TABLE OF CONTENTS	Page
PROSPECTUS SUMMARY	1
RISK FACTORS	7
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS	23
USE OF PROCEEDS	24
DIVIDEND POLICY	24
CAPITALIZATION	25
SELECTED HISTORICAL FINANCIAL DATA	26
EXPLANATORY NOTE	28
INDUSTRY AND MARKET DATA	29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS	45
BUSINESS	46
MANAGEMENT	74
EXECUTIVE COMPENSATION	79
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	82
PRINCIPAL STOCKHOLDERS	83
SELLING STOCKHOLDERS	86
DESCRIPTION OF CAPITAL STOCK	87
PLAN OF DISTRIBUTION	90
LEGAL MATTERS	92
EXPERTS	92
WHERE YOU CAN FIND MORE INFORMATION	92
GLOSSARY OF SELECTED WIRELESS TERMINOLOGY	93
INDEX TO FINANCIAL STATEMENTS	F-1

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PROSPECTUS SUMMARY

 

This summary highlights key aspects of our business that are described in more detail elsewhere in this registration statement. This summary does not contain all of the information that you should consider before making a future investment decision with respect to our securities. You should read this entire registration statement carefully, including the “Risk Factors,” the combined audited financial statements and the notes thereto included elsewhere in this registration statement.

 

Unless the context indicates otherwise, all references in this registration statement to “NextWave,” “the Company,” “we,” “us” and “our” refer to NextWave Wireless Inc. and its direct and indirect subsidiaries. References to Old NextWave Wireless refer to our existence as a company conducting a separate line of business prior to April 13, 2005, when we emerged from Chapter 11 as a new wireless technology company.

 

Our Company

 

Business Overview

 

We are an early-stage wireless technology company engaged in the development of next-generation mobile broadband and wireless multimedia products, technologies and services. We believe that mobile broadband represents the next logical step in the evolution of the Internet and that demand for mobile broadband will transform the global $500 billion wireless communications industry from one driven primarily by circuit switched voice to one driven by IP based broadband connectivity. We expect that mobile WiMAX, a wireless broadband standard utilizing a cellular architecture to deliver fully-mobile and high quality fixed voice and data services, will play a major role in enabling the widespread delivery of mobile broadband services. We intend to focus our business activities on developing WiMAX products and other technologies to extend the broadband experience beyond the home or office and allow people to remain connected to the information and content they need wherever they go.

 

We have organized our product, technology and service development activities into three major initiatives:

 

WiMAX Technology Development. Led by the Advanced Technology Group, a part of our NextWave Broadband subsidiary, we are developing WiMAX chipsets, base station components, and terminal device reference designs to enable integrated local communications networks (commonly called local area networks, or LANs) and geographically dispersed communications networks (commonly called wide area networks, or WANs) wireless broadband solutions. A key design objective of our products and technologies is to extend the ability of mobile WiMAX to cost-effectively handle the large volume of network traffic that we believe next-generation wireless multimedia applications such as mobile television, high-resolution streaming video, and real-time gaming will generate. By enabling mobile WiMAX networks to simultaneously operate over multiple frequency bands, by implementing a layered network architecture, and by developing integrated WiMAX/Wi-Fi solutions, we expect that our product line will significantly enhance the performance and economics of fixed and mobile WiMAX networks. We intend to sell and/or license our WiMAX products and technologies to network infrastructure and device manufacturers and network operators worldwide.

 

Mobile WiMAX Network Solutions. To stimulate demand for our products, we have accumulated a spectrum footprint across the U.S. covering a population of over 247 million people, or POPs. This spectrum footprint includes 154 AWS licenses, currently pending FCC approval, for which we were declared the high bidder in a recent FCC auction. Led by the Network Solutions Group, which operates within our NextWave Broadband subsidiary, we intend to work with network partners who are interested in funding the deployment of shared mobile WiMAX networks that operate on our licensed spectrum and utilize network and device equipment which incorporate our products and technologies. Potential network partners include wireless service providers, cable operators, Internet service providers, and content distributors. To demonstrate the features and capabilities of our network solutions, we intend to deploy a mobile WiMAX trial network in Henderson, Nevada.

 

Wireless Multimedia Software. Through our PacketVideo subsidiary, we intend to be a leading provider of the next generation of device-embedded multimedia software needed to enable the efficient capture, transmission and manipulation of multimedia content by fourth generation (4G) broadband-enabled mobile devices. At present, PacketVideo is a global provider of embedded multimedia software for mobile phones. PacketVideo licenses its multimedia software to some of the largest wireless handset manufacturers and wireless carriers in the world, who use it to transform a mobile phone into a feature-rich multimedia device that provides people with the ability to stream, download and play video and music, receive live TV broadcasts and engage in two-way video telephony. We also expect that global deployments of mobile broadband networks will create a unique opportunity for software developers such as PacketVideo to create innovative multimedia software applications optimized for the mobile environment.

 

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We believe the combination of our products and technologies, our device embedded multimedia software products, and our spectrum assets represent a unique platform to provide advanced wireless broadband solutions to the market.

 

Competitive Strengths

 

A highly accomplished team of wireless technology professionals. Our technology development efforts are led by a team of highly skilled senior engineers with broad experience in the development of wireless communications technologies and solutions. Team members have led major development initiatives at leading technology companies, such as Intel, Motorola, Nokia, QUALCOMM and Texas Instruments. Together they have been instrumental in developing some of today’s dominant wireless technologies. Several members of our team, including our Chief Executive Officer, Allen Salmasi, played key roles at QUALCOMM in the development and successful commercialization of the CDMA wireless technology standard used worldwide today. In addition, our senior team has extensive experience in building and operating wireless networks for companies such as Airtouch, AT&T Wireless, McCaw Cellular, Nextel and SprintPCS.

 

Significant capital resources. As of September 30, 2006, we had $222.2 million of cash, cash equivalents and short-term investments. While we anticipate that the costs of our research and development activities will increase as we approach the commercial deployment of our wireless broadband products and technologies, we believe our working capital position provides us with significant flexibility to continue funding our research and development activities and our operating losses. To the extent that attractive opportunities to acquire complimentary businesses or additional wireless broadband spectrum arise, we may need to raise additional funds to capitalize on such opportunities.

 

Attractive wireless spectrum portfolio, well-suited to support mobile WiMAX. To date, we have acquired licensed spectrum and entered into long-term leases that provide us with exclusive leasehold access to licensed spectrum throughout the U.S. Our spectrum portfolio, including 154 AWS licenses that are pending with the FCC for which we were declared high bidder at a recent FCC auction, covers approximately 247 million persons, or POPs, across the U.S., with the majority of POPs covered by 10MHz or more of spectrum. We believe that this spectrum footprint, which includes all top ten and 21 of the top 25 cities in the U.S., makes us attractive to potential network partners. Our spectrum resides in the 2.3GHz WCS, 2.5GHz BRS/EBS, and 1.7/2.1 GHz AWS bands and offers propagation and other characteristics suitable for use with mobile WiMAX.

 

Acquisitions and Strategic Investments

 

Since our emergence as a wireless technology company, we have completed several acquisitions and strategic investments, including the acquisition of PacketVideo Corporation for $46.6 million in July 2005, and transactions to acquire licensed spectrum rights, including subsequent lease obligations for amounts totaling $418.8 million, including our pending acquisition of 154 spectrum licenses through the AWS action for an aggregate bid of $115.5 million and our acquisition of WCS Wireless Inc., which holds spectrum covering 188.8 million persons, or POPs, in the Central, Western, and Northeastern United States, for $160.5 million. Our acquisitions and investments are described in this registration statement in greater detail under the heading “Business - Our History”.

 

At the time of our emergence on April 13, 2005, we had cash and investment balances of $555.1 million. As of September 30, 2006, our cash and investment balances were $222.2 million, reflecting the use of $418.8 million for the acquisition of wireless spectrum licenses and subsequent lease obligations, $77.3 million paid into a restricted cash account securing our 7% Senior Secured Notes, $56.1 million for business acquisitions and a joint venture investment, $18.3 million for the acquisition of property and equipment, and $57.1 million for operating activities, including research and development costs. On July 17, 2006, we issued senior secured notes due 2010 in the aggregate principal amount of $350.0 million. The notes were issued at a fifteen percent (15%) original issue discount, resulting in gross proceeds of $297.5 million. We will be obligated to pay the secured notes at their full face value of $350.0 million, and the original issue discount will provide the note purchasers with a yield that is in addition to the coupon rate upon repayment of the notes. In connection with the notes placement, we issued 4,110,382 warrants to purchase shares of our common stock at an exercise price of $0.01 per share. The notes placement provided us with net cash proceeds of $295.0 million available for the sole purpose of financing spectrum acquisitions and leases. The entire proceeds were used for the acquisition of WCS Wireless, Inc. for $160.5 million, the acquisition of two new EBS leases for $22.1 million and for the majority of the funding for the acquisition of 154 AWS licenses for $115.5 million, which remain subject to FCC approval.

 

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Risks Affecting Us

 

We are an early stage company that recently emerged from Chapter 11 with a new wireless technology business plan and have limited relevant operating history. With the exception of our PacketVideo subsidiary, we have never generated any material revenues and have limited commercial operations. We operate in an extremely competitive environment. If WiMAX technology fails to gain acceptance, we will not be successful in selling WiMAX products and technologies. Our wireless broadband products and technologies are in the early stages of development and will require a substantial investment before they may become commercially viable. We are currently unable to project when our wireless broadband products and technologies will be commercially deployed and generate revenue. We have made numerous acquisitions and investments since our emergence. We must successfully manage our growth and integrate these recent and any future acquisitions and investments. We are subject to a number of other risks of which you should be aware before making a future investment decision with respect to our securities. These risks are discussed more fully under the heading “Risk Factors.”

Capital Stock

 

Our authorized capital stock consists of 400,000,000 shares of common stock, par value $0.001 per share and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 1, 2006 we will have 82,207,649 shares of common stock outstanding held by approximately 1,400 holders of record. As of such date, there will be 17,319,249 shares of common stock reserved for future issuance, of which 14,873,435 will be reserved for issuance upon the exercise of granted and outstanding options and warrants and 2,445,814 will be available for future option grants.

 

Our common stock is currently quoted on the Over-the-Counter Bulletin Board. We have applied for the listing of our common stock on The Nasdaq Global Market under the symbol “WAVE.”

 

Corporate Information

 

Our principal executive offices are located at 12670 High Bluff Drive, San Diego, California 92130, and our telephone number is (858) 480-3100. NextWave’s website address is www.nextwave.com. Our website, and the information contained in the website, is not a part of this prospectus.

 

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THE OFFERING

 

Common stock outstanding prior to this offering, excluding the shares underlying the warrants		82,207,649 shares
Common stock being offered for resale to the public by the selling stockholders		4,110,382 shares
Common stock to be outstanding after this offering(1)		86,318,031 shares
Total proceeds raised by offering		We will not receive any proceeds from the resale of our common stock pursuant to this offering. We may receive proceeds upon the exercise of the warrants to the extent such warrants are exercised for cash.
Use of proceeds		Any proceeds we may receive will be used to meet our working capital needs and general corporate purposes.
Over-the-Counter Bulletin Board symbol		NWXVV.OB
Risk factors		See “Risk Factors” and the other information included in this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our common stock.

 

(1) The number of shares of our common stock to be outstanding after this offering is based on the number of shares of our common stock outstanding as of December 1, 2006. This number does not include, as of December 1, 2006:

 

·

10,263,053 shares of our common stock issuable upon exercise of options outstanding, at a weighted average exercise price of $6.00 per share;

 

·

2,445,814 shares of our common stock reserved for issuance under our NextWave Wireless Inc. 2005 Stock Incentive Plan and the CYGNUS Communications, Inc. 2004 Stock Option Plan; and

 

·

500,000 shares of our common stock issuable upon exercise of warrants issued to Station 4, LLC at an exercise price of $6.00 per share.

 

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Summary Historical Financial Data

 

You should read the following summary historical financial data together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our unaudited condensed consolidated financial statements and our audited consolidated financial statements and the notes to those financial statements included elsewhere in this registration statement.

 

Set forth below is summary historical financial data, at the dates and for the periods indicated, for NextWave Wireless LLC, which holds all of our operating subsidiaries and is our direct wholly-owned subsidiary. On November 13, 2006, we implemented a new corporate holding company structure in order to facilitate a planned Nasdaq listing. The holding company structure was implemented through the merger of a wholly-owned subsidiary of NextWave Wireless Inc. with and into NextWave Wireless LLC. As a result of this corporate conversion merger, we issued shares of our common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of NextWave Wireless Inc. common stock for every six membership units of NextWave Wireless LLC that they held. This prospectus does not include financial statements of NextWave Wireless Inc. because it was only recently formed for the purpose of effecting our new corporate holding company structure, will hold no significant assets and will not engage in any operations.

 

The following summary consolidated statement of operations data for the three and nine months ended September 30, 2006, for the three months ended September 30, 2005 and for the period from the date of our inception as a new wireless technology company pursuant to the plan of reorganization of Old NextWave Wireless (April 13, 2005) to September 30, 2005, and the summary consolidated balance sheet data as of September 30, 2006 was derived from our unaudited condensed consolidated financial statements and should be read in conjunction with our unaudited condensed consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this registration statement. Our unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and notes thereto, which include, in the opinion of our management, all adjustments (consisting of normal recurring adjustments), necessary for a fair presentation of the information for the unaudited interim periods. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period.

 

The following summary consolidated statement of operations data for the period from the date of our inception (April 13, 2005) to December 31, 2005 and summary consolidated balance sheet data as of December 31, 2005 was derived from our audited consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this registration statement.

 

(in thousands)		Three Months Ended September 30, 2006 (1)			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2006 (1)			Inception (April 13, 2005) to September 30, 2005 (2)			Inception (April 13, 2005) to December 31, 2005 (2)
Consolidated Statement of Operations Data (3):		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues		$	8,051		$	1,202		$	22,055		$	1,350		$	4,144
Loss from operations			(25,860	)		(20,220	)		(67,006	)		(26,357	)		(55,687	)
Net loss			(31,305	)		(16,653	)		(65,537	)		(19,601	)		(45,952	)

 

		September 30, 2006			December 31, 2005
Consolidated Balance Sheet Data (3):		(unaudited)
Cash and cash equivalents		$	25,371		$	93,649
Short-term investments			196,801			365,582
Deposits for wireless spectrum bids (4)			142,866			5,400
Restricted investments - non current (5)			76,792			—
Wireless spectrum licenses, net			374,137			45,467
Goodwill			32,829			24,782
Other intangible assets, net			16,306			18,100
Total assets			905,399			579,774
Long-term obligations, less current portion			292,310			14,934
Total members’ equity			507,906			539,364

(1)

Our Board of Managers approved a change, effective January 1, 2006, in our fiscal year end and quarterly reporting periods from quarterly calendar periods ending on December 31 to a 52-53 week fiscal year ending on the Saturday nearest to December 31 of the current calendar year or the following calendar year. The three and nine month periods ended September 30, 2006 includes 13 and 39 weeks, respectively.

 

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(2)	On April 13, 2005, pursuant to the plan of reorganization of the NextWave Telecom group, the equity securities of NextWave Wireless LLC were distributed to the NTI equity holders and we were reconstituted as a company with a new capitalization and a new wireless technology business plan. A summary of the assets and liabilities contributed to NextWave on April 13, 2005 is provided in the Notes to Consolidated Financial Statements included elsewhere in this registration statement. For more information on our emergence as a new wireless technology company, see “Business-Our History.”
(3)	The results of operations of PacketVideo Corporation and Inquam Broadband Holding, Inc. are included as of July 19, 2005 and January 6, 2006, the respective dates of the acquisitions, which affects the comparability of the Summary Historical Financial Data. During 2006, we also completed other acquisitions that were not significant and their results of operations have been included from their respective dates of acquisition. See Note 3 to the Notes to Condensed Consolidated Financial Statements included elsewhere in this registration statement.
(4)	In July 2006 we paid a $142.8 million deposit to the FCC to qualify for the AWS auction. On September 20, 2006, we were declared the winning bidder for 154 AWS licenses for an aggregate bid of $115.5 million. Accordingly, $27.3 million of our initial deposit was not used and was returned to us in October 2006. Our purchase of the AWS licenses remains subject to FCC spproval.
(5)	On July 17, 2006, we consummated our secured notes private placement, the terms of which require us to retain $75.0 million of our cash, cash equivalents and investments from funds other than the proceeds of the notes in a restricted collateral account.

 

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RISK FACTORS

 

Our business involves a high degree of risk. You should carefully consider the following risks together with all of the other information contained in this registration statement before making a future investment decision with respect to our securities. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected, and the value of our securities could decline.

 

Risks Relating to Our Business

 

We are an early-stage company and have limited relevant operating history and a history of losses.

 

We emerged from our reorganization in April 2005 with a new business plan and have made several recent acquisitions and investments. As a result, we are at an early stage of our development and have had a limited relevant operating history and, consequently, limited historical financial information. Other than through our PacketVideo business, which we acquired in July 2005, we have never generated any material revenues and have limited commercial operations. We are currently unable to project when our wireless broadband products and technologies will be commercially deployed and generate revenue. In addition, we, along with the companies we have acquired, have a history of losses. Other than our PacketVideo business, we will not have the benefit of any meaningful operations, and we will incur significant expenses in advance of generating significant revenues, particularly from our WiMAX products and network solutions, and are expected to realize significant operating losses for the next few years. We are therefore subject to all risks typically associated with a start-up entity.

 

We are in the early stages of the implementation of our business plan. If we are not able to successfully implement all key aspects of our business plan, including licensing, developing and deploying the technologies required to provide WiMAX services to network operators, we may not be able to provide the type and quality of services required to achieve our business objectives. In addition, we may not be able to develop a customer base sufficient to generate adequate revenues. If we are unable to successfully implement our business plan and grow our business, either as a result of the risks identified in this section or for any other reason, we may never achieve profitability, in which event our business would fail.

 

If we fail to effectively manage growth in our business, our ability to develop and commercialize our products will be adversely affected.

 

Our business and operations have expanded rapidly since the completion of our reorganization in April 2005. For example, from April 13, 2005 through December 1, 2006, the number of our employees has increased from 50 to 497 as a result of organic growth and acquisitions. We acquired PacketVideo in July 2005 and CYGNUS Communications in February 2006 and we are still in the process of integrating these businesses. To support our expanded research and development activities for our mobile WiMAX business and the growth in our PacketVideo business, we must continue to successfully hire, train, motivate and retain our employees. We expect that significant further expansion of our operations and employee base will be necessary. In addition, in order to manage our expanded operations, we will need to continue to expand our management, operational and financial controls and our reporting systems and procedures. We will also need to retain management, key employees and business partners of PacketVideo and CYGNUS. All of these measures will require significant expenditures and will demand the attention of management. Failure to fulfill any of the foregoing requirements could result in our failure to successfully manage our intended growth and development, and successfully integrate PacketVideo and CYGNUS, which would adversely affect our ability to develop and commercialize our products and achieve profitability.

 

We operate in an extremely competitive environment which could materially adversely affect our ability to win market acceptance of our products and achieve profitability.

 

We operate in an extremely competitive market and we expect such competition to increase in the future. Set forth below is a brief description of the competitive environment for each of our divisions and PacketVideo:

 

Advanced Technology Group - As providers of mobile WiMAX product and technologies, we will be competing with well established, international companies that are engaged in the development, manufacture and sale of products and technologies that support alternative wireless standards such as GSM, CDMA2000 and UMTS. Companies that support these alternative wireless technologies include well established industry leaders such as Alcatel, Ericsson, Huawei, LGE, Lucent, Motorola, Nokia, Nortel, QUALCOMM, Samsung and Siemens.

 

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In addition, we will be competing with numerous companies that are currently developing or marketing WiMAX products and technologies including Beceem, Fujitsu, Intel, Motorola, Nortel, RunCom, Samsung, Sequans and WaveSat. Some of these companies have significantly greater financial, technical development, and marketing resources than we do, are already marketing commercial WiMAX semiconductor products, and have established a significant time to market advantage. These companies are also our potential customers and partners and may not be available to us if they develop competing products. In addition, we expect additional competition to emerge in the WiMAX semiconductor and components market including well-established companies such as Samsung and Broadcom.

 

Network Solutions Group - The mobile WiMAX networks that we intend to build in partnership with service providers will be designed to provide end-user services that directly compete with some of the largest incumbent wireless operators in the world. These operators have already achieved high levels of market penetration, have established broad product and service distribution networks, and have developed high levels of brand recognition. Our shared network partners will also have to compete with commercial 802.11 Wi-Fi networks as well the growing number of municipal wireless broadband networks being sponsored by some major cities across the country such as San Francisco and Philadelphia. These municipal networks, which are often based on the popular 802.11 Wi-Fi standard, are expected to offer individuals with low-cost, nomadic Internet access that would compete with the fully mobile wireless broadband services our networks are intended to provide. Finally, our shared network partners may need to compete against emerging wireless multimedia broadcast networks such as Crown Castle’s Modeo and QUALCOMM’s Media Flow networks.

 

In addition, a growing number of incumbent wireless network operators, such as Sprint-Nextel, are developing MVNO business relationships with service provider companies such as Internet service providers and cable operators. These pre-existing MVNO relationships could prevent some of these service provider companies from entering into shared network arrangements.

 

PacketVideo - At present, the primary competitors for PacketVideo’s multimedia software products are the internal multimedia design teams at the OEM handset manufacturers to whom PacketVideo markets its products and services. Importantly, these OEMs represent some of PacketVideo’s largest customers. In addition several companies, including Flextronics/Emuzed, Hantro, Nextreaming, Philips Software, Sasken and Thin Multimedia also currently provide software products and services that directly or indirectly compete with PacketVideo. As the market for embedded multimedia software evolves, we anticipate that additional competitors may emerge including Apple Computer, Real Networks and OpenWave.

 

Some of our competitors have significantly greater financial, technological development, marketing and other resources than we do, are already marketing commercial products and technologies and have established a significant time to market advantage. Our ability to generate earnings will depend, in part, upon our ability to effectively compete with these competitors.

 

We intend to expand our business through additional acquisitions that could result in diversion of resources and extra expenses, which could disrupt our business and increase our expenses.

 

Part of our strategy is to pursue acquisitions of and investments in businesses and technologies to expand our business and enhance our technology development capabilities. In addition to our CYGNUS and PacketVideo acquisitions, we have made investments in a number of companies including Hughes Systique and Inquam Broadband. The negotiation of potential acquisitions and investments, as well as the integration of acquired businesses or technologies, could divert our management’s time and resources. Acquired businesses and technologies may not be successfully integrated with our products and operations. In addition, our investments, particularly minority investments, may not give us access to new technologies or provide us with business relationships with the other company. We may not realize the intended benefit of any acquisition or investment. Our acquisitions could result in substantial cash expenditures, potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, a decrease in our profit margins and amortization of intangibles and potential impairment of goodwill. In addition, our investments could result in substantial cash expenditures, fluctuations in our results of operations resulting from changes in the value of the investments and diversion of management’s time and attention. If acquisitions disrupt our operations or if our investments are not successful, our business, financial condition and results of operations may suffer.

 

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If WiMAX technology fails to gain acceptance, we will not be successful in selling WiMAX products and technologies.

