|
|
other related overhead costs.
|
We expense all research and development cost as it is incurred. Our research and development
is performed by our engineering personnel in the United States, India and the United Kingdom. We
intend to continue to invest significantly in our research and development efforts, which we
believe are essential to maintaining our competitive position and the development of new products
for new markets. We expect research and development expense to remain similar in amount through
fiscal 2010.
Sales and Marketing.
Sales and marketing expense consists primarily of:
|
|
|
salaries, benefits and stock-based compensation related to our sales, marketing and
customer support personnel;
|
|
|
|
|
commissions payable to our sales personnel;
|
|
|
|
|
travel, lodging and other out-of-pocket expenses;
|
|
|
|
|
marketing program expenses; and
|
|
|
|
|
other related overhead costs.
|
We expense sales commissions at the time they are earned, which typically is when the
associated product and service billings are recorded or when a customer agreement is executed. We
expect sales and marketing expense to increase in amount and as a percentage of product and service
billings for the foreseeable future as we continue to augment our sales and marketing functions,
primarily outside the United States.
General and Administrative.
General and administrative expense consists primarily of:
|
|
|
salaries, benefits and stock-based compensation related to our executive, finance, legal,
human resource and administrative personnel;
|
|
|
|
|
professional services costs; and
|
|
|
|
|
other related overhead costs.
|
54
General and administrative expense increased in 2009 as we incurred one-time charges related
to the proposed merger, partially offset by reduction in initial fees related to Sarbanes-Oxley
compliance incurred in fiscal 2008.
Stock-Based Compensation Expense
We adopted the requirements of ASC 718,
Stock Compensation,
or ASC 718, in the first quarter
of fiscal 2006. ASC 718 addresses all forms of shared-based payment awards, including shares issued
under employee stock purchase plans, stock options, restricted stock and stock appreciation rights.
ASC 718 requires us to expense share-based payment awards with compensation cost for share-based
payment transactions measured at fair value.
Operating Income on Billings
Operating income on billings, which is a non-GAAP measure, varies from period to period
according to the amount of gross profit on billings less operating expenses for the period.
Interest Income, Net
Interest income, net, primarily relates to interest earned on our cash, cash equivalents and
investments. In fiscal 2009, interest income also included $3.2 million received from Ericsson
related to accrued interest on the Nortel Networks pre-bankruptcy filing invoices collected in the
fourth quarter of fiscal 2009.
Cash Flow from Operating Activities
Customer collections and, consequently, cash flow from operating activities are driven by
sales transactions and related product and service billings, rather than recognized revenues. We
believe cash flow from operating activities is a useful measure of the performance of our business
because, in contrast to income statement profitability metrics that rely principally on revenue,
cash flow from operating activities captures the contribution of changes in deferred revenue and
deferred charges. We present cash flow from operating activities because it is a metric that
management uses to track business performance and, as such, is a key factor in our incentive
compensation program. In addition, management believes this metric is frequently used by securities
analysts, investors and other interested parties in the evaluation of software companies with
significant deferred revenue balances.
Cash and Investments
We had unrestricted cash and cash equivalents and investments totaling $228.4 million as of
December 28, 2008 and $263.2 million as of January 3, 2010. Our existing cash and cash equivalents
and investments are invested primarily in money market funds, high grade government sponsored
enterprises (AAA/A1+), high-grade commercial paper (A1+/P1), and high grade corporate notes
(A1/A+). We do not invest in any types of asset backed securities such as those backed by mortgages
or auto loans. None of our investments have incurred defaults or have been downgraded. We do not
hold auction rate securities. We hold unrestricted cash and cash equivalents for working capital
purposes. We do not enter into investments for trading or speculative purposes. The primary
objectives of our investment activities are to preserve principal, maintain proper liquidity to
meet operating needs, maximize yields and maintain proper fiduciary control over our investments.
We have an investment policy that guides our investing activities. In connection with our proposed
merger, we have begun to liquidate our available for sale securities.
We enter into derivative instruments for risk management purposes only and we do not enter
into derivative instruments for speculative purposes. Our derivative program does not qualify for
hedge accounting treatment. We operate internationally and, in the normal course of business, are
exposed to fluctuations in foreign exchange rates. These fluctuations can increase the costs of
financing, investing and operating the business. To limit further our exposure to currency exchange
rate fluctuations, we also occasionally exchange U.S. Dollars for other currencies in which we
incur expenses significantly in advance of our need to make payments in those currencies.
55
We use forward foreign currency exchange contracts to hedge our exposure to forecasted foreign
currency denominated transactions based in the United Kingdom. These forward contracts are not
designated as cash flow,
fair value or net investment hedges; are marked-to-market with changes in fair value recorded
to earnings; and are entered into for periods consistent with currency transaction exposures,
generally less than one year. These derivative instruments do not subject our earnings or cash
flows to material risk since gains and losses on these derivatives generally offset losses and
gains on the expenses and transactions being hedged. In addition, changes in currency exchange
rates related to any unhedged transactions may impact our earnings and cash flows. Gains and losses
on the changes in fair value recorded to earnings are classified as other income and amounted to a
$0.8 million gain for the year ended January 3, 2010. We had no outstanding forward foreign
currency exchange contracts as of January 3, 2010.
Fiscal Year
Our fiscal year ends on the Sunday closest to December 31. Our fiscal quarters end on the
Sunday that falls closest to the last day of the third calendar month of the quarter.
Critical Accounting Policies and Estimates
This managements discussion and analysis of financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
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.
On an ongoing basis, management evaluates its estimates and judgments, including those related to
revenue recognition. Management bases its estimates and judgments on historical experience and on
various other factors that it believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We regard an accounting estimate or assumption underlying our financial statements as a
critical accounting estimate where (i) the nature of the estimate or assumption is material due
to the level of subjectivity and judgment necessary to account for highly uncertain matters or the
susceptibility of such matters to change; and (ii) the impact of the estimates and assumptions on
financial condition or operating performance is material.
Revenue Recognition
We derive revenue from the licensing of software products and software upgrades; the sale of
hardware products, maintenance and support services; and the sale of professional services,
including training. Our products incorporate software that is more than incidental to the related
hardware. Accordingly, we recognize revenue in accordance with ASC 985-605
.
Under multiple-element arrangements where several different products or services are sold
together, we allocate revenue to each element based on VSOE of fair value. We use the residual
method when fair value does not exist for one or more of the delivered elements in a
multiple-element arrangement. Under the residual method, the fair value of the undelivered elements
are deferred and subsequently recognized when earned. For a delivered item to be considered a
separate element, the undelivered items must not be essential to the functionality of the delivered
item and there must be VSOE of fair value for the undelivered items in the arrangement. Fair value
is generally limited to the price charged when we sell the same or similar element separately or,
when applicable, the stated substantive renewal rate. If evidence of the fair value of one or more
undelivered elements does not exist, all revenue is deferred and recognized when delivery of those
elements occurs or when fair value can be established. For example, in situations where we sell a
product during a period when we have a commitment for the delivery or sale of a future specified
software upgrade, we defer revenue recognition until the specified software upgrade is delivered.
Significant judgments in applying the accounting rules and regulations to our business
practices principally relate to the timing and amount of revenue recognition given our current
concentration of revenues with one customer and our inability to establish VSOE of fair value for
specified software upgrades.
We sell our products primarily through OEM arrangements with telecommunications infrastructure
vendors such as Ericsson. We have collaborated with our OEM customers on a best efforts basis to
develop initial product features and subsequent enhancements for the products that are sold by a
particular OEM to its wireless operator customers.
For each OEM customer, we expect to continue to develop products based on our core technology
that are configured for the requirements of the OEMs base stations and its operator customers.
56
This business practice is common in the telecommunications equipment industry and is
necessitated by the long planning cycles associated with wireless network deployments coupled with
rapid changes in technology. Large and complex wireless networks support tens of millions of
subscribers and it is critical that any changes or upgrades be planned well in advance to ensure
that there are no service disruptions. The evolution of our infrastructure technology therefore
must be planned, implemented and integrated with the wireless operators plans for deploying new
applications and services and any equipment or technology provided by other vendors.
Given the nature of our business, the majority of our sales are generated through
multiple-element arrangements comprised of a combination of products, maintenance and support
services and, importantly, specified product upgrades. We have established a business practice of
negotiating with OEMs the pricing for future purchases of new product releases and specified
software upgrades. We expect that we will release one or more optional specified upgrades annually.
To determine whether these optional future purchases are elements of current purchase transactions,
we assess whether such new products or specified upgrades will be offered to the OEM customer at a
price that represents a significant and incremental discount to current purchases. Because we sell
uniquely configured products through each OEM customer, we do not maintain a list price for our
products and specified software upgrades. Additionally, as we do not sell these products and
upgrades to more than one customer, we are unable to establish VSOE of fair value for these
products and upgrades. Consequently, we are unable to determine if the license fees we charge for
the optional specified upgrades include a significant and incremental discount. As such, we defer
all revenue related to current product sales, software-only license fees, maintenance and support
services and professional services until all specified upgrades committed at the time of shipment
have been delivered. For example, we recognize deferred revenue from sales to an OEM customer only
when we deliver a specified upgrade that we had previously committed. However, when we commit to an
additional upgrade before we have delivered a previously committed upgrade, we defer all revenue
from product sales after the date of such commitment until we deliver the additional upgrade. Any
revenue that we have deferred prior to the additional commitment is recognized after the previously
committed upgrade is delivered.
If there are no commitments outstanding for specified upgrades, we recognize revenue when all
of the following have occurred: (1) delivery (FOB origin), provided that there are no uncertainties
regarding customer acceptance; (2) there is persuasive evidence of an arrangement; (3) the fee is
fixed or determinable; and (4) collection of the related receivable is reasonably assured, as long
as all other revenue recognition criteria have been met. If there are uncertainties regarding
customer acceptance, we recognize revenue and related cost of revenue when those uncertainties are
resolved. Any adjustments to software license fees are recognized when reported to us by an OEM
customer.
For arrangements where we receive initial licensing fees or customization fees for new
products under development, we defer recognition of these fees until the final product has been
delivered and accepted, and then we recognize the fees over the expected customer relationship
period. Revenue from pre-production units is deferred and recognized once the final product has
been delivered and accepted, provided that the other criteria for revenue recognition are met,
including but not limited to the establishment of VSOE of fair value for post-contract support. If
VSOE of fair value cannot be established for undelivered elements, we defer all revenues until VSOE
of fair value can be established or the undelivered element is delivered. If the only remaining
undelivered element is post-contract support, we recognize revenue ratably over the contractual
post-contract support period.
For arrangements that include annual volume commitments and pricing levels, where such
discounts are significant and incremental and where the maximum discount to be provided cannot be
quantified prior to the expiration of the arrangement, we recognize revenue, provided that delivery
and acceptance has occurred and provided that no other commitments such as specified upgrades are
outstanding, based on the lowest pricing level stated in the arrangement. Any amounts invoiced in
excess of the lowest pricing level are deferred and recognized ratably over the remaining discount
period, which typically represents the greater of the PCS period or the remaining contractual
period.
For our direct sales to end user customers, which have not been material to date, we recognize
product revenue upon delivery provided that all other revenue recognition criteria have been met.
57
Our support and maintenance services consist of the repair or replacement of defective
hardware, around-the-clock help desk support, technical support and the correction of bugs in our
software. Our annual support and maintenance fees are based on a percentage of the initial sales or
list price of the applicable hardware and software products and may include a fixed amount for help
desk services. Included in the price of the product, we provide
maintenance and support during the product warranty period, which is typically one year. As
discussed above, we defer all revenue, including revenue related to maintenance and support
services (post-contract customer support or PCS), until all specified upgrades outstanding at
the time of shipment have been delivered. In connection with an amendment to our OEM arrangement in
2007, we can no longer assert VSOE of fair value for PCS to Ericsson (formerly Nortel Networks).
When VSOE of fair value for PCS cannot be established, all revenue related to product sales and
software-only license fees, including bundled PCS, is deferred until all specified software
upgrades outstanding at the time of shipment are delivered. At the time of the delivery of all such
upgrades, we recognize a proportionate amount of all such revenue previously deferred based on the
portion of the applicable warranty period that has elapsed as of the time of such delivery. The
unearned revenue is recognized ratably over the remainder of the applicable warranty period. When
VSOE of fair value for PCS can be established, we allocate a portion of the initial product revenue
and software-only license fees to the bundled PCS based on the fees we charge for annual PCS when
sold separately. When all specified software upgrades outstanding at the time of shipment are
delivered, under the residual method, we recognize the previously deferred product revenue and
software-only license fees, as well as the earned PCS revenue, based on the portion of the
applicable warranty period that has elapsed. The unearned PCS revenue is recognized ratably over
the remainder the applicable warranty period. Notwithstanding our inability to establish VSOE of
fair value of maintenance and support services to Ericsson for revenue recognition purposes, we
present product revenue and service revenue separately on our consolidated statements of income
based on historical maintenance and support services renewal rates at the time of sale.
For maintenance and service renewals, we recognize revenue for such services ratably over the
service period as services are delivered.
We provide professional services for deployment optimization, network engineering and radio
frequency deployment planning, and provide training for network planners and engineers. We
generally recognize revenue for these services as the services are performed as we have deemed such
services not essential to the functionality of our products. We have not issued any refunds on
products sold. As such, no provisions have been recorded against revenue or related receivables for
potential refunds.
In addition, certain of our contracts include guarantees regarding failure rates.
Historically, we have not incurred substantial costs relating to these guarantees and we currently
expense such costs as they are incurred. We review these costs on a regular basis as actual
experience and other information becomes available; and should they become more substantial, we
would accrue an estimated exposure and consider the potential related effects of the timing of
recording revenue on our license arrangements. We have not accrued any costs related to these
warranties in the accompanying consolidated financial statements.
In accordance with ASC 605-45
, Principal Agent Considerations
, or ASC 605-45, we classify the
reimbursement by customers of shipping and handling costs as revenue and the associated cost as
cost of revenue. We record reimbursable out-of-pocket expenses in both product and services
revenues and as a direct cost of product and services. For fiscal 2008 and the first three quarters
of fiscal 2009, shipping and handling and reimbursable out-of-pocket expense were not material.
We have neither issued nor do we anticipate issuing any refunds on products sold. As such, no
provisions have been recorded against deferred revenues, revenue or any related receivables for
potential refunds.
We anticipate that the revenue recognition related to the our fixed-mobile convergence
products will be complex given that a number of our current arrangements for the development and
supply of these products contain significant customization services, volume discounts, specified
upgrades and multiple elements for new service offerings for which vendor-specific evidence of fair
value does not currently exist. To date, there have been no material revenues recognized with
respect to these products.
58
Investments and Restricted Investments
We determine the appropriate categorization of investments in securities at the time of
purchase. As of December 28, 2008 our investments were categorized as held-to-maturity and were
presented at their amortized cost. As of January 3, 2010, due to the proposed merger, we no longer
intended to hold some of our investments to maturity and, accordingly, reclassified certain of our
investments from held-to-maturity to available-for-sale. Held-to-maturity investments are presented
at their amortized cost and available-for-sale investments are presented at fair market value with
unrealized gains and losses considered to be temporary in nature reported as a separate component
of other comprehensive income (loss). The amortized cost of held-to-maturity debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and
accretion is included in interest or other income (expense). We classify securities on our
balance sheet as short-term or long-term based on the date we reasonably expect the securities to
mature or liquidate.
Stock-Based Compensation
Through the year ended January 1, 2006, we accounted for our stock-based awards to employees
using the intrinsic value method and elected the disclosure-only requirements
.
Under the intrinsic
value method, compensation expense is measured on the date of the grant as the difference between
the deemed fair value of our common stock and the exercise or purchase price multiplied by the
number of stock options or restricted stock awards granted. We followed the provisions of ASC
505-50,
Equity Based Payments to Non-Employees,
to account for grants made to non-employees.
ASC 718 requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their estimated fair values. In
accordance with ASC 718, we recognize the compensation cost of share-based awards on a
straight-line basis over the vesting period of the award, which is generally four to five years,
and have elected to use the Black-Scholes option pricing model to determine fair value. ASC 718
eliminated the alternative of applying the intrinsic value method to stock compensation awards. We
adopted the accounting standards of ASC 718 on the first day of fiscal 2006 using the
prospective-transition method. As such, we will continue to apply the intrinsic value method in
future periods to equity awards granted prior to the adoption of ASC 718.
As there was no public market for our common stock prior to July 19, 2007, the date of our
IPO, we determined the volatility percentage used in calculating the fair value of stock options we
granted based on an analysis of the historical stock price data for a peer group of companies that
issued options with substantially similar terms. The expected volatility percentage used in
determining the fair value of stock options granted in the year ended December 28, 2008 was between
54% and 58% and in the year ended January 3, 2010 between 50% and 51%. The expected life of options
has been determined utilizing the simplified method as prescribed by the SECs Staff Accounting
Bulletin No. 110
.
The expected life of options granted during the year ended December 28, 2008 and
January 3, 2010 was 6.25 years. For the years ended December 28, 2008 and January 3, 2010, the
weighted-average risk free interest rate used was 3.16% and 2.45%, respectively. The risk-free
interest rate is based on a weighted average of a 7-year treasury instrument whose term is
consistent with the expected life of the stock options. Although we paid a one-time special cash
dividend in April 2007, the expected dividend yield is assumed to be zero as we do not currently
anticipate paying cash dividends on our common stock in the future. In addition, ASC 718 requires
companies to utilize an estimated forfeiture rate when calculating the expense for the period,
whereas prior FASB accounting guidance permitted companies to record forfeitures based on actual
forfeitures, which was our historical policy. As a result, we applied an estimated forfeiture rate
between 3% and 6% for the year ended December 28, 2008 and 6% for the year ended January 3, 2010 in
determining the expense recorded in our consolidated statements of operations. These rates were
derived by review of our historical forfeitures since 2000.
For the years ended December 28, 2008 and January 3, 2010, we recorded expense of $4,844 and
$6,317, respectively, in connection with share-based awards and related tax benefit of
approximately $704 and $1,232 for fiscal 2008 and 2009, respectively. As of January 3, 2010, future
expense for non-vested stock options of $15,715 was expected to be recognized over a
weighted-average period of 2.52 years.
59
Income Taxes
We are subject to income taxes in both the United States and foreign jurisdictions, and we use
estimates in determining our provision for income taxes. We account for income taxes under the
provisions of ASC 740,
Income Taxes, or
ASC 740, which requires the recognition of deferred income
tax assets and liabilities for expected future
tax consequences of events that have been recognized in our financial statements or tax
returns. Under ASC 740, we determine the deferred tax assets and liabilities based upon the
difference between the financial statements and the tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. We must
then periodically assess the likelihood that our deferred tax assets will be recovered from our
future taxable income, and, to the extent we believe that it is more likely than not our deferred
tax assets will not be recovered, we must establish a valuation allowance against our deferred tax
assets.
In July 2006, the FASB issued accounting guidance which creates a single model to address
uncertainty in tax positions and clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with ASC 740 by prescribing the
minimum threshold a tax position is required to meet before being recognized in an enterprises
financial statements. We adopted this guidance on January 1, 2007. We did not recognize any
liability for unrecognized tax benefits as a result of adopting this guidance as of January 1,
2007. Our liability, including interest, was $5.7 million at December 28, 2008 and $6.1 million at
January 3, 2010. We did not recognize any interest or penalties in the year ended December 30,
2007. During the year ended December 28, 2008, we recognized approximately $184 of interest and $0
in penalties as a component of income tax expense. During the year ended January 3, 2010, we
recognized approximately $153 thousand of interest and $0 in penalties as a component of income tax
expense.
60
Results of Operations
The following table sets forth our results of operations for the periods shown:
AIRVANA, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
279,133
|
|
|
$
|
123,295
|
|
|
$
|
45,121
|
|
Service
|
|
|
26,652
|
|
|
|
14,878
|
|
|
|
19,473
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
305,785
|
|
|
|
138,173
|
|
|
|
64,594
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
34,794
|
|
|
|
3,267
|
|
|
|
3,195
|
|
Service
|
|
|
7,110
|
|
|
|
8,195
|
|
|
|
10,374
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
41,904
|
|
|
|
11,462
|
|
|
|
13,569
|
|
Gross profit
|
|
|
263,881
|
|
|
|
126,711
|
|
|
|
51,025
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
76,638
|
|
|
|
74,826
|
|
|
|
73,676
|
|
Selling and marketing
|
|
|
12,055
|
|
|
|
14,933
|
|
|
|
16,307
|
|
General and administrative
|
|
|
7,453
|
|
|
|
8,976
|
|
|
|
12,772
|
|
In-process research and development
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98,486
|
|
|
|
98,735
|
|
|
|
102,755
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
165,395
|
|
|
|
27,976
|
|
|
|
(51,730
|
)
|
Interest and other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
9,881
|
|
|
|
7,241
|
|
|
|
6,693
|
|
Interest expense
|
|
|
(35
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other income
|
|
|
9,846
|
|
|
|
7,240
|
|
|
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
175,241
|
|
|
|
35,216
|
|
|
|
(45,037
|
)
|
Income tax expense (benefit)
|
|
|
21,898
|
|
|
|
13,923
|
|
|
|
(20,045
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Other GAAP and Non-GAAP Financial Data
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and service billings
|
|
$
|
142,174
|
|
|
$
|
125,055
|
|
|
$
|
174,167
|
|
Cost related to product and service billings
|
|
|
8,740
|
|
|
|
13,625
|
|
|
|
19,300
|
|
Gross profit on Billings
|
|
|
133,434
|
|
|
|
111,430
|
|
|
|
154,867
|
|
Operating income on Billings
|
|
|
34,948
|
|
|
|
12,695
|
|
|
|
52,112
|
|
Deferred revenue, at end of period
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
176,433
|
|
Deferred product and service costs, at end of period
|
|
|
1,050
|
|
|
|
3,213
|
|
|
|
8,944
|
|
Cash flow from operating activities
|
|
|
91,771
|
|
|
|
12,569
|
|
|
|
44,396
|
|
|
|
|
(1)
|
|
For a reconciliation of non-GAAP financial data to GAAP data, please see the tables on the
following pages of Managements Discussion and Analysis of Financial Condition and Results of
Operations.
|
61
Comparison of Fiscal 2008 and Fiscal 2009
Revenue and Product and Service Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
138,173
|
|
|
$
|
64,594
|
|
|
$
|
(73,579
|
)
|
Deferred revenue, at end of period
|
|
|
66,860
|
|
|
|
176,433
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and service billings
|
|
$
|
125,055
|
|
|
$
|
174,167
|
|
|
$
|
49,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue in fiscal 2009 was derived principally from the recognition of $37.8 million of
software license and maintenance revenues related to the delivery in December 2009 of our July 2008
software release version 8.0 specified upgrade, $7.4 million of software license and maintenance
revenues related to the delivery in November 2008 of our December 2007 software release version 7.0
specified upgrade and $9.5 million from maintenance and support services performed during the year.
In addition, we recognized $6.5 million of revenue associated with fees related to a development
agreement with Qualcomm that was terminated by Qualcomm in the fourth quarter of fiscal 2009.
Revenue in fiscal 2008 was derived principally from the recognition of $61.3 million of software
license and maintenance revenues related to the delivery in June 2008 of our June 2007 software
release version 6.0 specified upgrade and $60.3 million of software license and maintenance
revenues related to the delivery in November 2008 of our December 2007 software release version 7.0
specified upgrade. The revenue related to our June 2007 specified upgrade consisted of billings
from June 2007 through November 2007; the revenue related to our December 2007 specified upgrade
consisted of billings from December 2007 through June 2008; and the revenue related to our July
2008 specified upgrade consisted of billings from July 2008 through October 2008.
The increase in product and service billings in fiscal 2009 was due primarily to the
collection of $21.8 million of pre-bankruptcy filing outstanding invoices to Nortel Networks that
were being accounted for on a cash basis. As a result, these amounts were excluded from billings in
fiscal 2008 and included in billings in fiscal 2009 when collected.
Cost of Revenue and Cost Related to Product and Service Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
11,462
|
|
|
$
|
13,569
|
|
|
$
|
2,107
|
|
Deferred product and service costs, at end of period
|
|
|
3,213
|
|
|
|
8,944
|
|
|
|
|
|
Less: Deferred product cost, at beginning of period
|
|
|
(1,050
|
)
|
|
|
(3,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost related to product and service billings
|
|
$
|
13,625
|
|
|
$
|
19,300
|
|
|
$
|
5,675
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in cost of revenue in fiscal 2009 was due primarily to an increase in cost of
service revenue associated with an increase in customer service headcount to support a larger
installed base of product.
The increase in cost related to product and service billings was due primarily to initial
sales of prototype units and costs related to NRE billings for custom development of our FMC
products.