 

Our business plan is reliant on the deployment and market acceptance of mobile WiMAX networks and WiMAX enabled handsets and devices. WiMAX and the market for WiMAX networks and services have only recently begun to develop and is continuing to evolve. We plan to generate most of our revenue from the sale of WiMAX products and the licensing of mobile WiMAX broadband technologies. There are currently no mobile WiMAX networks in commercial operation and there can be no assurance that commercial mobile WiMAX networks will prove to be commercially viable. Mobile WiMAX will compete with several third generation (3G) and fourth generation (4G) wireless air interface technologies that are currently being deployed or developed to enable the delivery of mobile broadband services to the market, including CDMA2000 and UMTS. In order for WiMAX to gain significant market acceptance among consumers, network operators and telecommunications service providers will need to deploy WiMAX networks. However, many of the largest wireless telecommunications providers have made significant expenditures in technologies that have the potential to be competitive with WiMAX and may choose to continue to develop these technologies rather than utilize WiMAX. Certification standards for WiMAX are controlled by the WiMAX Forum, an industry group. Accordingly, standard setting for WiMAX is beyond our control. If standards for WiMAX change, the commercial viability of mobile WiMAX may be delayed or impaired and our development efforts may also be delayed or impaired or become more costly. The development of mobile WiMAX networks is also dependent on the availability of spectrum. Access to spectrum suitable for mobile WiMAX is highly competitive. We currently contemplate using multiple frequencies for our mobile WiMAX networks. This multi-spectrum approach is technologically challenging and will require the development of new software, integrated circuits and equipment, which will be time consuming and expensive and may not be successful. In order for our business to continue to grow and to become profitable, mobile WiMAX technology and related services must gain acceptance among consumers, who tend to be less technically knowledgeable and more resistant to new technology or unfamiliar services. If consumers choose not to adopt mobile WiMAX technology, we will not be successful in selling WiMAX products and technologies and our ability to grow our business will be limited.

 

Our wireless broadband products and technologies are in the early stages of development and will require a substantial investment before they may become commercially viable.

 

Our wireless broadband products and technologies are in the early stages of development and will require a substantial investment before they may become commercially viable. We are currently unable to project when our wireless broadband products and technologies will be commercially deployed and generate revenue. While we intend to continue to make substantial investments in development for the foreseeable future, it is possible that our development efforts will not be successful and that our wireless broadband products and technologies will not result in meaningful revenues. In addition, unexpected expenses and delays in development could adversely affect our liquidity. Our wireless broadband products and technologies have not been tested, even on a pre-commercial basis. Even if our products and technologies function when tested, they may not produce sufficient performance and economic benefits to justify full commercial development efforts, or to ultimately attract customers. Failure to commercially deploy our wireless broadband products and technologies will adversely affect our ability to achieve profitability.

 

Our future WiMAX products may not receive the certification we expect, which may affect our ability to sell our WiMAX products and services.

 

If our mobile WiMAX technologies and products do not receive WiMAX industry certification, we may not be able to successfully market, license or sell our mobile WiMAX products or technologies. Our WiMAX-based products may not receive the necessary certification in the time frame we expect, or at all, and may therefore not achieve the wide acceptance that we are seeking. In addition, we expect industry standards for WiMAX to evolve and if we are not able to adapt our products and technologies to any such changes, our ability to license or sell our products and technologies would be impaired.

 

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The launch of our WiMAX network in Henderson, Nevada may be delayed or may not be successful, which could harm our business.

 

We are in the process of building a WiMAX trial network in Henderson, Nevada. We expect this trial network to be operational in 2007 and intend to utilize the network to showcase our advanced IP core network, next generation IP backhaul, NMS and back office system capabilities and to provide potential network partners an opportunity to evaluate the performance of mobile WiMAX technology. We plan to seek network partners to expand this network into a commercial mobile WiMAX network that will cover the greater Las Vegas metropolitan region and serve as a platform to support the initial deployment of our products.   The trial network and the commercial network development may not be successful or may be delayed or more costly than anticipated.    If either launch is delayed or not successful, the commercial roll-out of our wireless broadband technologies and products may be delayed, sales and licenses of our WiMAX network technologies and products may be harmed and our ability to attract a network partner could be adversely affected. In addition, we may need to dedicate substantial additional resources and management time and attention to the launch of the trial and commercial networks, which could limit or delay our ability to execute other aspects of our business plan.

 

The business plan of our Network Solutions Group is dependent on entering into or maintaining network partner relationships.

 

Our Network Solutions Group intends to build and operate shared WiMAX networks in partnership with wireless service providers, cable operators, multimedia content distributors, applications service providers and Internet service providers. We have not entered into any of these strategic relationships to date and we may not be able to negotiate these relationships on acceptable terms, or at all. If we are unable to establish and maintain these strategic relationships, we may have to modify our plans for the Network Solutions Group and seek another source of value for our spectrum licenses.

 

The dependence of our Network Solutions Group on future strategic relationships is subject to a number of risks, including:

 

·

the inability to control the amount and timing of resources that our strategic partners devote to their activities;

 

·

the possibility that our strategic relationship partners could separately move forward with competing products and services developed either independently or with one of our competitors;

 

·

the possibility that our strategic relationship partners may experience financial or technical difficulties;

 

·

business combinations or other changes in our strategic relationship partners business strategy may impact their willingness or ability to complete its obligations under any such relationship; and

 

·

changes in regulations could negatively impact the business environment in which such strategic relationship partners operate.

 

We may require significant capital to implement our business plan, but we may not be able to obtain additional financing on favorable terms or at all.

 

While we estimate that our working capital will be sufficient to fund our research and development activities and our operating losses at least through 2007, we may need to secure significant additional capital in the future to implement changes to, or expansions of, our business plan and to become cash flow positive. We may also require additional cash resources to pursue investments or acquisitions, including investments in or acquisitions of other technologies, businesses or spectrum licenses. Sources of additional capital may include public or private debt and equity financings. In addition, we have completed a private placement of senior secured notes that provided us with net cash proceeds of $295.0 million available for the sole purpose of financing spectrum acquisitions and leases. The entire proceeds were used for the acquisition of WCS Wireless, Inc. for $160.5 million, the acquisition of two new EBS leases for $22.1 million and for the majority of the funding for the acquisition of 154 AWS licenses for $115.5 million, which remain subject to FCC approval.. To the extent that other attractive opportunities to acquire complimentary businesses or additional spectrum arise, we may need to raise additional funds to capitalize on such opportunities.

 

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Risks Related to Our PacketVideo Business

 

Since our inception in April 2005, substantially all of our revenues have been generated by our PacketVideo subsidiary, which we acquired in July 2005, and we believe that PacketVideo will account for a substantial portion of our revenues until we complete the development and commercialization of our wireless broadband products and technologies. Our PacketVideo business is subject to a number of risks, including:

 

Reliance on a limited number of mobile phone and device manufacturers and wireless carriers. For the nine months ended September 30, 2006, PacketVideo’s sales to Verizon Wireless accounted for 50% of our revenues. For the period from our inception (April 13, 2005) through December 31, 2005 PacketVideo’s sales to Verizon Wireless, Fujitsu and Nokia accounted for 22%, 14% and 11%, respectively, of our revenues. Aggregated accounts receivable from Verizon Wireless and Microsoft accounted for 58% and 10%, respectively, of total gross accounts receivable at September 30, 2006. We expect that our PacketVideo subsidiary will continue to generate a significant portion of its revenues through a limited number of mobile phone and device manufacturers and wireless carriers for the foreseeable future, although these amounts may vary from period-to-period. If any of these customers decides not to embed PacketVideo software into their mobile phones and devices or otherwise reduces the amount of PacketVideo software they embed in their mobile phones or devices generally, our PacketVideo revenues and results of operations could be materially adversely affected.

 

Our agreements with mobile phone and device manufacturers are not exclusive and many contain no minimum purchase requirements. Accordingly, mobile phone and device manufacturers may effectively terminate these agreements by no longer embedding PacketVideo’s software into their products. In addition, PacketVideo has indemnified these manufacturers from certain claims that PacketVideo’s software infringes third-party intellectual property rights. Our carrier agreements are not exclusive and generally have a limited term of one or two years with evergreen, or automatic renewal, provisions upon expiration of the initial term. These agreements set out the terms of our distribution relationships with the carriers but generally do not obligate the carriers to market or distribute any of our applications. In addition, the carriers can terminate these agreements early, and in some instances, at any time, without cause.

 

Many factors outside our control could impair PacketVideo’s ability to generate revenues from mobile phone and device manufacturers and wireless carriers, including the following:

 

·

a preference for embedded software licensed by one of PacketVideo’s competitors;

 

·

competing applications;

 

·

a decision to discontinue embedding our PacketVideo software, or mobile broadband embedded software altogether;

 

·

a carrier’s decision not to provide mobile broadband applications or content thereby reducing the need for PacketVideo’s applications;

 

·

a carrier’s network encountering technical problems that disrupt the delivery of content for our applications;

 

·

a manufacturer’s decision to increase the cost of mobile phones and devices embedded with PacketVideo’s software;

 

·

a manufacturer’s decision to reduce the price it is willing to pay for embedded software such as PacketVideo’s; and

 

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·

consolidation among manufacturers or wireless carriers or the emergence of new manufacturers or wireless carriers that do not license PacketVideo software.

 

If wireless subscribers do not increase their use of their mobile phones to access multimedia content, our PacketVideo business may suffer. Our PacketVideo business is reliant on the continued and increased use of mobile phones to access multimedia content by consumers. The market for multimedia content delivery through mobile phones is relatively new. If the market does not continue to develop or develops more slowly than anticipated, mobile phone manufacturers may cease to embed PacketVideo’s software in their handsets and wireless carriers may limit or stop the delivery of multimedia content and the demand for mobile phones with embedded multimedia software may decline. If this occurs, our PacketVideo business would be harmed and our revenues would decline.

 

If we fail to deliver our PacketVideo applications to correspond with the commercial introduction of new mobile phone models, our sales may suffer. PacketVideo’s business is tied, in part, to the commercial introduction of new mobile phones with enhanced features. Many new mobile phone models are released in the final quarter of the year to coincide with the holiday shopping season. We cannot control the timing of these mobile phone launches. Our PacketVideo software must be modified for each new mobile phone model. If we are unable to release new versions of our PacketVideo software to coincide with these new mobile phone launches, our sales of our PacketVideo software may suffer. In addition, if new mobile phone launches are delayed or if we miss the key holiday selling season, our sales may suffer.

 

PacketVideo may experience difficulties in the introduction of new or enhanced products, which could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products. The development of new or enhanced embedded multimedia software products is a complex and uncertain process. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction, commercialization or marketing of new products or product enhancements. The difficulties could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products, which may adversely affect our results or operations.

 

We do not have any manufacturing capabilities and will depend on third-party manufacturers and suppliers to manufacture, assemble and package our semiconductor products.

 

We are currently designing and developing semiconductor products including digital baseband ASICs and multi-band RFICs. If we are successful in our design and development activities and a market for these products develops, these products will need to be manufactured. Due to the expense and complexity associated with the manufacturer of digital baseband ASICs and multi-band RFICs, we intend to depend on third-party manufacturers to manufacture these products. The dependence on third-parties to manufacture, assemble and package these products involves a number of risks, including:

 

·

a potential lack of capacity to meet demand;

 

·

reduced control over quality and delivery schedules;

 

·

risks of inadequate manufacturing yield or excessive costs;

 

·

difficulties in selecting and integrating subcontractors;

 

·

limited warranties in products supplied to us;

 

·

price increases; and

 

·

potential misappropriation of our intellectual property.

 

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We may not be able to establish manufacturing relationships on reasonable terms or at all. The failure to establish these relationships on a timely basis and on attractive terms could delay our ability to launch these products or reduce our revenues and profitability.

 

Defects or errors in our products and services or in products made by our suppliers could harm our relations with our customers and expose us to liability. Similar problems related to the products of our customers or licensees could harm our business.

 

Our WiMAX products and technologies that we are developing will be inherently complex and may contain defects and errors that are detected only when the products are in use. Further, because our products and technologies that we are developing will be responsible for critical functions in our customers’ products and/or networks, such defects or errors could have a serious impact on our customers, which could damage our reputation, harm our customer relationships and expose us to liability. Defects in our products and technologies or those used by our customers or licensees, equipment failures or other difficulties could adversely affect our ability and that of our customers and licensees to ship products on a timely basis as well as customer or licensee demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. We and our customers or licensees may also experience component or software failures or defects which could require significant product recalls, reworks and/or repairs which are not covered by warranty reserves and which could consume a substantial portion of the capacity of our third-party manufacturers or those of our customers or licensees. Resolving any defect or failure related issues could consume financial and/or engineering resources that could affect future product release schedules. Additionally, a defect or failure in our products and technologies that we are developing or the products of our customers or licensees could harm our reputation and/or adversely affect the growth of mobile WiMAX markets.

 

Because mobile WiMAX is an emerging technology that is not fully developed, there is a risk that still unknown persons or companies may assert proprietary rights to the various technology components that will be necessary to operate a WiMAX network.

 

As a technology company, we expect to incur expenditures to create and protect our intellectual property and, possibly, to assert infringement by others of our intellectual property. We also expect to incur expenditures to defend against claims by other persons asserting that the technology that will be used and sold by our Company infringes upon the right of such other persons. Because mobile WiMAX is an emerging technology that is not fully developed, there may be a greater risk that persons or entities unknown to us will assert proprietary rights to technology components that are necessary to operate WiMAX networks or products. More than 20 companies have submitted letters of assurance related to IEEE 802.16 and amendments stating that they may hold or control patents or patent applications, the use of which would be unavoidable to create a compliant implementation of either mandatory or optional portions of the standard. In such letters, the patent holder typically asserts that it is prepared to grant a license to its essential IP to an unrestricted number of applicants on a worldwide, non-discriminatory basis and on reasonable terms and conditions. If any companies asserting that they hold or control patents or patent applications necessary to implement mobile WiMAX do not submit letters of assurance, or state in such letters that they do not expect to grant licenses, this could have an adverse effect on the implementation of mobile WiMAX networks and the sale of our mobile WiMAX products and technologies. In addition, we can not be certain of the validity of the patents or patent applications asserted in the letters of assurance submitted to date, or the terms of any licenses which may be demanded by the holders of such patents or patent applications. If we were required to pay substantial license fees to implement our mobile WiMAX products and technologies, this could adversely affect the profitability of these products and technologies.

 

As the number of competitors in our market increases and the functionality of our products is enhanced, we may become subject to claims of infringement or misappropriation of the intellectual property rights of others. Any claims, with or without merit, could be time consuming to address, result in costly litigation, divert the efforts of our technical and management personnel or cause product release or shipment delays, any of which could have a material adverse effect upon our ability to commercially launch our products and technologies and on our ability to achieve profitability. If any of our products were found to infringe on another company’s intellectual property rights or if we were found to have misappropriated technology, we could be required to redesign our products or license such rights and/or pay damages or other compensation to such other company. If we were unable to redesign our products or license such intellectual property rights used in our products, we could be prohibited from making and selling such products. In any potential dispute involving other companies’ patents or other intellectual property, our customers could also become the targets of litigation. Any such litigation could severely disrupt the business of our customers, which in turn could hurt our relations with our customers and cause our revenues to decrease.

 

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We anticipate that we will develop a patent portfolio related to our WiMAX products and technologies. However, there is no assurance that we will be able to obtain patents covering WiMAX products. Litigation may be required to enforce or protect our intellectual property rights. As a result of any such litigation, we could lose our proprietary rights or incur substantial unexpected operating costs. Any action we take to license, protect or enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.

 

Other companies or entities also may commence actions or respond to an infringement action that we initiate by seeking to establish the invalidity or unenforceability of one or more of our patents or to dispute the patentability of one or more of our pending patent applications. In the event that one or more of our patents or applications are challenged, a court may invalidate the patent or determine that the patent is not enforceable or deny issuance of the application, which could harm our competitive position. If any of our key patent claims are invalidated or deemed unenforceable, or if the scope of the claims in any of these patents is limited by court decision, we could be prevented from licensing such patent claims. Even if such a patent challenge is not successful, it could be expensive and time consuming to address, divert management attention from our business and harm our reputation.

 

We are dependent on a small number of individuals, and if we lose key personnel upon whom we are dependent, our business will be adversely affected.

 

Our future success depends largely upon the continued service of our board members, executive officers and other key management and technical personnel, particularly Allen Salmasi, our Chairman and Chief Executive Officer. Mr. Salmasi has been a prominent executive and investor in the technology industry for over 20 years, and the Company has benefited from his industry relationships in attracting key personnel and in implementing acquisitions and strategic plans. In addition, in order to develop and achieve commercial deployment of our WiMAX products and technologies in competition with well-established companies such as Intel, QUALCOMM and others, we must rely on highly specialized engineering and other talent. Our key employees represent a significant asset, and the competition for these employees is intense in the wireless communications industry. We continue to anticipate significant increases in human resources, particularly in engineering resources, through the remainder of 2006. If we are unable to attract and retain the qualified employees that we need, our business may be harmed.

 

As a start-up company, we may have particular difficulty attracting and retaining key personnel in periods of poor operating performance given the significant use of incentive compensation by well-established competitors. We do not have employment agreements with our key management personnel and do not maintain key person life insurance on any of our personnel. We also have no covenants against competition or nonsolicitation agreements with certain of our key employees. The loss of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could negatively impact our ability to design, develop and commercialize our products and technology.

 

We may be liable for certain indemnification payments pursuant to the Plan of Reorganization.

 

In connection with the sale of NTI and its subsidiaries other than Old NextWave Wireless to Verizon Wireless, we agreed to indemnify NTI and its subsidiaries against all pre-closing liabilities of NTI and its subsidiaries and against any violation of the Bankruptcy Court injunction against persons having claims against NTI and its subsidiaries, with no limit on the amount of such indemnity. We are not currently aware of any such liabilities that remain following the plan of reorganization and Verizon Wireless has not made any indemnity claims. To the extent that we are required to fund amounts under the indemnification, our results of operations and our liquidity and capital resources could be materially adversely affected. In addition, we may not have sufficient cash reserves to pay the amounts required under the indemnification if any amounts were to become due.

 

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Risks Relating to Government Regulation

 

Government regulation could adversely impact our development of wireless broadband products and services, our offering of products and services to consumers, and our business prospects.

 

The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain. The FCC has jurisdiction over the grant, renewal, lease, assignment and sale of our wireless licenses, the use of wireless spectrum to provide communications services, and the resolution of interference between users of various spectrum bands. Other aspects of our business, including construction and operation of our wireless systems, and the offering of communications services, are regulated by the FCC and other federal, state and local governmental authorities. States may exercise authority over such things as billing practices and consumer-related issues.

 

Various governmental authorities could adopt regulations or take other actions that would adversely affect the value of our assets, increase our costs of doing business, and impact our business prospects. Changes in the regulation of our activities, including changes in how wireless, mobile, IP-enabled services are regulated, changes in the allocation of available spectrum by the United States and/or exclusion or limitation of our technology or products by a government or standards body, could have a material adverse effect on our business, operating results, liquidity and financial position.

 

Changes in legislation or regulations may affect our ability to conduct our business or reduce our profitability.

 

Future legislative, judicial or other regulatory actions could have a negative effect on our business. Some legislation and regulations applicable to the wireless broadband business, including how IP-enabled services are regulated, are the subject of ongoing judicial proceedings, legislative hearings and administrative proceedings that could change the manner in which our industry is regulated and the manner in which we operate. We cannot predict the outcome of any of these matters or their potential impact on our business.

 

If, as a result of regulatory changes, we become subject to the rules and regulations applicable to telecommunications providers, commercial mobile service providers or common carriers at the federal level or in individual states, we may incur significant administrative, litigation and compliance costs, or we may have to restructure our service offerings, exit certain markets or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.

 

We may not have complete control over our transition of EBS and BRS spectrum, which could impact compliance with FCC rules.

 

The FCC’s rules require transition of EBS and BRS spectrum to the new band plan on a Basic Trading Area (“BTA”) basis. See “Government Regulation-BRS-EBS License Conditions.” We do not hold all of the EBS and BRS spectrum in the BTAs in which we hold spectrum. Consequently, we will need to coordinate with other EBS and BRS licensees in order to transition spectrum we hold or lease. Disagreements with other EBS or BRS licensees about how the spectrum should be transitioned may delay our efforts to transition spectrum, could result in increased costs to transition the spectrum, and could impact our efforts to comply with applicable FCC rules. On April 27, 2006, the FCC implemented new, amended rules related to transition of the spectrum, and it adopted rules that will permit us to self-transition to the reconfigured band plan if other spectrum holders in our BTAs do not timely transition their spectrum.

 

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Our use of EBS spectrum is subject to privately negotiated lease agreements. Changes in FCC rules governing such lease agreements, contractual disputes with EBS licensees, or failures by EBS licensees to comply with FCC rules could impact our use of the spectrum.

 

All commercial enterprises are restricted from holding licenses for EBS spectrum. Eligibility for EBS spectrum is limited to accredited educational institutions, governmental organizations engaged in the formal education of enrolled students (e.g. school districts), and nonprofit organizations whose purposes are educational. Access to EBS spectrum can only be gained by commercial enterprises through privately-negotiated EBS lease agreements. FCC regulation of EBS leases, private interpretation of EBS lease terms, private contractual disputes, and failure of an EBS licensee to comply with FCC regulations all could impact our use of EBS spectrum and the value of our leased EBS spectrum. On April 27, 2006, the FCC released new rules governing EBS lease terms. EBS licensees are now permitted to enter into lease agreements with a maximum term of 30 years; lease agreements with terms longer than 15 years must contain a “right of review” by the EBS licensee every five years beginning in year 15. The right of review must afford the EBS licensee with an opportunity to review its educational use requirements in light of changes in educational needs, technology, and other relevant factors and to obtain access to such additional services, capacity, support, and/or equipment as the parties shall agree upon in the spectrum leasing arrangement to advance the EBS licensee’s educational mission. A spectrum leasing arrangement may include any mutually agreeable terms designed to accommodate changes in the EBS licensee’s educational use requirements and the commercial lessee’s wireless broadband operations. In addition, the terms of EBS lease agreements are subject to contract interpretation and disputes could arise with EBS licensees. There can be no assurance that EBS leases will continue for the full lease term, or be renewed, or be extended beyond the current term, on terms that are satisfactory to us. Similarly, since we are not eligible to hold EBS licenses, we must rely on EBS licensees with whom we contract to comply with FCC rules. The failure of an EBS licensee from whom we lease spectrum to comply with the terms of their FCC authorization or FCC rules could result in termination, forfeiture or non-renewal of their authorization, which would negatively impact the amount of spectrum available for our use.

 

If we do not comply with FCC build-out requirements relating to our spectrum licenses, such licenses could be subject to forfeiture.

 

Certain build-out or “substantial service” requirements apply to our licensed wireless spectrum, which generally must be satisfied as a condition of license renewal. In particular, the renewal deadline and the substantial service build-out deadline for our WCS spectrum is July 21, 2010; for our BRS and EBS spectrum, the substantial service build-out deadline is May 1, 2011. Failure to make the substantial service demonstration, without seeking and obtaining an extension from the FCC, would result in license forfeiture.

 

We have no guarantee that the licenses we hold or lease will be renewed.

 

The FCC generally grants wireless licenses for terms of ten years which are subject to renewal and revocation. FCC rules require all wireless licensees to comply with applicable FCC rules and policies and the Communications Act of 1934 in order to retain their licenses. For example, licensees must meet certain construction requirements, including making substantial service demonstrations, in order to retain and renew FCC licenses. Failure to comply with FCC requirements with respect to any license could result in revocation or non-renewal of a license. There is no guarantee that licenses we hold or lease will remain in full force and effect or be renewed.

 

New FCC concepts impacting spectrum use could affect our use of wireless spectrum.

 

The FCC has initiated a number of proceedings to evaluate its rules and policies regarding spectrum licensing and usage. For example, it is considering new concepts that might permit unlicensed users to “share” our licensed spectrum to the extent the FCC believes harmful interference will not occur. These new uses could adversely impact our utilization of our licensed spectrum and our operational costs.

 

Interference could negatively impact our use of wireless spectrum we hold, lease or use.

 

Under applicable FCC rules, users of wireless spectrum must comply with technical rules that are intended to eliminate or diminish harmful electrical interference between wireless users. Licensed spectrum is generally entitled to interference protection, subject to technical rules applicable to the radio service, while unlicensed spectrum has no interference protection rights and must accept interference caused by other users.

 

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Wireless devices utilizing WCS, BRS and EBS spectrum may be susceptible to interference from Satellite Digital Audio Radio Services (“SDARS” ).

 

Since 1997, the FCC has considered a proposal to permanently authorize terrestrial repeaters for SDARS adjacent to the C and D blocks of the WCS band; the FCC has permitted a large number of these SDARS terrestrial repeaters to operate on a special temporary authorization since 2001. Permanently authorizing SDARS repeaters adjacent to the WCS band could cause interference to WCS, BRS and EBS receivers. The extent of the interference from SDARS repeaters is unclear and is subject to the FCC’s final resolution of pending proceedings. Because WCS C and D block licenses are adjacent to the SDARS spectrum, the potential for interference to this spectrum is of greatest concern. There is a lesser magnitude concern regarding interference from SDARS to WCS A and B block licenses, and EBS and BRS licenses. Central to the FCC’s evaluation of this proposal has been the technical specification for the operation of such repeaters. SDARS licensees are seeking rule changes that would both unfavorably alter WCS technical operating requirements and permit all existing SDARS repeaters to continue to operate at their current operating paramters. Final technical rules will determine the potential interference conditions and requirements for mitigation. If SDARS repeaters result in interference, certain portions of our network coverage may become unserviceable with our WCS spectrum and consequently, our ability to offer that licensed spectrum to potential network partners could be adversely affected and our ability to realize value from this spectrum may be impaired.

 

Increasing regulation of the tower industry may make it difficult to deploy new towers and antenna facilities.

 

The FCC, together with the FAA, regulates tower marking and lighting. In addition, tower construction and deployment of antenna facilities is impacted by federal, state and local statutes addressing zoning, environmental protection and historic preservation. The FCC adopted significant changes to its rules governing historic preservation review of new tower projects, which makes it more difficult and expensive to deploy towers and antenna facilities. The FCC is also considering changes to its rules regarding when routine environmental evaluations will be required to determine compliance of antenna facilities with its RF radiation exposure limits. If adopted, these regulations could make it more difficult to deploy facilities. In addition, the FAA has proposed modifications to its rules that would impose certain notification requirements upon entities seeking to (i) construct or modify any tower or transmitting structure located within certain proximity parameters of any airport or heliport, and/or (ii) contruct or modify transmission facilities using the 2500-2700 MHz radio frequency band, which encompasses virtually all of the BRS/EBS frequency band. If adopted, these requirements could impose new administrative burdens upon use of BRS/EBS spectrum.

 

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Risks Relating to An Investment in Our Common Stock

 

Our operating results are subject to substantial quarterly and annual fluctuations and to market downturns.

 

We believe that our future operating results over both the short- and long-term will be subject to annual and quarterly fluctuations due to several factors, some of which are outside management’s control. These factors include:

 

·

significant research and development costs;

 

·

research and development issues and delays;

 

·

the timing and costs of our Las Vegas launch;

 

·

the financial results of our PacketVideo subsidiary;

 

·

the timing of entering into network partner arrangements and the success of these partnerships;

 

·

spectrum acquisition costs;

 

·

manufacturing issues and delays;

 

·

fluctuating market demand for WiMAX services;

 

·

impact of competitive products, services and technologies;

 

·

changes in the regulatory environment;

 

·

the cost and availability of network infrastructure; and

 

·

general economic conditions.

 

These factors affecting our future operating results are difficult to forecast and could harm our quarterly or annual operating results and the prevailing market price of our securities. If our operating results fail to meet the financial guidance we provide to investors or the expectations of investment analysts or investors in any period, securities class action litigation could be brought against us and/or the market price of our securities could decline.

Our common stock is not currently listed on a national securities exchange and you may have limited ability to resell your stock, or may have to sell it at a discount.

 

Our shares are currently quoted on the Over-the-Counter Bulletin Board. Although we intend for our common stock to be quoted on The Nasdaq Global Market, we cannot predict the timing of the commencement of such quotation or the extent to which a trading market will develop or how liquid that market may become. If an active trading market does not develop or is not sustained, holders of our common stock may have difficulty selling their shares of our common stock.

 

Substantially all of our stock is or will be eligible for future sale which could depress the price of our stock.

 

Sales of substantial amounts of our common stock, or the perception that a large number of shares will be sold, could depress the market price of our common stock. Most of our stockholders are former stockholders of NextWave Telecom Inc. that received shares of our stock in connection with our emergence from bankruptcy. Accordingly, these stockholders may wish to sell their shares of stock upon receipt or shortly thereafter and may not be long-term investors in the company. After the effectiveness of this registration statement and assuming the exercise of all the outstanding warrants, 85,941,357 shares, representing 99.6% of the issued and outstanding shares, will be freely tradeable, subject to the volume and other restrictions of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) imposed upon stockholders deemed to be our affiliates.

 

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If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the price of our common stock to decline.

 

Allen Salmasi, our executive officers and other members of our Board of Directors will beneficially own or control approximately 53.6% of our common stock. Accordingly, Mr. Salmasi and the other members of the Board of Directors will be able to significantly influence matters that require stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or other significant corporate transactions. Our controlling stockholders may have interests that differ from your interests and may vote in a way with which you may disagree and which may be adverse to your interests. Corporate action may be taken even if other stockholders oppose them. These stockholders may also delay or prevent a change of control of us, even if that change of control would benefit our other stockholders, which could deprive our stockholders of the opportunity to receive a premium for their shares. The significant concentration of ownership of our common stock may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

 

If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our shares adversely or if our operating results to not meet their expectations, the price of our common stock could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry and securities analysts publish about us or our business. If these analysts fail to publish reports about us or if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the price of our common stock to decline. Moreover, if one or more analysts who cover us downgrade our common stock or if our operating results do not meet their expectations, the price of our common stock could decline.

 

The market price for our common stock may be volatile, which could cause the value of your investment to decline.

 

The stock market in general, and the stock prices of technology and wireless communications companies in particular, have experienced volatility that often has been unrelated to the operating performance of any specific public company. Factors that may have a significant impact on the market price of our common stock include:

 

·

announcements concerning us or our competitors, including the selection of mobile WiMAX wireless communications technology by telecommunications providers and the timing of the roll-out of those systems;

 

·

receipt of substantial orders or order cancellations for integrated circuits and system software products for mobile WiMAX networks by us or our competitors;

 

·

quality deficiencies in technologies, products or services;

 

·

announcements regarding financial developments or technological innovations;

 

·

international developments, such as technology mandates, political developments or changes in economic policies;

 

·

lack of capital to invest in WiMAX networks;

 

·

new commercial products;

 

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·

changes in recommendations of securities analysts;

 

·

government regulations, including FCC regulations governing spectrum licenses;

 

·

earnings announcements;

 

·

proprietary rights or product or patent litigation;

 

·

strategic transactions, such as acquisitions and divestitures; or

 

·

rumors or allegations regarding our financial disclosures or practices.

 

Our share price may be subject to volatility, particularly on a quarterly basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.

 

From time to time, we may repurchase our common stock at prices that may later be higher than the market value of the share on the repurchase date. This could result in a loss of value for stockholders if new shares are issued at lower prices.

 

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to changes in the volatility of the price of our common stock, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.

 

Provisions of our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to holders of our common stock, and could make it more difficult for you to change management.

 

Our Certificate of Incorporation and Bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in management that holders of our common stock might deem advantageous. Specific provisions in our Certificate of Incorporation and Bylaws include:

 

·

our directors serve staggered, three-year terms and accordingly, pursuant to Delaware law, can only be removed with cause;

 

·

no action can be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws, and stockholders may not act by written consent;

 

·

our board of directors will be expressly authorized to make, alter or repeal our bylaws, and our stockholders will be able to make, alter or repeal our bylaws by a vote of 66-2/3% of the issued and outstanding voting shares;

 

·

any vacancies on the board of directors would be filled by a majority vote of the board;

 

·

our board of directors will be authorized to issue preferred stock without stockholder approval; and

 

·

we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.

 

As a result of the provisions of our Certificate of Incorporation and Bylaws, the price investors may be willing to pay in the future for our common stock may be limited.

 

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The issuance of a significant amount of additional common stock would result in dilution to our existing stockholders and could reduce our earnings per share, which in turn could negatively affect the market price of our common stock.

 

We may need to raise additional funds to fund our operations, to pay for an acquisition or to enter into a strategic alliance, and we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our stockholders may experience dilution. A significant amount of our common stock coming on the market at any given time could result in a decline in the price of our common stock or increased volatility.

 

As a public company, we will need to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and if we fail to achieve and maintain adequate internal controls over financial reporting, our business, results of operations and financial condition could be materially adversely affected.

 

As a public company, our systems of internal controls over financial reporting will be required to comply with the standards adopted by the Public Company Accounting Oversight Board. We are presently evaluating our internal controls for compliance. During the course of our evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. We have commenced a review of our existing internal control structure and plan to hire additional personnel. Although our review is not complete, we have taken steps to improve our internal control structure by hiring dedicated, internal Sarbanes-Oxley Act compliance personnel to analyze and improve our internal controls, to be supplemented periodically with outside consultants as needed. However, we cannot be certain regarding when we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results.

 

As a result of being a public company, we will incur increased costs that may place a strain on our resources or divert our management’s attention from other business concerns.

 

As a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. The Exchange Act requires us to file annual, quarterly and current reports with respect to our business and financial condition, which will require us to incur legal and accounting expenses. The Sarbanes-Oxley Act requires us to maintain effective disclosure controls and procedures and internal controls for financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. We expect the corporate governance rules and regulations of the SEC will increase our legal and financial compliance costs and make some activities more costly and time consuming. These requirements may place a strain on our systems and resources and may divert our management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we are hiring and will continue to hire additional legal, accounting and financial staff with appropriate public company experience and technical accounting knowledge, which will increase our operating expenses in future periods.

 

We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

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If the price of our common stock declines significantly, then our common stock may be deemed to be penny stock, which could adversely affect the liquidity of, and market for, our shares.

 

If our shares are considered penny stock, they would be subject to rules that impose additional sales practices on broker-dealers who sell our securities. Penny stocks generally are equity securities with a price of less than $5.00, other than securities registered on some national securities exchanges or quoted on Nasdaq. In this event, some brokers may be unwilling to effect transactions in our shares because of the additional obligations imposed. This could adversely affect the liquidity of our common stock and the ability of investors to sell our common stock. For instance, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. Also, a disclosure schedule must be prepared prior to any transaction involving a penny stock, and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Furthermore, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This registration statement and other reports, documents and materials we will file with the Securities and Exchange Commission (the “SEC”) contain, or will contain, disclosures that are forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words of similar meaning in connection with any discussion of the timing and value of future results or future performance. These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks, uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from historical results or those anticipated. These risks include, but are not limited to:

 

·	our limited relevant operating history;

 

·	our ability to manage growth or integrate recent or future acquisitions;

 

·	competition from alternative wireless technologies and other technology companies;

 

·	our ability to develop and commercialize mobile broadband products and technologies;

 

·	the ability of vendors to manufacture commercial WiMAX equipment and devices;

 

·	consumer acceptance of WiMAX technology;

 

·	the success of our WiMAX network launch in Henderson, Nevada;

 

·	our ability to enter into and maintain network partner relationships;

 

·	PacketVideo’s reliance on a limited number of mobile phone and device manufacturers and wireless carriers as customers;

 

·	changes in government regulations;

 

·	changes in capital requirements;

 

·	any loss of our key executive officers; and

 

·	the other risks described under “Risk Factors.”

 

There may also be other factors that cause our actual results to differ materially from the forward looking statements.

 

Because of these factors, we caution you that you should not place any undue reliance on any of our forward-looking statements. These forward-looking statements speak only as of the date of this registration statement and you should understand that those statements are not guarantees of future performance or results. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we have no duty to, and do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

 

We are registering these shares pursuant to the registration rights granted to the selling stockholders in our recent private placement. We will not receive any proceeds from the resale of our common stock under this offering. We have, however, received gross proceeds of approximately $297.5 million from the issuances of the senior secured notes and the warrants in the private placement. Net proceeds were $295.0 million after deducting all fees and expenses of the July 2006 private placement and this offering, which totalled $2.5 million. The entire proceeds were used for the acquisition of WCS Wireless, Inc. for $160.5 million, the acquisition of two new EBS leases for $22.1 million and for the majority of the funding for the acquisition of 154 AWS licenses for $115.5 million, which remain subject to FCC approval.

 

We may receive proceeds from the issuance of shares of common stock upon exercise of warrants if any of the warrants are exercised for cash. We estimate that we may receive up to an additional $41,103.82. We intend to use any proceeds that we may receive from the issuance of shares of our common stock upon exercise of warrants to meet our working capital needs and for general corporate purposes.

 

If the warrants issued in connection with the July 2006 private placement are exercised pursuant to their cashless exercise provision, we will not receive any additional proceeds from such exercise.

 

DIVIDEND POLICY

 

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We intend to retain all available funds and any future earnings to reduce debt and fund the development and growth of our business.

 

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CAPITALIZATION

 

The following table sets forth our cash, cash equivalents and capitalization as of September 30, 2006, on an actual basis and on a pro forma basis to give effect to the corporate conversion as if it had occurred on that date. On November 13, 2006, the corporate conversion merger was completed and NextWave Wireless LLC became a wholly-owned subsidiary of NextWave Wireless Inc. Under the terms of the merger agreement, NextWave Wireless Inc. issued shares of its common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of NextWave Wireless Inc. common stock for every six membership units of NextWave Wireless LLC that they held.

 

This table should be read in conjunction with “Use of Proceeds,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

		At September 30, 2006
(in thousands, except par value data)		Actual			Pro Forma
Cash and cash equivalents		$	25,371		$	25,371
Long-term obligations, net of current portion		$	292,310		$	292,310
Stockholders’/Members’ Equity:
Preferred stock, $0.001 par value, 25,000 shares authorized; no shares issued and outstanding, actual and pro forma			—			—
Common stock, $0.001 par value, 400,000 shares authorized; no shares issued or outstanding actual, 82,208 shares issued and outstanding pro forma			—			82
Additional paid-in capital			—			619,884
Membership interests; 492,583 interests issued and outstanding actual, no interests issued or outstanding pro forma			619,966			—
Accumulated other comprehensive loss			(571	)		(571	)
Retained deficit			(111,489	)		(111,489	)
Total stockholders’/members’ equity			507,906			507,906
Total capitalization		$	800,216		$	800,216

 

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SELECTED HISTORICAL FINANCIAL DATA

 

You should read the following selected historical financial data together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our unaudited condensed consolidated financial statements and our audited consolidated financial statements and the notes to those financial statements included elsewhere in this registration statement.

 

Set forth below is selected historical financial data, at the dates and for the periods indicated, for NextWave Wireless LLC, which holds all of our operating subsidiaries and is a direct wholly-owned subsidiary of NextWave Wireless Inc. On November 13, 2006, we implemented a new corporate holding company structure in order to facilitate a planned Nasdaq listing. The holding company structure was implemented through the merger of a wholly-owned subsidiary of NextWave Wireless Inc. with and into NextWave Wireless LLC. As a result of this corporate conversion merger, we issued shares of our common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of NextWave Wireless Inc. common stock for every six membership units of NextWave Wireless LLC that they held. Each holder of NextWave Wireless LLC’s limited liability interests own the same percentage of the outstanding equity of the Company before and immediately after the corporate conversion merger. This prospectus does not include financial statements of NextWave Wireless Inc. because it was only recently formed for the purpose of effecting our new corporate holding company structure, will hold no significant assets and will not engage in any operations.

 

The following selected consolidated statement of operations data for the three and nine months ended September 30, 2006, for the three months ended September 30, 2005 and for the period from the date of our inception as a new wireless technology company pursuant to the plan of reorganization of Old NextWave Wireless (April 13, 2005) to September 30, 2005, and the selected consolidated balance sheet data as of September 30, 2006 was derived from our unaudited condensed consolidated financial statements and should be read in conjunction with our unaudited condensed consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this registration statement. Our unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and notes thereto, which include, in the opinion of our management, all adjustments (consisting of normal recurring adjustments), necessary for a fair presentation of the information for the unaudited interim periods. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period.

 

The following selected consolidated statement of operations data for the period from the date of our inception (April 13, 2005) to December 31, 2005 and selected consolidated balance sheet data as of December 31, 2005 was derived from our audited consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this registration statement.

 

(in thousands)		Three Months Ended September 30, 2006 (1)			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2006 (1)			Inception (April 13, 2005) to September 30, 2005 (2)			Inception (April 13, 2005) to December 31, 2005 (2)
Consolidated Statement of Operations Data (3):		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues		$	8,051		$	1,202		$	22,055		$	1,350		$	4,144
Loss from operations			(25,860	)		(20,220	)		(67,006	)		(26,357	)		(55,687	)
Net loss			(31,305	)		(16,653	)		(65,537	)		(19,601	)		(45,952	)

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		September 30, 2006			December 31,  2005
Consolidated Balance Sheet Data (3):		(unaudited)
Cash and cash equivalents		$	25,371		$	93,649
Short-term investments			196,801			365,582
Deposits for wireless spectrum bids (4)			142,866			5,400
Restricted investments - non current (5)			76,792			—
Wireless spectrum licenses, net			374,137			45,467
Goodwill			32,829			24,782
Other intangible assets, net			16,306			18,100
Total assets			905,399			579,774
Long-term obligations, less current portion			292,310			14,934
Total members’ equity			507,906			539,364

 

(1)

Our Board of Managers approved a change, effective January 1, 2006, in our fiscal year end and quarterly reporting periods from quarterly calendar periods ending on December 31 to a 52-53 week fiscal year ending on the Saturday nearest to December 31 of the current calendar year or the following calendar year. The three and nine month periods ended September 30, 2006 includes 13 and 39 weeks, respectively.

 

(2)

On April 13, 2005, pursuant to the plan of reorganization of the NextWave Telecom group, the equity securities of NextWave Wireless LLC were distributed to the NTI equity holders and we were reconstituted as a company with a new capitalization and a new wireless technology business plan. A summary of the assets and liabilities contributed to NextWave on April 13, 2005 is provided in the Notes to Consolidated Financial Statements included elsewhere in this registration statement. For more information on our emergence as a new wireless technology company, see “Business-Our History.”

 

(3)

The results of operations of PacketVideo Corporation and Inquam Broadband Holding, Inc. are included as of July 19, 2005 and January 6, 2006, the respective dates of the acquisitions, which affects the comparability of the Summary Historical Financial Data. During 2006, we also completed other acquisitions that were not significant and their results of operations have been included from their respective dates of acquisition. See Note 3 to the Notes to Condensed Consolidated Financial Statements included elsewhere in this registration statement.

 

(4)

In July 2006 we paid a $142.8 million deposit to the FCC to qualify for the AWS auction. On September 20, 2006, we were declared the winning bidder for 154 AWS licenses for an aggregate bid of $115.5 million. Accordingly, $27.3 million of our initial deposit was not used and was returned to us in October 2006. Our purchase of the AWS licenses remains subject to FCC approval.

 

(5)	On July 17, 2006, we consummated our secured notes private placement, the terms of which require us to retain $75.0 million of our cash, cash equivalents and investments from funds other than the proceeds of the notes in a restricted collateral account.

 

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EXPLANATORY NOTE

 

NextWave Wireless Inc. (“Old NextWave Wireless”) was formed in 1996 as a wholly owned operating subsidiary of NextWave Telecom, Inc. (“NTI”), which sought to develop a nationwide CDMA-based personal communication services (“PCS”) network. In 1998, Old NextWave Wireless, together with NTI and its other subsidiaries (the “NextWave Telecom group”), filed for protection under Chapter 11 of the United States Bankruptcy Code. In December 2004, Old NextWave Wireless was converted from a corporation to a limited liability company.

 

On March 1, 2005, the Bankruptcy Court confirmed the plan of reorganization of the NextWave Telecom group. The cornerstone of the plan was the sale of NTI and its subsidiaries, excluding Old NextWave Wireless, to Verizon Wireless for approximately $3.0 billion. With the proceeds of the Verizon Wireless sale, as well as proceeds of prior PCS spectrum license sales to Cingular Wireless, Verizon Wireless and MetroPCS, all creditors of the NextWave Telecom group were paid in full and the NTI equity holders received an aggregate cash distribution of approximately $2.6 billion. In addition, the plan provided for the capitalization and distribution to the NTI equity holders of a new wireless technology company that would bear the NextWave name. Pursuant to the plan, on April 13, 2005, the NextWave Telecom group abandoned substantially all of its PCS assets other than the spectrum licenses, all remaining non-PCS assets and liabilities were contributed to Old NextWave Wireless, and Old NextWave Wireless was capitalized with $550 million in cash. Immediately thereafter, membership interests in our company were distributed to the NTI equity holders. Through this process, Old NextWave Wireless was reconstituted as a company with a new capitalization and a new wireless technology business plan.

 

Unless the context indicates otherwise, all references in this registration statement to NextWave, the Company, we, us and our refer to NextWave Wireless Inc. and its direct and indirect subsidiaries. References to Old NextWave Wireless refer to our existence as a company conducting a separate line of business prior to April 13, 2005.

 

Since our emergence as a new wireless technology company, we have made several strategic investments and acquisitions, most significantly the acquisition of PacketVideo Corporation, a developer of embedded multimedia software products for mobile phones. We have also consummated transactions to acquire licensed spectrum rights and have accumulated a spectrum footprint across the U.S. covering a population of over 206 million people, or POPs. Pursuant to the AWS auction, we were declared the winning bidder for 154 spectrum licenses, which are currently pending approval by the FCC. If the FCC approves the grant of these licenses, our spectrum portfolio would then cover approximately 247 million persons.

 

Our common stock is currently quoted on the Over-the-Counter Bulletin Board. On November 13, 2006, we implemented a new corporate holding company structure in order to facilitate a planned Nasdaq listing. The holding company structure was implemented through the merger of a wholly-owned subsidiary of NextWave Wireless Inc. with and into NextWave Wireless LLC. As a result of this corporate conversion merger, we issued 82,171,236 shares of our common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of our common stock for every six membership units of NextWave Wireless LLC that they hold. Each holder of NextWave Wireless LLC’s limited liability interests own the same percentage of the outstanding equity of the Company before and immediately after the corporate conversion merger.

 

The organizational chart below provides a summary depiction of our structure after giving effect to the reorganization, our organizational activities and acquisitions and the corporate conversion merger. For more information on the history of our company see “Business-Our History.”  

 

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This registration statement contains certain technical terms relating to the wireless industry. For an explanation of such technical terms, see “Glossary of Selected Wireless Terminology” beginning on page 97.