62
Gross Profit and Gross Profit on Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Gross profit
|
|
$
|
126,711
|
|
|
$
|
51,025
|
|
|
$
|
(75,686
|
)
|
Deferred revenue, at end of period
|
|
|
66,860
|
|
|
|
176,433
|
|
|
|
|
|
Less: Deferred revenue acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
|
|
|
|
Deferred product cost, at beginning of period
|
|
|
1,050
|
|
|
|
3,213
|
|
|
|
|
|
Less: Deferred product and service costs, at
end of period
|
|
|
(3,213
|
)
|
|
|
(8,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on Billings
|
|
$
|
111,430
|
|
|
$
|
154,867
|
|
|
$
|
43,437
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in gross profit was due primarily to a decrease in revenue of $73.6 million to
$64.6 million in fiscal 2009 and an increase in cost of revenue of $2.1 million to $13.6 million in
fiscal 2009. We expect gross profit on our revenue to continue to fluctuate significantly in the
future based on the time period between commitments for future software upgrades and the volume of
sales in those time intervals.
Gross profit on Billings increased primarily due to an increase in product and service
billings of $49.1 million to $174.2 million in fiscal 2009, partially offset by an increase in cost
related to product and service billings of $5.7 million to $19.3 million in fiscal 2009.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period Change
|
|
|
|
2008
|
|
|
2009
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
74,826
|
|
|
$
|
73,676
|
|
|
$
|
(1,150
|
)
|
|
|
1.5
|
%
|
Sales and marketing
|
|
|
14,933
|
|
|
|
16,307
|
|
|
|
1,374
|
|
|
|
9.2
|
%
|
General and administrative
|
|
|
8,976
|
|
|
|
12,772
|
|
|
|
3,796
|
|
|
|
42.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
98,735
|
|
|
$
|
102,755
|
|
|
$
|
4,020
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development.
The decrease in research and development expense in fiscal 2009 was
due primarily to a decrease in outside service expense and development tools expense related to
non-recurring engineering programs and reduced reliance on outside services for the outsourcing of
new product development, as well as an increase in development costs allocated to deferred cost for
our FMC products, partially offset by an increase in temporary staffing related to the assistance
of ongoing development projects in fiscal 2009 and an increase in salary and benefit expense
associated with annual salary raises in fiscal 2009. Outside service expense decreased by
$0.7 million to $2.3 million in fiscal 2009. Development tools expense decreased by $1.1 million to
$1.3 million in fiscal 2009. Development costs allocated to deferred cost increased by $3.3 million
to $6.9 million in fiscal 2009. Temporary staffing expense increased by $2.2 million to
$5.9 million in fiscal 2009. Salary and benefit expense increased by $1.6 million to $48.7 million
in fiscal 2009.
Sales and Marketing.
The increase in sales and marketing expense in fiscal 2009 was primarily
due to an increase in salary and benefit expense associated with an increase in the number of
sales, marketing and customer support employees to support a larger installed base and expansion of
our international sales offices, partially offset by a decrease in sales commission expense. Salary
and benefit expense associated with the increase in headcount increased by $2.2 million to
$12.2 million in fiscal 2009. Commission expense decreased by $0.5 million to $1.2 million in
fiscal 2009.
General and Administrative.
The increase in general and administrative expense in fiscal 2009
was primarily due to $3.2 million in professional fees incurred associated with our proposed merger
as well as an increase in salary and benefit expense associated with annual salary raises in fiscal
2009. Salary and benefit expense increased by $0.5 million to $4.4 million in fiscal 2009.
63
Operating Profit (Loss) and Operating Profit on Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Operating profit
|
|
$
|
27,976
|
|
|
$
|
(51,730
|
)
|
|
$
|
(79,706
|
)
|
Deferred revenue, at end of period
|
|
|
66,860
|
|
|
|
176,433
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(79,978
|
)
|
|
|
(66,860
|
)
|
|
|
|
|
Deferred product cost, at beginning of period
|
|
|
1,050
|
|
|
|
3,213
|
|
|
|
|
|
Less: Deferred product and service costs, at
end of period
|
|
|
(3,213
|
)
|
|
|
(8,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit on billings
|
|
$
|
12,695
|
|
|
$
|
52,112
|
|
|
$
|
39,417
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in operating profit in fiscal 2009 was due primarily to the decrease in our gross
profit, described above, coupled with an increase in operating expenses in fiscal 2009 described
above.
The increase in operating profit (loss) on billings in fiscal 2009 was due primarily to the
increase in our gross profit on billings, described above, coupled with an increase in operating
expenses in fiscal 2009, described above.
Interest and Other Income, Net.
Interest and other income, net, consists primarily of
interest generated from the investment of our cash balances. The decrease in interest income of
$0.5 million to $6.7 million in fiscal 2009 was due primarily to lower interest rates, partially
offset by other income of $0.8 million associated with gains on our hedging program and the
collection of $3.2 million of interest associated with Nortel Networks pre-bankruptcy outstanding
invoices.
Income Tax Expense.
We recorded an income tax benefit of $20.0 million for fiscal 2009. This
benefit is primarily related to losses incurred and tax credits generated from operations in the
United States, which will be carried back to offset taxes paid in prior years, and the impact of
the reduction of valuation allowance against our U.K. net operating loss carryforwards as a result
of implementing a sale of intellectual property from our U.K. subsidiary to the U.S. parent
company. This benefit is partially offset by increases in reserves for uncertain tax positions and
nondeductible stock compensation charges. We recorded income tax expense of $13.9 million for
fiscal 2008. This expense relates primarily to profits in the United States taxed at the federal
statutory rate, losses from foreign operations for which no tax benefits can be recognized, and
increases in unrecognized tax benefits. This tax is reduced by the benefit from federal research
credits and manufacturing deductions.
When our FMC products begin to ship in the United States in significant volumes, our effective
state tax rate may increase and we may realize benefits from our state tax credit carryforwards.
64
Comparison of Fiscal 2007 and Fiscal 2008
Revenue and Product and Service Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
305,785
|
|
|
$
|
138,173
|
|
|
$
|
(167,612
|
)
|
Deferred revenue, at end of period
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
|
|
Less: Deferred revenue acquired
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and service billings
|
|
$
|
142,174
|
|
|
$
|
125,055
|
|
|
$
|
(17,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue in fiscal 2008 was derived principally from the recognition of $61.3 million of
software license and maintenance revenues related to the delivery in June 2008 of our June 2007
software release version 6.0 specified upgrade and $60.3 million of software license and
maintenance revenues related to the delivery in November 2008 of our December 2007 software release
version 7.0 specified upgrade. The revenue related to our June 2007 specified upgrade consisted of
billings from June 2007 through November 2007 and the revenue related to our December 2007
specified upgrade consisted of billings from December 2007 through June 2008. Revenue in fiscal
2007 was derived principally from product shipments and sales of software licenses, maintenance and
support related to our April 2005 specified upgrade and our September 2006 specified upgrade. The
revenue related to our April 2005 specified upgrade consisted of billings from April 2005 through
August 2006 and the revenue related to our September 2006 specified upgrade consisted of billings
from September 2006 through May 2007. We recognized this revenue as a result of the delivery of
specified upgrades in April 2007 and November 2007.
The decrease in product and service billings in fiscal 2008 was due primarily to the exclusion
of $21.8 million of outstanding invoices to Nortel Networks that were subject to Nortel Networks
bankruptcy proceedings and accounted for on a cash basis. They were collected and included in
product and service billings in fiscal 2009.
Cost of Revenue and Cost Related to Product and Service Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
41,904
|
|
|
$
|
11,462
|
|
|
$
|
(30,442
|
)
|
Deferred product and service costs, at end of period
|
|
|
1,050
|
|
|
|
3,213
|
|
|
|
|
|
Less: Deferred product cost, at beginning of period
|
|
|
(34,214
|
)
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost related to product and service billings
|
|
$
|
8,740
|
|
|
$
|
13,625
|
|
|
$
|
4,885
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in cost of revenue in fiscal 2008 was due primarily to the transition of
manufacturing Rev A channel cards to our OEM in fiscal 2006 as cost of revenue in fiscal 2007
included hardware costs for channel cards shipped during 2006.
The increase in cost related to product and service billings was due primarily to deferred
costs associated with initial sales of prototype units and development costs of our FMC products.
65
Gross Profit and Gross Profit on Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Gross profit
|
|
$
|
263,881
|
|
|
$
|
126,711
|
|
|
$
|
(137,170
|
)
|
Deferred revenue, at end of period
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
|
|
Less: Deferred revenue acquired
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
|
|
Deferred product cost, at beginning of period
|
|
|
34,214
|
|
|
|
1,050
|
|
|
|
|
|
Less: Deferred product and service costs, at
end of period
|
|
|
(1,050
|
)
|
|
|
(3,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on Billings
|
|
$
|
133,434
|
|
|
$
|
111,430
|
|
|
$
|
(22,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in gross profit was due primarily to a decrease in revenue of $167.6 million to
$138.2 million in fiscal 2008, partially offset by a decrease in cost of revenue of $30.4 million
to $11.5 million in fiscal 2008. We expect gross profit on our revenue to continue to fluctuate
significantly in the future based on the time period between commitments for future software
upgrades and the volume of sales in those time intervals.
Gross profit on Billings decreased primarily due to a decrease in product and service billings
of $17.1 million to $125.1 million in fiscal 2008 due primarily to the exclusion of $21.8 million
of outstanding invoices to Nortel Networks that were subject to Nortel Networks bankruptcy
proceedings and an increase in cost related to product and service billings of $4.9 million to
$13.6 million in fiscal 2008.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period Change
|
|
|
|
2007
|
|
|
2008
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
76,638
|
|
|
$
|
74,826
|
|
|
$
|
(1,812
|
)
|
|
|
2.3
|
%
|
Sales and marketing
|
|
|
12,055
|
|
|
|
14,933
|
|
|
|
2,878
|
|
|
|
23.9
|
%
|
General and administrative
|
|
|
7,453
|
|
|
|
8,976
|
|
|
|
1,523
|
|
|
|
20.4
|
%
|
In-process research and development
|
|
|
2,340
|
|
|
|
|
|
|
|
(2,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
98,486
|
|
|
$
|
98,735
|
|
|
$
|
249
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development.
The decrease in research and development expense in fiscal 2008 was
due primarily to a decrease in outside service expense and development tools expense related to
non-recurring engineering costs incurred in fiscal 2007 and less reliance on outside services for
the outsourcing of new product development in fiscal 2008, partially offset by an increase in
temporary staffing related to the assistance of ongoing development projects in fiscal 2008 and an
increase in stock compensation expense related to additional stock options granted in fiscal 2008.
Outside service expense decreased by $2.6 million to $3.1 million in fiscal 2008. Development tools
expense decreased by $1.5 million to $2.4 million in fiscal 2008. Temporary staffing expense
increased by $0.8 million to $3.6 million in fiscal 2008. Stock compensation expense increased by
$1.1 million to $3.0 million in fiscal 2008.
Sales and Marketing.
The increase in sales and marketing expense in fiscal 2008 was primarily
due to an increase in salary and benefit expense associated with an increase in the number of
sales, marketing and customer support employees to support a larger installed base and expansion of
our international sales offices, and to a lesser extent an increase in travel expense associated
with our sales, marketing and customer support activities. Salary and benefit expense associated
with the increase in headcount increased by $2.6 million to $13.4 million in fiscal 2008.
General and Administrative.
The increase in general and administrative expense in fiscal 2008
was due to an increase in professional service fees associated with legal, audit and tax consulting
services, additional incremental expenses associated with being a public company such as higher
premiums for directors and officers insurance and costs of Sarbanes-Oxley compliance initiatives
and an increase in the number of general and administrative employees to support our growth. Legal,
audit and tax consulting fees, including for our Sarbanes-Oxley compliance initiatives, increased
by $0.6 million to $2.3 million in fiscal 2008. Directors and officers insurance premiums increased
by $0.4 million to $1.1 million in fiscal 2008 as 2008 was the first full year we were a public
company. Salary and benefit expense increased by $0.6 million to $5.0 million in fiscal 2008.
66
In-Process Research and Development.
In April 2007, we acquired 3 Way Networks, a
United Kingdom-based provider of personal base stations and solutions for the UMTS market. In
connection with this acquisition, we recorded $2.3 million of in-process research and development
expense in fiscal 2007.
Operating Profit and Operating Profit on Billings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Period-to-Period
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
Operating profit
|
|
$
|
165,395
|
|
|
$
|
27,976
|
|
|
$
|
(137,419
|
)
|
Deferred revenue, at end of period
|
|
|
79,978
|
|
|
|
66,860
|
|
|
|
|
|
Less: Deferred revenue acquired
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
Less: Deferred revenue, at beginning of period
|
|
|
(243,418
|
)
|
|
|
(79,978
|
)
|
|
|
|
|
Deferred product cost, at beginning of period
|
|
|
34,214
|
|
|
|
1,050
|
|
|
|
|
|
Less: Deferred product and service costs, at
end of period
|
|
|
(1,050
|
)
|
|
|
(3,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit on billings
|
|
$
|
34,948
|
|
|
$
|
12,695
|
|
|
$
|
(22,253
|
)
|
|
|
|
|
|
|
|
|
|
|
The decrease in operating profit on billings in fiscal 2008 was due primarily to the decrease
in our gross profit on billings, due primarily to the exclusion of $21.8 million of outstanding
invoices to Nortel Networks that were subject to Nortel Networks bankruptcy proceedings coupled
with operating expenses in fiscal 2008 remaining relatively flat compared to fiscal 2007.
Interest Income, Net.
Interest income, net, consists primarily of interest generated from the
investment of our cash balances. The decrease in interest income of $2.6 million to $7.2 million in
fiscal 2008 was due primarily to lower interest rates, partially offset by higher average cash and
investment balances in fiscal 2008.
Income Tax Expense.
We recognized income tax expense of $13.9 million for fiscal 2008. This
expense relates primarily to profits in the United States taxed at the federal statutory rate,
losses from foreign operations for which no tax benefits can be recognized, and increases in
unrecognized tax benefits. This tax is reduced by the benefit from federal research credits and
manufacturing deductions. We recognized income tax expense of $21.9 million for fiscal 2007. This
expense relates primarily to profits in the United States taxed at the federal statutory rate,
losses from foreign operations for which no tax benefits can be recognized, and unrecognized tax
benefits. This tax was offset by federal research credits and manufacturing deductions and the
recognition of deferred tax assets for which a valuation allowance had previously been recorded.
When our FMC products begin to ship in the United States in significant volumes, our effective
state tax rate may increase and we may realize benefits from our state tax credit carryforwards.
Liquidity and Capital Resources
We had unrestricted cash and cash equivalents and investments totaling $228.4 million as of
December 28, 2008 and $263.2 million as of January 3, 2010. Our existing cash and cash equivalents
and investments are invested primarily in money market funds, high grade government sponsored
enterprises (AAA/A1+), high-grade commercial paper (A1+/P1), and high grade corporate notes
(A1/A+). We do not invest in any types of asset backed securities such as those backed by mortgages
or auto loans. None of our investments have incurred defaults or have been downgraded. We do not
hold auction rate securities. We hold unrestricted cash and cash equivalents for working capital
purposes. We do not enter into investments for trading or speculative purposes. The primary
objectives of our investment activities are to preserve principal, maintain proper liquidity to
meet operating needs, maximize yields and maintain proper fiduciary control over our investments.
We have an investment policy that guides our investing activities.
In December 2009, we transferred $211.0 million of investments from the held-to-maturity
category to the available-for-sale category based on our liquidity needs associated with the
proposed merger.
67
We enter into derivative instruments for risk management purposes only and we do not enter
into derivative instruments for speculative purposes. Our derivative program does not qualify for
hedge accounting treatment. We operate internationally and, in the normal course of business, are
exposed to fluctuations in foreign exchange rates. These fluctuations can increase the costs of
financing, investing and operating the business. To limit further our exposure to currency exchange
rate fluctuations, we also occasionally exchange U.S. Dollars for other currencies in which we
incur expenses significantly in advance of our need to make payments in those currencies.
We use forward foreign currency exchange contracts to hedge our exposure to forecasted foreign
currency denominated transactions based in the United Kingdom. These forward contracts are not
designated as cash flow, fair value or net investment hedges; are marked-to-market with changes in
fair value recorded to earnings; and are entered into for periods consistent with currency
transaction exposures, generally less than one year. These derivative instruments do not subject
our earnings or cash flows to material risk since gains and losses on these derivatives generally
offset losses and gains on the expenses and transactions being hedged. In addition, changes in
currency exchange rates related to any unhedged transactions may impact our earnings and cash
flows. Gains and losses on the changes in fair value recorded to earnings are classified as other
income and amounted to a $0.8 million gain for the year ended January 3, 2010. We had no
outstanding forward foreign currency exchange contracts as of January 3, 2010.
As of January 3, 2010, we did not have any lines of credit or other similar source of
liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
43,547
|
|
|
$
|
30,425
|
|
|
$
|
30,318
|
|
Investments, short-term
|
|
|
178,416
|
|
|
|
197,941
|
|
|
|
232,849
|
|
Accounts receivable
|
|
|
14,171
|
|
|
|
3,354
|
|
|
|
19,030
|
|
Working capital
|
|
|
131,886
|
|
|
|
156,532
|
|
|
|
130,161
|
|
Cash flow from operating activities
|
|
|
91,771
|
|
|
|
12,569
|
|
|
|
44,396
|
|
Cash flow from investing activities
|
|
|
(113,670
|
)
|
|
|
(17,173
|
)
|
|
|
(40,134
|
)
|
Cash flow from financing activities
|
|
|
(21,391
|
)
|
|
|
(8,643
|
)
|
|
|
(4,369
|
)
|
During fiscal 2007, we funded our operations primarily with cash flow from operating
activities as well as from proceeds from our initial public offering of $51.0 million. In fiscal
2008 and fiscal 2009, we funded our operations primarily with cash flow from operating activities.
Cash flow from operating activities is generally derived from net income (loss), fluctuations of
current assets and liabilities and to a lesser extent non-cash expenses.
In fiscal 2007, our net income of $153.3 million exceeded our cash flow from operating
activities by $61.5 million primarily as a result of a decrease in deferred revenue of
$163.6 million, partially offset by a decrease in deferred product cost of $33.2 million, and a
decrease in accounts receivable of $31.9 million associated with the collection of billings made in
the fourth quarter of fiscal 2006, and an increase in accrued income taxes of $19.7 million. In
fiscal 2008, our net income of $21.3 million exceeded our $12.6 million in cash flow from operating
activities by $8.7 million primarily as a result of a decrease in accrued income taxes of
$10.0 million and a decrease in deferred revenue of $13.1 million, partially offset by a decrease
in accounts receivable of $10.8 million associated with collection of billings made in the fourth
quarter of fiscal 2008 and $4.8 million of stock compensation expense. In fiscal 2009, we generated
$44.4 million of cash flow from operating activities despite having a net loss of $25.0 million.
This was primarily the result of an increase in deferred revenue of $109.6 million associated with
current billings and collection of $21.8 million of pre-bankruptcy outstanding invoices to Nortel
Networks related to fiscal 2008 activity that we accounted for on the cash basis, an increase in
accounts receivable of $15.7 million associated with collection of billings made in the fourth
quarter of fiscal 2008, an increase in deferred tax benefit of $14.8 million associated primarily
with an increase in deferred revenue not deferred for tax purposes
and an increase in deferred product and service cost of
$5.7 million associated with custom development costs for our
fentocell products. Our ability to continue to generate cash from operations will depend in large part
on the volume of product and service billings, our ability to collect accounts receivable on a
timely basis and the level of our operating expenses.
Cash flow from investing activities for fiscal 2007, 2008 and 2009 resulted primarily from the
timing of purchases, maturities and sales of investments and purchases of property and equipment.
68
Cash used in financing activities in fiscal 2007 consisted primarily of payment of a cash
dividend of $72.7 million and repayment of $0.5 million of long-term debt partially offset by net
proceeds of $51.4 million from our IPO and proceeds of $0.6 million from the exercise of stock
options. Cash used in financing activities in fiscal 2008 consisted primarily of repurchases of
$13.3 million of our common stock, proceeds of $2.6 million from the exercise of stock options and
a $2.3 million tax benefit related to the exercise of stock options. Cash used in financing
activities in fiscal 2009 consisted primarily of repurchases of $9.3 million of our common stock,
proceeds of $2.5 million from the exercise of stock options and a $2.4 million tax benefit related
to the exercise of stock options.
Although we plan to use a significant amount of our cash and investments in connection with
the proposed merger, we believe our remaining cash, cash equivalents and investments and our cash
flows from operating activities will be sufficient to meet our anticipated cash needs for at least
one operating cycle (12 months). Our future working capital requirements will depend on many
factors, including the rate of our product and service billings growth, the introduction and market
acceptance of new products, the expansion of our sales and marketing and research and development
activities, and the timing of our revenue recognition and related income tax payments. To the
extent that our cash, cash equivalents and investments and cash from operating activities are
insufficient to fund our future activities, we may be required to raise additional funds through
bank credit arrangements or public or private equity or debt financings. We also may need to raise
additional funds in the event we determine in the future to effect one or more acquisitions of
businesses, technologies or products. In the event we require additional cash resources, we may not
be able to obtain bank credit arrangements or effect any equity or debt financing on terms
acceptable to us or at all.
In April 2007, we paid a special cash dividend of $1.333 per share of common stock from our
existing cash balance. The payment to holders of common stock and redeemable convertible preferred
stock, as converted, totaled $72.7 million. We have not declared any other cash dividends on our
capital stock and do not expect to declare any cash dividends for the foreseeable future. We intend
to use future cash flow from operating activities, if any, in the operation and expansion of our
business. Declaration of future cash dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial condition, operating
results, current and anticipated cash needs and plans for expansion, and restrictions imposed by
lenders, if any.
During fiscal 2009, we repurchased 1.7 million shares of our common stock for approximately
$9.3 million under our $20 million share repurchase program approved by our Board of Directors in
July 2008 and our second $20 million stock repurchase program, which was approved by our Board of
Directors in February 2009. As of January 3, 2010, there was $17.4 million remaining under the
second stock repurchase program, which terminates on April 30, 2010 or earlier if we so elect.
69
Contractual Obligations and Commitments
The following table discloses aggregate information about our contractual obligations and the
periods in which payments are due as of January 3, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
Operating leases(1)
|
|
$
|
3,676
|
|
|
$
|
1,652
|
|
|
$
|
2,014
|
|
|
$
|
10
|
|
|
$
|
|
|
Purchase commitments(2)
|
|
$
|
10,378
|
|
|
|
6,495
|
|
|
|
3,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,054
|
|
|
$
|
8,147
|
|
|
$
|
5,897
|
|
|
$
|
10
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of contractual obligations for non-cancelable office space under operating leases.
|
|
(2)
|
|
Represents amounts associated with agreements that are enforceable, legally binding and
specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of payment. Obligations under
contracts that we can cancel without a significant penalty are not included in the table
above.
|
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements. We do not have any interest in
entities referred to as variable interest entities, which includes special purposes entities and
other structured finance entities.
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures about Market Risk
|
Foreign Currency Exchange Risk
Our operating expenses and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates, particularly changes in the British pound and Indian rupee, the currencies
in which our operating obligations in Cambridge, United Kingdom and Bangalore, India, are paid. We
use derivative instruments to limit our expense and cash flow exposure to changes in currency
exchange rates in the United Kingdom. We had no currency derivative instruments outstanding at
January 3, 2010. Should we discontinue using derivative instruments to manage our earnings in the
United Kingdom, fluctuations in currency exchange rates could affect our business in the future. To
limit further our exposure to currency exchange rate fluctuations, we also occasionally exchange
U.S. Dollars for other currencies in which we incur expenses significantly in advance of our need
to make payments in those currencies. In the event of a hypothetical ten percent adverse movement
in foreign currency exchange rates, taking into account our hedges described above, our losses of
future earnings and assets as well as our loss of cash flows would be immaterial; however, actual
effects might differ materially from this hypothetical analysis.
70
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents and investments totaling $228.4 million and
$263.2 million at December 28, 2008 and January 3, 2010, respectively. Our existing cash and cash
equivalents and investments are invested primarily in money market funds, high grade government
sponsored enterprises (AAA/A1+), high-grade commercial paper (A1+/P1) and high grade corporate
notes (A1/A+). We do not invest in any types of asset backed securities such as those backed by
mortgages or auto loans. None of our investments have incurred defaults or have been downgraded. We
do not hold auction rate securities. We hold unrestricted cash and cash equivalents for working
capital purposes. We do not enter into investments for trading or speculative purposes. The primary
objectives of our investment activities are to preserve principal, maintain proper liquidity to
meet operating needs, maximize yields and maintain proper fiduciary control over our investments.
We have an investment policy that guides our investing activities.
Although our investments are subject to credit risk, our investment policy specifies credit
quality standards for our investments and limits the amount of credit exposure from any single
issue, issuer or type of investments. We do not own derivative financial investment instruments in
our investment portfolio. In the event of a hypothetical ten percent adverse movement in interest
rates, our losses of future earnings and assets, fair values of risk sensitive financial
instruments, as well as our loss of cash flows would be immaterial; however, actual effects might
differ materially from this hypothetical analysis.
71
|
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Airvana, Inc.:
We have audited the accompanying consolidated balance sheets of Airvana, Inc. (the Company)
as of December 28, 2008 and January 3, 2010, and the related consolidated statements of operations,
cash flows and redeemable convertible preferred stock, stockholders (deficit) equity and
comprehensive income for each of the three years in the period ended January 3, 2010. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as 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 financial position of Airvana, Inc. at December 28, 2008 and January 3, 2010, and the
results of its operations and its cash flows for each of the three years in the period ended
January 3, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Airvana, Inc.s internal control over financial reporting as of
January 3, 2010, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 9, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 9, 2010
73
AIRVANA, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
|
|
(In thousands, except share and per share amounts)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,425
|
|
|
$
|
30,318
|
|
Investments
|
|
|
197,941
|
|
|
|
232,849
|
|
Accounts receivable
|
|
|
3,354
|
|
|
|
19,030
|
|
Deferred product cost
|
|
|
1,913
|
|
|
|
3,379
|
|
Deferred tax assets, current
|
|
|
2,168
|
|
|
|
17,520
|
|
Deferred tax charges, current
|
|
|
|
|
|
|
543
|
|
Prepaid taxes
|
|
|
|
|
|
|
5,016
|
|
Prepaid expenses and other current assets
|
|
|
2,758
|
|
|
|
4,372
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
238,559
|
|
|
|
313,027
|
|
Property and equipment, net
|
|
|
4,822
|
|
|
|
5,380
|
|
Deferred service cost
|
|
|
1,300
|
|
|
|
5,565
|
|
Deferred tax assets, long-term, net
|
|
|
956
|
|
|
|
431
|
|
Deferred tax charges, long-term
|
|
|
|
|
|
|
3,255
|
|
Goodwill and intangible assets, net
|
|
|
11,096
|
|
|
|
10,027
|
|
Other assets
|
|
|
603
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
257,336
|
|
|
$
|
338,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,455
|
|
|
$
|
3,430
|
|
Accrued expenses and other current liabilities
|
|
|
14,365
|
|
|
|
11,974
|
|
Accrued income taxes
|
|
|
1,897
|
|
|
|
72
|
|
Deferred revenue, current
|
|
|
61,310
|
|
|
|
167,390
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
82,027
|
|
|
|
182,866
|
|
Deferred revenue, long-term
|
|
|
5,550
|
|
|
|
9,043
|
|
Accrued income taxes
|
|
|
5,703
|
|
|
|
6,132
|
|
Other liabilities
|
|
|
1,174
|
|
|
|
653
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
12,427
|
|
|
|
15,828
|
|
Commitments and contingencies (
Note 8
)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value per share: 10,000,000 shares authorized, no shares
issued or outstanding
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value per share: 350,000,000 shares authorized, 62,931,171 and
62,909,609 shares issued and outstanding at
December 28, 2008 and January 3, 2010,
respectively
|
|
|
63
|
|
|
|
63
|
|
Additional paid-in capital
|
|
|
186,824
|
|
|
|
188,777
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
180
|
|
Accumulated deficit
|
|
|
(24,005
|
)
|
|
|
(48,997
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
162,882
|
|
|
|
140,023
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
257,336
|
|
|
$
|
338,717
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
74
AIRVANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
279,133
|
|
|
$
|
123,295
|
|
|
$
|
45,121
|
|
Service
|
|
|
26,652
|
|
|
|
14,878
|
|
|
|
19,473
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
305,785
|
|
|
|
138,173
|
|
|
|
64,594
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
34,794
|
|
|
|
3,267
|
|
|
|
3,195
|
|
Service
|
|
|
7,110
|
|
|
|
8,195
|
|
|
|
10,374
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
41,904
|
|
|
|
11,462
|
|
|
|
13,569
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
263,881
|
|
|
|
126,711
|
|
|
|
51,025
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
76,638
|
|
|
|
74,826
|
|
|
|
73,676
|
|
Selling and marketing
|
|
|
12,055
|
|
|
|
14,933
|
|
|
|
16,307
|
|
General and administrative
|
|
|
7,453
|
|
|
|
8,976
|
|
|
|
12,772
|
|
In-process research and development
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98,486
|
|
|
|
98,735
|
|
|
|
102,755
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
165,395
|
|
|
|
27,976
|
|
|
|
(51,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,881
|
|
|
|
7,241
|
|
|
|
6,693
|
|
Interest expense
|
|
|
(35
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
175,241
|
|
|
|
35,216
|
|
|
|
(45,037
|
)
|
Income tax (benefit) expense
|
|
|
21,898
|
|
|
|
13,923
|
|
|
|
(20,045
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share applicable to
common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.63
|
|
|
$
|
0.33
|
|
|
$
|
(0.40
|
)
|
Diluted
|
|
$
|
2.19
|
|
|
$
|
0.30
|
|
|
$
|
(0.40
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,238
|
|
|
|
64,278
|
|
|
|
62,499
|
|
Diluted
|
|
|
43,496
|
|
|
|
70,091
|
|
|
|
62,499
|
|
The accompanying notes are an integral part of these financial statements
75
AIRVANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,078
|
|
|
|
3,215
|
|
|
|
3,249
|
|
Amortization of intangible assets
|
|
|
713
|
|
|
|
1,069
|
|
|
|
1,069
|
|
In-process research and development
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
2,996
|
|
|
|
4,844
|
|
|
|
6,317
|
|
Deferred tax benefit
|
|
|
(2,989
|
)
|
|
|
(951
|
)
|
|
|
(14,827
|
)
|
Excess tax benefit related to exercise of stock options
|
|
|
|
|
|
|
(2,266
|
)
|
|
|
(2,442
|
)
|
Amortization of investment discounts (premiums)
|
|
|
(5,661
|
)
|
|
|
(4,113
|
)
|
|
|
940
|
|
Amortization of leasehold incentive
|
|
|
(522
|
)
|
|
|
(522
|
)
|
|
|
(521
|
)
|
Non-cash interest income
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
31,901
|
|
|
|
10,817
|
|
|
|
(15,676
|
)
|
Deferred product and service costs
|
|
|
33,164
|
|
|
|
(2,163
|
)
|
|
|
(5,731
|
)
|
Deferred tax charges
|
|
|
|
|
|
|
|
|
|
|
(3,798
|
)
|
Prepaid taxes
|
|
|
14,512
|
|
|
|
115
|
|
|
|
(2,574
|
)
|
Prepaid expenses and other current assets
|
|
|
(542
|
)
|
|
|
306
|
|
|
|
(1,384
|
)
|
Accounts payable
|
|
|
512
|
|
|
|
649
|
|
|
|
(1,025
|
)
|
Accrued expenses and other current liabilities
|
|
|
2,948
|
|
|
|
3,358
|
|
|
|
(2,386
|
)
|
Accrued income taxes
|
|
|
19,691
|
|
|
|
(9,964
|
)
|
|
|
(1,396
|
)
|
Deferred revenue
|
|
|
(163,610
|
)
|
|
|
(13,118
|
)
|
|
|
109,573
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
91,771
|
|
|
|
12,569
|
|
|
|
44,396
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,190
|
)
|
|
|
(1,765
|
)
|
|
|
(3,827
|
)
|
Purchase of 3-Way Networks, net of cash acquired
|
|
|
(10,907
|
)
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(367,851
|
)
|
|
|
(341,622
|
)
|
|
|
(290,902
|
)
|
Maturities of investments
|
|
|
268,404
|
|
|
|
309,579
|
|
|
|
255,234
|
|
Proceeds from sale of investments
|
|
|
|
|
|
|
16,631
|
|
|
|
|
|
Other assets
|
|
|
(126
|
)
|
|
|
4
|
|
|
|
(639
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(113,670
|
)
|
|
|
(17,173
|
)
|
|
|
(40,134
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(583
|
)
|
|
|
(121
|
)
|
|
|
|
|
Proceeds from initial public offering, net of offering costs
|
|
|
51,353
|
|
|
|
|
|
|
|
|
|
Payments of cash dividend
|
|
|
(72,674
|
)
|
|
|
(92
|
)
|
|
|
(5
|
)
|
Purchase of treasury stock
|
|
|
(96
|
)
|
|
|
(13,328
|
)
|
|
|
(9,291
|
)
|
Excess tax benefit related to exercise of stock options
|
|
|
|
|
|
|
2,266
|
|
|
|
2,442
|
|
Proceeds from exercise of stock options
|
|
|
609
|
|
|
|
2,632
|
|
|
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(21,391
|
)
|
|
|
(8,643
|
)
|
|
|
(4,369
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
22
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(43,268
|
)
|
|
|
(13,122
|
)
|
|
|
(107
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
86,815
|
|
|
|
43,547
|
|
|
|
30,425
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,547
|
|
|
$
|
30,425
|
|
|
$
|
30,318
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
100
|
|
|
$
|
24,723
|
|
|
$
|
2,527
|
|
Supplemental Disclosure of Noncash Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of dividends on redeemable convertible preferred
stock
|
|
$
|
4,032
|
|
|
$
|
|
|
|
$
|
|
|
Retirement of property and equipment
|
|
$
|
867
|
|
|
$
|
4,985
|
|
|
$
|
60
|
|
The accompanying notes are an integral part of these financial statements
76
AIRVANA, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS (DEFICIT) EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B1
|
|
|
Series B2
|
|
|
Series C
|
|
|
Series D
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation
|
|
|
|
|
|
|
Liquidation
|
|
|
|
|
|
|
Liquidation
|
|
|
|
|
|
|
Liquidation
|
|
|
|
|
|
|
Liquidation
|
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
(Deficit) Equity
|
|
|
|
(In thousands, except share amounts)
|
|
Balance at December 31, 2006
|
|
|
10,937,500
|
|
|
$
|
16,749
|
|
|
|
3,994,328
|
|
|
$
|
36,274
|
|
|
|
900,414
|
|
|
$
|
7,362
|
|
|
|
25,031,017
|
|
|
$
|
56,150
|
|
|
|
3,288,490
|
|
|
$
|
13,507
|
|
|
|
13,814,535
|
|
|
$
|
14
|
|
|
$
|
3,251
|
|
|
$
|
|
|
|
$
|
(126,055
|
)
|
|
$
|
(122,790
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,328
|
|
|
|
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
609
|
|
Repurchase and retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,010
|
)
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
2,996
|
|
Conversion of convertible preferred stock warrants into common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative dividends on redeemable convertible preferred stock
|
|
|
|
|
|
|
480
|
|
|
|
|
|
|
|
1,080
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
1,771
|
|
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,032
|
)
|
|
|
(4,032
|
)
|
Exercise of convertible preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,166
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
248
|
|
Issuance of common stock in connection with the Companys acquisition of 3Way Networks Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441,845
|
|
|
|
1
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
2,662
|
|
Conversion of redeemable convertible preferred stock in connection with the Companys initial public offering
|
|
|
(10,937,500
|
)
|
|
|
(17,229
|
)
|
|
|
(3,994,328
|
)
|
|
|
(37,354
|
)
|
|
|
(900,414
|
)
|
|
|
(7,581
|
)
|
|
|
(25,074,183
|
)
|
|
|
(57,990
|
)
|
|
|
(3,288,490
|
)
|
|
|
(13,989
|
)
|
|
|
40,624,757
|
|
|
|
41
|
|
|
|
134,102
|
|
|
|
|
|
|
|
|
|
|
|
134,143
|
|
Issuance of common stock in connection with the Companys initial public offering, net of offering costs of $7,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,300,000
|
|
|
|
8
|
|
|
|
50,785
|
|
|
|
|
|
|
|
|
|
|
|
50,793
|
|
Cash dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,217
|
)
|
|
|
|
|
|
|
(68,554
|
)
|
|
|
(72,771
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,343
|
|
|
|
153,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,559,983
|
|
|
|
64
|
|
|
|
190,409
|
|
|
|
|
|
|
|
(45,298
|
)
|
|
|
145,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,076,625
|
|
|
|
2
|
|
|
|
2,630
|
|
|
|
|
|
|
|
|
|
|
|
2,632
|
|
Repurchase and retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,708,200
|
)
|
|
|
(3
|
)
|
|
|
(13,325
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,328
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,844
|
|
|
|
|
|
|
|
|
|
|
|
4,844
|
|
Exercise of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
|
2,266
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,293
|
|
|
|
21,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,931,171
|
|
|
|
63
|
|
|
|
186,824
|
|
|
|
|
|
|
|
(24,005
|
)
|
|
|
162,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,648,971
|
|
|
|
2
|
|
|
|
2,483
|
|
|
|
|
|
|
|
|
|
|
|
2,485
|
|
Repurchase and retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,670,533
|
)
|
|
|
(2
|
)
|
|
|
(9,289
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,291
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,317
|
|
|
|
|
|
|
|
|
|
|
|
6,317
|
|
Excess tax benefit related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,442
|
|
|
|
|
|
|
|
|
|
|
|
2,442
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,992
|
)
|
|
|
(24,992
|
)
|
Change in unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180
|
|
|
|
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
62,909,609
|
|
|
$
|
63
|
|
|
$
|
188,777
|
|
|
$
|
180
|
|
|
$
|
(48,997
|
)
|
|
$
|
140,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
77
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. Operations
Business Description
Airvana, Inc. (the Company) is a leading provider of network infrastructure products used by
wireless operators to provide mobile broadband services. The Companys high-performance technology
and products, from emerging comprehensive femtocell solutions to core mobile network
infrastructure, enable operators to deliver compelling and consistent broadband services to mobile
subscribers, wherever they are. These services include Internet access, e-mail, music downloads,
video, IP-TV, gaming, push-to-talk and voice-over-IP (VOIP). The Companys products are deployed
in over 70 commercial networks on six continents. The Company is headquartered in Chelmsford,
Massachusetts and has offices worldwide, including development centers in Bangalore, India and
Cambridge, United Kingdom.
On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks Limited,
and certain of its other Canadian subsidiaries filed for creditor protection under the Companies
Creditors Arrangement Act in Canada. Also on January 14, 2009, some of Nortel Networks
Corporations U.S. subsidiaries, including Nortel Networks Inc. (Nortel Networks), filed
Chapter 11 voluntary petitions in the State of Delaware. On July 28, 2009, the United States and
Canadian bankruptcy courts approved a bid for Nortel Networks CDMA business by Telefon AB L.M.
Ericsson (Ericsson), a global wireless network infrastructure provider, subject to satisfaction
of regulatory and other conditions. This acquisition was completed in November 2009. Substantially
all of the Companys current billings and revenue are now derived from Ericsson. Refer to Note 20
for a discussion of the impact of this acquisition on the Company.
Proposed Merger
As discussed in Note 21, on December 17, 2009, the Company entered into an Agreement and Plan
of Merger (the Merger Agreement) with 72 Mobile Holdings, LLC, a Delaware limited liability
company (Parent), and 72 Mobile Acquisition Corp. (Merger Sub), a wholly-owned subsidiary of
Parent. Parent is a newly formed entity to be owned, directly and indirectly, by affiliates of
S.A.C. Private Capital Group, LLC, GSO Capital Partners LP, Sankaty Advisors LLC and ZelnickMedia.
Under the terms of the Merger Agreement, upon closing of the merger, Merger Sub will be merged with
and into the Company, with the Company continuing as the surviving corporation (the merger) and
the holders of the Companys common stock will receive $7.65 in cash per share of common stock.
Following the closing of the merger, Parent will own all of the outstanding capital stock of the
surviving corporation.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain
accounting policies as described in this note and elsewhere in the accompanying consolidated
financial statements. The Company believes that a significant accounting policy is one that is both
important to the portrayal of the Companys financial condition and results of operations and
requires managements most difficult, subjective or complex judgments, often as the result of the
need to make estimates about the effect of matters that are inherently uncertain.
These consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States (GAAP).
Principles of Consolidation
The principles of Accounting Standards Codification (ASC) 810,
Consolidation,
(ASC 810)
,
is considered when determining whether an entity is subject to consolidation. The accompanying
consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, after elimination of intercompany transactions and balances.
78
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
significant estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Significant estimates and
assumptions by management affect the Companys timing of revenue recognition for multiple element
arrangements, expensing or capitalizing research and development costs for software, expected
future cash flows used to evaluate the recoverability of long-lived assets and goodwill, estimated
fair values of intangible assets and goodwill, amortization methods and periods, certain accrued
expenses, stock-based compensation, contingent liabilities, the assessment of uncertain tax
positions and the related tax reserves and recoverability of the Companys net deferred tax assets
and related valuation allowance.
Although the Company regularly assesses these estimates, actual results could differ
materially from these estimates. Changes in estimates are recorded in the period in which they
become known. The Company bases its estimates on historical experience and various other
assumptions that it believes to be reasonable under the circumstances. Actual results could differ
from managements estimates if its assumptions do not turn out to be substantially accurate.
The Company is subject to a number of risks similar to those of other companies of similar
size in its industry, including, but not limited to: a highly concentrated customer base, sales
volatility, dependency on particular air interface standards, rapid technological changes,
competition from substitute products and services from larger companies, limited number of
suppliers, the current crisis affecting world financial markets, future sales or issuances of its
common stock, government regulations, management of international activities, protection of
proprietary rights, patent litigation, and dependence on key individuals.
Reclassification
The Company has netted previously reported restricted investments of $193 as of December 28,
2008 against its previously reported other assets of $410. This reclassification has been made to
conform to the current period presentation.
Fiscal Year
The Companys fiscal year ends on the Sunday nearest to December 31. Each of our fiscal
quarters ends on the Sunday closest to the last day of the third calendar month of that quarter.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with original maturities of three months
or less at the date of purchase. Cash equivalents are carried at cost, which approximates their
fair market value. Refer to Note [5] for further discussion of cash equivalents.
Investments and Restricted Investments
The Company determines the appropriate categorization of investments in securities at the time
of purchase. As of December 28, 2008 the Companys investments were categorized as held-to-maturity
and are presented at their amortized cost (see Note 3). As of January 3, 2010 the Company held
investments that were categorized as held-to-maturity and available-for-sale. The held-to-maturity
investments are presented at their amortized cost. The available-for-sale investments are presented
at fair market value with unrealized gains and losses considered to be temporary in nature reported
as a separate component of other comprehensive income (loss). The amortized cost of
held-to-maturity debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion is included in interest or other income
(expense) (see Note 3). The Company classifies securities on its balance sheet as short-term or
long-term based on the date it reasonably expects the securities to mature or liquidate.
79
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
As of December 28, 2008, the Company had classified $193 as long-term restricted investments
on its consolidated balance sheets. As of January 3, 2010, the Company had classified $210 as
short-term restricted
investments and $193 as long-term restricted investments on its consolidated balance sheets.
Refer to Note 5 for a discussion of these restricted investments.
Prepaid and Other Current Assets
Prepaid and other current assets consist of prepaid software licenses, prepaid software and
hardware maintenance contracts and inventories. Inventories are stated at the lower of cost or
market on the first-in, first-out basis. The amount of inventories held as of December 28, 2008 and
January 3, 2010 were not material.
Deferred Product and Service Cost
When the Companys products have been delivered, but the product revenue associated with the
arrangement has been deferred as a result of not meeting the revenue recognition criteria in ASC
985-605, Software Revenue Recognition, the Company also defers the related inventory costs for the
delivered items in accordance with ASC 330, Inventory, which primarily relates to third party
royalties. For development costs incurred in connection with specified upgrades, the Company
expenses these costs as incurred.
When the Company performs development services that are essential to the functionality of the
initial delivery of a new product where the associated revenues have been deferred due to the fact
that they do not qualify as units of accounting separate from the delivery of software, the Company
defers direct and incremental development costs in accordance with ASC 310-20, Accounting for
Nonrefundable Fees and Costs Associated With Originating or Acquiring Loans and Initial Direct
Costs of Leases. The costs deferred consist of employee compensation and benefits for those
employees directly involved with performing the development, as well as other direct and
incremental costs. All costs incurred in excess of the related revenues are expensed as incurred.
Direct costs included in long-term deferred service cost in the accompanying consolidated balance
sheets were $1,223 and $5,194 at December 28, 2008 and January 3, 2010, respectively.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for depreciation by charges
to operations on a straight-line basis in amounts estimated to allocate the cost of the assets over
their estimated useful lives. Depreciation expense was $3,078, $3,215 and $3,249 for the years
ended December 30, 2007, December 28, 2008 and January 3, 2010, respectively. Expenditures for
repairs and maintenance are expensed as incurred. Property and equipment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
Estimated Useful Life
|
|
|
2008
|
|
|
2010
|
|
Computer equipment and
purchased software
|
|
1.5 - 3 years
|
|
$
|
2,513
|
|
|
$
|
2,531
|
|
Test and lab equipment
|
|
3 years
|
|
|
4,510
|
|
|
|
8,285
|
|
Leasehold improvements
|
|
Shorter of original contractual life of the lease or 5 years
|
|
|
6,546
|
|
|
|
6,558
|
|
Office furniture and equipment
|
|
3 - 5 years
|
|
|
856
|
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
|
14,425
|
|
|
|
18,221
|
|
Less: Accumulated
depreciation and amortization
|
|
|
|
|
|
|
(9,603
|
)
|
|
|
(12,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,822
|
|
|
$
|
5,380
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008 and fiscal 2009, the Company completed a physical inventory of its property
and equipment. In fiscal 2008, the Company determined that approximately $4,985 of fully
depreciated assets were no longer in service and wrote-off these assets.
80
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Capitalized Internal-Use Software
The Company capitalizes certain costs incurred to purchase internal-use software in accordance
with ASC 350-40,
Internal-Use Software
, (ASC 350-40). To date, such costs have included external
direct costs of materials and services consumed in obtaining internal-use software and are included
within computer hardware and software. Once the capitalization criteria of ASC 350-40 have been
met, such costs are capitalized and amortized on a straight-line basis over three years after the
software has been put into use. Subsequent additions, modifications, or upgrades to internal use
software are capitalized only to the extent that they allow the software to perform a task it
previously did not perform. Software maintenance and training costs are expensed in the period in
which they are incurred. The Company capitalized $294, $57 and $72 during fiscal 2007, fiscal 2008
and fiscal 2009, respectively, related to a company-wide enterprise resource planning system
implementation project, as well as upgrades and enhancements that added significant functionality
to the system. At January 3, 2010, the Company had capitalized software of $1,411 and accumulated
depreciation of $1,285 which is included in computer equipment and purchased software.
Software Development Costs
The Companys research and development expenses have been charged to operations as incurred.
In accordance with ASC 985-20,
Costs of Software to Be Sold, Leased or Marketed
, the Company
capitalizes software development costs incurred after the technological feasibility of software
development projects has been established. The Company determines technological feasibility has
been established at the time when a working model of the software has been completed. Because the
Company believes its current process for developing software is essentially completed concurrently
with the establishment of technological feasibility, no software development costs have met the
criteria for capitalization.
Revenue Recognition
The Company derives revenue from the licensing of software products and software upgrades; the
sale of hardware products, maintenance and support services; and the sale of professional services,
including training. The Companys products incorporate software that is more than incidental to the
related hardware. Accordingly, the Company recognizes revenue in accordance with ASC 985-605
.
Under multiple-element arrangements where several different products or services are sold
together, the Company allocates revenue to each element based on vendor specific objective evidence
(VSOE) of fair value. It uses the residual method when fair value does not exist for one or more
of the delivered elements in a multiple-element arrangement. Under the residual method, the fair
value of the undelivered elements is deferred and subsequently recognized when earned. For a
delivered item to be considered a separate element, the undelivered items must not be essential to
the functionality of the delivered item and there must be VSOE of fair value for the undelivered
items in the arrangement. Fair value is generally limited to the price charged when the Company
sells the same or similar element separately or, when applicable, the stated substantive renewal
rate. If evidence of the fair value of one or more undelivered elements does not exist, all revenue
is deferred and recognized after delivery of those elements occurs or when fair value can be
established. For example, in situations where the Company sells a product during a period when it
has a commitment for the delivery or sale of a future specified software upgrade, the Company
defers revenue recognition until the specified software upgrade is delivered.
Significant judgments in applying accounting rules and regulations to the Companys business
practices principally relate to the timing and amount of revenue recognition given its current
concentration of revenues with one customer and its inability to establish VSOE of fair value for
specified software upgrades.
The Company sells its products primarily through original equipment manufacturer (OEM)
arrangements with telecommunications infrastructure vendors, such as Ericsson. The Company
collaborates with its OEM customers on a best efforts basis to develop initial product features and
subsequent enhancements for the products that are sold by that particular OEM to its wireless
operator customers. For each OEM customer, the Company expects to continue to develop products
based on its core technology that are configured for the requirements of the OEMs base stations
and its operator customers.