 

“NextWave Wireless”, “PacketVideo”, “CYGNUS Communications”, “IBridge” and the NextWave, CYGNUS and PacketVideo logos are our trademarks. Other service marks, trademarks and trade names referred to in this registration statement are the property of their respective owners. As indicated in this registration statement, we have included market data and industry information and forecasts that were obtained from industry publications.

 

INDUSTRY AND MARKET DATA

 

In this registration statement, we rely on and refer to information regarding market data obtained from internal surveys, market research, publicly available information and industry publications. Unless otherwise noted, data relating to persons of population, or POPs, is derived from information provided by Applied Geographic Solutions Inc. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although we believe the information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Our actual results could differ substantially from those anticipated by such forward-looking information due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this registration statement. Additionally, the following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this registration statement and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the period from inception (April 13, 2005) to December 31, 2005 contained in NextWave Wireless Inc.’s Amended Form S-4, filed with the Securities and Exchange Commission on November 7, 2006.

 

OVERVIEW

 

Corporate Conversion Merger

 

In order to convert NextWave Wireless LLC into a corporate form, the Board of Directors and a majority in interest of the holders of NextWave Wireless LLC membership units approved the merger of NextWave Wireless LLC with a wholly owned subsidiary of a newly formed Delaware corporation, NextWave Wireless Inc. On November 13, 2006, the corporate conversion merger was completed and NextWave Wireless LLC became a wholly-owned subsidiary of NextWave Wireless Inc. Under the terms of the merger agreement, NextWave Wireless Inc. issued shares of its common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of NextWave Wireless Inc. common stock for every six membership units of NextWave Wireless LLC that they held. Following the corporate conversion merger, NextWave Wireless LLC’s obligation to file periodic reports under the Securities Exchange Act of 1934 was suspended, and NextWave Wireless Inc. became the successor to NextWave Wireless LLC for SEC reporting purposes.

 

Inception of NextWave Wireless LLC

 

NextWave Wireless Inc. (“Old NextWave Wireless”) was formed in 1996 as a wholly-owned subsidiary of NextWave Telecom Inc. (“NTI”) which sought to develop a nationwide CDMA-based personal communication services (“PCS”) network. Pursuant to the plan of reorganization of NTI and its subsidiaries, NTI and its subsidiaries, excluding Old NextWave Wireless, were sold to Verizon Wireless for approximately $3.0 billion. Prior to this sale, on April 13, 2005, the NextWave Telecom Group abandoned substantially all of its PCS assets other than the spectrum licenses and all remaining non-PCS assets and liabilities were contributed to Old NextWave Wireless. Immediately thereafter, membership interests in NextWave Wireless LLC (together with its subsidiaries, “NextWave”) were distributed to the NTI equity holders and Old NextWave Wireless was capitalized with $550.0 million in cash. Through this process, Old NextWave Wireless was reconstituted as a company with a new capitalization and a new wireless technology business plan.

 

Our Business

 

We are an early stage wireless technology company engaged in the development of next-generation mobile broadband and wireless multimedia products, technologies and services. At present, nearly all of our revenues are derived from the sale of device-embedded multimedia software solutions by our PacketVideo subsidiary, which was acquired in July 2005. While we expect to continue to grow and expand our multimedia software business, we expect that, following the development of our WiMAX products and technologies, the majority of our revenues will ultimately be derived from the sale and licensing of our WiMAX chipsets, network components and device technologies to network infrastructure and mobile terminal manufacturers on a global basis.

 

Our revenues for the third quarter and first nine months of 2006 totaled $8.1 million and $22.1 million, respectively, compared to revenues of $1.2 million and $1.4 million that was recognized during the third quarter of 2005 and the period from inception (April 13, 2005) to September 30, 2005, respectively. Our net losses for the third quarter and first nine months of 2006 totaled $31.3 million and $65.5 million, respectively, compared to our net losses for the third quarter of 2005 and the period from inception (April 13, 2005) to September 30, 2005 which totaled $16.7 million and $19.6 million, respectively. Our net losses for the third quarter and first nine months of 2006 included $0.9 million and $3.5 million, respectively, of stock-based compensation expense related to the adoption of SFAS 123R on January 1, 2006 and non-employee stock based compensation.

 

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At present, the majority of our employees are assigned to the Advanced Technology Group and are directly engaged in the design, development, and commercialization of a suite of WiMAX compliant products, including 802.16e compliant digital baseband ASICs and multi-band RFICs, software defined radio platforms, base station channel card reference designs and innovative terminal device reference designs. Our development team is also focused on developing technologies such as advanced antenna systems and advanced cognitive radios that we believe will help stimulate sales of our suite of WiMAX compliant products. All of our WiMAX semiconductor product and technologies are in an early stage of development.

 

To conserve capital we intend to outsource the production of our semiconductors to third-party chip manufacturers that can rapidly scale production volumes to meet our future needs. We plan to license our reference designs to third party vendors. By adopting this approach, we will be able to continue investing in the research and development needed over the next several years to fully commercialize our WiMAX technologies and semiconductor designs. Although we expect most of our WiMAX semiconductors and products to incorporate the proprietary, performance improving technologies we are currently developing, we intend our products to be WiMAX Forum certified to ensure full interoperability with WiMAX certified products and systems being developed by other companies.

 

The success of our WiMAX semiconductor and product business will be reliant on market acceptance of WiMAX as a competitive wireless broadband technology and on our ability to differentiate our WiMAX products from those offered by competitors. To help accelerate global market adoption of WiMAX and to showcase the competitive strength of our WiMAX mobile broadband and wireless multimedia products, we intend to make our significant spectrum holdings available to Internet service providers, cable operators, satellite television companies, content developers, existing wireless service providers and other companies interested in funding, on a shared network basis, the deployment of WiMAX networks that utilize our WiMAX mobile broadband and wireless multimedia technologies. We expect these shared networks, which will operate on our spectrum, to represent a major opportunity for us to sell our WiMAX certified semiconductors and products.

 

Our PacketVideo subsidiary supplies device embedded multimedia software to many of the largest manufacturers of high-end mobile phones in the world including LGE, Motorola, Nokia and Samsung. PacketVideo’s software enables a mobile handset to stream, download, and play video and music, receive live TV, or engage in two way video telephony. PacketVideo’s continued growth will be reliant on its ability to continue offering superior software solutions to its customers and on the continued growth of the global market for high-end mobile phones and other converged devices. PacketVideo’s revenues are currently generated from royalties associated with the licensing of its software products and by providing its customers with customized software development services on a contract basis. During the first nine months of 2006, 68% of PacketVideo’s revenues were royalty based. We expect this percentage to increase over time based on the anticipated growth in the global market for devices having multimedia capabilities.

 

Change in Fiscal Year End

 

Our Board of Managers approved a change, effective January 1, 2006, in our fiscal year end and quarterly reporting periods from quarterly calendar periods ending on December 31 to a 52-53 week fiscal year ending on the Saturday nearest to December 31 of the current calendar year or the following calendar year. Normally, each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks. Fiscal year 2006 will be a 52-week year and the first 53-week year will occur in 2009. The three and nine month periods ended September 30, 2006 include 13 and 39 weeks, respectively.

 

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Third Quarter of 2006 Compared to Third Quarter of 2005

 

Revenues. Revenues for the third quarter of 2006 were $8.1 million, compared to $1.2 million for 2005.

 

Revenues from royalties for the third quarter of 2006 were $5.6 million compared to none for 2005, an increase of $5.6 million. This increase resulted from unit sales growth and market penetration of mobile subscriber services by PacketVideo’s customer base, which includes wireless operators and device manufacturers. Additionally, any royalty revenues reported by PacketVideo licensees during the period from our acquisition in July 2005 to September 30, 2005, were not recognizable by us under EITF 01-3, “Accounting in a Business Combination for Deferred Revenue of an Acquiree,” as these represented royalties on customer revenues that were generated prior to our acquisition of PacketVideo.

 

Revenues from contract services for the third quarter of 2006 were $2.5 million compared to $1.2 million for 2005, an increase of $1.3 million. Higher contract revenues from our PacketVideo subsidiary primarily accounted for this increase which resulted from growth in technology development contracts, addressing an increasing number of wireless devices.

 

In general, the financial consideration received from wireless carriers and mobile phone and device manufacturers is derived from a combination of technology development contracts and royalties.

 

Since our inception in April 2005, substantially all of our revenues have been generated by our PacketVideo subsidiary, which we acquired in July 2005. We believe that PacketVideo will continue to account for a substantial portion of our revenues until we complete the development and commercialization of our wireless broadband products and technologies by the Advanced Technology Group of NextWave. Following the development and commercialization of our wireless broadband products and technologies, we believe that the sale or licensing of our proprietary chipsets, network components and device technologies will become an additional source of recurring revenue for us.

 

We expect that future revenues will be affected by, among other things, new product and service introductions, competitive conditions, customer marketing budgets for introduction of new subscriber products, the rate of expansion of our customer base, price increases, subscriber device life cycles, demand for wireless data services and acquisitions or dispositions of businesses or product lines.

 

Cost of Revenues. Cost of revenues for the third quarter of 2006 were $4.6 million compared to $1.9 million for 2005, an increase of $2.7 million.

 

Cost of revenues for our PacketVideo subsidiary for the third quarter 2006 were $4.6 million compared to $1.8 million for 2005 and included $0.4 million and $0.3 million, respectively, of amortization expense for the purchase of intangible assets related to the acquisition of PacketVideo. The increase is due to the growth in contract service revenues.

 

Cost of revenues includes direct engineering labor expenses, allocated overhead costs and other direct costs related to the execution of technology development contracts as well as costs associated with offshore development contract costs, amortization of acquired software and other costs.

 

We believe that cost of revenues as a percentage of revenue for future periods will be affected by, among other things, the integration of acquired businesses in addition to sales volumes, competitive conditions, royalty payments on licensed technologies, changes in average selling prices, and our ability to make productivity improvements.

 

Engineering, Research and Development. Engineering, research and development expenses for the third quarter of 2006 were $11.5 million compared to $5.1 million for 2005, an increase of $6.4 million.

 

Costs for the internal and external development of our wireless broadband products and technologies, including our chipsets, for the third quarter of 2006 were $9.0 million compared to $4.2 million for 2005, an increase of $4.8 million which is due primarily to an increase in engineers assigned to the Advanced Technology Group of NextWave.

 

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Costs for the internal and external development of our PacketVideo software for the third quarter of 2006 were $2.5 million compared to $0.9 million for 2005, an increase of $1.6 million, which is due primarily to 2006 acquisitions.

 

Share-based compensation for the third quarter of 2006 totaled $0.5 million.

 

Largely due to our planned increase in engineering personnel to further our WiMAX technology development initiatives, we expect our engineering, research and development expenses to increase over the next twelve months.

 

General and Administrative. General and administrative expenses for the third quarter of 2006 were $14.9 million compared to $6.6 million for 2005, an increase of $8.3 million.

 

PacketVideo and NextWave accounted for $1.0 million and $7.3 million of the increase, respectively. The increases are comprised primarily of increased spending for compensation and associated costs of general and administrative personnel of $5.8 million, professional fees of $1.7 million, share-based compensation of $0.4 million, and losses incurred by our strategic investment of $0.4 million. In addition to our principal executive offices in San Diego, California, we maintain significant operating facilities in Henderson, Nevada.

 

We expect that general and administrative costs will increase in absolute terms as we hire additional personnel and incur costs related to the anticipated growth of our business and our operations as a public company. As our business continues to grow, we expect to incur increased expenses from the addition of general and administrative personnel. We also expect an increase in our general and administrative expenses to occur as a result of our efforts to develop and protect intellectual property rights, including expenses associated with the identification and documentation of intellectual property, and the preparation and prosecution of patent applications. In addition, we expect our general and administrative expenses to increase as we incur additional expenses associated with being a publicly traded company, including expenses associated with comprehensively analyzing, documenting and testing our system of internal controls and maintaining our disclosure controls and procedures as a result of the regulatory requirements of the Sarbanes-Oxley Act.

 

Sales and Marketing. Sales and marketing expenses for the third quarter of 2006 were $3.0 million compared to $1.2 million for 2005, an increase of $1.8 million.

 

PacketVideo and NextWave accounted for $1.2 million and $0.6 million of the increase, respectively. The increases are comprised primarily of increased spending for compensation and associated costs for marketing and sales personnel of $1.6 million, share-based compensation of $0.1 million, and expenses associated with marketing and promotional activities of $0.1 million.

 

We expect sales and marketing expenses to increase in absolute terms with the growth of our business, primarily from our PacketVideo business, in the upcoming year. Additionally, as we achieve full commercial deployment of our wireless broadband technologies and products, we will increase sales and marketing expenses both in absolute terms, and as a percentage of revenues at NextWave Broadband.

 

Purchased In-Process Research and Development Costs. In conjunction with our acquisition of PacketVideo in July 2005, we purchased in-process research and development projects valued at $6.6 million that were expensed upon the date of acquisition.

 

Interest Income. Interest income for the third quarter of 2006 was $3.4 million compared to $3.9 million for 2005, a decrease of $0.5 million, and consisted of interest earned during the respective periods on our unrestricted and restricted cash and investment balances, which totaled $299.0 million and $492.6 million at September 30, 2006 and 2005, respectively.

 

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Interest income in the future will be affected by changes in short-term interest rates and changes in our cash and investment balances, which may be materially impacted by development plans, acquisitions and other financial activities.

 

Interest Expense. Interest expense for the third quarter of 2006 was $9.0 million compared to $0.4 million for 2005, an increase of $8.6 million which resulted from our issuance of $350.0 million in principal amount of 7% Senior Secured Notes in July 2006.

 

Our interest expense will increase during the remainder of 2006 and in 2007 due to the accrual of interest on our 7% Senior Secured Notes, amortization of the discount and debt issue costs related to our 7% Senior Secured Notes and interest accreted on our newly acquired spectrum lease liabilities.

 

Provision for Income Taxes. NextWave Wireless LLC is classified as a partnership for U.S. federal and state income tax purposes. Therefore, its income is not subject to federal or state income tax at the entity level. Its income passes through to its members, where it is subject to income tax at the member level. Our corporate subsidiaries or controlled corporations are subject to federal, state and foreign income taxes on corporations.

 

During the third quarter of 2006 substantially all of these corporate subsidiaries and controlled corporations all had net losses for tax purposes, and, therefore, no material income tax provision or benefit was recognized during the third quarter of 2006. Our income tax provision of $0.1 million for the third quarter of 2005 is comprised of foreign withholding tax on royalty payments received from PacketVideo customers.

 

Minority Interest. Minority interest for the third quarter of 2006 was $0.3 million compared to $7,000 for 2005. Minority interest in 2006 primarily represents our minority partner’s share of losses in our INQUAM joint venture formed in January 2006.

 

First Nine Months of Fiscal 2006 Compared to the Period From Inception (April 13, 2005) to September 30, 2005

 

Revenues. Revenues for the first nine months of 2006 were $22.1 million compared to $1.4 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $20.7 million.

 

Revenues from royalties for the first nine months of 2006 were $15.0 million compared to none for the period from inception (April 13, 2005) to September 30, 2005, an increase of $15.0 million. This increase resulted from unit sales growth and market penetration of mobile subscriber services by PacketVideo’s customer base, which includes wireless operators and device manufacturers, in addition to the inclusion of PacketVideo’s revenues for a full nine months in 2006. Additionally, any royalty revenues reported by PacketVideo licensees during the period from our acquisition in July 2005 to September 30, 2005, were not recognizable by us under EITF 01-3, “Accounting in a Business Combination for Deferred Revenue of an Acquiree,” as these represented royalties on customer revenues that were generated prior to our acquisition of PacketVideo.

 

Revenues from contract services for the first nine months of 2006 were $7.0 million compared to $1.3 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $5.7 million. Higher contract revenues from our PacketVideo subsidiary primarily accounted for this increase, which resulted from growth in technology development contracts, addressing an increasing number of wireless devices, in addition to the inclusion of PacketVideo’s revenues for a full nine months in 2006.

 

Cost of Revenues. Cost of revenues for the first nine months of 2006 were $10.5 million compared to $2.0 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $8.5 million.

 

Cost of revenues for our PacketVideo subsidiary for the first nine months of 2006 were $10.5 million compared to $1.8 million for the period from inception (April 13, 2005) to September 30, 2005 and included $1.1 million and $0.3 million, respectively, of amortization expense for the purchase of intangible assets related to the acquisition of PacketVideo. The remainder of the increase is due to growth in contract services revenue.

 

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Engineering, Research and Development. Engineering, research and development expenses for the first nine months of 2006 were $34.3 million compared to $8.0 million for 2005, an increase of $26.3 million.

 

Costs for the internal and external development of our wireless broadband products and technologies, including our chipsets, for the first nine months of 2006 were $28.2 million compared to $7.1 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $21.1 million which is due primarily to the expansion of the engineering development organization.

 

Costs for the internal and external development of our PacketVideo software for the first nine months of 2006 were $6.1 million compared to $0.9 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $5.2 million, which is due primarily to the inclusion of expenses for a full nine months in 2006, 2006 acquisitions and an increase in headcount in the engineering development organization.

 

Share-based compensation for the first nine months of 2006 totaled $1.3 million.

 

General and Administrative. General and administrative expenses for the first nine months of 2006 were $35.5 million compared to $9.9 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $25.6 million.

 

PacketVideo and NextWave accounted for $2.7 million and $22.9 million of the increase, respectively. These increases are comprised primarily of increased spending for compensation and associated costs of general and administrative personnel of $18.1 million, professional fees of $3.7 million, losses incurred by our strategic investment of $1.0 million, amortization of intangible assets of $0.8 million, and share-based compensation of $2.0 million.

 

Sales and Marketing. Sales and marketing expenses for the first nine months of 2006 were $7.1 million compared to $1.2 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $5.9 million.

 

PacketVideo and NextWave accounted for $4.5 million and $1.4 million of the increase, respectively. The increases are comprised primarily of increased spending for compensation and associated costs for marketing and sales personnel of $5.1 million, share-based compensation of $0.2 million, expenses associated with marketing and promotional activities of $0.3 million, and amortization expenses related to intangible assets of $0.3 million.

 

Purchased In-Process Research and Development Costs. In conjunction with one of our immaterial acquisitions during 2006 and our acquisition of PacketVideo in 2005, we purchased in-process research and development projects valued at $1.6 million and $6.6 million, respectively, that were expensed upon the date of acquisition.

 

Interest Income. Interest income for the first nine months of 2006 was $9.8 million compared to $7.4 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $2.4 million, and consisted of interest earned during the respective periods on our unrestricted and restricted cash and investment balances, which totaled $299.0 million and $492.6 million at September 30, 2006 and 2005, respectively.

 

Interest Expense. Interest expense for the first nine months of 2006 was $9.7 million compared to $0.7 million for the period from inception (April 13, 2005) to September 30, 2005, an increase of $9.0 million. Our issuance of $350.0 million in principal amount of 7% Senior Secured Notes in July 2006 accounted for $8.6 million of the increase. The remainder of the increase of $0.4 million consists primarily of the accretion of discounted wireless spectrum license lease liabilities acquired in 2006.

 

Provision for Income Taxes. During the first nine months of 2006, substantially all of these corporate subsidiaries and controlled corporations had net losses for tax purposes, and, therefore, no income tax provision was recognized during the first nine months of 2006. Our income tax benefit of $0.1 million for the first nine months of 2006 is comprised primarily of a reversal of an accrual for federal personal holding company taxes for NextWave Broadband Inc. which is partially offset by foreign withholding tax on royalty payments received from PacketVideo customers. Our income tax provision of $0.1 million for the period from inception (April 13, 2005) to September 30, 2005 is comprised of foreign withholding tax on royalty payments received from PacketVideo customers.

 

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Minority Interest. Minority interest for the first nine months of 2006 was $1.1 million compared to $7,000 for the period from inception (April 13, 2005) to September 30, 2005. Minority interest in 2006 primarily represents our minority partner’s share of losses in our INQUAM joint venture formed in January 2006.

 

Liquidity And Capital Resources

 

Since our inception (April 13, 2005), we have incurred operating losses and negative cash flows and had a retained deficit of $49.2 million at December 31, 2005, consisting of $34.8 million and $14.4 million from NextWave and PacketVideo, respectively. We have funded our operations primarily with the $550.0 million in cash received in our initial capitalization. Our total cash, cash equivalents and short-term investments at December 31, 2005 were $459.2 million. Cash and cash equivalents were $93.6 million at December 31, 2005, consisting of $92.1 million and $1.5 million at NextWave and PacketVideo, respectively, a decrease of $461.5 million from our inception balance of $555.1 million at April 13, 2005. Of this decrease, $365.6 million is the result of our investment in liquid marketable securities that offered a more favorable investment return than if held in cash. We held short-term investments of $365.6 million at December 31, 2005.

 

During the three and nine months ended September 30, 2006, we incurred operating losses of $25.9 million and $67.0 million, respectively, and our retained deficit at September 30, 2006 totaled $111.5 million, consisting of $91.6 million and $19.9 million, from NextWave and PacketVideo, respectively. Our total cash, cash equivalents and investments at September 30, 2006 were $222.2 million. The following table presents working capital, cash, cash equivalents and investments:

 

(in thousands)		September 30, 2006			Increase (Decrease) for the Three Months Ended September 30, 2006			Increase (Decrease) for the Nine Months Ended September 30, 2006			July 1, 2006			December 31, 2005
Working capital		$	351,877		$	16,920		$	(104,541	)	$	334,957		$	456,418
Cash and cash equivalents			25,371			(5,272	)		(68,278	)		30,643			93,649
Short-term investments			196,801			(112,993	)		(168,781	)		309,794			365,582
Total cash, cash equivalents and investments		$	222,172		$	(118,265	)	$	(237,059	)	$	340,437		$	459,231

 

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The following table presents our utilization of cash, cash equivalents and short-term investments for the three and nine months ended September 30, 2006 compared to the period from inception (April 13, 2005) to September 30, 2005 and the period from inception (April 13, 2005) to September 30, 2006:

 

(in thousands)		Three Months Ended September 30, 2006			Nine Months Ended September 30, 2006			Inception (April 13, 2005) to September 30, 2006			Inception (April 13, 2005) to September 30, 2006
Beginning cash, cash equivalents and investments		$	340,437		$	459,231		$	555,099		$	555,099
Cash paid for business combinations, net of cash acquired			(75	)		(4,950	)		(46,621	)		(56,071	)
Cash paid for acquisition of wireless spectrum licenses and subsequent lease obligations			(317,615	)		(400,049	)		(50	)		(418,829	)
Proceeds from long-term obligations, net of costs to issue			295,098			295,098			—			295,098
Payment to restricted investment account securing long-term obligations			(77,324	)		(77,324	)		—			(77,324	)
Cash used by Inquam Broadband Ltd joint venture, net of cash investment from joint venture partner			(328	)		(961	)		—			(961	)
Cash used in all other operating activities			(16,794	)		(38,464	)		(12,415	)		(57,138	)
Acquisition of property and equipment			(3,833	)		(10,990	)		(3,474	)		(18,268	)
Proceeds from the sale of membership interests and subsidiary common stock			2,049			2,379			—			2,379
Other, net			557			(1,798	)		(11	)		(1,813	)
Ending cash, cash equivalents and investments		$	222,172		$	222,172		$	492,528		$	222,172

The decrease in cash, cash equivalents and investments of $118.3 million during the three months ended September 30, 2006, primarily reflects $317.6 million paid for wireless spectrum licenses and subsequent lease obligations, our payment of $77.3 million into a restricted cash account to secure our 7% Senior Secured Notes, cash used in operating activities of $17.4 million, consisting of $15.6 million used by NextWave and our joint venture and $1.8 million used by PacketVideo, and $3.8 million paid for capital expenditures. These uses of cash were partially offset by the net proceeds from the issuance of our 7% Senior Secured Notes of $295.1 million and proceeds from the sale of membership interests and subsidiary common stock of $2.0 million.

 

The decrease in cash, cash equivalents and investments of $237.1 million during the nine months ended September 30, 2006, primarily reflects $400.0 million paid for wireless spectrum licenses and subsequent lease obligations, our payment of $77.3 million into a restricted cash account to secure our 7% Senior Secured Notes, cash used in operating activities of $40.6 million, consisting of $38.4 million used by NextWave and our joint venture, and $2.2 million used by PacketVideo, $5.0 million paid to acquire businesses and $11.0 million paid for capital expenditures. These uses of cash were partially offset by the net proceeds from the issuance of our 7% Senior Secured Notes of $295.1 million and proceeds from the sale of membership interests and subsidiary common stock of $2.4 million.

 

The decrease in cash, cash equivalents and investments of $62.6 million during the period from inception (April 13, 2005) to September 30, 2005, primarily reflects the use of $46.6 million for business acquisitions, $12.4 million for operating activities and $3.5 million paid for capital expenditures.

 

The decrease in cash, cash equivalents and investments of $332.9 million during the period from inception (April 13, 2005) to September 30, 2006, primarily reflects $418.8 million paid for wireless spectrum licenses and subsequent lease obligations, our payment of $77.3 million into a restricted cash account to secure our 7% Senior Secured Notes, cash used in operating activities of $59.2 million, consisting of $53.5 million used by NextWave and our joint venture, and $5.7 million used by PacketVideo, $56.1 million paid to acquire businesses and $18.3 million paid for capital expenditures. These uses of cash were partially offset by the net proceeds from the issuance of our 7% Senior Secured Notes of $295.1 million and proceeds from the sale of membership interests and subsidiary common stock of $2.4 million.

 

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In August 2006, we acquired WCS Wireless Inc., which holds spectrum covering 188.8 million persons, or POPs, in the central, western, and northeastern United States, for $160.5 million. The acquisition agreement provides that $8.0 million of the sale proceeds would be deposited into an escrow fund to cover liabilities resulting from breaches of representations and warranties, breaches of covenants and certain pre-closing tax losses. The escrow fund will remain in place until February 2007. The $160.5 million purchase price for WCS was funded with a portion of the proceeds from our recently completed 7% Senior Secured Notes financing. Wireless licenses that are purchased from third parties or in spectrum auctions held by the FCC are initially recorded at fair value, which is the purchase price paid for the license at the time of acquisition plus legal costs incurred to acquire the intangible asset. NextWave has determined that its WCS wireless spectrum licenses meet the definition of indefinite-lived intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets,” and, accordingly, the licenses are not amortized to expense, but, rather, reviewed for impairment on an annual basis.

 

In July 2006, we issued 7% Senior Secured Notes due 2010 (the “Notes”) in the aggregate principal amount of $350.0 million. The Notes were issued at a fifteen percent (15%) original issue discount, resulting in gross proceeds of $297.5 million. We will be obligated to pay the Notes at their full face value of $350.0 million on July 17, 2010 and interest of 7% per annum, or $24.5 million, is payable semiannually in January and July each year commencing January 15, 2007. The original issue discount will provide the note purchasers with a yield that is in addition to the coupon rate upon repayment of the Notes. After the payment of transaction related expenses, we received net proceeds of $295.1 million available for the sole purpose of financing spectrum acquisitions and leases. After giving effect to our recent acquisition of WCS Wireless, Inc. for $160.5 million and the acquisition of two new EBS leases for $22.1 million, the remaining net proceeds, or $110.0 million, of the Notes were used to fund the majority of a $142.8 million deposit to the FCC to qualify for the AWS auction. In September 2006, we were declared the winning bidder for 154 spectrum licenses for an aggregate bid of $115.5 million. Accordingly, $27.3 million of our initial deposit was not used and was returned to us in October 2006 after the auction was completed.

 

The purchasers of the Notes were investment funds and other institutional investors, including affiliates of Avenue Capital Group, among others. Robert T. Symington, a member of our Board of Directors, is a Portfolio Manager at Avenue Capital Group. Neither Mr. Symington nor Avenue Capital Group or its affiliates received any compensation in connection with the financing. The Notes are guaranteed by certain of our subsidiaries, including NextWave Broadband and PacketVideo. In addition, after our anticipated corporate conversion merger with and into a wholly owned limited liability company subsidiary of NextWave Wireless Inc., a new corporation formed under the laws of the State of Delaware, the Notes will be guaranteed by NextWave Wireless Inc. No scheduled principal payments will be due on the Notes before the maturity date of July 15, 2010. The Notes are pre-payable at our option at specified premiums to the principal amount that will decline over the term of the Notes from 105% to 100%, plus a make-whole amount applicable until July 17, 2008. The obligations under the Notes are secured by first priority liens on certain pledged equity interests, FCC licenses, spectrum leases, securities accounts and proceeds of any of the foregoing. We are required to maintain $75.0 million in cash or cash equivalents from funds other than the proceeds of the Notes in a restricted collateral account at all times while the Notes remain outstanding. The purchase agreement contains representations and warranties, affirmative and negative covenants (including, without limitation, (i) our obligation to maintain in full force and effect our FCC licenses and spectrum leases, (ii) our obligation to use the note proceeds for the acquisition of spectrum, not to exceed $0.25 per MHz-POP, (iii) our obligation not to become liable to any additional indebtedness, subject to certain exceptions including the ability to enter into spectrum leases or to incur $25.0 million of acquired company debt or purchase money indebtedness and (iv) our obligation not to make restricted payments to holders of subordinated debt or equity securities, including dividends) that are customary in similar types of transactions.  The purchase agreement also contains customary events of default and additional events of default including, the termination, cancellation or rescission of any FCC license owned or leased by us and necessary for our operation of a wireless communications system.

 

In connection with the Notes financing described above, NextWave Wireless Inc. entered into a warrant agreement with the purchasers of the Notes whereby on November 13, 2006, NextWave Wireless Inc. issued 4,110,382 common stock purchase warrants to purchase shares of common stock. The warrants have an exercise price of $0.01 per share (subject to certain adjustments as set forth in the warrant agreement) and are exercisable at any time from the date of issuance until July 15, 2009, and have anti-dilution protection provisions. The shares of NextWave Wireless Inc. underlying the warrants are also entitled to registration rights that obligate NextWave Wireless Inc. to file a shelf registration statement within 30 days following the corporate conversion merger, and use its commercially reasonable efforts to have the shelf registration statement become or declared effective within 60 days from its filing. The holders of warrants will be entitled to continuous shelf registration rights for a period of two years from the date that such shelf registration is declared effective by the SEC. NextWave Wireless Inc. is required to bear the expenses of the shelf registration.

 

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In July 2005, we entered into a purchase agreement for an office building in Henderson, Nevada for $8.2 million, plus related interior construction, fixtures and furniture costs of approximately $3.6 million, to accommodate our facility requirements and to consolidate current operations from two leased facilities into one. The interior construction costs are payable in the fourth quarter of 2006. Construction is expected to be completed during first quarter of 2007, at which time we expect to occupy the facility and the purchase price will be due and payable.

 

Since our emergence as a wireless technology company, we have consummated transactions to acquire licensed spectrum rights, including subsequent lease obligations, for amounts totaling $391.5 million, including $27.3 million that was returned to us in October 2006 after the conclusion of the AWS auction. These transactions include our acquisitions of 154 spectrum licenses totaling $115.5 million, the WCS licenses from Bal-Rivgam, LLC for $56.9 million, and WCS Wireless Inc., which holds spectrum covering 188.8 million persons, or POPs, in the Central, Western, and Northeastern United States, for $160.5 million. The Bal-Rivgam acquisition agreement provides that $21.9 million of the proceeds of the purchase would be deposited into escrow until January 2008 to cover any liabilities stemming from Bal-Rivgam's ownership of the licenses prior to closing, claims resulting from breaches of representations or warranties and certain claims under the spectrum licenses.

 

We have decided to participate in an upcoming wireless spectrum auction in Germany, which will require deposit funding of up to $20.0 million on November 22, 2006. If we are successful in winning these licenses, we anticipate funding any future cash requirements for maintaining these licenses by obtaining external capital funding in 2008.

 

As of September 30, 2006, we had $222.2 million of unrestricted cash, cash equivalents and short-term investments, and $76.8 million in restricted investments required to be reserved under our Notes financing. In September 2006, we were declared the winning bidder for 154 spectrum licenses for an aggregate bid of $115.5 million. Accordingly, approximately $27.3 million of our initial $142.8 million deposit was not used and was returned to us in October 2006.

 

We are currently unable to project when our wireless broadband products and technologies will be commercially deployed and generate revenue. However, we believe that our current revenues, cash and short-term investments and financing activities will be sufficient to fund our operating activities at least through 2007, even if the estimated $40 million expenditure relating to the current WCS substantial service date is required over the next 12 months.

 

·

We plan to fund our WiMAX technology development activities with our $222.2 million of unrestricted cash and investments until such point that we begin sales of our chipsets and network component products and enter into licensing arrangements for our wireless broadband technologies. Our wireless broadband products and technologies are in the early stages of development and will require a substantial investment before they may become commercially viable. Our research and development expenses for our wireless broadband products and technologies, including our chipsets were $9.0 million in the third quarter of 2006. Largely due to our planned increase in engineering personnel, we expect our WiMAX development expenses to increase by approximately 50% over the next twelve months. Because we are adopting a strategy of licensing our technology and selling chipsets to third party equipment manufacturers, we do not anticipate that the license and sale of our products and technologies will require significant additional capital.

 

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·

Our mobile WiMAX network solutions offerings will involve a service business and are not expected to require significant additional capital expenditures beyond what is necessary to complete our Henderson, Nevada office building and our trial network. With the exception of our trial network in Henderson, Nevada, we will not build-out wireless networks, but will provide our technologies, services and spectrum to our network partners who are engaged in these activities. In 2006, we expect to expend $5.0 million on the deployment of our trial network in Henderson, Nevada. If that trial network is successful, we anticipate that we will seek a network partner to expand the trial network to cover most of the Las Vegas metropolitan region.

 

We may need to secure significant additional capital in the future to implement changes to, or expansions of, our business plan and to become cash flow positive. We may also require additional cash resources for other future developments, including any investments or acquisitions we may pursue, including investments or acquisitions of other business or technologies. If our existing working capital resources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity securities or to obtain a credit facility. Our Notes prohibit our incurrence of additional indebtedness, subject to certain exceptions. The sale of equity securities or convertible debt securities could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and the requirement that we comply with operating and financial covenants that would restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of intangible assets and investments, and litigation. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others.

 

Revenue Recognition. We derive revenue principally from contracts to provide embedded multimedia software products for mobile phones and related license fees. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates.

 

For software arrangements with multiple elements, such as those that include rights to software products, customer support, and training services, we allocate revenue to each component of the arrangement based on objective evidence of its fair value, which is specific to us. The objective evidence for each element is based on the sale price of each element when sold or offered for sale separately.

 

Revenues from software products are generally recognized when the products are delivered. Revenues from customer support and training services are recognized on a straight-line basis over the life of the contract. For engineering design contracts, we recognize revenue pursuant to the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” and specifically follow guidance under Percentage of Completion (“POC”). Under the POC method, revenues are recognized on the basis of contract completion to-date or using actual costs incurred to total expected costs under the contract, resulting in the recognition of unbilled receivables or the deferral of costs or profit on these contracts. Deferred costs include all direct material and labor costs and those indirect costs related to contract performance and are reported as deferred contract costs in the consolidated balance sheet. We regularly review project profitability and underlying estimates. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by us. Provisions for estimated losses, if any, are recognized in the period in which the loss is determined. Amounts received from customers in excess of revenues earned under the POC method are recorded as advance payments from customers and reported as unearned revenue in the consolidated balance sheet.

 

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Revenues from time and material contracts are recorded at agreed-upon billing rates at the time services are provided.

 

We earn royalties on licensed embedded multimedia software incorporated into products sold worldwide by our licensees at the time that the licensees’ sales occur. Our licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter. Royalty revenues are recognized when reported by licensees to us and totaled $5.6 million and $15.0 million during the three and nine months ended September 30, 2006, respectively.

 

Valuation of Intangible Assets and Investments. In accordance with Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill and certain spectrum licenses. In lieu of amortization, we are required to perform an annual review for impairment or more frequently if impairment indicators arise. Goodwill and intangible assets not subject to amortization are considered to be impaired if we determine that the carrying value of the asset exceeds its fair value.

 

We will test goodwill for impairment at a reporting unit level using a two-step process. As of December 31, 2005, we had two reporting units as defined by SFAS 142, NextWave and PacketVideo. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we then perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

 

We also evaluate the remaining useful life of our intangible assets that are not subject to amortization on an annual basis to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, that asset is tested for impairment and then amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization. Additionally, if the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

 

At October 1, 2005, our goodwill and intangible assets not subject to amortization were evaluated for impairment and we determined that no impairment existed at that date.

 

At December 31, 2005, intangible assets subject to amortization were evaluated for impairment as required by SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” which requires the recognition of an impairment loss when the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value, and we determined that no impairment existed at that date.

 

Any required impairment loss would be recorded as a reduction in the carrying value of the related asset and charged to results of operations.

 

The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets requires the exercise of judgment. Upon initially recording intangible assets that are acquired through business combinations we may use an independent valuation firm to assist us in determining the appropriate values for those assets. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily use the undiscounted cash flows expected to result from the use of the assets. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we use are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry averages.

 

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The recorded value of goodwill and other intangible assets may become impaired in the future. As of September 30, 2006, our goodwill and intangible assets, net of accumulated amortization, were $32.8 million and $390.4 million, respectively. If the estimates of fair values or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our goodwill and intangible assets. We also cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on our reported asset values. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets associated with our acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on our results of operations.

 

Share-Based Payments and Pro forma Stock Based Compensation. We grant options and warrants to purchase our membership interests and common stock of our PacketVideo and CYGNUS subsidiaries to our employees, directors and consultants under our unit and stock option plans. The benefits provided by these plans qualify as share-based compensation under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires us to recognize compensation expense based on the estimated fair values of the share-based awards determined on the date of grant for all awards granted, modified or cancelled as of January 1, 2006 (the effective date).

 

Prior to the effective date, we did not recognize any compensation cost in our income statements for share-based awards granted with an option price equal to the fair market value of respective units or common stock on the date of grant as we accounted for them under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and its related interpretations and adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Stock-Based Compensation” (“SFAS 123”). We provided pro forma net income in accordance with the disclosure only provision of SFAS 123. The stock based compensation expense used in these pro forma amounts is based on the minimum value method option-pricing model. This method required us to use several assumptions to estimate the fair value including the expected life of the option.

 

We adopted the provisions of SFAS 123R using the prospective transition method, whereby we will continue to account for nonvested equity awards to employees outstanding at December 31, 2005 using APB 25, and apply SFAS 123R to all awards granted or modified after that date. In accordance with the transition rules of SFAS 123R, we no longer provide the pro forma disclosures in reports issued for periods ending after December 31, 2005 as SFAS 123R precludes companies that use the minimum value method for pro forma disclosure from continuing to provide those pro forma disclosures for outstanding awards accounted for under the intrinsic value method of APB 25. For the three and nine months ended September 30, 2006, we recognized $0.5 million and $2.2 million, respectively, in compensation expense for employee stock options. At September 30, 2006, there was $5.8 million remaining in unrecognized compensation cost related to employee stock options which is expected to be recognized over a weighted average period of 3.6 years.

 

We believe it is important for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation under SFAS 123R and SFAS 123. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, in our opinion, existing valuation models, including the Black-Scholes, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined in accordance with SFAS 123R and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107) using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer and willing seller market transaction. If factors change and we employ different assumptions in the application of SFAS 123R in future periods than those currently applied under SFAS 123R and those previously applied under SFAS 123 in determining our pro forma amounts, the compensation expense that we record in the future under SFAS 123R may differ significantly from what we have reported during the first quarter of 2006 and what we have reported as our pro forma expense during the period from inception (April 13, 2005) to December 31, 2005 under SFAS 123.

 

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Litigation. We are currently involved in certain legal proceedings. Although there can be no assurance that unfavorable outcomes in any of these matters would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and intend to vigorously defend the actions. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. We have not recorded any accrual for contingent liability associated with our legal proceedings based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. Revisions in our estimates of the potential liability could materially impact our results of operations.

 

Recent Accounting Pronouncements

 

We adopted SFAS 123R effective January 1, 2006, which requires us to expense the estimated fair value of employee stock options and similar awards. As a nonpublic entity, we have adopted the provisions of SFAS 123R using the prospective transition method, whereby we will continue to account for nonvested equity awards to employees outstanding at December 31, 2005 using APB 25, and apply SFAS 123R to all awards granted or modified after that date. We will no longer provide the pro forma disclosures in reports issued for periods ending after December 31, 2005 as SFAS 123R also precludes nonpublic companies that use the minimum value method for pro forma disclosure from continuing to provide those pro forma disclosures for outstanding awards accounted for under the intrinsic value method of APB 25. We use the Black-Scholes valuation model as the method for determining the fair value of our equity awards that are issued after January 1, 2006 and will incur expense during 2006 and future years for new awards granted during those periods that cannot yet be quantified. For the three and nine months ended September 30, 2006, we recognized $0.5 million and $2.2 million, respectively, in compensation expense for employee stock options. At September 30, 2006, there was $5.8 million remaining in unrecognized compensation cost related to employee stock options which is expected to be recognized over a weighted average period of 3.6 years.

 

In November 2005, the Financial Accounting Standards Board (“FASB”) issued staff position 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 address the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

 

FSP 115-1 replaces the impairment evaluation guidance of Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”), with references to existing other-than-temporary impairment guidance. EITF 03-1’s disclosure requirements remain in effect, and are applicable for year-end reporting and for interim periods if there are significant changes from the previous year-end. FSP 115-1 also supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value,” and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. FSP 115-1 applies to reporting periods beginning after December 15, 2005. FSP 115-1 did not have a material impact on our results of operations, or cash flows for the three or nine months ended September 30, 2006.

 

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In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB 20”), and Statement of Financial Accounting Standard No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires retrospective application to prior periods’ financial statements for reporting a voluntary change in accounting principle, unless impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This standard also distinguishes between retrospective application and restatement. It redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Adoption of SFAS No. 154 did not have a significant effect on our consolidated financial statements.

 

In June 2006, the FASB Issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective for our fiscal year beginning December 31, 2006, with earlier application permitted. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We believe that adoption of this interpretation is not expected to have a material impact on our financial statements.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at September 30, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

		Payments Due by Period(1)
(in thousands)		Total			Remainder of 2006			Years 2007-2008			Years 2009-2010			Years 2011 and Thereafter
Long-term obligations		$	377,912		$	261		$	5,365		$	354,350		$	17,936
Pending wireless spectrum acquisitions			14,209			6,811			560			576			6,262
Services and other purchase agreements			16,195			4,102			12,093			—			—
Pending business acquisition			3,147			3,147			—			—			—
Capital expenditures			8,200			—			8,200			—			—
Operating leases			19,606			1,432			11,575			6,550			49
Total		$	439,269		$	15,753		$	37,793		$	361,476		$	24,247

 

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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Interest Rate Risk

 

At September 30, 2006, our investment portfolio included unrestricted and restricted short-term investment securities with fair values of $196.8 million and $76.8 million, respectively. These securities are subject to interest rate risk and will decline in value if interest rates increase. Interest income earned on our investments is affected by changes in the general level of U.S. interest rates. These income streams are generally not hedged.

 

Due to the relatively short duration of our investment portfolio, an immediate ten percent change in interest rates (e.g. 3.00% to 3.30%) would have no material impact on our financial condition or results of operations.

 

Foreign Currency Risk

 

We conduct our business through subsidiaries in Europe, Asia-Pacific and North America. Substantially all of our sales to customers located in foreign countries are denominated in U.S. dollars, minimizing foreign currency risks related to those transactions. Our foreign subsidiaries use the U.S. dollar as their functional currency. Accordingly, monetary assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses associated with monetary assets and liabilities are translated at the rates of exchange that approximate the rates in effect at the transaction date. Non-monetary assets and liabilities and related elements of revenues, expenses, gains and losses are translated at historical rates. Resulting exchange gains or losses of these foreign investees are recognized in the consolidated statements of operations. Changes in currency exchange rates have affected, and will continue to affect our operating costs and net income.

 

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BUSINESS

 

We are an early-stage wireless technology company engaged in the development of next-generation mobile broadband and wireless multimedia products, technologies and services. For a description of our formation, our emergence from Chapter 11 and our recent investments and acquisitions please see the section entitled “Our History.”

 

We are developing proprietary chipsets and related network and device products based on the Institute of Electronical and Electronic Engineers 802.16e mobile WiMAX standards. Mobile WiMAX is a wireless broadband standard utilizing a cellular architecture to deliver fully mobile and high quality fixed voice and data services. WiMAX, an earlier generation of standards from the Institute of Electronical and Electronic Engineers, refers to a wireless broadband system designed to support fixed terminals. For more information about the fixed and mobile WiMAX standards please see “IEEE 802.16 WiMAX Standard” below.

 

A key design objective of our products and technologies is to extend the ability of mobile WiMAX to cost-effectively handle the large volume of network traffic that we believe next-generation wireless multimedia applications such as mobile television, high resolution streaming video, high-fidelity streaming audio, and interactive real-time gaming will generate. We intend to market our WiMAX products and technologies to network infrastructure and device manufacturers as well as network operators worldwide. To stimulate demand for our products, we plan to partner with service providers to build and operate WiMAX networks that operate on our licensed spectrum and utilize network and device equipment which incorporate our products and technologies. In addition, through our PacketVideo subsidiary, we are a global provider of embedded multimedia software for mobile phones. We believe our enhanced network and subscriber solutions, combined with our wireless multimedia software products and our spectrum assets, will offer wireless service providers, cable operators, multimedia content distributors, applications service providers and Internet service providers a platform to provide advanced wireless broadband services to their customers. To date, we have accumulated a spectrum footprint across the U.S. covering a population of over 247 million people, or POPs. This spectrum footprint includes 154 AWS licenses, currently pending with the FCC, for which we were declared the high bidder in a recent FCC auction.

 

Mobile Broadband Market

 

The Internet has evolved into a global system that over one billion people depend on every day. For many, the Internet has become an essential part of their business and personal lives and is the primary means in which they communicate and access information. We believe that a major driver of Internet usage is the rapidly growing adoption of DSL and cable/satellite broadband services that enable people to access the Internet at very high data speeds. Due to broadband connectivity, dependency on the Internet is increasing rapidly. Millions of people now use the Internet as a primary source for multimedia content such as music and movies, as a virtual store to purchase products and services, as a social networking tool, and to engage in bandwidth intensive activities such as high-speed web surfing, VoIP telephony, and interactive real-time gaming. However, while dependency on the Internet continues to grow, these types of critical Internet services and applications often become inaccessible to most people whenever they leave their home or business. This is because widespread deployment of wireless networks capable of providing mobile or nomadic broadband service, with data rates and connection quality comparable to DSL and cable, has not yet occurred.