This business practice is common in the telecommunications equipment industry and is
necessitated by the long planning cycles associated with wireless network deployments, coupled with
rapid changes in technology. Large and complex wireless networks support tens of millions of
subscribers and it is critical that any changes or upgrades be
planned well in advance to ensure that there are no service disruptions. The evolution of the
Companys infrastructure technology therefore must be planned, implemented and integrated with the
wireless operators plans for deploying new applications and services and any equipment or
technology provided by other vendors.
81
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Given the nature of the Companys business, the majority of its sales are generated through
multiple-element arrangements comprised of a combination of products, maintenance and support
services, specified product upgrades and in some cases, upfront licensing and development fees. The
Company has established a business practice of negotiating with OEMs the pricing for future
purchases of new product releases and specified software upgrades. For example, for Ericsson, the
Company expects that it will release one or more optional specified upgrades annually. To determine
whether these optional future purchases are elements of current purchase transactions, the Company
assesses whether such new products or specified upgrades will be offered to the OEM customer at a
price that represents a significant and incremental discount to current purchases. Because the
Company sells uniquely configured products through each OEM customer, it does not maintain a list
price for its products and specified software upgrades. Additionally, as it does not sell these
products and upgrades to more than one customer, the Company is unable to establish VSOE of fair
value for these products and upgrades. Consequently, the Company is unable to determine if the
license fees it charges for the optional specified upgrades include a significant and incremental
discount. As such, the Company defers all revenue related to current product sales, software-only
license fees, maintenance and support services and professional services until all specified
upgrades committed at the time of shipment have been delivered. For example, the Company recognizes
deferred revenue from sales to an OEM customer only after it delivers a specified upgrade to which
it had previously committed. However, when it commits to an additional upgrade before it has
delivered a previously committed upgrade, the Company defers all revenue from product sales after
the date of such commitment until it delivers the additional upgrade. Any revenue that the Company
had deferred prior to the additional commitment is recognized after the previously committed
upgrade is delivered.
If there are no commitments outstanding for specified upgrades, the Company recognizes revenue
when all of the following have occurred: (1) delivery (FOB origin), provided that there are no
uncertainties regarding customer acceptance; (2) there is persuasive evidence of an arrangement;
(3) the fee is fixed or determinable; and (4) collection of the related receivable is reasonably
assured, as long as all other revenue recognition criteria have been met. If there are
uncertainties regarding customer acceptance, the Company recognizes revenue and related cost of
revenue when those uncertainties are resolved. Any adjustments to software license fees are
recognized when reported to the Company by an OEM customer.
For arrangements where the Company receives initial licensing fees or customization fees for
new products under development, the Company defers recognition of these fees until the final
product has been delivered and accepted, and then recognizes the fees over the expected customer
relationship period. Revenue from pre-production units is deferred and recognized once the final
product has been delivered and accepted and the other criteria for revenue recognition are met,
including but not limited to VSOE of fair value for post-contract customer support (PCS). If VSOE
of fair value does not exist for undelivered elements, the Company defers all revenues until VSOE
of fair value exists or the undelivered element is delivered. If the only remaining undelivered
element is PCS, the Company recognizes revenue ratably over the contractual PCS period.
For arrangements that include annual volume commitments and pricing levels, where the
associated discounts represent significant and incremental discounts and where the maximum discount
to be provided cannot be quantified prior to the expiration of the arrangement, the Company
recognizes revenue, provided that delivery and acceptance has occurred and no other commitments
such as specified upgrades are outstanding, based on the lowest pricing level stated in the
arrangement. Any amounts invoiced in excess of the lowest pricing level are deferred and recognized
ratably over the remaining discount period, which typically represents the greater of the PCS
period or the remaining contractual period.
For its direct sales to end user customers, which have not been material to date, the Company
recognizes product revenue upon delivery, provided that all other revenue recognition criteria have
been met.
82
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The Companys support and maintenance services consist of the repair or replacement of
defective hardware, around-the-clock help desk support, technical support and the correction of
bugs in its software. The Companys annual support and maintenance fees are based on a percentage
of the initial sales or list price of the applicable hardware and software products and may include
a fixed amount for help desk services. Included in the price of the product, the Company provides
maintenance and support during the product warranty period, which is typically one year. As
discussed above, the Company defers all revenue, including revenue related to PCS, until all
specified
upgrades outstanding at the time of shipment have been delivered. In connection with an
amendment to the Companys OEM arrangement with Ericsson dated September 28, 2007, the Company can
no longer assert VSOE of fair value for PCS to Ericsson. When VSOE of fair value for PCS cannot be
established, all revenue related to product sales and software-only license fees, including bundled
PCS, is deferred until all specified software upgrades outstanding at the time of shipment are
delivered. At the time of the delivery of all such upgrades, the Company recognizes a proportionate
amount of all such revenue previously deferred based on the portion of the applicable warranty
period that has elapsed as of the time of such delivery. The unearned revenue is recognized ratably
over the remainder of the applicable warranty period. When VSOE of fair value for PCS can be
established, the Company allocates a portion of the initial product revenue and software-only
license fees to the bundled PCS based on the fees the Company charges for annual PCS when sold
separately. When all specified software upgrades outstanding at the time of shipment are delivered,
under the residual method, the Company recognizes the previously deferred product revenue and
software-only license fees, as well as the earned PCS revenue, based on the portion of the
applicable warranty period that has elapsed. The unearned PCS revenue is recognized ratably over
the remainder the applicable warranty period. Notwithstanding the Companys inability to establish
VSOE of fair value of PCS to Ericsson for revenue recognition purposes, the Company presents
product revenue and service revenue separately on its consolidated statements of income based on
historical maintenance and support services renewal rates at the time of sale.
For PCS renewals, the Company recognizes revenue for such services ratably over the service
period as services are delivered.
The Company provides professional services for deployment optimization, network engineering
and radio frequency deployment planning, and provides training for network planners and engineers.
The Company generally recognizes revenue for these services as the services are performed as it has
deemed such services not essential to the functionality of its products.
In addition, certain contracts contain other mutually agreed upon specifications or service
level requirements. Certain of the Companys product specifications include an uptime guarantee and
guarantees regarding failure rates. Historically, the Company has not incurred substantial costs
relating to these guarantees and the Company currently expenses such costs as they are incurred.
The Company reviews these costs on a regular basis as actual experience and other information
becomes available; and should they become more substantial, the Company would accrue an estimated
exposure and consider the potential related effects of the timing of recording revenue on its sales
arrangements. The Company has not accrued any costs related to these warranties in the accompanying
consolidated financial statements.
In accordance with ASC 605-45,
Principal Agent Considerations
, the Company classifies the
reimbursement by customers of shipping and handling costs as revenue and the associated cost as
cost of revenue. The Company records reimbursable out-of-pocket expenses in both product and
services revenues and as a direct cost of product and services. For fiscal 2008 and fiscal 2009,
shipping and handling and reimbursable out-of-pocket expenses were not material.
The Company has not issued and does not anticipate issuing any refunds for products sold. As
such, no provisions have been recorded against deferred revenue, revenue or any related receivables
for potential refunds.
The Company anticipates that the revenue recognition related to the Companys fixed-mobile
convergence products will be complex, given that a number of the Companys current arrangements for
the development and supply of these products contain significant customization services, volume
discounts, specified upgrades and multiple elements for new service offerings for which
vendor-specific evidence of fair value does not currently exist. To date, there have been no
material revenues recognized with respect to these products.
Concentrations of Credit Risk and Significant Customers
Financial instruments that subject the Company to credit risk consist of cash and cash
equivalents, short and long-term restricted investments, short-term and long-term investments and
accounts receivable. The Company maintains its cash and cash equivalents and investment accounts
with two major financial institutions. The Companys cash equivalents and investments are invested
in securities with high credit ratings.
83
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The Companys customers are principally located in the United States, Canada, Europe and
Japan. The Company performs ongoing credit evaluations of the financial condition of its customers
and generally does not require collateral. Although the Company is directly affected by the overall
financial condition of the telecommunications industry as well as global economic conditions,
management does not believe significant credit risk exists as of January 3, 2010. The Company
generally has not experienced any material losses related to receivables from individual customers
or groups of customers in the telecommunications industry. The Company believes that all of its
accounts receivable are collectible and, therefore, has not provided any reserve for doubtful
accounts as of December 28, 2008 and January 3, 2010.
At December 28, 2008, Nortel accounted for $500 of accounts receivable that was paid in the
ordinary course prior to Nortels bankruptcy filing. At December 28, 2008, the Company had four
customers who accounted for 49%, 15%, 11% and 11% of accounts receivable. At January 3, 2010
Ericsson accounted for 96% of accounts receivable. Nortel Networks accounted for 99% of revenues
individually for each of the years ended December 30, 2007 and December 28, 2008. Ericsson and one
other customer accounted for 85% and 10%, respectively, of revenues, for the year ended January 3,
2010.
On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks Limited,
and certain of its other Canadian subsidiaries filed for creditor protection under the Companies
Creditors Arrangement Act in Canada. Some of Nortel Networks Corporations U.S. subsidiaries,
including Nortel Networks, filed Chapter 11 voluntary petitions in the State of Delaware. See
Note 20 for further discussion. In November 2009, Ericsson acquired Nortel Networks CDMA business.
Substantially all of the Companys current billings and revenue are now derived from Ericsson.
Segment and Geographic Information
ASC 280,
Segment Reporting
(ASC 280), establishes standards for reporting information about
operating segments in annual financial statements and requires selected information of these
segments be presented in interim financial reports to stockholders. Operating segments are defined
as components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making group, in making
decisions on how to allocate resources and assess performance. The Companys chief operating
decision making group, as defined under ASC 280, consists of the Companys chief executive officer,
chief financial officer and the executive vice presidents. As of January 3, 2010, the Company views
its operations and manages its business as one operating segment. The Company continues to evaluate
its current and new product lines for their impact on reporting segments.
Export sales from the United States to unaffiliated customers are primarily to a customer in
Canada, and accounted for 99%, 99% and 85% of revenues individually for fiscal 2007, fiscal 2008
and fiscal 2009, respectively.
Transfers between the Company and its subsidiaries are generally recorded at amounts similar
to the prices paid by unaffiliated foreign dealers. All intercompany profit is eliminated in
consolidation.
The Companys identifiable long-lived assets by geographic region as of December 28, 2008 and
January 3, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
United States
|
|
$
|
5,501
|
|
|
$
|
24,048
|
|
United Kingdom
|
|
|
12,178
|
|
|
|
864
|
|
Other foreign locations
|
|
|
1,099
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
$
|
18,778
|
|
|
$
|
25,690
|
|
|
|
|
|
|
|
|
84
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Stock-Based Compensation
As of January 3, 2010, the Company had two stock-based employee compensation plans which are
more fully described in Note 11.
Through the year ended January 1, 2006, the Company accounted for its stock-based awards to
employees using the intrinsic value method and elected the disclosure-only requirements. Under the
intrinsic value method, compensation expense is measured on the date of the grant as the difference
between the deemed fair value of the Companys common stock and the exercise or purchase price
multiplied by the number of stock options or restricted stock awards granted.
ASC 718,
Stock Compensation
(ASC 718), requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the Companys income statement
based on their estimated fair values. In accordance with ASC 718, the Company recognizes the
compensation cost of share-based awards on a straight-line basis over the vesting period of the
award, which is generally four to five years, and the Company has elected to use the Black-Scholes
option pricing model to determine fair value. ASC 718 eliminates the alternative of applying the
intrinsic value method to stock compensation awards. The Company adopted this accounting standard
on the first day of fiscal 2006 using the prospective-transition method, and the Company will
continue to apply the intrinsic value method in future periods to equity awards granted prior to
the adoption this guidance.
Comprehensive Income
ASC 220,
Comprehensive Income,
establishes standards for reporting and displaying
comprehensive income and its components in financial statements. Comprehensive income is defined as
the change in stockholders equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. Comprehensive income for the years ended
December 30, 2007 and December 28, 2008 is equal to the reported net income. Comprehensive loss for
the year ended January 3, 2010 is equal to the reported net loss adjusted for unrealized gains and
losses on short-term investments. Accumulated other comprehensive income is made up entirely of
unrealized gains and losses on investments at January 3, 2010.
Net Income (Loss) Per Share
The Company calculates net income (loss) per share in accordance with ASC 260,
Earnings Per Share
.
Basic net income (loss) per share is computed by dividing the
net income (loss) applicable to common stock
by the weighted-average number of common shares outstanding for the fiscal period. Diluted net
income per share is computed using the more dilutive of (a) the two-class method or (b) the
if-converted method. Diluted net income per share gives effect to all potentially dilutive
securities, including stock options and unvested restricted common stock using the treasury stock
method. Prior to the Companys initial public offering (IPO), the Company allocated net income
first to preferred stockholders based on dividend rights under the
85
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Companys
charter and then to common and preferred stockholders based on ownership interests. Net losses were not allocated to
preferred stockholders. Effective with the Companys IPO, all of the then outstanding preferred
stock was converted into common stock and thus subsequent to the IPO, diluted net income per share
is computed using the weighted average number of common shares and, if dilutive, potential common
shares outstanding during the period. Potential common shares consist of the incremental common
shares issuable upon the exercise of stock options, warrants and unvested common shares subject to
repurchase or cancellation. The dilutive effect of outstanding stock options, restricted shares and
warrants is reflected in diluted earnings per share by application of the treasury stock method. A
reconciliation of the numerator and denominator used in the calculation of basic and diluted net
income (loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Allocation of net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable preferred stock
|
|
$
|
4,032
|
|
|
$
|
|
|
|
$
|
|
|
Dividend allocated to preferred stockholders
|
|
|
54,153
|
|
|
|
|
|
|
|
|
|
Net income applicable to preferred stockholders
|
|
|
58,185
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
|
95,158
|
|
|
|
21,293
|
|
|
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable preferred stock
|
|
$
|
4,032
|
|
|
$
|
|
|
|
$
|
|
|
Dividend allocated to preferred stockholders
|
|
|
54,153
|
|
|
|
|
|
|
|
|
|
Net income applicable to preferred stockholders
|
|
|
58,185
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
|
95,158
|
|
|
|
21,293
|
|
|
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
153,343
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
36,238
|
|
|
|
64,278
|
|
|
|
62,499
|
|
Dilutive effect of common stock equivalents
|
|
|
7,258
|
|
|
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
43,496
|
|
|
|
70,091
|
|
|
|
62,499
|
|
Calculation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
95,158
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
36,238
|
|
|
|
64,278
|
|
|
|
62,499
|
|
Net income (loss) per share
|
|
$
|
2.63
|
|
|
$
|
0.33
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders
|
|
$
|
95,158
|
|
|
$
|
21,293
|
|
|
$
|
(24,992
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
43,496
|
|
|
|
70,091
|
|
|
|
62,499
|
|
Net income (loss) per share
|
|
$
|
2.19
|
|
|
$
|
0.30
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding do not include options to purchase common stock
and unvested restricted shares outstanding totaling 1,328,185, 3,966,960 and 6,350,918 shares of
common stock for the years ended December 30, 2007, December 28, 2008 and January 3, 2010,
respectively, as their effect would have been anti-dilutive.
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC 360 which requires that
long-lived assets and certain identifiable assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Any
write-downs are treated as permanent reductions in the carrying amount of the assets. Based on this
evaluation, the Company determined that, as of each of the balance sheet dates presented, none of
the Companys long-lived assets were impaired.
86
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Goodwill and Other Intangibles
The Company accounts for its goodwill in accordance with ASC 350,
Intangibles Goodwill and
Other
(ASC 350), which requires that goodwill be tested for impairment on an annual basis, which
the Company has selected to be in the fourth fiscal quarter of each year. The Company operates its
business and tests its goodwill for impairment as a single reporting unit. Testing is required
between annual tests if events occur or circumstances change that
would, more likely than not, reduce the fair value of the reporting unit below its carrying
value. There was no impairment of goodwill during any periods presented.
Foreign Currency Translation
The financial statements of the Companys foreign subsidiaries are translated in accordance
with ASC 830,
Foreign Currency Matters
. The functional currency of the Companys foreign
subsidiaries in India, the United Kingdom, Japan and Korea is the U.S. dollar. Accordingly, all
monetary assets and liabilities, including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, of these foreign subsidiaries are remeasured into U.S. dollars using
the exchange rates in effect at the balance sheet date. Revenue and expenses of these foreign
subsidiaries are remeasured in U.S. dollars at the average rate in effect during the year. All
non-monetary assets and liabilities, including prepaid expenses, deferred product costs, property
and equipment, goodwill, intangible assets and deferred revenues are measured into U.S. dollars
using the historical exchange rates at the time such assets were acquired or liabilities assumed.
Any differences resulting from the remeasurement of assets, liabilities, and operations of India,
the United Kingdom, Japan and Korea subsidiaries are recorded within operating expense in the
consolidated statements of operations. During the years ended December 30, 2007, December 28, 2008,
the Company recorded foreign currency gains of $113 and, $114, respectively. During the year ended
January 3, 2010, the Company recorded foreign currency losses of $51.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740,
Income Taxes
, which sets
forth the asset and liability method for accounting and reporting income taxes. Under ASC 740,
deferred tax assets and liabilities are recognized based on temporary differences between the
financial reporting and income tax bases of assets and liabilities using statutory rates. In
addition, ASC 740 requires a valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized.
ASC 740 also provides criteria for the recognition, measurement, presentation and disclosures
of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is
more likely than not that the position is sustainable based solely on its technical merits. There
was no effect to the Companys financial statements at the implementation date. As of December 28,
2008 and January 3, 2010 the Company had $5,703 and $6,132, respectively, including interest, of
unrecognized tax benefits.
Fair Value of Financial Instruments
Financial instruments consist principally of cash and cash equivalents, short-term and
long-term investments, short-term and long-term restricted investments, accounts receivable and
accounts payable. The fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their respective fair values due to their
short-term maturities. The Company has short-term investments that are classified as
held-to-maturity, which are reported at amortized cost and approximate fair market value, and
available-for-sale which are reported at fair market value. Refer to Notes 3 and 5 for further
discussion of fair value of investments.
Single or Limited Source Suppliers and Contract Manufacturers
Because the Company has and will continue to subcontract the manufacturing and assembly of its
products and procurement of materials to major independent manufacturers, the Company does not have
significant internal manufacturing capabilities. The Companys reliance on contract manufacturers
exposes it to a number of risks, including reduced control over manufacturing capacity and
component availability, product completion and delivery times, product quality, manufacturing
costs, and inadequate or excess inventory levels, which could lead to product shortage or charges
for excess and obsolete inventory. As of January 3, 2010, a majority of the Companys sales consist
of software-only license fees which do not include a manufactured hardware component. However, the
Company expects to rely on third party contract manufacturers for its production of its
fixed-mobile convergence products.
87
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Advertising Costs
Advertising costs are charged to operations as incurred. The Company has not used any
direct-response advertising. Advertising costs, which include trade shows and conventions, were
approximately $253, $548 and $693 for fiscal 2007, fiscal 2008 and fiscal 2009, respectively, and
were included in selling and marketing expense in the Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
ASC 805,
Business Combinations
(ASC 805), applies to all transactions in which an entity
obtains control of one or more businesses and establishes principles and requirements for how the
acquirer:
a. Recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date
fair values;
b. Recognizes and measures the goodwill acquired in the business combination or a gain from
a bargain purchase; and
c. Determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
While prior guidance by the Financial Accounting Standards Board (FASB) permitted deferred
recognition of pre-acquisition contingencies until the contingency was resolved and consideration
was issued or issuable, ASC 805 requires an acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date, measured at their
acquisition-date fair values. Acquisition costs, such as legal, accounting and other professional
and consulting fees, are to be expensed in the periods in which the costs are incurred and the
services are received, except for costs to issue debt or equity securities. This accounting
standard was effective for the Company for business combinations for which the acquisition date is
on or after January 1, 2009. The Company has not had any business combinations after this date.
ASC 820,
Fair Value Measurements and Disclosures
(ASC 820), defines fair value, establishes
a framework for measuring fair value and expands disclosure requirements about fair value
measurements. This accounting standard was effective on January 1, 2008, however, in February 2008,
the FASB delayed the effective date of this accounting standard for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption of this accounting
standard for the Companys financial assets and liabilities did not have a material impact on its
consolidated financial statements. The adoption of this accounting standard for the Companys
non-financial assets and liabilities did not have a material impact on its financial position or
results from operations.
ASC 810-10-65,
Noncontrolling Interests in Consolidated Financial Statements
(ASC
810-10-65), amends ASC 810-10-10 to establish accounting and reporting standards for the
noncontrolling (i.e. minority) interest in a subsidiary and for the deconsolidation of a
subsidiary. ASC 810-10-65 requires, among other things, that a minority interest shall be clearly
identified and presented within the equity section of a consolidated balance sheet and that the
amount of consolidated net income attributable to the parent and to the noncontrolling interest be
clearly identified and presented on the face of a consolidated statement of income. This accounting
standard was effective for fiscal years beginning after December 15, 2008 and the adoption of this
accounting standard did not have a material effect on the Companys consolidated financial
statements.
ASC 350-30,
General Intangibles Other Than Goodwill
(ASC 350-30), amends the factors that
must be considered in developing renewal or extension assumptions used to determine the useful life
over which to amortize the cost of a recognized intangible asset under ASC 350-10. ASC 350-30
requires an entity to consider its own assumptions about renewal or extension of the term of the
arrangement, consistent with its expected use of the asset.
88
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
ASC 350-30 also requires the following incremental disclosures for renewable intangible
assets:
|
|
|
The weighted-average period prior to the next renewal or extension
(whether explicit and implicit) for each major intangible asset
class;
|
|
|
|
|
The entitys accounting policy for the treatment of costs incurred to
renew or extend the term of a recognized intangible asset; and
|
|
|
|
|
For intangible asset renewed or extended during the period:
|
|
|
|
For entities that capitalize
renewal or extension costs, the
costs incurred to review or
extend the asset, for each major
intangible asset class and
|
|
|
|
|
The weighted-average period
prior to the next renewal or
extension (whether explicit and
implicit) for each major
intangible asset class.
|
ASC 350-30 is effective for financial statements for fiscal years beginning after December 15,
2008. The guidance for determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date. Early adoption is prohibited.
Accordingly, ASC 350-30 would not serve as a basis to change the useful life of an intangible asset
that was acquired prior to the effective date (January 1, 2009 for a calendar year company).
However, the incremental disclosure requirements described above would apply to all intangible
assets, including those recognized in periods prior to the effective date of ASC 350-30. The
adoption of ASC 350-30 did not have a material impact on the Companys financial position or
results of operations.
ASC 815,
Derivative and Hedging,
requires additional disclosures about the Companys
objectives and strategies for using derivative instruments, how the derivative instruments and
related hedged items are accounted for under ASC 815, and related interpretations, and how the
derivative instruments and related hedged items affect the financial statements. The adoption of
ASC 815 had no financial impact on the Companys consolidated financial statements. Refer to Note
6, Derivative Instruments and Hedging Activities for additional information on the Companys
hedging activities.
ASC 825,
Financial Instruments
, requires disclosures about fair value of financial instruments
in interim as well as in annual financial statements. ASC 825 also requires fair value disclosures
in all interim financial statements. This accounting standard was effective for the Company as of
the second fiscal quarter of 2009 and did not have a material impact on the Companys financial
position, results of operations or cash flows.
ASC 855,
Subsequent Events
(ASC 855), establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. ASC 855 is effective for interim or annual financial periods
ending after June 15, 2009, the quarter ending June 28, 2009 for the Company. The implementation of
this standard did not have a significant impact on the financial statements of the Company.
In June 2009, the FASB issued the FASB Accounting Standards Codification (the Codification)
as the single source of authoritative GAAP. The Codification supersedes all existing non-SEC
accounting and reporting standards. As a result, upon adoption, all references to accounting
literature in the Companys SEC filings will be required to conform to the appropriate reference
within the Codification. The Company adopted this standard for its third quarter ending
September 27, 2009. The adoption of this standard did not have an impact on its financial position
or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In September 2009, the FASB ratified the final consensuses reached by the Emerging Issues Task
Force regarding revenue arrangements with multiple deliverables and software revenue recognition.
The consensus reached on arrangements with multiple deliverables addresses how consideration should
be allocated to different units of accounting and removes the previous criterion that entities must
use objective and reliable evidence of fair value in separately accounting for deliverables. The
consensus reached on software revenue recognition will exclude products containing both software
and non-software components that function together to deliver the products essential functionality
from the scope of current revenue recognition guidance for software products. Although these
consensuses are effective for the Company as of January 1, 2011, early adoption is permitted with
expanded
disclosures and retrospective adjustment to the beginning of the fiscal year of adoption. The
Company is currently assessing the timing of adoption.