 

We believe that market demand for mobile broadband services will transform the global $500 billion wireless communications industry from one driven primarily by circuit-switched voice to one driven by IP based broadband connectivity. This transformation is already starting to occur and according to Yankee Group, an independent market research firm, by 2009, 63% of all wireless phones globally will be used for some sort of mobile data with data revenue accounting for 22% of total wireless revenue.

 

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We believe that mobile broadband will do for the Internet what cellular technology did for wireline telephony -- extend high-speed connectivity outside the home or office and enable people to remain connected to the information and content they need, wherever they go. We call this the “Living in Motion” lifestyle. We are developing our products and technologies to help make “Living in Motion” a reality and to provide people the ability to use a next-generation mobile device to:

 

·

Find, purchase, download and listen to their favorite music or audio titles;

 

·

View high resolution broadcasts of their favorite TV shows;

 

·

Participate in interactive, real-time gaming;

 

·

Easily access the full richness of the World Wide Web, including Mobile Web 2.0 services;

 

·

Remotely access their personal Digital Video Recorders and watch recorded television;

 

·

Remotely view real-time images from home or office security cameras;

 

·

Conduct two-way video conferences;

 

·

Capture and transmit high resolution digital photos or video to friends, family members, and business associates;

 

·

Download and view movies and other types of video content;

 

·

Engage in a wide-range of multimedia shopping services customized via location based services;

 

·

Conduct a broad range of financial transactions; and

 

·

Make “landline quality”, VoIP telephone calls.

 

While the mobile broadband transformation of the wireless communications market is still in an early stage of development, we believe it is already having a profound effect on service providers, network infrastructure manufacturers, device manufacturers and content distributors who will need to adapt their businesses to an industry model based on delivering mobile broadband services. Such adaptations will require network operators to make major investments in new wireless broadband network infrastructure equipment and technologies, will require the introduction of new classes of mobile broadband handsets, the development of next-generation device-embedded multimedia software, and new techniques to maximize the use of available spectrum. We intend to focus our business activities to capitalize on these market trends.

 

We believe that several factors are already beginning to drive global market demand for fourth generation (4G) mobile broadband services like mobile WiMAX:

 

·

Increased demand by cellular phone users around the world for the ability to easily access the Internet and multimedia content on a fully mobile basis;

 

·

A growing awareness of the limitations of 802.11 Wi-Fi and existing third generation (3G) wireless networks;

 

·

Broader availability of high-quality, multimedia content optimized for mobile/portable devices;

 

·

Mandates by public safety agencies for reliable mobile broadband services;

 

·

The deployment of wireless technologies such as WiMAX to serve as a cost-effective way to deliver broadband to millions of homes in the U.S. and abroad with no or limited (e.g., dial-up) Internet connectivity; and

 

·

Market demand for fully integrated wireless local area network (LAN) and wide area network (WAN) solutions that utilize both 802.11 Wi-Fi and 802.16e WiMAX technologies.

 

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To complement WiMAX’s ability to provide fully mobile broadband service, we believe that WiMAX can also serve as a cost-effective “last mile” technology suitable to provide stationary broadband service to millions of homes in the U.S. and abroad that have no or limited (e.g., dial-up) Internet connectivity. According to Gartner, an independent market research firm, in the United States alone, there were close to 31 million households that still used a dial-up connection to reach the Internet and nearly 45 million households that had no Internet connection at all in 2005 (“Forecast: Consumer Telecommunications and Internet Access, United States, 2004-2010,” June 2006). We believe that WiMAX may provide a cost-effective option for such households.

 

The introduction of affordable, high-speed Internet service via DSL and cable broadband provided software developers with a unique opportunity to develop entire new categories of software applications. Many of these applications focused on the capture, manipulation, and transmission of multimedia content such as music, images, and video. Several, such as iTunes, Windows Media Player, Google Video, and peer-to-peer applications such as Napster and BitTorrent have achieved extremely high levels of popularity and, in some cases, spawned businesses with market valuations that exceed those of the companies that actually provide broadband connections to end-users. We expect a similar software opportunity to arise with the wide-scale introduction of affordable mobile broadband services and believe that PacketVideo is well positioned to help develop the next generation of innovative mobile software.

 

IEEE 802.16 WiMAX Standard

 

WiMAX is an acronym that stands for Worldwide Interoperability for Microwave Access and is a certification mark established by the WiMAX Forum for products that are compliant with the Institute of Electronical and Electronic Engineers (“IEEE”) 802.16 set of standards. WiMAX, which has now become synonymous with the set of IEEE 802.16 standards, specifies an air interface for wireless Metropolitan Area Networks (MANs). Published in April of 2002, the original 802.16 standard specified equipment operating in the 10-66 GHz frequency band which required tall transmission towers and line-of-sight connectivity making the standard most suitable to provide high-bandwidth wireless backhaul services. Subsequently, the IEEE published a series of amendments to the standard to support lower radio frequencies in the 2-11 GHz range, to allow non line-of-sight connectivity, and to address interoperability issues. In 2004, the IEEE consolidated these amendments into a new standard called IEEE 802.16-2004 which is often referred to as IEEE 802.16d.

 

In December of 2005, the IEEE published the 802.16e standard, often referred to as mobile WiMAX, which specified a system to support mobile broadband services via portable devices such as laptops, personal digital assistants (PDA), mobile phones, and other converged devices. The 802.16e standard includes several enhancements to improve mobile system performance including support for inter-cell handoff, sleep modes to support low-power mobile devices and support for broadcast/multicast services. In parallel, in a coordinated effort with the IEEE and the WiMAX Forum, the Telecommunications Technology Association (TTA) in Korea developed WiBro, an 802.16-based standard, which includes support for mobility based on the 802.16e amendment. Efforts supported by TTA and IEEE 802.16 to harmonize the WiBro standard with the IEEE 802.16e standard were successful.

 

Mobile WiMAX is one of several wireless air interface technologies that are currently being deployed or developed to enable the delivery of mobile broadband services to the market. These alternative technologies include CDMA2000, UMTS (Universal Mobile Telecommunications System) and 802.20 (Mobile-Fi). Some of these technologies, such as CDMA 2000 and UMTS, have already been deployed by major wireless carriers and have achieved significant levels of market penetration. We believe that mobile WiMAX will also become a major, global wireless broadband standard and will achieve a significant level of global adoption for the following reasons:

 

·

Mobile WiMAX enjoys broad support from wireless industry leaders. Members of the WiMAX Forum, an industry organization dedicated to promoting and certifying WiMAX products, include Alcatel, AT&T, Bell Canada, British Telecom, Broadcom, Cisco, Deutsche Telekom, Ericsson, Intel, Korea Telecom, LG Electronics, Lucent, Motorola, NEC, Nokia, Nortel, Samsung, Siemens, Sprint Nextel and Texas Instruments.

 

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·

Companies such as Intel, who are interested in seeing mobile WiMAX integrated into laptops and other mobile computing platforms, are actively working to drive the market adoption of WiMAX and the deployment of WiMAX networks.

 

·

International support by network operators for WiMAX is growing. At present, numerous WiMAX networks based on the 802.16-2004 standard are currently being deployed by numerous operators in Europe, Asia, South America, and the Middle East.

 

·

Deployments of 802.16e compliant mobile broadband networks by companies such as Korea Telecom who expect to launch commercial service in 2006 using the WiBro derivative of mobile WiMAX.

 

·

Mobile WiMAX economics, including network construction and operating costs, are expected to be competitive with those of alternative mobile broadband technologies.

 

·

Mobile WiMAX incorporates quality of service capabilities that are required to efficiently handle quality of service dependent applications such as VoIP telephony, video conferencing and real-time, interactive gaming.

 

·

Mobile WiMAX network performance, including the ability to handle the high volumes of traffic associated with VoIP, high speed web-surfing and next-generation wireless multimedia applications, is expected to be competitive with alternative mobile broadband technologies.

 

Competitive Strengths

 

A highly accomplished team of wireless technology professionals. Our technology development efforts are led by a team of highly skilled senior engineers with broad experience in the development of wireless communications technologies and solutions. Team members have led major development initiatives at leading technology companies, such as Intel, Motorola, Nokia, QUALCOMM and Texas Instruments. Together they have been instrumental in developing some of today’s dominant wireless technologies. Several members of our team, including our Chief Executive Officer, Allen Salmasi, played key roles at QUALCOMM in the development and successful commercialization of the CDMA wireless technology standard used worldwide today. In addition, our senior team has extensive experience in building and operating wireless networks for companies such as Airtouch, AT&T Wireless, McCaw Cellular, Nextel and SprintPCS.

 

Significant capital resources. As of September 30, 2006, we had $222.2 million of cash, cash equivalents and short-term investments. While we anticipate that the costs of our research and development activities will increase as we approach the commercial deployment of our wireless broadband products and technologies, we believe our working capital position provides us with significant flexibility to continue funding our research and development activities and our operating losses. To the extent that attractive opportunities to acquire complimentary businesses or additional wireless broadband spectrum arise, we may need to raise additional funds to capitalize on such opportunities.

 

Attractive wireless spectrum portfolio, well-suited to support mobile WiMAX. To date, we have acquired licensed spectrum and entered into long-term leases that provide us with exclusive leasehold access to licensed spectrum throughout the U.S. Our spectrum portfolio, including 154 AWS licenses that are pending with the FCC for which we were declared high bidder at a recent FCC auction, covers approximately 247 million persons, or POPs, across the U.S., with the majority of POPs covered by 10MHz or more of spectrum. We believe that this spectrum footprint, which includes all top ten and 21 of the top 25 cities in the U.S., makes us attractive to potential network partners. Our spectrum resides in the 2.3GHz WCS, 2.5GHz BRS/EBS, and 1.7/2.1 GHz AWS bands and offers propagation and other characteristics suitable for use with mobile WiMAX.

 

Unique combination of silicon, software, systems engineering and spectrum. Unlike most other wireless technology development companies, we have assembled a unique combination of assets, including a world class semiconductor design and wireless technology development team, one of the world’s leading providers of device embedded multimedia software, an experienced network design and operations team, and an attractive portfolio of licensed spectrum. We believe that the combination of these assets will enable us to efficiently develop and market mobile broadband products and positions us well to deliver fully integrated, mobile WiMAX network solutions to potential network partners.

 

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Integrated business model. We believe that our technology development business, our network solutions business and our multimedia software business each represent standalone business opportunities. We expect these initiatives to be mutually supportive and highly complementary to each other and believe that our multi-initiative business model will provide us with the ability to adapt our business and allocate resources to address rapidly evolving industry trends.

 

Well established industry position. Our PacketVideo subsidiary has established strong commercial relationships with the wireless industry’s leading device manufacturers, infrastructure manufacturers and network operators. Its customers include leading handset manufacturers such as LGE, Motorola, Nokia and Samsung as well as some of the world’s largest network operators including NTT DoCoMo, Orange, T-Mobile and Verizon Wireless. While some of these customers are also some of PacketVideo’s competitors, we believe that these relationships will be highly valuable as we pursue strategic partnerships and begin to market our products, technologies and network solutions.

 

Extensive experience in building and operating wireless networks. Our senior team has extensive experience in building and operating wireless networks for companies such as Airtouch, AT&T Wireless, McCaw Cellular, Nextel and SprintPCS. Members of our Network Solutions Group have spent the last several years conducting extensive field trials of numerous wireless broadband technologies, including 1xEV-DO, TD-CDMA, and Flash-OFDM. In addition, our team has led the development of a next-generation IP core network and back office system (“BOSS”) designed specifically to enable the delivery of highly-differentiated mobile broadband network services.

 

Business Strategy

 

Our strategy is focused on the rapid development of our mobile broadband technologies and solutions, and includes:

 

Develop the key elements of an end-to-end mobile WiMAX system. We intend to develop the key elements of an end-to-end mobile WiMAX network solution that includes proprietary chipsets and related network and device products compliant with the mobile WiMAX standard. We anticipate that by incorporating our proprietary technologies on both sides of the radio connection, we will be better positioned to commercialize our network performance technologies. To date, we have made significant progress in our development efforts and we anticipate that we will begin field testing elements of our product line in 2007. These field testing activities will be part of a comprehensive technical field trial of WiMAX technology in Henderson, Nevada, that will combine our advanced IP core and back-office systems with a multi-site mobile WiMAX network. We expect to implement this trial with vendor partners who are interested in working with us to develop our end-to-end WiMAX system, and believe that the trial will be a critical step towards successful commercialization of our end-to-end WiMAX system solution and the development of our wireless broadband products and technologies.

 

Market our products and technologies to third parties. We intend to market our products and technologies worldwide to network equipment and device manufacturers and to wireless broadband service providers. We expect that our marketing efforts will benefit from growing worldwide demand for fully-mobile access to the Internet and the delivery of rich-media content to mobile devices. Similar to other proprietary wireless technologies, we believe that the sale or licensing of our chipsets, network components and device technologies will generate a long-term, recurring revenue stream for our company.

 

Form strategic relationships with network partners interested in offering wireless broadband services. We intend to implement a shared network model under which NextWave will seek network partners to fund the cost of building and operating a mobile WiMAX network utilizing our licensed spectrum and our products and technologies. Potential network partners include wireless service providers, cable operators, multimedia content distributors, applications service providers and Internet service providers that wish to provide advanced wireless broadband services to their customers. We believe that our shared network model will be attractive to potential network partners as it will allow them to operate as facility-based service providers at a lower cost than building and operating a network on their own.

 

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Grow and extend PacketVideo’s multimedia software business. We believe that the number of multimedia enabled smartphones as a percentage of global handsets shipped annually will rise significantly over the next several years. We will seek to maintain PacketVideo’s strong position in this growing market through the growth and extension of its existing multimedia software business. At present, the primary competitors for PacketVideo’s multimedia software products are the internal multimedia design teams at the OEM handset manufacturers to whom PacketVideo markets its products and services. Furthermore, we believe that the deployment of mobile broadband networks will spawn the development of entire new categories of software applications that can take full advantage of the distinctive mobility features inherent in mobile broadband systems. While we expect the competition from the OEM internal multimedia design teams and other independent multimedia software providers to increase in the next few years, we expect PacketVideo will be able to leverage its industry position and help develop these types of next-generation mobile broadband software applications.

 

Identify and pursue acquisitions and investments to accelerate and improve the development of our end-to-end wireless broadband solutions. We believe there are a number of companies participating in the WiMAX technology, wireless broadband and wireless multimedia sectors that could be attractive acquisition or investment candidates. We continue to monitor these opportunities and may pursue those which we believe will enhance our capabilities and product offerings.

 

Acquire additional wireless spectrum to complement our existing portfolio. We believe that expanding our spectrum footprint will make us more attractive to potential network partners. As such, we are actively evaluating spectrum acquisition and leasing opportunities and will pursue those which allow us to obtain complementary spectrum at prices that we believe to be attractive. We also believe that there may exist opportunities to obtain spectrum internationally which we will continue to monitor.

 

Our Technologies and Products

 

WiMAX Products and Technologies

 

Based in San Diego, California, our Advanced Technology Group, a part of our NextWave Broadband subsidiary, is developing WiMAX chipsets, network components and device technologies designed to enhance the capabilities and economics of fixed and mobile WiMAX networks. NextWave Broadband was formed as a Delaware corporation in 2004 and did not have any significant operating history prior to our emergence as a new wireless technology company in April 2005. Our Advanced Technology Group includes the historical operations of CYGNUS Communications Inc., a company we acquired in February 2006. CYGNUS was formed as a Delaware corporation in 2004 and operated as a research and development company. We owned approximately 50% of the outstanding equity of CYGNUS from its formation until the 2006 acquisition.

 

Our Advanced Technology Group’s WiMAX products are expected to reduce network capital and spectrum costs by enabling fixed and mobile WiMAX to more efficiently handle bandwidth-intensive and quality of service dependent applications such as mobile television, VoIP telephony, streaming audio and video, video conferencing and real-time gaming. Our Advanced Technology Group’s products and technologies are intended to enhance the scalability and performance of WiMAX networks by enabling managed quality of service on multiple frequency bands. We believe that enabling WiMAX to operate over multiple frequency bands will significantly improve the economics of WiMAX network deployments for the following reasons:

 

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WiMAX network operators will have the ability to assemble a licensed spectrum footprint using multiple frequency bands as opposed to having to acquire scarce spectrum in a single frequency band;

 

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carriers will have the ability to address network coverage and capacity issues via the acquisition of low-cost spectrum as opposed to costly cell splitting; and

 

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the ability of frequency-agile WiMAX devices to roam between multiple WiMAX networks will be facilitated.

 

We believe that to fully optimize mobile WiMAX for the efficient delivery of bandwidth intensive multimedia applications requires a total system development strategy that includes all of the key elements of the WiMAX air interface. By adopting this approach, we expect to offer network infrastructure and device manufacturers a comprehensive suite of products including low-power WiMAX digital baseband ASICs and RFICs, software defined radio platforms, base station channel card reference designs and innovative terminal device reference designs.

 

Our Advanced Technology Group, which now includes the employees of our recently merged CYGNUS subsidiary, is comprised of over 211 employees and is led by a highly accomplished team of senior engineers with broad experience in the development of advanced wireless communications technologies and products, such as digital baseband ASICs, radio frequency technologies including multi-band RFICs, advanced antenna systems, SDR, mobile terminal designs and device enabled application software. Our Advanced Technology Group team members have led major technology development initiatives at companies such as Intel, Motorola, Nokia, QUALCOMM and Texas Instruments and have been instrumental in developing some of today’s dominant wireless technologies. Our founder and Chief Executive Officer, Allen Salmasi, was a member of the original QUALCOMM executive team and played a key role in the development and successful commercialization of the CDMA wireless technology standard used worldwide today. Many members of our development team worked with Mr. Salmasi at QUALCOMM on the CDMA technology development and have re-joined him at NextWave to pursue the development of next-generation wireless broadband technologies based on WiMAX.

 

Our wireless broadband products and technologies are in the early stages of development and will require a substantial investment before they may become commercially viable. We are currently unable to project when our wireless broadband products and technologies will be commercially deployed and generate revenue. Our wireless broadband products currently under development include:

 

WiMAX Semiconductor Products

 

Digital Baseband Application Specific Integrated Circuits (ASICs): An ASIC is an integrated circuit or chip customized for a specific purpose. Our family of WiMAX digital baseband ASICs represent the core of our system architecture and product line. All of our low-power mobile subscriber station (MSS) WiMAX ASICs are being designed to perform physical layer (PHY) and media access control (MAC) functions and will include optimized scheduling and the ability to support multiple frequency bands.

 

Radio Frequency Integrated Circuits (RFICs): An RFIC is part of the front-end of a radio system that receives a radio frequency signal, converts it to a lower frequency and modifies it for further processing. Designed to utilize multiple spectral bands to achieve high throughput performance, our RFICs are part of an advanced radio frequency subsystem that is matched to our family of baseband ASICs and is expected to enable a mobile device to operate over a wide range of operational frequencies without sacrificing overall performance.

 

WiMAX Network Products

 

Software Defined Radio (SDR): A SDR system is a radio communication system which uses software to modulate and demodulate radio signals. In a wireless radio network, the design goal of an SDR is to provide for a capability to improve the performance of the baseband portion of the radio sub-system, incorporated into a Base Transceiver Station (BTS) by simply upgrading the SDR’s software. This eliminates the need for costly and time-consuming hardware upgrades. Designed to complement our planned line of ASICs, our SDR platform will include WiMAX MAC and PHY layer software suitable for both macro and microcell base station deployments and is intended to provide improved operational flexibility and cost-effectiveness by leveraging a design platform that combines programmability as well as ASIC-level performance.

 

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Channel Card: Our channel card reference designs will specify a complete WiMAX base station transceiver unit that can be easily installed in third party base station platforms. We intend to incorporate leading-edge architecture and algorithms throughout our channel card design to enable the most cost-effective and high-performance mobile WiMAX network deployment.

 

Microcell Base Transceiver Station (BTS) Reference Design: A BTS, also known as a wireless base station, includes equipment needed to transmit and receive radio signals (transceiver), antennas, and the electronics required to communicate with other network elements. Unlike a conventional BTS which can provide radio coverage over a radius of several miles, a microcell BTS is much smaller in size and is intended to provide low-cost capacity and coverage relief in very small geographic areas.

 

WiMAX Subscriber Products

 

Mobile Terminal Reference Designs and Software Development Kits (SDK): Our reference designs and SDKs are intended to accelerate volume sales of our semiconductor products by enabling mobile device manufacturers to reduce the time required to develop and launch compliant products including handsets and portable computing platforms.

 

Other Systems Initiatives

 

Home Gateway Reference Designs: Our WiMAX home gateway reference designs are intended to provide gateway manufacturers with a specification for an integrated WAN/LAN platform that can simplify the management of and enable multi-platform access to personal multimedia content such as music and audio files.

 

Advanced Antenna Systems: To improve spectral efficiency and network performance, we are developing an advanced antenna system incorporating technologies such as beamforming and MIMO. These technologies are being designed to work on both the infrastructure and mobile device side of our network solution.

 

WiMAX Network Solutions

 

Based in Henderson, Nevada, our Network Solutions Group, a part of our NextWave Broadband subsidiary, intends to build and operate WiMAX compliant networks in partnership with wireless service providers, cable operators, multimedia content distributors, applications service providers and Internet service providers that wish to provide advanced wireless broadband products and services to their customers. We expect these networks to be deployed over our licensed spectrum, to take advantage of our advanced back-office systems, to utilize third party network infrastructure equipment that incorporate our products and technologies, and to be compatible with mobile devices that utilize the family of chipsets that we are currently developing.

 

Our Network Solutions Group’s 41 employees have extensive backgrounds in building and operating wireless networks and in designing and implementing back-office systems. Since 2003, our Network Solutions Group’s engineers have been operating a test-bed facility in Henderson, Nevada, to evaluate the capabilities of various wireless technologies including lxEV-DO, TD-CDMA and Flash-OFDM. These technical evaluations included in-depth assessments of key performance criteria including link budgets, spectral efficiencies, service quality, data rates, connection reliability, mobile capabilities, data link security and cost-per-bit economics.

 

In parallel to its technology assessment initiatives, our Network Solutions Group has also developed and implemented an advanced IP core network designed to support end-to-end IP connectivity, reduce IP core network costs, quickly enable new services and facilitate easy interconnection between a Network Solutions Group operated network and the existing network infrastructure of our network partners. During the same period, our Network Solutions Group also completed the design and has begun implementation of an advanced back-office system architecture consisting of billing, operational support systems (e.g., Mediation, LDAP and RADIUS) and customer care systems and has implemented a network operations center that will enable our Network Solutions Group to efficiently monitor the performance of its managed networks.

 

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We intend to implement a shared network model under which NextWave will seek network partners to fund the cost of building and operating a mobile WiMAX network utilizing our licensed spectrum and our products and technologies. We believe that this model will be attractive to potential network partners as it will allow them to operate as facility-based service providers at a lower cost than building and operating a network on their own.

 

To support our shared network business, our Network Solutions Group will be responsible for providing the following services:

 

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RF design;

 

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Network construction;

 

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Network optimization;

 

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Network operations center implementation;

 

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IP core network including security integration;

 

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Core network integration;

 

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Billing and operational support systems;

 

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Customer support systems; and

 

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Network operations and maintenance, including Network Management Systems (NMS).

 

Las Vegas Trial Network

 

To demonstrate the features and capabilities of our end-to-end network solutions, our Network Solutions Group is currently building a WiMAX trial network in Henderson, Nevada, that will utilize our licensed frequencies and is expected to become operational in 2007. We intend to use this trial network to conduct a comprehensive technical field trial of WiMAX technology that will combine our advanced IP core and back-office systems with a multi-site radio access network. We expect to implement this trial with vendor partners who are interested in working with us to develop our end-to-end WiMAX system and believe that the trial will be a critical step towards successful commercialization of our end-to-end WiMAX system solution and the development of our products and technologies. In addition, to accelerate industry development of WiMAX technologies, we intend to make our trial network facilities available to others in the WiMAX industry for the purpose of conducting product evaluations and compatibility testing.

 

We believe that Las Vegas represents an ideal location for testing, developing and evaluating a mobile WiMAX trial network for a number of reasons, including:

 

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Las Vegas is one of the fastest growing metropolitan areas in the country, with demographics that are conducive to trials for gauging customer acceptability;

 

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Existing tower inventory and flexible zoning procedures will reduce the time required to deploy a network;

 

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As the current operational headquarters for our Network Service Group, most of our network engineering and resources needed to design, build, and operate a mobile WiMAX network are already located in the market; and

 

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Las Vegas represents a highly attractive market for the prospective network and service provider partners.

 

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PacketVideo Multimedia Software Products

 

Based in San Diego, our PacketVideo subsidiary has 180 employees and is a global provider of embedded multimedia software products for mobile devices. PacketVideo was formed as a Delaware corporation in August 1998 and was privately held prior to its acquisition by NextWave in July 2005.

 

We expect that global deployments of mobile broadband networks will create a unique opportunity for software developers such as PacketVideo to create innovative multimedia software applications optimized for the mobile environment, and believe that PacketVideo is ideally positioned to help develop these types of next-generation, mobile broadband software applications.

 

PacketVideo’s software, which it licenses to the world’s leading mobile device manufacturers and wireless carriers, transforms a mobile phone or other mobile device into a feature-rich multimedia device that allows people to stream, download, and play video and music, receive live TV, or engage in two way video telephony. PacketVideo’s innovations and engineering leadership have led to breakthroughs in content encoding, content delivery systems, and advanced handset development around the world.

 

For mobile device manufacturers, shorter product cycles and increasing demand for advanced technologies are driving collaboration with third party solution providers, such as PacketVideo, to aid their product development. We believe that PacketVideo’s technical capabilities and depth of knowledge are key reasons why PacketVideo has been chosen by the world’s largest device manufacturers and wireless carriers to help them quickly develop and introduce new multimedia enabled handsets and multimedia services to the market. Tens of millions of handsets containing PacketVideo software have been shipped worldwide by device manufacturers including LGE, Motorola, Nokia and Samsung. In addition, PacketVideo provides multimedia software solutions to some of the world’s largest wireless carriers including NTT DoCoMo, Orange, T-Mobile and Verizon Wireless. According to IDC, high-end mobile phones and converged mobile devices represented 20% of all mobile phones shipped in 2005. This percentage is expected to increase to 45% of the more than one billion handsets forecasted to be shipped in 2008. We believe that this trend, combined with forthcoming software from PacketVideo that contains major enhancements, will enable PacketVideo to maintain its strong market share position.

 

PacketVideo’s current suite of device embedded software solutions are based on a modular architecture to enable rapid integration with the industry’s leading hardware platforms and operating systems and support the following set of mobile multimedia applications:

 

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Video streaming media applications;

 

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Electronic program guide;

 

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Content catalog - integrated media navigation;

 

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Digital camcorder - Video recorder;

 

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Two-way video telephony communications;

 

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Digital media broadcast receiver/player;

 

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Multi-format multimedia player/recorder;

 

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Digital music download/streaming playback;

 

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Digital still camera and image organizer;

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Live camera surveillance; and

 

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Streaming radio player.

 

Current PacketVideo Embedded Software Products

 

pv2way™ - PacketVideo Two Way Video Communicator : The pv2way Two Way Video Communicator software enables synchronous two-way voice and video conversations, video conferencing with picture-in-picture, call recording options, and is extendable to IP and SIP-based VoIP, PoC and Push-to-View.

 

pvPlayer™ - PacketVideo Media Player : The pvPlayer software is built on PacketVideo’s industry leading video engine and supports streaming, progressive download and playback with support available for all major mobile content types. It can be configured as separate audio and video applications or as a single integrated media player.

 

pvCamcorder™ - PacketVideo Camcorder & Digital Camera : The PacketVideo pvCamcorder & Digital Camera software lets users record audio and videos directly on their phone using PacketVideo’s optimized encoder libraries. Users can play recorded files locally or send them to others. pvCamcorder uses PacketVideo’s author engine and optimized codecs to provide smoother, improved quality recording of audio, video and digital photos.

 

Future PacketVideo Software Products

 

The introduction of affordable, high-speed Internet service via DSL and cable broadband provided software developers with a unique opportunity to develop entire new categories of software applications. Many of these applications focused on the capture, manipulation, and transmission of multimedia content such as music, images, and video. Several, such as iTunes, Windows Media Player, Google Video, and peer-to-peer applications such as Napster and BitTorrent have achieved extremely high levels of popularity and, in some cases, spawned businesses with market valuations that exceed those of the companies that actually provide broadband connections to end-users. We believe that a similar opportunity to develop innovative software applications, optimized for the mobile environment, exists with the wide scale introduction of affordable mobile broadband services.

 

The emergence of mobile broadband will necessitate the development of new categories of software applications optimized to take full advantage of the distinctive mobility features inherent in mobile broadband systems. To be successful, developers of these new software applications must accommodate the complexities (e.g., variable connection rates) and unique capabilities (e.g., mobile positioning) associated with wireless broadband and will need to overcome mobile device (e.g., smartphones) design restrictions such as limited memory and on-board processing capabilities. In addition, mobile application software developers will need to fully understand underlying wireless broadband network technologies such as WiMAX to ensure optimal performance of their multimedia software applications in a challenging wireless environment. We expect that global deployments of mobile broadband networks will create a unique opportunity for software developers such as PacketVideo to create innovative multimedia software applications optimized for the mobile environment.

 

We believe that PacketVideo is well positioned to help develop these types of next-generation, mobile broadband software applications for the following reasons:

 

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PacketVideo is already a global provider of device embedded, mobile multimedia software and has broad experience in developing software for memory and processor limited mobile devices.

 

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As part of NextWave, PacketVideo will have full access to the company’s WiMAX technology development activities and will be able to develop new multimedia software applications that take full advantage of the unique capabilities we are designing into our products and technologies.

 

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Unlike the aforementioned PC software environment, there are no dominant mobile device operating systems and, in fact, over two dozen such operating systems are currently in use by mobile handset manufacturers worldwide. PacketVideo’s software has been engineered to work with virtually all of the most popular mobile device operating systems in use today. By maintaining this flexible approach, we expect that PacketVideo’s next generation of mobile broadband software will continue to enjoy wide scale industry adoption.

 

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Spectrum Portfolio

 

We are actively engaged in obtaining rights to licensed spectrum across the United States as part of our plan to partner with service providers and deploy mobile WiMAX networks. To date, we have acquired spectrum and entered into long-term leases that provide us with exclusive leasehold access to licensed spectrum throughout the U.S. We have compiled a spectrum portfolio covering approximately 206 million persons, or POPs, across the country, with 10MHz or more of spectrum in markets covering 182 million persons. We are focused on acquiring authorizations to use licensed spectrum in the top 100 U.S. markets, which have population densities and demographics most suitable to drive adoption of wireless broadband. We believe that our spectrum footprint, which will include nine of the top ten and 15 of the top 20 markets in the U.S., makes us attractive to potential network partners. We have also acquired licenses to use spectrum in smaller markets and plan to continue to acquire licenses in these markets to improve our overall coverage footprint.

 

To date, we have focused our efforts on obtaining licenses or other rights to use 2.3 GHz Wireless Communication Service (“WCS”) spectrum, 2.5 GHz Broadband Radio Service (“BRS”) and Educational Broadband Service (“EBS”) spectrum. We believe these spectrum bands are suitable for the deployment of mobile WiMAX networks and we are engineering our products and technologies to take advantage of the acquired licenses. We believe that additional spectrum bands are also attractive for the deployment of mobile WiMAX networks, including the 1.7GHz/2.1GHz band (known as the Advanced Wireless Service, or AWS, spectrum band) and in the future we may obtain spectrum in those bands. Pursuant to the AWS auction, we were declared the winning bidder for 154 spectrum licenses, which are currently pending approval by the FCC. If the FCC approves the grant of these licenses, our spectrum portfolio would then cover approximately 247 million persons. Summary information about our current spectrum holdings is set forth below.

 

Geographic Service Area Designation		Market Name/Coverage Area (1)			Spectrum Band (2)			POPs (mm)
REAG 06			West region			WCS			53.9
REAG 01			Northeast region			WCS			51.4
REAG 05			Central region			WCS			43.7
MEA 44			Los Angeles - San Diego, CA			WCS			24.6
—			New York, NY metropolitan area (3)			EBS			16.7
MEA 18			Chicago, IL			WCS			14.1
MEA 16			Detroit, MI			WCS			10.9
MEA 01			Boston, MA			WCS			9.3
MEA 31			Houston, TX			WCS			7.1
MEA 20			Minneapolis, MN			WCS			6.8
MEA 40			Phoenix, AZ			WCS			5.4
MEA 33			Denver, CO			WCS			5.4
MEA 15			Cleveland, OH			WCS			5.2
MEA 17			Milwaukee, WI			WCS			5.1
MEA 46			Seattle, WA			WCS			5.1
MEA 30			St. Louis, MO			WCS			4.9
MEA 38			San Antonio, TX			WCS			4.0
MEA 45			Portland, OR			WCS			4.0
—			Los Angeles, CA (Orange County) (4)			EBS			3.3
MEA 29			Kansas City, KS/MO			WCS			3.3
MEA 21			Des Moines, IA			WCS			2.9

 

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Geographic Service Area Designation		Market Name/Coverage Area (1)			Spectrum Band (2)			POPs (mm)
MEA 9			Jacksonville, FL			WCS			2.8
MEA 34			Omaha, NE			WCS			1.8
—			Las Vegas, NV			BRS			1.7
MEA 03			Buffalo, NY			WCS			1.5
MEA 48			Hawaii			WCS			1.3
—			Albuquerque, NM			BRS			0.8
Poughkeepsie/Otsego, NY						EBS			0.6
Total (excluding overlaps)									205.1

 

(1)

WCS licenses are assigned by the FCC according to MEAs or REAGs (see further explanation below in “WCS Spectrum”). MEAs are named for the largest metropolitan area contained within the licensed geographic service area. An MEA is significantly larger than the metropolitan area for which it is named. REAGs are named for the geographic region the license covers.

 

(2)

Our WCS and BRS spectrum is held directly through FCC licenses. Our EBS spectrum has been leased on a long-term basis from current license holders.

 

(3)

We lease EBS spectrum from multiple parties in the greater New York, NY metropolitan area, including geographic areas in New York, New Jersey and Connecticut. These leases give us access to different amounts of spectrum in specific parts of the market area. The term of these leases range from 20 to up to 60 years when their renewal options are included

 

(4)

We lease EBS spectrum from The Orange Catholic Foundation in the Los Angeles, CA (Orange County) area. This lease has an initial 10 year term and contains five renewal options for 10 years each to extend the term of the lease.

 

WCS Spectrum

 

We have acquired WCS spectrum from third parties pursuant to privately negotiated purchase agreements. The 2.3 GHz WCS band is divided into four frequency blocks, A through D. Blocks A and B have 10MHz of spectrum each and blocks C and D have 5 MHz each. We have acquired WCS licenses in the A, B, C and D frequency blocks. The WCS A and B blocks are licensed in 52 individual geographic regions covering the United States, including the Gulf of Mexico, and are called Major Economic Areas (MEA). The WCS C and D blocks are licensed in six larger geographic regions, also covering the United States and are called Regional Economic Area Groupings (REAGs). Both MEAs and REAGs are of various sizes in terms of population and geographic coverage.

 

WCS licenses are allocated by the FCC for “flexible use.” This means that the spectrum can be used to provide any type of fixed, portable, mobile (except aeronautical mobile) or radiolocation services to individuals and businesses, including the wireless broadband services we intend to offer. Any such offerings must be consistent with international agreements concerning spectrum allocations, and are subject to compliance with technical rules in Part 27, Title 47 of the Code of Federal Regulations.

 

BRS and EBS Spectrum

 

We have acquired BRS spectrum licenses from third parties pursuant to privately negotiated purchase agreements. In the future, licenses for vacant BRS spectrum may also be obtained through third parties and FCC auctions. Rights to lease and use EBS spectrum are acquired by commercial interests like us from educational entities through privately negotiated lease agreements. Our long-term leases make available to us exclusive leasehold access to the leased EBS spectrum for a total period of time ranging from 20 to up to 60 years when renewal options are included. On April 27, 2006, the FCC released new rules governing EBS lease terms. EBS licensees are now permitted to enter into lease agreements with a maximum term of 30 years; lease agreements with terms longer than 15 years must contain a “right of review” by the EBS licensee every five years beginning in year 15.

 

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Under current regulations, after giving effect to an FCC-mandated transition of the spectrum to a new band configuration, which must occur in the next 3-4 years, the total spectrum bandwidth licensed by the FCC for EBS and BRS spectrum is 194 MHz. Approximately 75% of this spectrum is licensed for the Educational Broadband Service and 25% is licensed for the Broadband Radio Service. Under FCC rules, regulations and policies (“FCC rules”), up to 95% of the spectrum dedicated to each EBS license can be leased for commercial purposes subject to compliance with FCC rules. After transitioning the EBS and BRS spectrum to the new band plan, individual channels and channel groups of EBS and BRS spectrum will range from 5.5 MHz to 23.5 MHz of spectrum. Most, but not all, EBS and BRS channel groups contain 23.5 MHz of spectrum.

 

Until 1996, BRS spectrum was licensed according to Geographic Service Areas with a 35-mile radius. These “incumbent” licenses continue to exist today. In 1996, the FCC conducted an auction and assigned licenses for available BRS spectrum according to Basic Trading Areas or BTAs of various sizes. These BTA licenses were granted subject to the prior rights of the incumbent BRS license holders. We have acquired licenses for incumbent BRS licenses, licensed for 35-mile Geographic Service Areas. We may in the future acquire BRS spectrum licensed for BTAs.

 

EBS spectrum is licensed only for Geographic Service Areas with a 35-mile radius. In the future, vacant EBS spectrum may be assigned by BTAs. EBS spectrum is licensed exclusively to accredited educational institutions, governmental organizations engaged in the formal education of enrolled students (e.g., school districts), and nonprofit organizations whose purposes are educational.

 

The FCC’s rules for BRS and EBS spectrum were substantially revised in 2004 to provide more flexibility in how the spectrum is licensed and used; proceedings to revise the rules continue today. Use of the spectrum has evolved to include fixed and mobile, digital, two-way systems capable of providing high-speed, high-capacity broadband service, including two-way Internet access service via low-power, cellularized communication systems and single-cell high-power systems. On April 27, 2006, the FCC released additional orders to reform FCC rules related to BRS and EBS spectrum. The new, amended rules will not become effective until July 19, 2006; certain rules will be subject to petitions for reconsideration. For a more detailed description of these new rules, see “Government Regulation - BRS/EBS License Conditions.”

 

International Investments

 

We have made international investments to leverage our development activities and to potentially serve as a vehicle to market our WiMAX products in international markets. These investments include a 51% interest in Inquam Broadband, a joint venture seeking spectrum licenses located in Germany and a 33% interest in Hughes Systique, an offshore development company located in India. In addition, we have opened a liaison office in Korea, the location of the world’s first commercial metropolitan-area wireless broadband network.

 

Inquam Broadband

 

We acquired 51% of the equity of Inquam Broadband Limited, a Cayman Islands corporation, for 1.3 million Euros, or approximately $1.6 million. Inquam Broadband was formed in January 2006 as a joint venture with Inquam-BMR GP, a private investment partnership. We invested in Inquam Broadband for the purpose of investing in and potentially operating broadband telecommunications assets in Germany. Inquam Broadband and its subsidiary have not yet conducted any significant operating activities.

 

In connection with the formation of Inquam Broadband, we received an option to acquire a 51% equity interest in Inquam Deutschland GmbH for an exercise price of EUR 9,690,000, subject to certain adjustments. Inquam Deutschland, an affiliate of Inquam-BMR GP, holds a nationwide spectrum award of 2x1.25 MHz from the German telecommunications regulatory agency. We may exercise our option to purchase 51% of Inquam Deutschland and Inquam Broadband may implement and operate a pilot network in Cologne, Germany, together with Netcologne, using the existing spectrum in Inquam Deutschland.

 

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Hughes Systique

 

In October 2005, we acquired a 33% equity interest in Hughes Systique Corporation for approximately $4.5 million. The remaining equity is owned by Hughes Communications, Inc., the parent company of Hughes Network Systems, and the employees of Systique. Systique is a newly formed offshore development company that specializes in providing software development services to the telecommunications industry using engineers and software developers in India. The President and CEO of Systique, Pradeep Kaul, has more than 33 years of experience in the wireless industry, including as an executive at Hughes Network Systems, and previously formed a successful offshore development company that was sold to Flextronics International. We entered into the relationship with Systique to facilitate and expedite the development of software modules and applications required in connection with our broadband development activities. We have entered into a 24 month service agreement with Systique pursuant to which we have agreed to contract for a minimum level of programmers during the term of the agreement.

 

Korea Liaison Office

 

In January 2006, we obtained the necessary governmental approvals to open a corporate liaison office in Korea limited to five employees. Our country manager, Dr. Hyock Jo Kwon, was President and CEO of Shinsegi Telecom Company, which launched the world’s first commercial wireless network based on CDMA technology. Our Korea liaison office occupies leased office space in Seoul’s Korea Stock Exchange Building. The goal of the office is to establish, develop and pursue mutually beneficial business opportunities and technology relationships in wireless communications with Korean corporations and research organizations addressing advance wireless products and services for global markets. 

 

Korea has become a global leader in the wireless broadband industry. Korea Telecom is currently deploying the world’s first mobile broadband network based on the WiBro standard, scheduled for commercial development in June 2006. WiBro was developed by Korea’s Electronics and Telecommunications Research Institute (ETRI) and industry players and has been harmonized to the IEEE 802.16e standard. South Korea’s Telecommunications Technology Association (TTA) was recently named as the world’s second WiMAX Forum certification laboratory to provide testing and certifying services for WiMAX.

 

Sales and Marketing

 

WiMAX Products & Technologies

 

We intend to market our 802.16e WiMAX compliant products and technologies to network infrastructure and device manufacturers as well as network operators worldwide. We plan to utilize a company-owned direct sales organization and third party outlets to license our technologies and will utilize third party sales representatives and stocking distributors as additional channels to market our chipsets. In addition, we also intend to utilize a direct sales organization and third party outlets to market and/or license our network products and technologies to network infrastructure manufacturers who intend to market WiMAX network equipment to wireless broadband service providers.

 

We intend to promote industry awareness of our products and technologies via the deployment of our Las Vegas trial network, and through industry trade shows, public relations initiatives, trade advertising and our company web site. In addition, we intend to actively work with leading trade publications and industry analysts to educate potential customers on the benefits of our products and technologies.

 

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WiMAX Network Solutions

 

We intend to provide network design, deployment, and management services primarily to our service provider partners who will help finance the construction and operation of networks based on our technologies. Because our network services will be provided in connection with our shared network activities, we do not envision the need to develop a separate sales channel to market our network services.

 

We expect that marketing of the mobile broadband services shared network will be performed by our network partners. We anticipate our network partners to include wireless service providers, cable operators, multimedia content distributors, applications service providers and Internet service providers that have mature retail distribution and customer service capabilities.

 

In connection with our Las Vegas market trial which is scheduled for later this year, we intend to generate market awareness and promote our network services through print and broadcast advertising, supported by direct marketing, internet sales channels and event marketing initiatives.

 

Multimedia Software Products

 

Our PacketVideo subsidiary utilizes a team of strategic account managers to market its multimedia software products to device manufacturers and service provider customers in North America, Asia and Europe. At present, PacketVideo’s customers include BenQ-Siemens, Fujitsu, LGE, Mitsubishi, Motorola, NEC, Nokia, Orange, Panasonic, Samsung, Sanyo, Sony-Ericsson, T-Mobile and Verizon Wireless.

 

To promote its suite of software products and services, PacketVideo exhibits at high profile wireless trade events including 3GSM World Congress, CTIA, and CTIA Wireless IT & Entertainment.

 

Geographic Breakdown of Revenues

 

For the period from inception (April 13, 2005) to December 31, 2005, we have generated $1.9 million of revenues (44.8%) in the United States, $1.3 million (31.9%) in Japan, $0.6 million (13.3%) in Europe and $0.4 million (10.0%) in other regions of the world.

 

Competition

 

Advanced Technology Group

 

We expect the market for our products and services to be highly competitive and expect that competition will increase in the future. The principal competitive factors include:

 

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Industry adoption of wireless standards that compete with mobile WiMAX; and

 

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Mobile WiMAX semiconductors and related products offered by our competitors.

 

Competing Wireless Broadband Standards 

 

Mobile WiMAX will compete with third generation (3G), CDMA based wireless technologies and fourth generation (4G), Orthogonal Frequency Division Multiple Access (OFDMA) based wireless air-interface technologies that are intended to provide mobile broadband services to the market. Major alternative wireless broadband technologies include:

 

CDMA2000: CDMA2000 is a registered trademark of the Telecommunications Industry Association and describes a family of 3G mobile telecommunications   standards based on the 3GPP2 telecommunications specification. CDMA2000 includes the 1xEV-DO standards which have achieved high levels of industry support in the United States and abroad, including nationwide deployments by Verizon Wireless and Sprint Nextel. It is expected that CDMA2000 may be harmonized with the 802.20 Mobile Broadband Wireless Access OFDMA that is currently under development.

 

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UMTS: Universal Mobile Telecommunications System (UMTS) is a 3G wireless technology, based on the 3GPP specification, that uses W-CDMA (Wideband - Code Division Multiple Access) as its underlying air-interface standard. UMTS has achieved a high level of industry acceptance and has the support of some of the largest GSM wireless network operators in the world. To enhance network performance, UMTS network operators are currently deploying a new WCDMA protocol called High Speed Downlink Packet Access (HSDPA) that is expected to significantly improve downstream network data rates. In the future, it is expected that network operators will also deploy High Speed Uplink Packet Access (HSUPA) that is expected to significantly improve upstream network data rates. In addition, LTE, or Long Term Evolution, is the trade name for research and development work that is underway to identify future OFDMA technologies and capabilities needed to help ensure that 3GPP remains a highly competitive technology in the future.

 

As providers of mobile WiMAX product and technologies, we may compete indirectly with some or all of well-established, international companies that are engaged in the development, manufacture and sale of products and technologies that support alternative wireless broadband standards, including Alcatel, Ericsson, Huawei, LGE, Lucent, Motorola, Nokia, Nortel, QUALCOMM, Samsung and Siemens.

 

Competing WiMAX Products and Technology Providers

 

We will be competing with numerous companies that are developing or marketing WiMAX products and technologies that will directly compete with our products and technologies including Beceem, Fujitsu, Intel, Motorola, Nortel, RunCom, Samsung, Sequans and WaveSat. Some of these companies have significantly greater financial, technical development, marketing and other resources than we do, are already marketing commercial WiMAX semiconductor products, and have established a significant time to market advantage. In addition, we expect additional competition to emerge in the WiMAX semiconductor and components market from well-established companies, such as Broadcom and Samsung.