89
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
3. Investments
In accordance with ASC 320,
Investments Debt and Equity Securities
, the Company has
classified its investments as held to maturity and available for sale. Its held-to-maturity
securities are reported at amortized cost, which approximates fair market value. Its
available-for-sale securities are reported at fair market value.
The amortized cost and estimated fair value of the Companys held-to-maturity securities was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2008
|
|
|
January 3, 2010
|
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Corporate debt securities
|
|
$
|
86,140
|
|
|
$
|
86,674
|
|
|
$
|
|
|
|
$
|
|
|
Debt securities of U.S. government agencies
|
|
|
111,801
|
|
|
|
112,709
|
|
|
|
21,830
|
|
|
|
21,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197,941
|
|
|
$
|
199,383
|
|
|
$
|
21,830
|
|
|
$
|
21,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All held-to-maturity investment securities had maturities of less than one year as of
December 28, 2008 and January 3, 2010.
The amortized cost and estimated fair value of the Companys available-for-sale securities was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2010
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Value
|
|
Corporate debt securities
|
|
$
|
99,711
|
|
|
$
|
113
|
|
|
$
|
(10
|
)
|
|
$
|
99,814
|
|
Debt securities of U.S. government agencies
|
|
|
111,128
|
|
|
|
134
|
|
|
|
(57
|
)
|
|
|
111,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,839
|
|
|
$
|
247
|
|
|
$
|
(67
|
)
|
|
$
|
211,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 28, 2008, the Company sold certain credit card asset backed
securities which were classified as held-to-maturity due to a deterioration of creditworthiness of
the underlying trusts that issued the securities. The Company routinely monitors all of its
investments, and for the securities that were sold, certain liquidity and cash flow metrics tracked
by the Company had recently deteriorated. The Company believed that it was prudent to liquidate
these investments prior to any potential downgrades by credit analysts. The Company sold a total of
eight securities having a total amortized cost of $16,630 and realized a gain on sale of these
investments of $83.
During the year ended January 3, 2010, the Company transferred $210,987 of investments from
the held-to-maturity category to the available-for-sale category based on its liquidity needs
associated with the proposed merger (see Note 21).
The Company held all of the securities it held with maturity dates on or before February 28,
2010 as of January 3, 2010 to maturity.
The Company held three and thirteen investments in debt securities that were in an unrealized
loss position as of December 28, 2008 and January 3, 2010, respectively, however, the losses were
not material and management does not believe any individual unrealized loss at December 28, 2008
and January 3, 2010 represents an other-than-temporary impairment given the nominal amount of the
unrealized losses and the creditworthiness of the issuers of the securities that were in unrealized
loss positions.
As of December 28, 2008 and January 3, 2010, the Company had gross unrealized gains in its
held-to-maturity securities of $1,442 and $8, respectively, which are not recorded. As of January
3, 2010, the Company had gross unrealized gains in its available-for-sale securities of $180, which
are included in other comprehensive income.
90
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
4. Goodwill and Intangible Assets
The Companys intangible assets and goodwill arose in connection with its business combination
with 3 Way Networks Limited (see Note 14). The intangible assets were recorded at fair value and
are stated net of accumulated amortization.
The Company amortizes its intangible assets that have finite lives using either the
straight-line method or, if reliably determinable, based on the pattern in which the economic
benefit of the asset is expected to be consumed utilizing expected undiscounted future cash flows.
Amortization is recorded over estimated useful lives ranging from three to five years. The Company
reviews its intangible assets subject to amortization quarterly to determine if any adverse
conditions exist or a change in circumstances has occurred that would indicate impairment or a
change in remaining useful life. If the carrying value of an asset exceeds its undiscounted cash
flows, the Company will write-down the carrying value of the intangible asset to its fair value in
the period identified. The Company generally calculates fair value as the present value of
estimated future cash flows to be generated by an asset using a risk-adjusted discount rate. If the
estimate of an intangible assets remaining useful life is changed, the Company will amortize the
remaining carrying value of the intangible asset prospectively over the revised remaining useful
life.
As of December 28, 2008, goodwill and intangible assets, net, consisted of goodwill of $7,998
and acquired intangible assets of $3,098. As of January 3, 2010, goodwill and intangible assets,
net, consisted of goodwill of $7,998 and acquired intangible assets of $2,029. As of December 28,
2008 and January 3, 2010, the Companys acquired intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2008
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Intangible
|
|
|
Amortization
|
|
|
Intangible
|
|
Developed technology
|
|
$
|
3,340
|
|
|
$
|
1,113
|
|
|
$
|
2,227
|
|
Customer relationships
|
|
|
1,350
|
|
|
|
563
|
|
|
|
787
|
|
Non-compete agreements
|
|
|
190
|
|
|
|
106
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
4,880
|
|
|
$
|
1,782
|
|
|
$
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2010
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Intangible
|
|
|
Amortization
|
|
|
Intangible
|
|
Developed technology
|
|
$
|
3,340
|
|
|
$
|
1,782
|
|
|
$
|
1,558
|
|
Customer relationships
|
|
|
1,350
|
|
|
|
900
|
|
|
|
450
|
|
Non-compete agreements
|
|
|
190
|
|
|
|
169
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
4,880
|
|
|
$
|
2,851
|
|
|
$
|
2,029
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on intangible assets was $1,069 and $1,069 for the years ended
December 28, 2008 and January 3, 2010, respectively. The Company records amortization expense
related to developed technology as a component of cost of product revenues in the accompanying
consolidated statements of operations. Expected future amortization of intangible assets for fiscal
years indicated is as follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2010
|
|
|
1,026
|
|
2011
|
|
|
780
|
|
2012
|
|
|
223
|
|
|
|
|
|
|
|
$
|
2,029
|
|
|
|
|
|
In accordance with ASC 360, the Company evaluates the realizability of long-lived assets,
which primarily consist of property and equipment and definite lived intangible assets (the
Long-Lived Assets), on an annual basis, or more frequently when events or business conditions
warrant it, based on expectations of non-discounted future cash flows. Based upon a combination of
factors, including the deteriorating macro-economic environment and
declines in the stock markets, the Company performed in the fourth quarter of fiscal 2009 a
test for the impairment of long-lived assets as required by ASC 360.
91
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The interim evaluation of the impairment of long-lived assets, other than goodwill, was based
on expectations of non-discounted future cash flows compared to the carrying value of the
long-lived asset groups in accordance with ASC 360-10-35-21. The Companys cash flow estimates were
based upon historical cash flows, as well as future projected cash flows derived from the annual
Company-wide budgeting process and interim forecasting. The Company believes that its procedures
for estimating gross future cash flows are reasonable and account for market conditions at the time
of estimation. The results of the Companys interim impairment testing under ASC 360 indicated that
there was no impairment of the Long-Lived Assets, as of January 3, 2010.
The Company conducted its annual goodwill impairment test as of the first day of the fourth
quarter of fiscal 2009 in accordance with ASC 350. In performing the test, the Company utilized the
two-step approach prescribed under ASC 350. The first step requires a comparison of the carrying
value of the reporting unit, as defined, to the fair value of this unit. The Company considered a
number of factors to determine the fair value of a reporting unit, including an independent
valuation to conduct this test. The valuation is based upon expected future discounted operating
cash flows of the reporting unit as well as analysis of recent sales or offerings of similar
companies. The Company based the discount rate used to arrive at a present value as the date of the
impairment test on the Companys weighted average cost of capital. If the carrying value of a
reporting unit exceeds its fair value, the Company will perform the second step of the goodwill
impairment test to measure the amount of impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of a reporting units goodwill to its carrying
value. To date, the Company has not performed the second step of the impairment test as part of its
review because the fair value of the reporting unit exceeded its respective carrying value.
The Company also evaluated the fair value of its reporting unit compared to its market
capitalization as of the date of the impairment test noting that the fair value of the reporting
unit as compared to the Companys market capitalization would indicate an implied control premium
of 15%. The Company has concluded that this is reasonable when compared to industry specific
studies. Additionally, the Companys market capitalization increased from September 28, 2009, the
date of the annual goodwill impairment test, through the year ended January 3, 2010 as a result of
the announcement of the proposed merger with Parent. The Company considered the announcement of the
proposed merger and concluded that this would not have a material impact on the Companys goodwill
impairment analysis.
5. Fair Value Measurements
ASC 820,
Fair Value Measurements and Disclosures,
defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy
that prioritizes the inputs used to measure fair value. This hierarchy requires entities to
maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels
of inputs used to measure fair value are as follows:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities
|
|
|
|
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
|
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
|
92
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The Companys adoption of this accounting standard did not have a material impact on its
consolidated financial statements. As of December 28, 2008 and January 3, 2010, the Company had
investments disclosed in Note 3 that were valued using Level 2 inputs (significant and observable
assumptions) as follows:
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
Corporate debt securities
|
|
$
|
86,674
|
|
|
$
|
99,814
|
|
Government sponsored entities
|
|
|
112,709
|
|
|
|
133,043
|
|
|
|
|
|
|
|
|
|
|
$
|
199,383
|
|
|
$
|
232,857
|
|
|
|
|
|
|
|
|
As of December 28, 2008, the Company had cash equivalents in corporate debt securities and
government sponsored entities that were valued using Level 2 inputs (significant and observable
assumptions) and had cash equivalents in money market mutual funds that were valued using Level 1
inputs (quoted market prices for identical assets) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 Inputs
|
|
|
Level 1 Inputs
|
|
|
Totals
|
|
Corporate debt securities
|
|
$
|
3,099
|
|
|
$
|
|
|
|
$
|
3,099
|
|
Government sponsored entities
|
|
|
1,500
|
|
|
|
|
|
|
|
1,500
|
|
Money market mutual funds
|
|
|
|
|
|
|
20,665
|
|
|
|
20,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,599
|
|
|
$
|
20,665
|
|
|
$
|
25,264
|
|
|
|
|
|
|
|
|
|
|
|
As of January 3, 2010, the Company had $4,000 of cash equivalents in corporate debt securities
and $13,814 of cash equivalents in government sponsored entities that were valued using Level 2
inputs (significant and observable assumptions).
As of December 28, 2008, the Company had $193 of restricted investments which represent
certificates of deposits that collateralize outstanding letters of credit related to certain of the
Companys facility leases. As of January 3, 2010, the Company had $403 of restricted investments
which represent certificates of deposits that collateralize outstanding letters of credit related
to certain of the Companys facility leases as well as the Companys foreign currency hedging
program. The Company believes that carrying value approximates fair value based on the market rate
of interest for a comparable instrument as of December 28, 2008 and January 3, 2010.
6. Derivative Instruments and Hedging Activities
The Company operates internationally and, in the normal course of business, is exposed to
fluctuations in foreign exchange rates. These fluctuations can increase the costs of financing,
investing and operating the business. During fiscal 2009, the Company began entering into
derivative instruments for risk management purposes only. The Company does not enter into
derivative instruments for speculative purposes. The Companys current derivative program does not
qualify for hedge accounting treatment under ASC 815.
Beginning in fiscal 2009, the Company has used forward foreign currency exchange contracts to
hedge its exposure to forecasted foreign currency denominated transactions based in the United
Kingdom. These forward contracts are not designated as cash flow, fair value or net investment
hedges under ASC 815; are marked-to-market with changes in fair value recorded to earnings; and are
entered into for periods consistent with currency transaction exposures, generally less than one
year. These derivative instruments do not subject its earnings or cash flows to material risk since
gains and losses on these derivatives generally offset losses and gains on the expenses and
transactions being hedged. However, changes in currency exchange rates related to any unhedged
transactions may impact the Companys earnings and cash flows.
The success of the Companys hedging program depends, in part, on forecasts of transaction
activity in various currencies (primarily British pound sterling and Indian rupee). The Company may
experience unanticipated currency exchange gains or losses to the extent that there are differences
between forecasted and actual activity during periods of currency volatility.
93
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Realized and unrealized foreign currency gains (losses), net of hedging are accounted for in
other income (expense). The Company had no forward foreign exchange contracts outstanding during
the year ended
December 28, 2008. During the year ended January 3, 2010, the Company recorded a foreign
exchange gain of $808 in interest and other income, net. The Company settles forward foreign
exchange contracts in cash. There are no forward foreign exchange contracts outstanding as of
January 3, 2010.
The Company does not have significant concentrations of credit risk arising from its
derivative financial instruments, whether from an individual counterparty or group of
counterparties. The Company reduces its concentration of counterparty credit risk on its derivative
instruments by limiting acceptable counterparties to major financial institutions with investment
grade credit ratings, and by actively monitoring credit ratings and outstanding positions on an
ongoing basis. Furthermore, none of the Companys derivative transactions are subject to collateral
or other security arrangements or contain provisions that are dependent on its credit ratings from
any credit rating agency.
7. Income Taxes
Income (loss) before income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
Domestic
|
|
$
|
183,068
|
|
|
$
|
44,531
|
|
|
$
|
(48,298
|
)
|
Foreign
|
|
|
(7,827
|
)
|
|
|
(9,315
|
)
|
|
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
175,241
|
|
|
$
|
35,216
|
|
|
$
|
(45,037
|
)
|
|
|
|
|
|
|
|
|
|
|
The expense (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
24,618
|
|
|
$
|
14,572
|
|
|
$
|
(1,772
|
)
|
State
|
|
|
117
|
|
|
|
89
|
|
|
|
34
|
|
Foreign
|
|
|
119
|
|
|
|
213
|
|
|
|
(3,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,854
|
|
|
|
14,874
|
|
|
|
(5,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
40,879
|
|
|
|
(796
|
)
|
|
|
(15,193
|
)
|
State
|
|
|
(1,216
|
)
|
|
|
(1,322
|
)
|
|
|
(1,811
|
)
|
Foreign
|
|
|
(2,213
|
)
|
|
|
(2,405
|
)
|
|
|
2,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,450
|
|
|
|
(4,523
|
)
|
|
|
(14,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(42,646
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
1,197
|
|
|
|
1,316
|
|
|
|
1,824
|
|
Foreign
|
|
|
1,043
|
|
|
|
2,256
|
|
|
|
(2,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,406
|
)
|
|
|
3,572
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) expense
|
|
$
|
21,898
|
|
|
$
|
13,923
|
|
|
$
|
(20,045
|
)
|
|
|
|
|
|
|
|
|
|
|
The following reconciles federal statutory income tax rate to the Companys effective income
tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2007
|
|
|
2008
|
|
|
2010
|
|
Expected provision at federal statutory rate, 35%
|
|
$
|
61,345
|
|
|
$
|
12,326
|
|
|
$
|
(15,763
|
)
|
State taxes, net of federal benefit
|
|
|
76
|
|
|
|
151
|
|
|
|
(377
|
)
|
Foreign taxes
|
|
|
141
|
|
|
|
1,078
|
|
|
|
(1,593
|
)
|
Federal research and development credit
|
|
|
(2,524
|
)
|
|
|
(3,090
|
)
|
|
|
(1,826
|
)
|
State research and investment credits
|
|
|
(1,216
|
)
|
|
|
(1,333
|
)
|
|
|
(1,374
|
)
|
Domestic manufacturing deduction
|
|
|
(1,930
|
)
|
|
|
(817
|
)
|
|
|
204
|
|
Change in valuation allowance
|
|
|
(40,406
|
)
|
|
|
3,572
|
|
|
|
(626
|
)
|
Change in unrecognized tax benefits
|
|
|
4,675
|
|
|
|
1,142
|
|
|
|
501
|
|
In process research and development
|
|
|
702
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
890
|
|
|
|
895
|
|
|
|
839
|
|
Other items
|
|
|
145
|
|
|
|
(1
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
21,898
|
|
|
$
|
13,923
|
|
|
$
|
(20,045
|
)
|
|
|
|
|
|
|
|
|
|
|
94
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Deferred income taxes reflect the net effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Companys deferred tax assets and liabilities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
Foreign net operating loss carryforwards
|
|
$
|
4,166
|
|
|
$
|
534
|
|
State research and investment credit carryforwards
|
|
|
6,372
|
|
|
|
7,344
|
|
Depreciation and amortization
|
|
|
140
|
|
|
|
333
|
|
Stock compensation
|
|
|
877
|
|
|
|
2,089
|
|
Deferred revenue and deferred cost
|
|
|
106
|
|
|
|
13,296
|
|
Accrued expenses and other temporary differences
|
|
|
1,134
|
|
|
|
3,003
|
|
|
|
|
|
|
|
|
|
|
|
12,795
|
|
|
|
26,599
|
|
Less valuation allowance
|
|
|
(9,671
|
)
|
|
|
(8,648
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,124
|
|
|
$
|
17,951
|
|
|
|
|
|
|
|
|
The Company reviews all available evidence to evaluate its recovery of deferred tax assets,
including its recent history of accumulated losses in all tax jurisdictions over the most recent
three years as well as its ability to generate income in future periods. The Company has provided a
valuation allowance against its net deferred tax assets relating principally to state tax credit
carryovers and temporary differences and foreign net operating loss carryovers as it is more likely
than not that these assets will not be realized given the nature of the assets and the likelihood
of future utilization.
The Company implemented a tax planning strategy during the first quarter of 2009 that resulted
in the realization of taxable profits in the United Kingdom from the sale of intellectual property
and other intangible assets to Airvana, Inc. As a result of this sale, there was a $3,299
reduction in the valuation allowance against the Companys U.K. net operating loss carryforwards
which were used to offset the taxable profit realized on this transaction. The Company has
eliminated the impact of this inter-company sale in the financial statements in accordance with the
provisions of ASC 810.
At January 3, 2010 the Company had available foreign net operating loss carryforwards of
approximately $1,907 (1,222 British Pounds) which have no expiration. These carryforwards are
subject to review and possible adjustment by the relevant taxing authorities. The Company has
provided a full valuation allowance against its net deferred tax assets related to these net
operating loss carryforwards and all other deferred tax assets.
The Company had gross state research credit carryforwards of $9,712 and $11,196 at
December 28, 2008 and January 3, 2010, respectively, which expire at various dates beginning in
2017. The Company also had gross state investment tax credit carryforwards of $91 and $102 at
December 28, 2008 and January 3, 2010, respectively, which expire at various dates beginning in
2012. The Company has provided a full valuation allowance against its net deferred tax assets
related to these state credit carryforwards and all other deferred tax assets.
95
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The Company recognized no material adjustment in the liability for unrecognized income tax
benefits as a result of the implementation of ASC 740. The following reconciles the beginning and
ending amount of gross unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
4,675
|
|
|
$
|
5,518
|
|
Increases (decreases) for prior years
|
|
|
96
|
|
|
|
(93
|
)
|
Increases for the current year
|
|
|
861
|
|
|
|
369
|
|
Reductions related to settlements with tax authorities
|
|
|
(114
|
)
|
|
|
|
|
Reductions related to expiration of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
5,518
|
|
|
$
|
5,794
|
|
|
|
|
|
|
|
|
At January 3, 2010, if these benefits were recognized in a future period, the timing of which
is not estimable, the net unrecognized tax benefit of approximately $5,794 would impact the
Companys effective tax rate. Within the next 12 months, it is reasonably possible that the Company
will recognize $4,000 to $4,500 of previously unrecognized tax benefits as a result of the
conclusion of audits and the expiration of the statute of limitations.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. At December 28, 2008 and January 3, 2010, the Company had $184 and $338, respectively,
recorded for interest and penalties related to unrecognized tax benefits.
The Company and its subsidiaries file income tax returns in the U.S. federal tax jurisdiction
as well as in various state and foreign jurisdictions. The tax years 2000 through 2009 remain open
to examination by the major taxing jurisdictions for which the Company is subject to income tax.
During 2008, The Commonwealth of Massachusetts completed an audit of the Companys Massachusetts
excise tax returns for the tax years ended January 2, 2005, January 1, 2006 and December 31, 2006.
There was no change made to the Companys tax liability, however, certain tax benefit carryovers
were adjusted. The Company recently was notified that its Massachusetts excise returns for the tax
years ended December 30, 2007 and December 28, 2008 were selected for an audit, scheduled to
commence in April of 2010. As of January 3, 2010 the Company is under audit by the Internal Revenue
Service (IRS) for the tax years ended December 31, 2006 and December 30, 2007. The Company does
not expect that any of the proposed adjustments will have a material effect on its earnings.
The Company files income tax returns in the US federal tax jurisdiction, various state
jurisdictions and various foreign jurisdictions. The statute of limitations for federal and state
tax authorities is closed for years prior to the year ended December 31, 2006 although carryforward
and carryback attributes that were generated prior to or subsequent to 2004 may still be subject to
examination if they either have been or will be utilized to offset taxable income in tax years 2004
and forward. The statute of limitations in the United Kingdom is closed for tax years prior to
2004. The statute of limitations in India is closed for years prior to 2006.
The Emergency Economic Stabilization Act of 2008 was enacted into law on October 3, 2008. A
provision of this Act extended the federal research and experimental credit for expenses incurred
from January 1, 2008 through December 31, 2009. The Company recognized a benefit of $3,090 and
$1,826 from the federal research credit for the years ended December 28, 2008 and January 3, 2010,
respectively.
The Companys subsidiary in India operates under a tax holiday granted to certain software
companies that has resulted in tax savings of $1,648 through January 3, 2010. The tax holiday is
scheduled to expire in March of 2011.
The Companys intention is to reinvest the total amount of its unremitted foreign earnings in
the local jurisdiction, to the extent they are generated and available, or to repatriate the
earnings only when tax-effective. As such, the Company has not provided U.S. tax expense on $5,180
of the unremitted earnings of its foreign subsidiaries, principally India. If such earnings were
distributed, it would result in approximately $1,191 of incremental US tax expense.
96
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
8. Commitments and Contingencies
The Company conducts its operations in leased facilities, and rent expense charged to
operations for the years ended December 30, 2007, December 28, 2008 and January 3, 2010 was $1,310,
$1,509 and $1,571, respectively.
In October 2004, the Company entered into a seven-year lease agreement for its headquarters
facility. The Company is obligated to pay monthly rent through 2012.
Substantially all of the Companys lease agreements require the Company to maintain the
facilities during the term of the lease and to pay all taxes, insurance, utilities and other costs
associated with those facilities. The Company makes customary representations and warranties and
agrees to certain non-financial covenants and indemnities. In the event the Company defaults on a
lease, the landlord may terminate the lease, accelerate payments and collect liquidated damages. As
of the end of fiscal 2009, the Company was not in default of any of its lease covenants. Certain of
the Companys lease agreements provide for renewal options. Such renewal options are at rates
similar to the current rates under the agreements.
In connection with a lease incentive arrangement entered into as part of the Companys
headquarters lease, the Company received reimbursements of approximately $2,800 and $790 for
leasehold improvements capitalized in the years ended January 1, 2006 and December 31, 2006,
respectively. As a result of this arrangement, the Company recorded a lease incentive obligation
for the reimbursed amount, and is amortizing that obligation as a reduction to rent expense over
the term of the lease. As of December 28, 2008 and January 3, 2010, the unamortized amount was
$1,696 and $1,174, respectively. During the years ended December 30, 2007, December 28, 2008 and
January 3, 2010, the Company amortized the lease incentive obligation by approximately $522, $522
and $521, respectively. The remaining lease incentive amounts are classified either as components
of accrued expenses and other current liabilities or other liabilities based on the future timing
of amortization against rent expense.
In addition, certain of the Companys facilities operating leases contain escalating rent
payments and as a result, the Company has recognized rent expense on a straight-line basis associated with this
lease in accordance with ASC 840. As of December 28, 2008, the Company has recorded rent expense in
excess of cash payments of $3 and as of January 3, 2010 the Company has recorded cash payments in
excess of rent expense of $12, which is included in accrued expenses in the accompanying
consolidated balance sheets.
Future minimum commitments as of January 3, 2010, under all of the Companys leases, are as
follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2010
|
|
|
1,652
|
|
2011
|
|
|
1,529
|
|
2012
|
|
|
485
|
|
2013
|
|
|
10
|
|
|
|
|
|
|
|
$
|
3,676
|
|
|
|
|
|
The Company has contractual commitments that require the Company to purchase certain minimum
quantities of products as of January 3, 2010.
Future minimum commitments as of January 3, 2010 are as follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2010
|
|
$
|
6,495
|
|
2011
|
|
|
3,883
|
|
|
|
|
|
|
|
$
|
10,378
|
|
|
|
|
|
97
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Indemnification
The Company includes indemnification provisions in software license agreements with its OEM
customers. These indemnification provisions include provisions indemnifying the customer against
losses, expenses, and liabilities from damages that could be awarded against the customer in the
event that the Companys software is found to infringe upon a patent or copyright of a third party.
The scope of remedies available under these indemnification obligations is limited by the OEM
agreements. The Company believes that its internal business practices and policies and the
ownership of information limits the Companys risk in paying out any claims under these
indemnification provisions. To date the Company has not been subject to any litigation relating to
license agreements and has not had to reimburse any customers for any losses associated with these
indemnification provisions.
9. Common Stock
Holders of common stock are entitled to one vote for each share held and to receive dividends
if and when declared by the Companys Board of Directors (the Board) and subject to and qualified
by the rights of holders of the preferred stock. Upon dissolution or liquidation of the Company,
holders of common stock will be entitled to receive all available assets. As of December 28, 2008
and January 3, 2010, the Company has reserved common shares for the following issuances:
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
2000 Stock Incentive Plan
|
|
|
9,836,508
|
|
|
|
8,076,564
|
|
2007 Stock Incentive Plan
|
|
|
25,542,512
|
|
|
|
19,918,549
|
|
|
|
|
|
|
|
|
Total number of common shares reserved
|
|
|
35,379,020
|
|
|
|
27,995,113
|
|
|
|
|
|
|
|
|
10. Preferred Stock
In May 2007, the Board approved, and in June 2007, the Companys stockholders consented to,
the amendment of the Companys Certificate of Incorporation to, among other things, increase the
authorized number of shares of common stock to 350,000,000 and to authorize 10,000,000 shares of
undesignated preferred stock, none of which preferred stock has been issued.
11. Stock Incentive Plans
Stock Options and Restricted Common Stock
As of December 31, 2006, the Company had one stock-based employee compensation plan, the 2000
Plan under which the Company could issue up to 21,005,251 shares of common stock. Under the 2000
Plan, the Board may authorize the sale of common stock to employees, directors and consultants of
the Company. The purchase price and the terms under which the Company may repurchase such shares
shall be determined by the Board.
Under the 2000 Plan, the Board could grant incentive stock options (ISOs) to employees of
the Company and nonstatutory stock options (NSOs) to officers, employees, directors, consultants
and advisors of the Company. Under the 2000 Plan, the Board determined the option price for all
stock options, which generally expire ten years from the date of grant.
In June 2007, the Companys stockholders approved the 2007 Stock Incentive Plan (the 2007
Plan). The 2007 Plan permits the Company to grant ISOs, NSOs, restricted stock awards and other
stock-based awards. The number of shares of common stock issuable under the 2007 Plan equals the
sum of 11,252,813 shares of common stock, any shares of common stock reserved for issuance under
the 2000 Plan that remained available for issuance under the 2000 Plan immediately prior to the
closing of the Companys IPO on July 19, 2007, any shares of common stock subject to awards under
the 2000 Plan which awards expire, terminate, or are otherwise surrendered, canceled, forfeited or
repurchased without having been fully exercised and an annual increase in the number of shares as
described in the 2007 Plan.
98
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
As there was no public market for the Companys common stock prior to July 19, 2007, the date
of the Companys IPO, the Company determined the volatility percentage used in calculating the fair
value of stock options it granted based on an analysis of the historical stock price data for a
peer group of companies that issued options with substantially similar terms. The expected
volatility percentage used in determining the fair value of stock options granted in the year ended
December 28, 2008 was between 54% and 58% and in the year ended January 3, 2010 was between 50% and
51%. The expected life of options has been determined utilizing the simplified method as
prescribed by the SECs Staff Accounting Bulletin No. 110
.
The expected life of options granted
during each of the years ended December 28, 2008 and January 3, 2010 was 6.25 years. For the years
ended December 28, 2008 and January 3, 2010, the weighted-average risk free interest rate used was
3.16% and 2.45%, respectively. The risk-free interest rate is based on a weighted average of a
7-year treasury instrument whose term is consistent with the expected life of the stock options.
Although the Company paid a one-time special cash dividend in April 2007, the expected dividend
yield is assumed to be zero as the Company does not currently anticipate paying cash dividends on
its shares of common stock in the future. ASC 718,
Stock Compensation,
(ASC 718) requires
companies to utilize an estimated forfeiture rate when calculating the expense for the period,
previous guidance permitted companies to record forfeitures based on actual forfeitures, which was
the Companys historical policy. As a result, the Company applied an estimated forfeiture rate
between 3% and 6% for the year ended December 28, 2008 and 6% for the year ended January 3, 2010 in
determining the expense recorded in its consolidated statement of operations. These rates were
derived by review of the Companys historical forfeitures since 2000.
Stock option and restricted stock activity under the 2000 Plan and the 2007 Plan is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Fair
|
|
|
|
Number of
|
|
|
Range of
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
Value
|
|
|
|
Shares
|
|
|
Exercise Prices
|
|
|
per Share
|
|
|
Term in Years
|
|
|
Intrinsic Value
|
|
|
Per Share
|
|
Outstanding at December 28, 2008
|
|
|
12,729,531
|
|
|
$
|
0.001-7.89
|
|
|
$
|
2.94
|
|
|
|
6.68
|
|
|
$
|
37,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,182,822
|
|
|
|
5.22-7.49
|
|
|
|
5.56
|
|
|
|
|
|
|
|
|
|
|
$
|
5.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,648,971
|
)
|
|
|
0.07-6.44
|
|
|
|
1.51
|
|
|
|
|
|
|
$
|
7,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(665,817
|
)
|
|
|
1.08-7.44
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2010
|
|
|
13,597,565
|
|
|
$
|
0.001-7.89
|
|
|
$
|
3.61
|
|
|
|
6.36
|
|
|
$
|
54,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 28, 2008
|
|
|
7,093,242
|
|
|
$
|
0.001-7.89
|
|
|
$
|
1.78
|
|
|
|
5.41
|
|
|
$
|
28,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 3, 2010
|
|
|
7,710,333
|
|
|
$
|
0.001-7.89
|
|
|
$
|
2.45
|
|
|
|
4.90
|
|
|
$
|
39,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at
January 3, 2010(1)
|
|
|
13,251,803
|
|
|
$
|
0.001-7.89
|
|
|
$
|
3.56
|
|
|
|
6.30
|
|
|
$
|
53,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at January 3, 2010
|
|
|
14,397,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
This represents the number of vested stock options as of January 3,
2010 plus the unvested outstanding options at January 3, 2010 expected
to vest in the future, adjusted for estimated forfeitures.
|
As of December 28, 2008, the Company had 3,750 shares of restricted stock, which became fully
vested in January 2009.
For the years ended December 28, 2008 and January 3, 2010, the Company recorded expense of
$4,844 and $6,317, respectively, in connection with share-based awards and related tax benefit of
approximately $704 and $1,232 for fiscal 2008 and fiscal 2009, respectively. As of January 3, 2010,
future expense for non-vested stock options of $15,715 was expected to be recognized over a
weighted-average period of 2.52 years.
99
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The following table summarizes stock-based compensation expense related to employee and
director stock options, employee stock purchases, and restricted stock grants for the years ended
December 28, 2008 and January 3, 2010, which were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
Cost of service revenue
|
|
$
|
250
|
|
|
$
|
405
|
|
Research and development
|
|
|
2,893
|
|
|
|
3,666
|
|
Selling and marketing
|
|
|
1,038
|
|
|
|
1,258
|
|
General and administrative
|
|
|
663
|
|
|
|
988
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
4,844
|
|
|
$
|
6,317
|
|
|
|
|
|
|
|
|
Common Stock Repurchase Plan
In July 2008, the Companys board of directors authorized the repurchase of up to $20,000 of
the Companys common stock over the following 12 months. This initial stock repurchase program was
scheduled to terminate on July 29, 2009 or earlier if the Company had so elected. The purchases of
common stock were executed periodically on the open market, as market conditions warranted, under a
Rule 10b5-1 plan, which the Company entered into in August 2008 and which permitted shares to be
repurchased when the Company might otherwise have been precluded from doing so under insider
trading laws. The Company completed its initial stock repurchase program in April 2009.
In February 2009, the Companys board of directors authorized a second stock repurchase
program authorizing the Company to purchase up to an additional $20,000 of the Companys common
stock following the completion of the initial stock repurchase program.
The following table summarizes the Companys repurchases under the initial stock repurchase
program for the year ended January 3, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Shares That May
|
|
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
Yet Be Purchased
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Publicly
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Announced
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Program
|
|
|
Program
|
|
Through December 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,673
|
|
December 29, 2008 January 25, 2009
|
|
|
318,400
|
|
|
$
|
5.43
|
|
|
|
318,400
|
|
|
$
|
4,944
|
|
January 26, 2009 February 22, 2009
|
|
|
329,400
|
|
|
$
|
5.34
|
|
|
|
329,400
|
|
|
$
|
3,185
|
|
February 23, 2009 March 29, 2009
|
|
|
299,730
|
|
|
$
|
5.65
|
|
|
|
299,730
|
|
|
$
|
1,492
|
|
March 30, 2009 April 26, 2009
|
|
|
206,918
|
|
|
$
|
5.80
|
|
|
|
206,918
|
|
|
$
|
292
|
|
April 27, 2009 May 24, 2009
|
|
|
51,061
|
|
|
$
|
5.69
|
|
|
|
51,061
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,205,509
|
|
|
$
|
5.54
|
|
|
|
1,205,509
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys repurchases under the second stock repurchase
program for the year ended January 3, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Shares That May
|
|
|
|
|
|
|
|
|
|
|
|
as Part of
|
|
|
Yet Be Purchased
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Publicly
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Announced
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Program
|
|
|
Program
|
|
Through December 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,000
|
|
December 29, 2008 January 25, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
20,000
|
|
January 26, 2009 February 22, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
20,000
|
|
February 23, 2009 March 29, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
20,000
|
|
March 30, 2009 April 26, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
20,000
|
|
April 27, 2009 May 24, 2009
|
|
|
188,482
|
|
|
$
|
5.33
|
|
|
|
188,482
|
|
|
$
|
18,995
|
|
May 25, 2009 June 28, 2009
|
|
|
215,266
|
|
|
$
|
5.77
|
|
|
|
215,266
|
|
|
$
|
17,753
|
|
June 29, 2009 July 26, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
17,753
|
|
July 27, 2009 August 23, 2009
|
|
|
61,276
|
|
|
$
|
6.03
|
|
|
|
61,276
|
|
|
$
|
17,384
|
|
August 24, 2009 September 27, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
17,384
|
|
September 28, 2009 October 25, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
17,384
|
|
October 26, 2009 November 22, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
17,384
|
|
November 23, 2009 January 3, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
17,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
465,024
|
|
|
$
|
5.63
|
|
|
|
465,024
|
|
|
$
|
17,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
12. Deferred Revenue and Deferred Product and Service Costs
Under the Companys revenue recognition policy, as described above in Note 2 Summary of
Significant Accounting Policies, the Company recognizes revenue from sales to an OEM customer only
when it delivers a specified upgrade that it has previously committed. When the Company commits to
an additional upgrade before it has delivered a previously committed upgrade, it defers all revenue
from product sales after the date of such commitment until it delivers the additional upgrade.
The Company made a commitment for a specified future software upgrade in April 2005, which the
Company refers to as its April 2005 specified upgrade. The Company delivered the April 2005
specified upgrade in April 2007. The Company committed to a subsequent specified upgrade in
September 2006, which the Company refers to as its September 2006 specified upgrade. The Company
delivered the September 2006 specified upgrade in November 2007. The Company committed to an
additional subsequent specified upgrade in June 2007, which the Company refers as its June 2007
specified upgrade. The Company delivered the June 2007 specified upgrade in June 2008. The Company
committed to an additional subsequent specified upgrade in December 2007, which the Company refers
to as its December 2007 specified upgrade. The Company delivered the December 2007 specified
upgrade in the fourth quarter of fiscal 2008. The Company committed to an additional subsequent
specified upgrade in July 2008, which the Company refers to as its July 2008 specified upgrade. The
Company delivered the July 2008 specified upgrade in the fourth quarter of fiscal 2009. The Company
has outstanding commitments for additional specified upgrades committed to in October 2008, May
2009 and December 2009, which the Company refers to as its October 2008 specified upgrade, its May
2009 specified upgrade and its December 2009 specified upgrade, respectively. The Company expects
to deliver the October 2008, May 2009 and December 2009 specified upgrades in 2010.
At December 28, 2008 and January 3, 2010, other deferred revenue primarily related to sales
and development services for the Companys new fixed-mobile convergence related products.
101
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Deferred revenue and deferred product and service costs at December 28, 2008 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
Deferred revenue related to December 2007 specified upgrade
|
|
$
|
7,397
|
|
|
$
|
|
|
|
$
|
7,397
|
|
Deferred revenue related to July 2008 specified upgrade
|
|
|
37,775
|
|
|
|
|
|
|
|
37,775
|
|
Deferred revenue related to October 2008 specified upgrade
|
|
|
13,663
|
|
|
|
|
|
|
|
13,663
|
|
Other deferred revenue
|
|
|
2,475
|
|
|
|
5,550
|
|
|
|
8,025
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
61,310
|
|
|
$
|
5,550
|
|
|
$
|
66,860
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product cost related to December 2007 specified upgrade
|
|
$
|
79
|
|
|
$
|
|
|
|
$
|
79
|
|
Deferred product cost related to July 2008 specified upgrade
|
|
|
742
|
|
|
|
|
|
|
|
742
|
|
Deferred product cost related to October 2008 specified upgrade
|
|
|
566
|
|
|
|
|
|
|
|
566
|
|
Other deferred product and service costs
|
|
|
526
|
|
|
|
1,300
|
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product and service costs
|
|
$
|
1,913
|
|
|
$
|
1,300
|
|
|
$
|
3,213
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and deferred product and service costs at January 3, 2010 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Total
|
|
Deferred revenue related to October 2008 specified upgrade
|
|
$
|
83,346
|
|
|
$
|
|
|
|
$
|
83,346
|
|
Deferred revenue related to May 2009 specified upgrade
|
|
|
69,866
|
|
|
|
|
|
|
|
69,866
|
|
Deferred revenue related to December 2009 specified upgrade
|
|
|
12,768
|
|
|
|
|
|
|
|
12,768
|
|
Other deferred revenue
|
|
|
1,410
|
|
|
|
9,043
|
|
|
|
10,453
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
167,390
|
|
|
$
|
9,043
|
|
|
$
|
176,433
|
|
|
|
|
|
|
|
|
|
|
|
Deferred product cost related to October 2008 specified upgrade
|
|
$
|
1,707
|
|
|
$
|
|
|
|
$
|
1,707
|
|
Deferred product cost related to May 2009 specified upgrade
|
|
|
1,229
|
|
|
|
|
|
|
|
1,229
|
|
Deferred product cost related to December 2009 specified upgrade
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
Other deferred product and service costs
|
|
|
307
|
|
|
|
5,565
|
|
|
|
5,872
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product and service costs
|
|
$
|
3,379
|
|
|
$
|
5,565
|
|
|
$
|
8,944
|
|
|
|
|
|
|
|
|
|
|
|
13. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
January 3,
|
|
|
|
2008
|
|
|
2010
|
|
Payroll and payroll-related accruals
|
|
$
|
9,497
|
|
|
$
|
6,472
|
|
Other accruals
|
|
|
4,868
|
|
|
|
5,502
|
|
|
|
|
|
|
|
|
|
|
$
|
14,365
|
|
|
$
|
11,974
|
|
|
|
|
|
|
|
|
102
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
14. Acquisition
On April 30, 2007, the Company acquired 3 Way Networks Limited (3 Way Networks), a United
Kingdom-based provider of personal base stations and solutions for the Universal Mobile
Telecommunications System (UMTS) market, for an aggregate purchase price of approximately $11,000
in cash and 441,845 shares of the Companys common stock with a fair value of $2,662. This
acquisition furthered the Companys strategy to address the UMTS market and to deliver fixed-mobile
convergence and in-building mobile broadband solutions. There were no preexisting relationships
between the two companies.
The Company accounted for this acquisition under the purchase method of accounting. In
connection with this acquisition, the Company recorded $7,998 of goodwill, $2,340 of in-process
research and development (IPR&D) expense and $4,880 of intangible assets related to developed
technology, customer relationships, and non-compete agreements with estimated useful lives ranging
from 36 to 60 months and a weighted-average amortization period of 56 months. The estimated fair
value of acquired intangible assets was assigned as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Life
|
|
|
Fair Value
|
|
Developed Technology
|
|
60 months
|
|
$
|
3,340
|
|
Customer Relationships
|
|
48 months
|
|
|
1,350
|
|
Non-Compete Agreements
|
|
36 months
|
|
|
190
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
$
|
4,880
|
|
|
|
|
|
|
|
|
|
Management used various valuation methods to determine the fair value of the acquired assets
of 3 Way Networks. To value the developed technology and customer relationship intangible assets,
an income approach was used, specifically the relief-from-royalty method and the excess earning
method, respectively. For the developed technology intangible asset, expenses and income taxes were
deducted from estimated revenues attributable to the developed technologies. For the customer
relationship intangible asset, expenses and income taxes were deducted from estimated revenues
attributable to the existing customers. The projected net cash flows for each were then tax
affected using an effective rate of 40% and then discounted using a discount rate of 34% for the
developed technology intangible asset and 39% for the customer relationship intangible asset to
determine the value of the intangible assets, respectively. To value the non-compete agreements an
income approach was used, specifically the with or without model. Management then projected net
cash flows for the Company with and without the non-compete agreements in place. The present value
of the sum of the difference between the net cash flows with and without the non-compete agreements
in place was calculated, based on a discount rate of 39%. In-process research and development was
determined by discounting forecasted cash flows directly related to the products expecting to
result from the research and development, net of returns on contributory assets including fixed
assets, and the acquired workforce and applying a discount rate of 42%.
The Company allocated $2,340 to IPR&D expense for projects associated with femtocell based
technology, which was expensed at the respective date of acquisition because it had no alternative
use and had not yet reached technological feasibility. The value assigned to IPR&D at the
acquisition date was determined by discounting forecasted cash flows directly related to the
products expecting to result from the research and development, net of returns on contributory
assets less cost of goods sold, general and administrative expenses, and selling and marketing
expenses. The Company also deducted the cost to complete the IPR&D projects, which was estimated to
be $9,600 over the next two years. Based upon the risk associated with this IPR&D relative to
developed product technologies and the fact that the femtocell market has not yet developed, the
Company applied a discount rate of 42%. The successful completion of these projects was a
significant risk at the date of acquisition due to the remaining efforts to achieve technical
viability, development of a femtocell market and competitive threats. If these projects are not
successfully completed, there is no alternative use for the projects and the expected future income
will not be realized.
103
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
The following table summarizes the fair values of the assets acquired and liabilities assumed
in connection with this acquisition.
|
|
|
|
|
|
|
Fair Value
|
|
|
|
April 30, 2007
|
|
Assets Acquired:
|
|
|
|
|
Current assets
|
|
$
|
462
|
|
Fixed assets
|
|
|
504
|
|
Deferred tax asset
|
|
|
509
|
|
In-process research and development
|
|
|
2,340
|
|
Intangible assets
|
|
|
4,880
|
|
Goodwill
|
|
|
7,998
|
|
|
|
|
|
|
|
|
16,693
|
|
Liabilities Assumed:
|
|
|
|
|
Current liabilities
|
|
|
689
|
|
Deferred tax liability
|
|
|
1,464
|
|
Non-current liabilities
|
|
|
704
|
|
|
|
|
|
|
|
|
2,857
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,836
|
|
|
|
|
|
Results of operations for 3 Way Networks have been included in the Companys results of
operations since the acquisition date of April 30, 2007. As part of the acquisition of 3 Way
Networks, the Company assumed long-term debt of $543, which it repaid in full during fiscal 2007
and capital leases of $161, which it repaid in full during fiscal 2008.
15. Employee Benefit Plan
The Company has a 401(k) plan covering all eligible employees. The Plan allows for matching
contributions to be made. In fiscal 2008 and fiscal 2009, the Company matched 50% of employee
contributions on the first 4% of their eligible compensation. Total matching contributions for
fiscal 2008 and fiscal 2009 of $700 and $825 were paid in January 2009 and January 2010,
respectively.
16. Related Party Transactions
In 2000, the Company entered into an agreement with Qualcomm Incorporated (Qualcomm) under
which it licenses software for use in the development of infrastructure equipment. The Company also
entered into a supply and distribution agreement with Qualcomm relating to the Companys ipBTS
products. The Company paid Qualcomm approximately $1,116 in fiscal 2007, $1,721 in fiscal 2008 and
$2,033 in fiscal 2009 in upfront license payments, royalties and component purchases under its
license and supply agreements with Qualcomm. During fiscal 2007, fiscal 2008 and fiscal 2009,
Qualcomm paid the Company $46, $2,412 and $4,530, respectively, for prototype purchases and
development services. Amounts due to Qualcomm of $871 and $1,098 were included in accrued expenses
and other current liabilities as of December 28, 2008 and January 3, 2010, respectively.
In January 2009, the Company formalized a development agreement with Qualcomm to develop and
commercialize certain EV-DO software products. The fees paid by Qualcomm under this agreement are
potentially subject to refund as royalties on future sales of this developed product, if and when
development and commercialization occur. Total development fees under this arrangement, which were
billed in fiscal 2008 and fiscal 2009, were $6,500. The Company received a letter from Qualcomm
dated September 24, 2009 providing the Company a 30 day written notice of Qualcomms intent to
terminate the development agreement, which became effective in the fourth quarter of fiscal 2009.
As a result of the termination of the agreement, the Company recognized $6,500 of revenue and has
no continuing obligation to Qualcomm.
As of December 28, 2008, Qualcomm owned approximately 9.2% of the Companys outstanding common
stock. As of January 3, 2010, Qualcomm owned approximately 3.8% of the Companys outstanding common
stock.
104
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
Some of the technology that the Company incorporates into its EV-DO products and sells to
Ericsson is licensed from Qualcomm. In the fourth quarter of fiscal 2008 and the first quarter of
fiscal 2009, Qualcomm undertook an audit of the royalties that were paid to Qualcomm in respect of
the EV-DO products that the Company sold between 2003 and 2007. Qualcomm determined that the
Company did not owe any additional royalties beyond the amounts accrued.
17. Special Cash Dividend
On March 8, 2007, the Company declared a special cash dividend of $1.333 per common stock
equivalent payable on April 5, 2007 to stockholders of record on March 28, 2007. The aggregate
payment to holders of common stock and redeemable convertible preferred stock in April 2007 was
$72,771. In conjunction with this dividend and as required by the Companys stock incentive plan,
all vested and unvested options outstanding were adjusted by multiplying the exercise price by
0.8113 and the number of shares of common stock issuable upon exercise of the option by 1.2326. As
the fair value of the modified stock option grants was the same as the fair value of the original
option grants immediately before the modification, no incremental compensation cost was recognized
as a result of this special cash dividend. The option information in Note 11 reflects these
adjustments to the outstanding awards. The Company has not declared or paid any other cash
dividends on its capital stock.
18. Reverse Stock Split
On May 22, 2007, the Board approved, and on June 18, 2007, the stockholders of the Company
approved, a 1-for-1.333 reverse stock split of the Companys common stock, which was effective on
June 29, 2007. All share data shown in the accompanying consolidated financial statements and
related notes reflect the reverse stock split.
19. Quarterly Financial Data (unaudited)
The following table presents the Companys unaudited quarterly consolidated results of
operations for each of the eight quarters in the period ended January 3, 2010 including all
recurring adjustments necessary in the opinion of management for a fair presentation of such
information.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30,
|
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June 29,
|
|
|
September 28,
|
|
|
December 28,
|
|
|
March 29,
|
|
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June 28,
|
|
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September 27,
|
|
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January 3,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
Revenue
|
|
$
|
7,638
|
|
|
$
|
59,019
|
|
|
$
|
8,247
|
|
|
$
|
63,269
|
|
|
$
|
9,263
|
|
|
$
|
4,880
|
|
|
$
|
2,726
|
|
|
$
|
47,725
|
|
Cost of revenue
|
|
|
1,913
|
|
|
|
3,327
|
|
|
|
2,652
|
|
|
|
3,570
|
|
|
|
2,547
|
|
|
|
3,402
|
|
|
|
2,900
|
|
|
|
4,720
|
|
Gross (loss) profit
|
|
|
5,725
|
|
|
|
55,692
|
|
|
|
5,595
|
|
|
|
59,699
|
|
|
|
6,716
|
|
|
|
1,478
|
|
|
|
(174
|
)
|
|
|
43,005
|
|
Total operating expenses
|
|
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24,910
|
|
|
|
24,237
|
|
|
|
24,949
|
|
|
|
24,639
|
|
|
|
23,946
|
|
|
|
24,786
|
|
|
|
26,126
|
|
|
|
27,897
|
|
(Loss) income from
operations
|
|
|
(19,185
|
)
|
|
|
31,455
|
|
|
|
(19,354
|
)
|
|
|
35,060
|
|
|
|
(17,230
|
)
|
|
|
(23,308
|
)
|
|
|
(26,300
|
)
|
|
|
15,108
|
|
Net (loss) income
|
|
|
(11,674
|
)
|
|
|
20,563
|
|
|
|
(12,445
|
)
|
|
|
24,849
|
|
|
|
(7,203
|
)
|
|
|
(14,033
|
)
|
|
|
(16,855
|
)
|
|
|
13,099
|
|
Basic net (loss) income
per share
|
|
$
|
(0.18
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.19
|
)
|
|
$
|
0.39
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.21
|
|
Diluted net (loss)
income per share
|
|
$
|
(0.18
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.19
|
)
|
|
$
|
0.36
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.19
|
|
20. Nortel Bankruptcy
On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks Limited,
and certain of its other Canadian subsidiaries filed for creditor protection under the Companies
Creditors Arrangement Act in Canada. Also on January 14, 2009, some of Nortel Networks
Corporations U.S. subsidiaries, including Nortel Networks, filed Chapter 11 voluntary petitions in
the State of Delaware (the bankruptcy filing).
Substantially all of the Companys billings and revenue have been derived from Nortel
Networks. Pre-bankruptcy filing outstanding invoices to Nortel Networks as of December 28, 2008
totaled $21,818. Collection of these invoices was subject to Nortel Networks bankruptcy
proceedings, and the Company was not able to estimate how much, if any, of these invoices would be
collected. As such, the Company elected to treat these invoices on a cash basis. Invoices
outstanding as of the bankruptcy filing date were not reflected in the Companys Balance Sheet as
of December 28, 2008.
105
AIRVANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts) (Continued)
On June 19, 2009, Nortel Networks Corporation announced the proposed stalking horse asset
sale of Nortel Networks CDMA business to Nokia Siemens Networks B.V. (Nokia), a global wireless
network infrastructure provider. Two additional entities were qualified by Nortel Networks
Corporation to bid with Nokia in an auction to
purchase the CDMA business. The auction was held on July 24, 2009. On July 28, 2009, the
United States and Canadian bankruptcy courts approved a bid for Nortel Networks CDMA business by
Ericsson, another global wireless network infrastructure provider, subject to satisfaction of
regulatory and other conditions, which was completed in November 2009. In conjunction with the
completed sale of Nortel Networks CDMA business to Ericsson, Nortel Networks agreement with the
Company was assumed, and Ericsson paid all of Nortel Networks outstanding obligations to the
Company, including the $36,442 of obligations outstanding prior to the filing, plus approximately
$3,200 of accrued interest.
21. Proposed Merger
On December 17, 2009, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with 72 Mobile Holdings, LLC, a Delaware limited liability company (Parent), and 72
Mobile Acquisition Corp. (Merger Sub), a wholly-owned subsidiary of Parent. Parent will be owned,
directly and indirectly, by affiliates of S.A.C. Private Capital Group, LLC, GSO Capital Partners
LP, Sankaty Advisors LLC and ZelnickMedia. Under the terms of the Merger Agreement, Merger Sub will
be merged with and into the Company, with the Company continuing as the surviving corporation (the
merger). If the merger is completed, common stockholders will be entitled to receive $7.65 in
cash for each share of Airvana common stock. The consummation of the Merger is subject to customary
conditions, including adoption of the Merger Agreement by the Companys stockholders and expiration
or termination of any waiting period (and any extension thereof) under the Hart-Scott Rodino
Antitrust Improvement Act of 1976, as amended. Dates for closing the Merger and for the Companys
stockholders meeting have not yet been determined. The Company has made various representations and
warranties and agreed to specified covenants in the Merger Agreement, including covenants relating
to the conduct of the Companys business between the date of the Merger Agreement and the closing
of the Merger, restrictions on solicitation of proposals with respect to alternative transactions,
governmental filings and approvals, public disclosures and other matters. The Merger Agreement
contains certain termination rights of Parent and the Company and provides that, upon the
termination of the Merger Agreement under specified circumstances, the Company will be required to
pay Parent a termination fee of $15,000.
106
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, as ours are designed to do,
and management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of January 3, 2010, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective at the reasonable assurance level.
Report of Management on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the
supervision of our principal executive and principal financial officers and effected by our board
of directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and disposition of our assets;
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provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorization of our management and directors; and
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|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
|
Our internal control system was designed to provide reasonable assurance to our management and
board of directors regarding the preparation and fair presentation of published financial
statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
We have assessed the effectiveness of our internal control over financial reporting as of
January 3, 2010. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on our assessment, we believe that, as of January 3, 2010, our internal control over
financial reporting was effective at a reasonable assurance level based on these criteria.
Ernst & Young LLP, an independent registered public accounting firm has issued an audit report
on the effectiveness of our internal control over financial reporting as of January 3, 2010. This
report in which they expressed an unqualified opinion is included below.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Airvana, Inc.:
We have audited Airvana, Inc.s (the Company) internal control over financial reporting as
of January 3, 2010, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Companys management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Report of Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Airvana, Inc. maintained, in all material respects, effective internal control
over financial reporting as of January 3, 2010, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Airvana, Inc. as of
December 28, 2008 and January 3, 2010 and the related consolidated statements of operations,
redeemable convertible preferred stock, stockholders (deficit) equity and comprehensive income, and cash flows for each of the three years in the period ended January 3, 2010 and our
report dated March 9, 2010 expressed an unqualified opinion thereon.
Boston, Massachusetts
March 9, 2010
108
Item 9B.
Other Information
None.
PART III
Item 10.
Directors and Executive Officers of the Registrant
The information required by this Item is incorporated herein by reference to the information
provided under the headings Executive Officers of the Company, Election of Directors-Nominees
and Corporate Governance and the Board of Directors and its Committees in our definitive proxy
statement to be filed with the SEC not later than 120 days after the fiscal year ended January 3, 2010 (the
2010 Proxy Statement).
Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, we have adopted a Code of Ethics
for Senior Financial Officers that applies to our principal executive officer and principal
financial officer, principal accounting officer and controller, and other persons performing
similar functions. Our Code of Ethics for Senior Financial Officers is publicly available on our
website at
www.airvana.com.
We intend to satisfy the disclosure requirement under Item 5.05 of
Current Report on Form 8-K regarding any amendment to, or waiver from, a provision of this code by
posting such information on our website, at the address specified above.
Item 11.
Executive Compensation
Compensation Discussion and Analysis
The compensation committee of our board, or our compensation committee, oversees the
compensation of all of our executive officers. In this capacity, our compensation committee
designs, implements, reviews and approves all compensation for our chief executive officer and
other named executive officers. The goal of our compensation committee is to ensure that our
compensation program is aligned with our business goals and objectives and that the total
compensation paid to each of our executive officers is fair, reasonable and competitive.
Compensation Objectives and Philosophy
Our compensation program is designed to attract and retain qualified and talented executives,
motivating them to achieve our business goals and rewarding them for superior short- and long-term
performance. In particular, our compensation program is intended to reward the achievement of
specified, predetermined goals and to align our executives interests with those of our
stockholders in order to attain the ultimate objective of increasing stockholder value. In
determining our executive officer compensation, we consider generally available compensation data
from companies in our industry that we believe are generally comparable to us in terms of size,
organizational structure and growth characteristics, and against which we believe we compete for
executive talent. This peer group of companies is reviewed and approved by our compensation
committee periodically. From time to time, we also engage outside executive compensation
consultants to assist our compensation committee in its review of our compensation program and in
implementing any changes or additions to our compensation mix.
In general, we intend to implement total compensation packages for our executive officers that
are in line with the median competitive levels of comparable public companies.
Elements of Compensation
The primary elements of our executive compensation program are:
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|
|
equity incentive awards; and
|
|
|
|
benefits and other compensation.
|
109
We do not have any formal or informal policy or target for allocating compensation between
long-term and short-term compensation, between cash and non-cash compensation or among different
forms of non-cash compensation. Instead, our compensation committee, after reviewing market and
peer group information provided by management, and periodically through an outside executive
compensation consultant, determines subjectively what it believes to be an appropriate level and
mix of various compensation components. In determining total compensation, we try to balance
long-term equity and short-term cash compensation by offering reasonable base salaries and
opportunities for growth through our equity incentive awards.
Determining and Setting Executive Compensation
Our compensation committee determines executive compensation after carefully reviewing overall
company performance and performing a detailed evaluation of each executives performance against
established company goals. Historically, our compensation committee reviewed our executives
performance annually against corporate and departmental performance goals that were finalized and
set forth in writing during the first quarter of each fiscal year. In February 2009, our board
approved specific company-related performance goals for the first half of fiscal 2009 and, in July
2009, our board approved specific company-related performance goals for the second half of fiscal
2009. Department goals which were used in previous years to assist in our evaluation of the
performance of our executives, were replaced in fiscal 2009 with cross functional product line
goals. Corporate goals are proposed by our management and approved by our board. Our compensation
committee approves the goals for our president and chief executive officer. Increases in base
salary, equity incentive awards and cash bonuses, if any, are tied to the achievement of these
performance goals. Our management evaluates our corporate performance and each executives
performance, as compared to the applicable goals. Based on this evaluation, our president and chief
executive officer recommends to our compensation committee any annual executive salary increases,
cash bonuses and equity incentive awards. Our president and chief executive officers performance
evaluation is conducted by our compensation committee, which also determines whether to change his
base salary or grant to him cash bonuses or equity incentive awards. Equity incentive awards in the
form of stock options have typically have been granted at our boards first meeting of each year.
Any changes in base salary are effective at the beginning of the second calendar quarter of the
year.
Due to the pending merger, our compensation committee does not plan to take any action with
respect to executive compensation, including any equity incentive awards, for fiscal 2010.
Our compensation committee has the authority to retain compensation consultants and other
outside advisors to assist in the evaluation of executive officer compensation. In the fourth
quarter of fiscal 2008, our compensation committee retained an independent compensation consultant,
Wilson Group, Inc., to evaluate certain aspects of our compensation practices and provide general
information relating to compensation practices in our industry. To provide our compensation
committee with additional information regarding industry compensation, the Wilson Group collected
publicly available data from high technology sector peer group companies with similar growth
strategies, as well as data from the Radford Executive Survey, a published market survey, and
calculated summary compensation composites for our executive positions. The survey included
companies located in the New England region and stratified by level of revenue. The purpose of the
review was to provide our compensation committee with current information regarding the
competitiveness of our total cash compensation, which consists of salary and bonus, compared to the
market data presented in the summary composite. Equity compensation was excluded from this study.
The study compared the estimated total cash compensation to be paid in fiscal 2009 to certain of
our executive officers, including our principal executive officer, principal financial officer and
three other most highly compensated executive officers, whom we refer to collectively as our named
executive officers to the median compensation of each matching position in the composite group,
expressed as a percentage of the market. The study indicated that when comparing the median total
cash compensation of the composite group in the 50th percentile to cash compensation to be paid to
our executive officers in positions matching those in the composite group, one of our named
executive officers was below the median (Mr. Battat -12%). and Mr. Glidden, Dr. Eyuboglu, and Mr.
Verma were at the median. The study did not include Mr. Clark, as Mr. Clark commenced employment
with the Company during fiscal 2009. Our compensation committee factored this market data into
its overall compensation analysis, decided not to change the annual cash incentive bonus targets
for any of our named executive officers and,
based on performance during fiscal 2008 and for retention purposes, recommended increases in
the annual base salaries of our named executive officers as of April 1, 2009 as follows:
Mr. Battat, from $345,000 to $360,000; Mr. Glidden, from $245,000 to $250,000; Dr. Eyuboglu, from
$260,000 to $265,000; and Mr. Verma, from $245,000 to $255,000. For fiscal 2009, we increased the
base salaries paid to our named executive officers by an average of 3%.
110
During the fourth quarter of fiscal 2009, our compensation committee engaged the Wilson Group
to evaluate certain aspects of our compensation practices and provide general information relating
to compensation practices in our industry, and we expect that our compensation committee
periodically will engage a compensation consultant to provide advice and resources to our
compensation committee.
Base Salary
We use base salary to recognize the experience, skills, knowledge and responsibilities
required of each of our employees, including our executives. We typically set base salaries for our
executives in our offer letter to the executive at the outset of employment. None of our executives
is currently party to an employment agreement that provides for automatic or scheduled increases in
base salary. However, from time to time in the discretion of our board, following recommendations
of our compensation committee, and consistent with our incentive compensation program objectives,
we evaluate our executives base salaries, together with other components of compensation, for
adjustment based on our assessment of their performance and compensation trends in our industry.
As discussed above, after factoring in the results of the evaluation performed by the Wilson
Group during the fourth quarter of fiscal 2008 and the performance of our named executive officers
during fiscal 2008, our board, following the recommendations of our compensation committee,
increased annual base salaries as of April 1, 2009 for certain of our named executive officers.
Following these increases, our named executive officers base salaries in fiscal 2009 were as
follows: Mr. Battat, $360,000; Mr. Glidden, $250,000; Mr. Eyuboglu, $265,000; and Mr. Verma,
$255,000. Mr. Clark commenced employment with the Company on July 13, 2009 and his annual base
salary was set at $270,000.
Incentive Cash Bonuses
We believe that cash bonuses are an important factor in motivating our management team as a
whole and individual executives, in particular, to perform at their highest level to achieve and
exceed established incentive goals. The level of bonus pay for each named executive officer is
recommended by our compensation committee and approved by our board, and is related to the
achievement of company performance goals, which consist of financial, operational and strategic
objectives. We believe achievement of these goals will improve short-term operational financial
results and long-term growth and stockholder value consistent with the interests of our
stockholders. For 2009, we paid lump sum cash bonuses in August 2009 to reward performance during
the first half of the year, and in February 2010 to reward performance during the second half of
the year.
In February 2009, our board approved specific company-related performance goals for the first
half of fiscal 2009. Similarly, in July 2009, our board approved specific company-related
performance goals for the second half of fiscal 2009. The bonuses of Mr. Battat and our other
named executive officers were based on performance against these goals and each named executive
officers relative contribution towards achievement of these goals. These company performance
objectives consisted of financial metrics including billings, operating income on billings and cash
flow and EV-DO and FMC product line metrics including billings, operating profit on billings, and
product development and cost milestones.
Annual cash incentive bonus targets are set by our compensation committee as a percentage of
each named executives base salary. For Mr. Battat, in fiscal 2009, this target percentage was 35%
of base salary. For our other named executives, except for our Vice President, Worldwide Sales and
Technical Services, in fiscal 2009, this target percentage was 30% of base salary. Our compensation
plan also provides for an additional bonus amount if stretch performance objectives are achieved or
exceeded. Assuming that all company stretch performance objectives are met, subject to the
discretion of our board, Mr. Battat would receive a bonus equal to approximately 81% of his base
salary, and our other named executive officers, except for our Vice President, Worldwide Sales and
Technical Services, would receive bonuses equal to 69% of their respective base salaries. Stretch
performance objectives are
objectives that are set at levels higher than target amounts established for each company
objective. Our compensation committee believes that each stretch performance objective is
aggressive, but attainable. The maximum annual cash incentive bonus for each named executive
officer, except for our Vice President, Worldwide Sales and Technical Services, is three times the
predetermined target percentage of base salary for financial objectives, and two times the
predetermined target percentage for product line objectives.
111
For the first half of fiscal 2009, we achieved our financial and EV-DO product line
objectives, exceeded our CDMA femto product line objectives, and did not achieve our UMTS femto and
UAG product line objectives. For the second half of fiscal 2009, we exceeded our financial
objectives, and did not achieve our EV-DO, CDMA femto and UMTS femto product line objectives.
Based on our compensation committees assessment of the relative performance of each of our named
executive officers, except for our Vice President, Worldwide Sales and Technical Services against
such objectives, the following bonuses were awarded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1H 2009 Cash Bonus Awards
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Target
|
|
|
Actual
|
|
|
Actual
|
|
|
|
Base
|
|
|
Bonus
|
|
|
Bonus
|
|
|
Bonus
|
|
|
Bonus (%)
|
|
Name
|
|
Salary
|
|
|
(%)
|
|
|
($)
|
|
|
($)
|
|
|
of Target
|
|
Randall S. Battat
|
|
$
|
360,000
|
|
|
|
35
|
%
|
|
$
|
63,000
|
|
|
$
|
70,000
|
|
|
|
111
|
%
|
Jeffrey D. Glidden
|
|
$
|
250,000
|
|
|
|
30
|
%
|
|
$
|
37,500
|
|
|
$
|
40,000
|
|
|
|
107
|
%
|
Vedat Eyuboglu
|
|
$
|
265,000
|
|
|
|
30
|
%
|
|
$
|
39,750
|
|
|
$
|
43,000
|
|
|
|
108
|
%
|
Sanjeev Verma
|
|
$
|
255,000
|
|
|
|
30
|
%
|
|
$
|
38,250
|
|
|
$
|
43,000
|
|
|
|
112
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2H 2009 Cash Bonus Awards
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Target
|
|
|
Actual
|
|
|
Actual
|
|
|
|
Base
|
|
|
Bonus
|
|
|
Bonus
|
|
|
Bonus
|
|
|
Bonus (%)
|
|
Name
|
|
Salary
|
|
|
(%)
|
|
|
($)
|
|
|
($)
|
|
|
of Target
|
|
Randall S. Battat
|
|
$
|
360,000
|
|
|
|
35
|
%
|
|
$
|
63,000
|
|
|
$
|
70,000
|
|
|
|
111
|
%
|
Jeffrey D. Glidden
|
|
$
|
250,000
|
|
|
|
30
|
%
|
|
$
|
37,500
|
|
|
$
|
65,000
|
|
|
|
173
|
%
|
Vedat Eyuboglu
|
|
$
|
265,000
|
|
|
|
30
|
%
|
|
$
|
39,750
|
|
|
$
|
45,000
|
|
|
|
113
|
%
|
Sanjeev Verma
|
|
$
|
255,000
|
|
|
|
30
|
%
|
|
$
|
38,250
|
|
|
$
|
45,000
|
|
|
|
118
|
%
|
Our Vice President, Worldwide Sales and Services, Mr. Clark, was not compensated on the same
general basis as our other named executive officers with respect to his fiscal year 2009 cash
bonus. Instead, Mr. Clark was entitled to receive commissions, paid monthly, based on aggregate
product line billings and the achievement of predetermined strategic objectives. The strategic
objectives related to achieving overall product line billings targets and negotiating and signing
new customer agreements. For fiscal 2009, Mr. Clarks annual commissions target was $150,000.
Mr. Clark commissions for aggregate bookings and billings were determined by multiplying
applicable aggregate product line bookings and billings by predetermined commission rates.
Mr. Clark commissions for strategic objectives were based on a predetermined value assigned to
achievement of the various strategic objectives. For fiscal 2009, we paid Mr. Clark commissions
totaling $60,000 which was comprised of commissions related to bookings and billings of
$26,802,commissions related to achievement of strategic objectives of $15,960, and discretionary
commissions of $17,238.
112
Equity Incentive Awards
Our equity award program is our primary vehicle for offering long-term incentives to our
executives. We typically have made equity awards to our executives in the form of stock options.
Prior to our initial public offering in July 2007, our executives were eligible to participate in
our 2000 Stock Incentive Plan, and following the completion of our initial public offering, we
began to grant our executives stock-based awards pursuant to our 2007 Stock Incentive Plan. Under
our 2007 Stock Incentive Plan, executives are eligible to receive grants of stock options,
restricted stock awards, restricted stock unit awards, stock appreciation rights and other
stock-based equity awards at the discretion of our compensation committee.
Although we do not have any equity ownership guidelines for our executives, we believe that
equity grants provide our executives with a direct link to our long-term performance, create an
ownership culture, and align the interests of our executives and our stockholders. In addition, the
vesting feature of our equity grants should further our objective of executive retention because
this feature provides an incentive to our executives to remain in our employ during the vesting
period. We believe that the long-term performance of our business is improved through the grant of
stock-based awards. In determining the size of equity grants to our executives, our board has
considered comparative share ownership of executives in our compensation peer group, our
company-level performance, the applicable executives performance, the amount of equity previously
awarded to the executive, the vesting of such awards and the recommendations of management.
We typically make an initial equity award of stock options to new executives in connection
with the start of their employment. Grants of equity awards, including those to executives, are all
approved by our board and are granted based on the fair market value of our common stock.
Historically, the equity awards we granted to our executives vested as to 20% of such awards after
one year and in equal quarterly installments over the succeeding four years. This vesting schedule
is consistent with the vesting of stock options granted to other employees. When we adopted our
2007 Stock Incentive Plan in May 2007, our board shortened the vesting schedule for equity awards
so that 25% of an award would vest after one year and the remainder would vest in equal quarterly
installments over the succeeding three years.
In fiscal 2009, our board granted additional equity awards to each of our named executive
officers, except for Mr. Clark, who commenced employment on July 13, 2009 and who received an
initial equity award in connection with the start of his employment. Due to the pending merger,
our compensation committee does not plan to take any action with respect to equity incentive awards
for fiscal 2010.
We do not have a program, plan or practice of selecting grant dates for equity compensation to
our executive officers in coordination with the release of material non-public information. Equity
award grants are made from time to time in the discretion of our board and compensation committee
consistent with our incentive compensation program objectives.
Benefits and Other Compensation
We maintain broad-based benefits that are provided to all employees, including medical and
dental insurance, life and disability insurance and a 401(k) plan. Other benefits we offer to all
full-time employees include programs for job-related educational assistance. Other than our
employee referral programs, in which our corporate officers are not eligible to participate,
executives are eligible to participate in all of our employee benefit plans, in each case on the
same basis as other full-time employees.
Tax Considerations
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax
deduction to public companies for compensation in excess of $1.0 million paid to a companys chief
executive officer and its four other most highly paid executive officers. Qualified
performance-based compensation is not subject to the deduction limitation if specified requirements
are met. We periodically review the potential effects of Section 162(m) and we generally intend to
structure the performance-based portion of our executive compensation, where feasible, to comply
with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However,
our compensation committee may, in its judgment, authorize compensation payments that do not
comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to
attract and retain executive talent and are in our best interest and that of our stockholders.
113
Summary Compensation Table
The following table sets forth the total compensation paid or accrued for fiscal years 2009,
2008 and 2007 to our named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
|
|
Fiscal
|
|
|
Salary
|
|
|
Bonus(1)
|
|
|
Awards(2)
|
|
|
Compensation(3)
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Randall S. Battat
|
|
|
2009
|
|
|
|
356,250
|
|
|
|
140,000
|
|
|
|
327,492
|
|
|
|
1,713
|
|
|
|
825,455
|
|
President and Chief
|
|
|
2008
|
|
|
|
338,750
|
|
|
|
114,000
|
|
|
|
270,612
|
|
|
|
1,270
|
|
|
|
724,632
|
|
Executive Officer
|
|
|
2007
|
|
|
|
300,500
|
|
|
|
140,000
|
|
|
|
|
|
|
|
1,598
|
|
|
|
442,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey D. Glidden
|
|
|
2009
|
|
|
|
248,750
|
|
|
|
105,000
|
|
|
|
136,455
|
|
|
|
7,228
|
|
|
|
497,433
|
|
Vice President, Chief
|
|
|
2008
|
|
|
|
241,250
|
|
|
|
63,000
|
|
|
|
120,272
|
|
|
|
6,862
|
|
|
|
431,384
|
|
Financial Officer
|
|
|
2007
|
|
|
|
223,750
|
|
|
|
80,000
|
|
|
|
|
|
|
|
7,129
|
|
|
|
310,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Clark
|
|
|
2009
|
|
|
|
126,865
|
|
|
|
60,000
|
(4)
|
|
|
633,240
|
(5)
|
|
|
52,421
|
|
|
|
872,526
|
|
Vice President Worldwide
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Services
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vedat M. Eyuboglu
|
|
|
2009
|
|
|
|
263,750
|
|
|
|
88,000
|
|
|
|
177,392
|
|
|
|
6,419
|
|
|
|
535,561
|
|
Vice President, Chief
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Officer
|
|
|
2007
|
|
|
|
241,250
|
|
|
|
90,000
|
|
|
|
|
|
|
|
8,536
|
|
|
|
339,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanjeev Verma
|
|
|
2009
|
|
|
|
253,750
|
|
|
|
88,000
|
|
|
|
177,392
|
|
|
|
6,062
|
|
|
|
525,204
|
|
Vice President, Femto
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business and
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts shown as paid to Mr. Battat, Mr. Glidden, Dr. Eyuboglu and Mr. Verma were for
achievement during the year for which the amounts are shown of specified corporate
performance and product line objectives pursuant to our management bonus plan, but in each
case were paid in August 2009 and February 2010.
|
|
(2)
|
|
The amounts reported in the Option Awards column represent the compensation expense, without
any reduction for risk of forfeiture, for financial reporting purposes, of grants of options
to each of the named executive officers, calculated in accordance with the provisions of
Accounting Standards Codification 718-10,
Stock Compensation
. The assumptions we used in
calculating these amounts are included in Note 11 of this Form 10-K.
|
|
(3)
|
|
The amounts reported in the All Other Compensation column reflect, for each named executive
officer, the sum of (i) the incremental cost to us of all perquisites and other personal
benefits; (ii) the amount we contributed to our 401(k) plan in respect of such executive
officer; (iii) other discretionary cash awards; and (iv) with respect to Mr. Clark, a
$50,000 sign-on bonus upon his commencement of employment with us.
|
|
(4)
|
|
Consists of commissions earned for sales performance and achievement of strategic objectives.
|
|
(5)
|
|
Consists of options granted upon commencement of employment in fiscal 2009.
|
114
Grants of Plan-Based Awards in Fiscal 2009
The following table sets forth information regarding grants of awards made to our named
executive officers during the fiscal year ended January 3, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
|
Under Non-Equity Incentive
|
|
|
Securities
|
|
|
Base Price
|
|
|
Fair Value
|
|
|
|
|
|
|
|
Plan Awards
|
|
|
Underlying
|
|
|
of Option
|
|
|
of Option
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Options
|
|
|
Awards
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
($/Sh)(2)
|
|
|
($)(3)
|
|
Randall S. Battat
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
63,000
|
(1)
|
|
|
144,900
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
5.33
|
|
|
|
327,492
|
|
Executive Officer
|
|
|
7/28/2009
|
|
|
|
|
|
|
|
63,000
|
(1)
|
|
|
144,900
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey D. Glidden
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
37,500
|
(1)
|
|
|
86,250
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President,Chief
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
5.33
|
|
|
|
136,455
|
|
Financial Officer
|
|
|
7/28/2009
|
|
|
|
|
|
|
|
37,500
|
(1)
|
|
|
86,250
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Clark
|
|
|
7/28/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
(5)
|
|
|
5.99
|
|
|
|
633,240
|
|
Vice President,
Worldwide
|
|
|
7/28/2009
|
|
|
|
|
|
|
|
75,000
|
(4)
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vedat M. Eyuboglu
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
39,750
|
(1)
|
|
|
91,425
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
5.33
|
|
|
|
177,392
|
|
Chief Technical
Officer
|
|
|
7/28/2009
|
|
|
|
|
|
|
|
39,750
|
(1)
|
|
|
91,425
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanjeev Verma
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
38,250
|
(1)
|
|
|
87,975
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President,
|
|
|
2/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000
|
|
|
|
5.33
|
|
|
|
177,392
|
|
Femto Business and
|
|
|
7/28/2009
|
|
|
|
|
|
|
|
38,250
|
(1)
|
|
|
87,975
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For fiscal 2009, our company performance goals consist of: financial
metrics including billings, operating income on billings and cash flow,
and EV-DO and FMC product line metrics including billings, operating
profit on billings, and product development and cost milestones. Each
named executive officers bonus was based on performance against these
goals and each named executive officers relative contribution towards
achievement of these goals.
|
|
(2)
|
|
In determining the exercise price for the options granted, we used the
closing price of our stock on the Nasdaq Global Market.
|
|
(3)
|
|
Amounts represent the total grant date fair value of stock options granted
in fiscal 2009 under Accounting Standards Codification 718-10,
Stock
Compensation
. The assumptions used by us with respect to the valuation of
option grants are set forth in Note 11 to our Annual Report on From 10-K,
filed with the SEC on March 10, 2010.
|
|
(4)
|
|
The estimated future payout is based on sales commissions and the
achievement of predetermined strategic objectives. There is no maximum
payout.
|
|
(5)
|
|
Consists of options granted upon commencement of employment in fiscal 2009.
|
115
Information Relating to Equity Awards and Holdings
The following table sets forth information regarding outstanding stock options held by our
named executive officers at January 3, 2010:
Outstanding Equity Awards At 2009 Fiscal Year End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercisable
|
|
|
Option
|
|
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Expiration
|
|
Name
|
|
(#)
|
|
|
(#)
|
|
|
($)
|
|
|
Date
|
|
Randall S. Battat
|
|
|
462,340
|
(1)
|
|
|
|
|
|
|
1.081
|
(1)
|
|
|
3/1/2014
|
|
President and Chief
|
|
|
60,103
|
(1)
|
|
|
32,364
|
(1)(2)
|
|
|
2.433
|
(1)
|
|
|
8/20/2016
|
|
Executive Officer
|
|
|
39,375
|
|
|
|
50,625
|
(3)
|
|
|
5.210
|
|
|
|
2/3/2018
|
|
|
|
|
|
|
|
|
120,000
|
(4)
|
|
|
5.330
|
|
|
|
2/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey D. Glidden
|
|
|
475,820
|
(1)
|
|
|
129,456
|
(1)(5)
|
|
|
2.163
|
(1)
|
|
|
12/12/2015
|
|
Vice President, Chief
|
|
|
17,500
|
|
|
|
22,500
|
(3)
|
|
|
5.210
|
|
|
|
2/3/2018
|
|
Financial Officer
|
|
|
|
|
|
|
50,000
|
(4)
|
|
|
5.330
|
|
|
|
2/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Clark
|
|
|
|
|
|
|
200,000
|
(6)
|
|
|
5.990
|
|
|
|
7/27/2019
|
|
Vice President, Worldwide Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vedat M. Eyuboglu
|
|
|
231,170
|
(1)
|
|
|
|
|
|
|
1.081
|
(1)
|
|
|
3/1/2014
|
|
Vice President, Chief
|
|
|
30,052
|
(1)
|
|
|
16,182
|
(1)(2)
|
|
|
2.433
|
(1)
|
|
|
8/20/2016
|
|
Technical Officer
|
|
|
19,687
|
|
|
|
25,313
|
(3)
|
|
|
5.210
|
|
|
|
2/3/2018
|
|
|
|
|
|
|
|
|
65,000
|
(4)
|
|
|
5.330
|
|
|
|
2/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanjeev Verma
|
|
|
161,819
|
(1)
|
|
|
|
|
|
|
1.081
|
(1)
|
|
|
3/1/2014
|
|
Vice President, Femto Business
|
|
|
30,052
|
(1)
|
|
|
16,182
|
(1)(2)
|
|
|
2.433
|
(1)
|
|
|
8/20/2016
|
|
and Corporate Development
|
|
|
19,687
|
|
|
|
25,313
|
(3)
|
|
|
5.210
|
|
|
|
2/3/2018
|
|
|
|
|
|
|
|
|
65,000
|
(4)
|
|
|
5.330
|
|
|
|
2/9/2019
|
|
|
|
|
(1)
|
|
The number of shares underlying options and exercise prices reflect
adjustments to the number of shares of common stock subject to stock
options and related exercise prices resulting from the cash dividend
on our capital stock that we paid in April 2007.
|
|
(2)
|
|
20% of the shares underlying this option vested as of August 21, 2007
and the remaining 80% of the shares underlying this option vest in 16
equal quarterly installments beginning on November 21, 2007.
|
|
(3)
|
|
20% of the shares underlying this option vested as of February 4, 2008
and the remaining 80% of the shares underlying this option vest in 16
equal quarterly installments beginning on May 4, 2008.
|
|
(4)
|
|
25% of the shares underlying this option vested as of February
10, 2010 and the remaining 75% of the shares underlying this option
vest in 12 equal quarterly installments beginning on May 10, 2010.
|
|
(5)
|
|
20% of the shares underlying this option vested as of December 12,
2006 and the remaining 80% of the shares underlying this option vest
in 16 equal quarterly installments beginning on March 12, 2007.
|
|
(6)
|
|
25% of the shares underlying this option will vest on July 28, 2010
and the remaining 75% of the shares underlying this option vest in 12
equal quarterly installments beginning on October 28, 2010.
|
116
Option Exercises and Stock Vested in Fiscal 2009
The following table sets forth information concerning the exercise of stock options during the
fiscal year ended January 3, 2010 for each named executive officer:
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of Shares
|
|
|
Value Realized
|
|
|
|
Acquired on
|
|
|
on
|
|
Name
|
|
Exercise (#)
|
|
|
Exercise ($)
|
|
Randall S. Battat
|
|
|
|
|
|
|
|
|
Jeffrey D. Glidden
|
|
|
42,000
|
|
|
|
192,688
|
|
Michael Clark
|
|
|
|
|
|
|
|
|
Vedat Eyuboglu
|
|
|
|
|
|
|
|
|
Sanjeev Verma
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans (including
individual compensation arrangements), which authorize the issuance of equity securities, as of
January 3, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of Securities
|
|
|
Weighted
|
|
|
for
|
|
|
|
to be
|
|
|
Average
|
|
|
Future Issuance
|
|
|
|
Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Under Equity
|
|
|
|
of
|
|
|
Outstanding
|
|
|
Compensation
|
|
|
|
Outstanding Options
|
|
|
Options
|
|
|
Plans(1)
|
|
Plan Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation
Plans Approved by
Security Holders
|
|
|
13,597,565
|
|
|
$
|
3.61
|
|
|
|
14,397,548
|
|
Equity Compensation
Plans Not Approved
by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,597,565
|
|
|
$
|
3.61
|
|
|
|
14,397,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of shares of our common stock available for future issuance
under our 2007 Stock Incentive Plan. No awards of our common stock are
available for issuance under our 2000 Stock Incentive Plan.
|
Potential Payments Upon Termination or Change-in-Control
We do not have formal employment agreements with any of our named executive officers. The
initial compensation of our named executive officers was set forth in an offer letter that we
executed with each of them at the time their employment with us commenced. Each offer letter
provides that the executive officers employment with us is on an at-will basis. Other than the
change in control and severance benefits described below that we provided in our offer letter to
Mr. Glidden, none of our named executive officers is currently party to a change in control or
severance agreement with us; however, pursuant to the terms of our standard incentive stock option
agreement, each of our executive officers and other employees who holds an incentive stock option
is entitled to accelerated vesting of 30% of the original number of shares subject to such option
immediately prior to the effective date of an acquisition, which would accelerate the final vesting
date of such option by 18 months.
117
In our offer letter to Mr. Glidden, we agreed that in connection with an acquisition and a
reduction in his responsibilities or termination of employment with or without cause, his initial
option to purchase 647,276 shares of common stock that we granted to him on December 13, 2005 would
be accelerated as to 40% of the original number of shares subject to such option and the final
vesting date would be accelerated by 24 months. Assuming acceleration of Mr. Gliddens outstanding
stock options as of January 3, 2010, and assuming a price per share of our common stock of $7.60,
which was the closing price of our common stock, as reported on the Nasdaq Global Market on such
date, the value realized upon exercise of the 129,456 additional shares then available for purchase
upon exercise of that accelerated option would be approximately $703,852. In addition, in the event
that we are acquired and Mr. Glidden is terminated without cause in connection with such
acquisition, we have agreed to continue to pay his salary and medical benefits for a period of six
months thereafter. If such an acquisition were to have occurred on January 3, 2010, Mr. Glidden
would have been entitled to $21,827 per month in salary and benefits for a six-month period, or
$131,748 in the aggregate.
Compensation of Directors
We compensate our non-employee directors for their service on our board. We do not pay
directors who are also our employees any additional compensation for their service as directors.
Accordingly, Messrs. Battat and Verma do not receive any additional compensation for their service
as directors.
The independent members of our board, after considering the recommendation of our nominating
and corporate governance committee, establish the annual compensation for our non-employee
directors. The compensation of our non-employee directors consists of cash payments and stock and
option awards.
In May 2007, our board approved the following compensation program for non-employee directors:
Cash Compensation.
Our non-employee directors each receive an annual cash fee of $20,000 for
service as a director. Our lead director receives an additional annual fee of $15,000. Each
non-employee director who serves on a committee of our board of directors receives the following
additional annual cash fees:
|
|
|
chair of our audit committee $10,000; other members $5,000;
|
|
|
|
chair of our compensation committee $5,000; other members $2,500; and
|
|
|
|
chair of our nominating and corporate governance committee $5,000; other members
$2,500;
|
Non-employee directors also receive reimbursement of out-of-pocket expenses incurred in
connection with attending our board, committee and stockholder meetings.
Equity Compensation.
Our non-employee directors also receive equity compensation for serving
as directors as follows:
|
|
|
Each new non-employee director receives an option to purchase 37,509 shares of our common
stock upon his or her initial appointment or election to our board of directors. Subject to
the non-employee directors continued service as a director, this option vests over a
four-year period, with 25% of the shares of common stock subject to the option vesting on
the first anniversary of the date of grant and the remaining 75% vesting in equal quarterly
installments over the succeeding three years. In the event of a change of control of us, the
vesting schedule of the option accelerates in full. The exercise price of this option will
be equal to the fair market value of our common stock on the date of grant; and
|
|
|
|
Each non-employee director who has served on our board for at least six months annually
receives an option to purchase 18,754 shares of our common stock on the date of the first
meeting of our board of directors held after each annual meeting of stockholders; provided
that, Mr. Badavas did not receive an annual option grant until the first meeting of our
board held after our 2009 annual meeting of stockholders. This option vests with respect to
50% of the shares of common stock subject to the option on the first anniversary of the date
of grant and the remaining 50% vesting in equal quarterly installments over the succeeding
two years, and, in
the event of a change in control of us, the vesting schedule of the option accelerates in
full. The exercise price of this option is equal to the fair market value of our common stock
on the date of grant.
|
118
In December 2009, our board approved the following additional compensation for
non-employee directors:
|
|
|
chair of our Special Committee $15,000 per month between July 9, 2009 and December
17, 2009, and $7,500 per month from December 18, 2009 to the effective date of the
proposed merger; and
|
|
|
|
|
other members of our Special Committee $10,000 per month between July 9, 2009 and
December 17, 2009, and $5,000 per month from December 18, 2009 to the effective date of
the proposed merger.
|
The following table sets forth information concerning the compensation of our non-employee
directors in fiscal year 2009:
Non-Employee Director Compensation For Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
or
|
|
|
Stock
|
|
|
Awards
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
(1)(2)(3)
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Hassan Ahmed, Ph.D.
|
|
|
25,000
|
|
|
|
|
|
|
|
50,885
|
|
|
|
75,885
|
|
Robert P. Badavas
|
|
|
30,000
|
|
|
|
|
|
|
|
50,885
|
|
|
|
80,885
|
|
Gururaj Deshpande, Ph.D.
|
|
|
30,000
|
|
|
|
|
|
|
|
50,885
|
|
|
|
80,885
|
|
Paul J. Ferri
|
|
|
22,500
|
|
|
|
|
|
|
|
50,885
|
|
|
|
73,385
|
|
Anthony S. Thornley
|
|
|
42,500
|
|
|
|
|
|
|
|
50,885
|
|
|
|
93,385
|
|
|
|
|
(1)
|
|
Amounts represent the total grant date fair value of stock options
granted in fiscal 2009 under Accounting Standards Codification 718-10,
Stock Compensation
. The assumptions used by us with respect to the
valuation of option grants are set forth in Note 11 of this Form 10-K.
|
|
(2)
|
|
As of January 3, 2010, our non-employee directors held the following
aggregate numbers of shares under outstanding equity awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Number of
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Aggregate
|
|
|
Underlying Option
|
|
Name
|
|
Stock Awards
|
|
|
Awards
|
|
Hassan Ahmed, Ph.D.
|
|
|
75,018
|
|
|
|
37,508
|
|
Robert P. Badavas
|
|
|
|
|
|
|
186,240
|
|
Gururaj Deshpande, Ph.D.
|
|
|
|
|
|
|
75,017
|
|
Paul J. Ferri
|
|
|
|
|
|
|
75,017
|
|
Anthony S. Thornley
|
|
|
|
|
|
|
75,017
|
|
119
|
|
|
(3)
|
|
The number of shares underlying stock options granted to our
non-employee directors for their service on our board during fiscal
year 2009 and the grant date fair value of such stock options are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
|
|
|
|
Shares
|
|
|
Fair
|
|
|
|
|
|
|
|
Underlying
|
|
|
Value of Stock
|
|
|
|
|
|
|
|
Stock
|
|
|
Option Grants
|
|
|
|
|
|
|
|
Option Grants
|
|
|
in
|
|
|
|
Date of
|
|
|
in
|
|
|
2009 (b)(c)
|
|
Name
|
|
Grant
|
|
|
2009(a)
|
|
|
($)
|
|
Hassan Ahmed, Ph.D.
|
|
|
5/19/09
|
|
|
|
18,754
|
|
|
|
50,885
|
|
Robert P. Badavas
|
|
|
5/19/09
|
|
|
|
18,754
|
|
|
|
50,885
|
|
Gururaj Deshpande, Ph.D.
|
|
|
5/19/09
|
|
|
|
18,754
|
|
|
|
50,885
|
|
Paul J. Ferri
|
|
|
5/19/09
|
|
|
|
18,754
|
|
|
|
50,885
|
|
Anthony S. Thornley
|
|
|
5/19/09
|
|
|
|
18,754
|
|
|
|
50,885
|
|
|
|
|
(a)
|
|
Vests with respect to 50% of the shares of common stock subject to the
option on the first anniversary of the date of grant and the remaining
50% vesting in equal quarterly installments over the succeeding two
years, and, in the event of a change in control of us, immediately
vests in full.
|
|
(b)
|
|
The Grant Date Fair Value computed in accordance with Accounting
Standards Codification 718,
Stock Compensation
represents the value
of options granted during 2009. The weighted-average grant date fair
value per option was $2.7133. The Grant Date Fair Value may never be
realized.
|
|
(c)
|
|
The exercise price of this option is equal to the fair market value of
our common stock on the date of grant as determined by the closing
price as listed on the Nasdaq Global Market.
|
120
Compensation Committee Interlocks and Insider Participation
During fiscal 2009, the members of our compensation committee were Drs. Deshpande and Ahmed
and Mr. Ferri, none of whom was a current or former officer or employee of Airvana and none of whom
had any related person transaction involving Airvana.
Report of the Compensation Committee
The compensation committee has reviewed the Compensation Discussion and Analysis required by
Item 402(b) of Regulation S-K with management. Based on this review and discussion, the
compensation committee recommended to the board that the Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K for the year ended January 3, 2010.
By the compensation committee of the board of directors of Airvana,
Inc.
Respectfully submitted,
Gururaj Deshpande, Ph.D. (Chair)
Hassan Ahmed, Ph.D.
Paul J. Ferri
|
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
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The information required by this Item is incorporated herein by reference to the information
provided under the headings Security Ownership of Certain Beneficial Owners and Management and
Executive and Director Compensation in the 2010 Proxy Statement.
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated herein by reference to the information
provided under the headings Corporate Governance and the Board of Directors and its Committees in
the 2010 Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to the information
provided under the headings Independent Registered Public Accounting Firm Fees and Services in
the 2010 Proxy Statement.
121
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
The following consolidated financial statements are filed as part of this report under Item 8
Financial Statements and Supplementary Data:
(a) (2) List of Schedules
All schedules to the consolidated financial statements are omitted as the required information
is either inapplicable or presented in the consolidated financial statements.
(a) (3) List of Exhibits
The exhibits which are filed with this report or which are incorporated herein by reference
are set forth in the Exhibit Index hereto.
122
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 10, 2010.
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AIRVANA, INC.
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By:
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/s/ Randall S. Battat
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Randall S. Battat
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President and Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been
signed below by the following persons on behalf of the Registrant and in the capacities indicated
as of March 10, 2010.
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Name
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Title
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/s/ Randall S. Battat
Randall S. Battat
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President, Chief Executive Officer and Director
(Principal Executive Officer)
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/s/ Jeffrey D. Glidden
Jeffrey D. Glidden
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Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
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/s/ Hassan Ahmed
Hassan Ahmed
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Director
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/s/ Robert P. Badavas
Robert P. Badavas
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Director
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/s/ Gururaj Deshpande
Gururaj Deshpande
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Director
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/s/ Paul J. Ferri
Paul J. Ferri
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Director
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/s/ Anthony S. Thornley
Anthony S. Thornley
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Director
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/s/ Sanjeev Verma
Sanjeev Verma
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Director
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123
EXHIBIT INDEX
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Exhibit No.
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Exhibit
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3.1
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Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1
to the Registrants Report on Form 8-K filed on July 25, 2007 (File
No. 001-33576) and incorporated herein by reference)
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3.2
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Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.4 to the
Registrants Registration Statement on Form S-1 (File No. 333-142210) and
incorporated herein by reference)
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4.1
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Specimen certificate evidencing shares of common stock (filed as Exhibit 4.1
to the Registrants Registration Statement on Form S-1 (File No. 333-142210)
and incorporated herein by reference)
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4.2
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Third Amended and Restated Investor Rights Agreement dated as of June 6, 2007
between the Registrant and the Preferred Investors, Other Investors, Founders
and Warrant Holders (filed as Exhibit 10.5 to the Registrants Registration
Statement on Form S-1 (File No. 333-142210) and incorporated herein by
reference)
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10.1
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*
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2000 Stock Incentive Plan, as amended (filed as Exhibit 10.1 to the
Registrants Registration Statement on Form S-1 (File No. 333-142210) and
incorporated herein by reference)
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10.2
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*
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2007 Stock Incentive Plan (filed as Exhibit 10.2 to the Registrants
Registration Statement on Form S-1 (File No. 333-142210) and incorporated
herein by reference)
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10.3
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*
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Forms of Incentive Stock Option Agreements under 2007 Stock Incentive Plan
(filed as Exhibit 10.3 to the Registrants Registration Statement on Form S-1
(File No. 333-142210) and incorporated herein by reference)
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10.4
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*
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Forms of Nonstatutory Stock Option Agreements under 2007 Stock Incentive Plan
(filed as Exhibit 10.4 to the Registrants Registration Statement on Form S-1
(File No. 333-142210) and incorporated herein by reference)
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10.5
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Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO)
Products dated October 1, 2001 between the Registrant and Nortel Networks,
Inc., as amended (filed as Exhibit 10.6 to the Registrants Registration
Statement on Form S-1 (File No. 333-142210) and incorporated herein by
reference)
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10.6
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HDR Infrastructure Equipment License Agreement, entered into on September 18,
2000, by and between Qualcomm Incorporated and the Registrant, as amended
(filed as Exhibit 10.7 to the Registrants Registration Statement on Form S-1
(File No. 333-142210) and incorporated herein by reference)
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10.7
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CSM 6800 Software Agreement, entered into as of April 28, 2004, by and between
Qualcomm Incorporated and the Registrant (filed as Exhibit 10.8 to the
Registrants Registration Statement on Form S-1 (File No. 333-142210) and
incorporated herein by reference)
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10.8
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Lease Agreement, dated as of October 4, 2004, between the Registrant and
W9/TIB Realty, L.L.C. (filed as Exhibit 10.9 to the Registrants Registration
Statement on Form S-1 (File No. 333-142210) and incorporated herein by
reference)
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10.9
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Lease Agreement, dated as of August 4, 2005, between the Registrant and W9/TIB
III Realty, L.L.C. (filed as Exhibit 10.10 to the Registrants Registration
Statement on Form S-1 (File No. 333-142210) and incorporated herein by
reference)
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10.10
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Amendment No. 10 to Development and Purchase And Sale Agreement For CDMA High
Data Rate (1xEV-DO) Products between the Registrant and Nortel Networks, Inc.,
entered into as of September 28, 2007 (filed as Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q filed on November 8, 2007 (File
No. 001-33576) for the quarterly period ended September 30, 2007 and
incorporated herein by reference)
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10.11
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Amendment No. 11 to Development and Purchase And Sale Agreement For CDMA High
Data Rate (1xEV-DO) Products between the Registrant and Nortel Networks, Inc.,
entered into as of November 6, 2008 (filed as Exhibit 10.11 to the
Registrants Annual Report on Form 10-K filed on February 24, 2009 (File
No. 001-33576) for the annual period ended December 28, 2008 and incorporated
herein by reference)
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Exhibit No.
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Exhibit
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10.12
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#
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Amendment No. 12 to Development and Purchase And Sale Agreement For CDMA High
Data Rate (1xEV-DO) Products between the Registrant and Ericsson AB, entered
into as of November 23, 2009
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10.13
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Agreement and Plan of Merger, by and among the Registrant, 72 Mobile Investors
and 72 Mobile Acquisition Corp., dated as of December 17, 2009 (filed as
Exhibit 2.1 to the Registrants Current Report on Form 8-K, as filed on
December 18, 2009 (File No. 001-33576) and incorporated herein by reference)
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10.14
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#
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Separation Agreement, dated November 4, 2009,
between the Registrant and Luis Pajares
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21.1
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#
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Subsidiaries of the Registrant
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23.1
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#
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Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
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31.1
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#
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
Rule 13(a)- 14(a)/15d-14(a), by President and Chief Executive Officer
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31.2
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#
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
Rule 13(a)- 14(a)/15d-14(a), by Vice President, Chief Financial Officer
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32
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#
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by President and Chief
Executive Officer and Vice President, Chief Financial Officer
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*
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Management contracts or compensatory plans or arrangements required to
be filed as an exhibit hereto pursuant to Item 15(a) of Form 10-K.
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Indicates confidential treatment requested as to certain portions,
which portions were omitted and filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment Request.
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#
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Filed herewith.
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