 

Network Solutions

 

We intend to partner with service providers to build and operate wireless broadband networks that operate over our licensed spectrum and incorporate our technologies. These networks will be utilized to provide mobile VoIP and broadband services to consumers and businesses in direct competition to some of the largest incumbent wireless operators in the world. These operators have already achieved high levels of market penetration, have established broad product and service distribution networks, and have developed very high levels of brand recognition. Our shared network partners will also have to compete with commercial 802.11 Wi-Fi networks as well as the growing number of municipal wireless broadband networks being sponsored by some major cities across the country such as San Francisco and Philadelphia. These municipal networks, which are often based on the popular 802.11 Wi-Fi standard, are expected to offer individuals with very low cost and nomadic Internet access that would compete with the mobile wireless broadband services our networks are intended to provide. Finally, our shared network partners may compete against emerging wireless multimedia broadcast networks such as Crown Castle’s Modeo and QUALCOMM’s Media Flow networks.

 

In addition, some incumbent wireless network operators, such as Sprint Nextel, have already announced mobile virtual network operator (MVNO) business relationships with service provider companies such as Internet service providers and cable operators. In some cases these pre-existing MVNO relationships could prevent some of these service providers from entering into shared network arrangements.

 

Multimedia Software Products

 

At present, the primary competitors for PacketVideo’s multimedia software products are the internal multimedia design teams at the OEM handset manufacturers to whom PacketVideo markets its products and services. Importantly, these OEMs represent some of PacketVideo’s largest customers. In addition several companies, including Flextronics/Emuzed, Hantro, Nextreaming, Philips Software, Sasken and Thin Multimedia also currently provide software products and services that directly or indirectly compete with PacketVideo. As the market for embedded multimedia software evolves, we anticipate that additional competitors may emerge including Apple Computer, Real Networks and OpenWave.

 

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Intellectual Property

 

In order to protect our proprietary rights in our products and technologies, we rely primarily upon a combination of patent, trademark, trade secret and copyright law as well as confidentiality, non-disclosure and assignment of inventions agreements. We have five U.S. patents, one of which is the subject of extensive foreign filing. We have twelve patent applications pending in the United States as well as six U.S. provisional patent applications. We have nine pending intent-to-use U.S. trademark applications as well as four U.S. trademark registrations. There are numerous foreign trademark applications as well as seven foreign registrations. Due to the early development stage of our WiMAX technology development business, our registered PacketVideo trademark is the only trademark that is currently material to our business.

 

In addition, we have typically entered into nondisclosure, confidentiality and assignment of inventions agreements with our employees, consultants and with some of our suppliers and customers who have access to sensitive information. We cannot assure you that the steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of our technology or independent development and/or the sale by others of products with features based upon, or otherwise similar to, those of our products.

 

Given the rapid pace of technological development in the communications industry, we also cannot assure you that our products do not or will not infringe on existing or future proprietary rights of others. Specifically, more than 20 companies have submitted letters of assurance related to IEEE Standard 802.16 and amendments stating that they may hold or control patents or patent applications, the use of which would be unavoidable to create a compliant implementation of either mandatory or optional portions of the standard. In such letters, the patent holder typically asserts that it is prepared to grant a license to its essential IP to an unrestricted number of applicants on a worldwide, non-discriminatory basis and on reasonable terms and conditions. If any companies asserting that they hold or control patents or patent applications necessary to implement mobile WiMAX do not submit letters of assurance, or state in such letters that they do not expect to grant licenses, this could have an adverse effect on the implementation of mobile WiMAX networks and the sale of our mobile WiMAX products and technologies. In addition, we can not be certain of the validity of the patents or patent applications asserted in the letters of assurance submitted to date, or the terms of any licenses which may be demanded by the holders of such patents or patent applications. If we were required to pay substantial license fees to implement our mobile WiMAX products and technologies, this could adversely affect the profitability of these products and technologies.

 

Although we believe that our technology has been independently developed and that none of our intellectual property infringes on the rights of others, we cannot assure you that third parties will not assert infringement claims against us or seek an injunction on the sale of any of our products in the future. If an infringement were found to exist, we may attempt to acquire the requisite licenses or rights to use such technology or intellectual property. However, we cannot assure you that such licenses or rights could be obtained on terms that would not have a material adverse effect on us, if at all.

 

We license and will continue to seek licenses to certain technologies from others for use in connection with some of our technologies. The typical duration of our license agreements is one year with the opportunity for renewal. While none of our current license agreements are material at the time of this registration statement, the inability to obtain such licenses or loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost.

 

Participation in the WiMAX Standardization Process

 

The standardization of a wireless broadband technology such as WiMAX is driven by professional associations consisting of experts employed by companies who have an interest in developing the relevant technology. We believe that our participation in these associations is important in order to influence the development of standards and in order to keep up to date with the latest technological developments in our industry.

 

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The most important technological standards in our industry are developed by the Institute of Electrical and Electronics Engineers (IEEE). WiMAX is based on the IEEE standard 802.16e for broadband wireless access. The 802.16e mobile WiMAX standard is the latest generation of the IEEE 802.16 Air Interface standard, which is the state-of-the-art standard for wireless multimedia distribution. It was initially designed for multimedia distribution for outdoor fixed broadband wireless access (BWA) markets where it addresses the “Last Mile” problem for the extension of fiber, cable and DSL networks. It takes the best features from earlier proprietary wireless access systems and combines them to provide a flexible wireless network solution capable of meeting the most stringent requirements for reliable multimedia communications.

 

NextWave has actively participated in the development of the IEEE 802.16 standard. Ken Stanwood, the CEO of NextWave’s CYGNUS subsidiary has participated in IEEE 802.16 from the very start, and is responsible for much of the core Media Access Control (MAC) layer technology in the standard. He recently finished a three year term as vice chair of IEEE 802.16. In addition, we recently hired Dr. Roger Marks as a Senior Vice President - Industry Relations of our Advanced Technology Group. Dr. Marks currently serves as chairman of IEEE 802.16. Many additional NextWave personnel support the process as task group officers and participants.

 

Even with the development of the IEEE 802.16 standard, the interoperability of wireless broadband devices and networks is not guaranteed. For example, two vendors could pick the same profile but implement it differently. The companies involved in the development of IEEE 802.16 decided to create another voluntary industry organization, known as the WiMAX Forum that would certify devices and technologies that meet a uniform standard. In April 2001, the WiMAX Forum was established, with Mr. Stanwood as one of the founders. The WiMAX Forum creates and monitors the test specifications for wireless broadband systems and components based on the IEEE 802.16 standard.

 

The WiMAX Forum now has hundreds of industry participants as members, including AT&T, Cisco, Intel, Motorola, Nokia, Nortel and Samsung. The WiMAX Forum is in the process of certifying fixed WirelessMAN-OFDM systems through independent laboratory conformance testing and plug-fests. Plug-fests are events at which participating companies have the opportunity to test and demonstrate the interoperability of their products based on a set of standards. The WiMAX Forum is embarking on test specifications and plug-fests for WirelessMAN-OFDMA scalable OFDMA mobile systems, commonly referred to as 802.16e systems.

 

In parallel with efforts by the IEEE and the WiMAX Forum, the Telecommunications Technology Association (TTA) in Korea developed WiBro, an 802.16-based standard, which emphasizes support for mobility based on the 802.16e amendment. Efforts supported by TTA and IEEE 802.16 to harmonize the WiBro standard with the IEEE 802.16e standard were successful. WiBro was converted from a wireless standard to a service requiring WiMAX certified equipment in the 2.3 GHz band.

 

Government Regulation

 

Overview

 

Communications industry regulation changes rapidly, and such changes could adversely impact us. The following discussion describes some of the major communications-related regulations that affect us, but numerous other substantive areas of regulation not discussed here also may influence our business.

 

Communications services are regulated to varying degrees at the federal level by the Federal Communications Commission (“FCC”) and at the state level by public utilities commissions (“PUCs”). NextWave’s suite of wireless broadband products and services is subject to federal regulation in a number of areas, including the licensing and use of spectrum, and the technical parameters, certification, marketing, operation and disposition of wireless devices. Applicable consumer protection regulations also are enforced at the federal and state levels.

 

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The following summary of applicable regulation does not describe all present and proposed federal, state and local legislation and regulations affecting the communications industry. Some legislation and regulations are the subject of ongoing judicial proceedings, legislative hearings and administrative proceedings that could change the manner in which our industry is regulated and the manner in which we operate. We cannot predict the outcome of any of these matters or their potential impact on our business. See “Risks Relating to Government Regulation.”

 

Licensing and Use of Wireless Spectrum

 

The FCC regulates the licensing, construction, use, renewal, revocation, acquisition and sale of our licensed wireless spectrum holdings. Our wireless spectrum holdings currently include licensed spectrum in the WCS and BRS bands, and leased spectrum in the EBS band. We intend to use this spectrum to provide our suite of WiMAX wireless broadband products and services to our network partners.

 

Certain general regulatory requirements apply to all licensed wireless spectrum. For example, certain build-out or “substantial service” requirements apply to our licensed wireless spectrum, which generally must be satisfied as a condition of license renewal. The Communications Act and FCC rules also require FCC prior approval for the acquisition, assignment or transfer of control of FCC licenses. In addition, FCC rules permit spectrum leasing arrangements for a range of wireless licenses with FCC oversight. Approval from the Federal Trade Commission and the Department of Justice, as well as state or local regulatory authorities, also may be required if we sell or acquire spectrum.

 

·

The FCC sets rules, regulations and polices to, among other things:

 

·

grant licenses in the WCS, BRS and EBS bands;

 

·

regulate the technical parameters and standards governing wireless services, the operation and marketing of radio frequency devices and the placement of certain transmitting facilities;

 

·

impose build-out or performance requirements as a condition to license renewals;

 

·

rule on applications for license renewals;

 

·

rule on assignments and transfers of control of FCC licenses;

 

·

approve leases covering use of FCC licenses held by other persons and organizations;

 

·

resolve harmful electrical interference between users of various spectrum bands;

 

·

impose fines, forfeitures and license revocations for violations of FCC rules; and

 

·

impose other obligations that it determines to be in the public interest.

 

Additional, more specific regulatory requirements apply to WCS, BRS and EBS spectrum, and are described below. Compliance with all of the foregoing regulatory requirements, and those listed below, increases our cost of doing business. For a description of an interference issue which may impact use of WCS, BRS and EBS spectrum, see “Risks Relating to Government Regulation-Wireless Devices utilizing WCS, BRS and EBS Spectrum May Be Susceptible to Interference from Satellite Digital Audio Radio Services (“SDARS”).”

 

WCS License Conditions

 

WCS licensees must comply with all applicable legal and technical rules imposed by the FCC, including those found in Part 27, Title 47 of the Code of Federal Regulations. WCS licenses are granted for ten-year license terms, and licensees are required to demonstrate that they are providing “substantial service” in their license area within the initial ten-year license term. Substantial service is defined as “service which is sound, favorable, and substantially above a level of mediocre service which just might minimally warrant renewal.” For WCS licensees, the renewal deadline and the substantial service build-out deadline is July 21, 2010. Failure to make the substantial service demonstration, without seeking and obtaining an extension from the FCC, would result in license forfeiture. Extensions of time to meet substantial service demonstrations are not routinely granted by the FCC.

 

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BRS-EBS License Conditions

 

Like WCS licenses, EBS and BRS licenses are granted for ten-year license terms, and licensees must comply with all applicable legal and technical rules imposed by the FCC, including those found in Part 27, Title 47 of the Code of Federal Regulations. Unlike WCS licenses, BRS and EBS licenses were granted at different times and, therefore, do not have a uniform expiration date. BRS and EBS licensees must also demonstrate that they are providing “substantial service” in their license areas. On April 27, 2006, the FCC released an order in which the substantial service deadline for EBS and BRS spectrum was set at May 1, 2011.

 

From 2004 to 2006, the FCC adopted a number of rule changes which created more flexible BRS/EBS spectrum rules to facilitate the growth of new and innovative wireless technologies and services, including fixed and mobile wireless broadband services. Although the proceedings to reform BRS/EBS rules have largely been completed, they remain subject to legal challenges and, thus, are subject to additional revisions. The FCC replaced the site-based licensing regime with a geographic service area “blanket” licensing regime, and it ordered the 2.5 GHz band to be reconfigured into three segments: upper- and lower-band segments for low-power operations, and a middle-band segment for high-power operations. The new BRS/EBS band configuration also eliminates the use of interleaved channels by licensees in favor of contiguous channel blocks. By creating contiguous channel blocks, and grouping high- and low-power users into separate portions of the BRS/EBS band, the new band plan reduces the likelihood of interference caused by incompatible uses and creates incentives for the development of low-power, cellularized broadband operations, which were inhibited by the prior band plan. The new BRS/EBS band plan will allow licensees to use the 2496-2690 MHz spectrum in a more economically efficient manner and will support the introduction of next-generation wireless technologies. The new rules preserve the operations of existing licensees, including educational institutions currently offering instructional television programming, but require that licensees transition to the new band plan by October 19, 2010 (barring disputes in the transition process), which includes relocating lic ensees from their current channel assignments to new spectrum designations in the band .

 

Given the recent adoption of new, amended FCC rules regarding transition to the reconfigured band plan, no transitions have been effected, but planning for this work has commenced. For each EBS and BRS licensee, the deadline for filing initial plans for the transition is January 19, 2009. After the initial plan is filed with the FCC, licensees will have a 90-day transition planning period, followed by an additional eighteen months to complete the transition. We and other parties intend to transition the 2.5 GHz band to the new configuration on a market-by-market basis, in a process that may require several years to complete nationally. When the transition is complete, which should occur by October 19, 2010, we believe that the 2.5 GHz band will be more suitable for providing NextWave’s suite of wireless broadband products and services. See, “Risks Relating to Government Regulation-We Will Not Have Complete Control Over our Transition of EBS and BRS Spectrum, Which Could Impact Compliance With FCC Rules.”

 

Point-to-Point Microwave License Conditions

 

We hold a number of 18 GHz and 23 GHz point-to-point microwave licenses in Las Vegas that we intend to use as part of our network to transmit or “backhaul” wireless broadband communications traffic to our cell cites and network trial operations center. These licenses are granted based upon applications that demonstrate that the applicant is legally and technically qualified and that the proposed station will not cause impermissible interference to other stations or proposed stations that are entitled to interference protection. These licenses also have license terms of 10 years, and are subject to satisfying construction deadlines that occur 18 months after the licenses are granted. Point-to-point microwave licensees must also comply with certain technical rules contained in Part 101, Title 47 of the Code of Federal Regulations.

 

New Spectrum Opportunities and Spectrum Auctions

 

Several FCC proceedings and initiatives are underway that may affect the availability of spectrum for commercial wireless services. These proceedings may make more wireless spectrum available to us and other new wireless competitors. We believe that additional spectrum bands may also be attractive for the deployment of mobile WiMAX networks, and in the future we may obtain spectrum in those bands through secondary markets acquisitions and leases and whatever mechanisms the FCC may establish including participation in FCC auctions. Through our subsidiary, AWS Wireless Inc., we participated in the AWS spectrum auction and on September 20, 2006 we were declared the winning bidder for 154 spectrum licenses for an aggregate bid of $115.5 million. Our purchase of the AWS licenses remains subject to FCC approval.

 

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Other FCC Requirements

 

Internet Access Services

 

Internet access services are generally considered “information services,” not “telecommunications services,” and are therefore exempt from common carrier regulation by the FCC. Such services are not, however, without regulatory requirements. Providers of facilities-based broadband Internet access services, and providers of interconnected VoIP services, are required to comply with the Communications Assistance for Law Enforcement Act (“CALEA”). Providers of interconnected VoIP services are also required to comply both with Enhanced 911 (“E911”) regulations, which require routing of 911 calls to geographically appropriate public safety answering points based on the caller’s location, as well as certain Universal Service Fund (“USF”) contribution, reporting and registration obligations. Certain consumer protection regulations may also apply at the state and federal levels. The regulatory treatment of other IP-enabled services, including the remainder of NextWave’s wireless broadband products and services, is presently under consideration by the FCC.

 

Voice over Internet Protocol

 

The FCC has and continues to consider the regulatory status of various forms of VoIP. In 2004, the FCC issued decisions in which it found that: (i) a computer-to-computer VoIP service for which no charge is assessed and conventional telephone numbers are not used, is an unregulated “information service,” rather than a telecommunications service ; and (ii) long distance offerings in which calls originate from and terminate to the ordinary public switched telephone network, using regular telephones, but are transmitted in part through the use of IP, are “telecommunications services,” thereby rendering such services subject to the payment of access charges. The FCC also preempted states from exercising entry and related economic regulation of VoIP services that require the use of specialized end user equipment to send/receive calls over a broadband connection to the Internet, and use North American Numbering Plan (NANP) numbers as the identification mechanism for the user’s IP address (such that the NANP number is not necessarily tied to the user’s physical location for either assignment or use). This ruling did not address specifically whether this form of VoIP is an “information service” or a “telecommunications service,” or what regulatory obligations, such as intercarrier compensation, should apply. In 2005, as detailed herein, the FCC subjected "interconnected VoIP" service providers to Enhanced 911 and Communications Assistance for Law Enforcement Act obligations. In 2006, also detailed herein, the FCC subjected “interconnected VoIP” service providers to certain USF contribution, reporting, registration and contribution obligations. Issues surrounding whether or how VoIP offerings should be regulated, including whether they should pay access charges, along with the regulatory treatment of other IP-enabled services, is presently under consideration by the FCC.  

 

E911 Services

 

The FCC has adopted E911 obligations that apply to broadband service providers that offer interconnected VoIP service to end users. E911 systems route 911 calls to a geographically appropriate public safety answering point based on the caller’s location. Unlike basic 911, which merely connects the caller with public safety entities, E911 provides public safety entities with the caller’s call back number and in many cases location information. The FCC order establishing this obligation was not clear as to whether the obligation, which has been effective since November 28, 2005, applies to both wholesale and retail providers of interconnected VoIP service. The obligation can be met through contracting with third parties or purchasing tariffed E911 services from local exchange carriers. There is also pending an FCC proceeding in which the FCC is examining whether to apply a range of additional E911 requirements to interconnected VoIP providers.

 

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CALEA Requirements

 

Providers of interconnected VoIP and facilities-based broadband Internet access providers are subject to the requirements set forth in CALEA. CALEA requires that our equipment, facilities and services allow for lawfully authorized electronic surveillance by law enforcement agencies based on either industry or FCC standards. In September 2005, the FCC extended CALEA obligations to facilities-based broadband Internet access providers and to interconnected VoIP providers, whether wireline or wireless. The FCC has pending a range of issues involving CALEA, including CALEA compliance extensions and exemptions, cost recovery issues, identification of future services and entities subject to CALEA, and enforcement matters.

 

Universal Service Fund 

 

In 2006, the FCC established USF contribution, reporting and registration obligations for providers of interconnected VoIP. The USF contribution obligation is based upon the portion of revenues derived from “telecommunications” service and the end-user telecommunications revenues derived from interstate and international traffic. The FCC rules provide various mechanisms for determining the contribution figure. Some aspects of these contribution rules, as applied to providers of interconnected VoIP service, are the subject of a pending challenge in federal court. Interconnected VoIP service providers also will be subject to the same USF reporting procedures that apply to all other providers of interstate and international telecommunications. These reporting procedures involve quarterly reporting of the gross projected billed and collected end-user interstate and international revenues as well as annual reporting of actual gross-billed and collected end-user interstate and international revenues. Under the FCC rules, providers of interstate and international telecommunications whose annual USF contribution are expected to be less than $10,000 are not required to contribute to the USF, or file quarterly of annual USF reports. All interconnected VoIP providers that have not already registered with the FCC (and designated an agent for service of process) must complete certain registration requirements.

 

Consumer-Related Regulations

 

The FCC is considering whether Internet access services, regardless of the technology used, should be subject to FCC consumer protection regulations. Various states may also exercise authority over terms and conditions of Internet access services, such as certain billing practices and other consumer-related matters. Compliance with additional consumer-related obligations will result in significant additional costs for us.

 

Privacy-Related Regulations

 

In providing NextWave’s suite of wireless broadband products and services to consumers, we may be required to comply with FCC-mandated rules that limit how customer proprietary network information, or CPNI, can be used for marketing purposes, and what we must do to safeguard CPNI. It has recently been reported that the call detail records of both wireline and wireless telephone customers are available from certain Internet-based vendors. Both Congress and state legislatures are considering legislation to criminalize the sale of call detail records and to further restrict the manner in which carriers make such information available. The FCC is investigating these practices and is examining whether existing regulations with respect to CPNI require revision or expansion, which could result in additional costs to us, including administrative or operational burdens on our customer care, sales, marketing and IT systems.

 

Equipment Certification

 

Our equipment must conform to a variety of federal regulations that require compliance with administrative and technical requirements as a condition to marketing devices that emit radio frequency energy.

 

Tower Siting

 

Wireless systems must comply with various federal, state and local regulations that govern the siting, marking, lighting and construction of transmitter towers and antennas, including regulations promulgated by the FCC and Federal Aviation Administration, or FAA. FCC rules subject certain tower locations to environmental and historic preservation statutory requirements. To the extent governmental agencies impose additional requirements on the tower siting process, the time and cost to construct and deploy towers could be negatively impacted. The FAA has proposed modifications to its rules that would impose certain notification requirements upon entities seeking to (i) construct or modify any tower or transmitting structure located within certain proximity parameters of any airport or heliport, and/or (ii) contruct or modify transmission facilities using the 2500-2700 MHz radiofrequency band, which encompasses virtually all of the BRS/EBS frequency band. If adopted, these requirements could impose new administrative burdens upon users of BRS/EBS spectrum.

 

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E-waste legislation

 

Electronics waste laws, also known as “E-waste” laws, went into effect July 1, 2006 in California, China, Japan and the European Union (“EU”) and require electronics developers, manufacturers and distributors to eliminate hazardous substances,   such as lead and mercury, in their products and to participate in, and finance, the recycling of E-waste. Congress is considering national legislation that would override state E-waste laws and provide for more consistent application of E-waste standards.

 

Employees

 

As of December 1, 2006 we had 497 full-time employees, including 211 in our Advanced Technology Group, 41 in our Network Solutions Group, 180 in PacketVideo and 65 in corporate operations and administration. We are not subject to any collective bargaining agreements and believe that our relationship with our employees is good.

 

Our History

 

NextWave Telecom and the PCS Business

 

Old NextWave Wireless was formed in 1996 as a wholly owned operating subsidiary of NextWave Telecom, Inc. (“NTI”), which sought to develop a nationwide CDMA-based PCS network. In 1998, Old NextWave Wireless, together with NTI and its other subsidiaries (the “NextWave Telecom group”), filed for protection under Chapter 11 of the United States Bankruptcy Code. During the seven-year pendency of the Chapter 11 case, Old NextWave Wireless continued its involvement in the build-out of NTI’s PCS network. Substantially all of the related assets, except the PCS licenses, were abandoned when NTI was sold to Verizon Wireless as part of the plan of reorganization of the NextWave Telecom group described below.

 

Wireless Broadband Development

 

Although a commercial wireless broadband business was not developed during the pendency of the Chapter 11 case, the vision for our company was created at that time. Beginning in 2003, NTI began to explore opportunities to create the technology for a broadband wireless network utilizing BRS spectrum in the 2.5 GHz frequency range. In late 2003, NTI received authority from the Bankruptcy Court to construct and test a wireless broadband network in the Las Vegas, Nevada metropolitan area. Old NextWave Wireless acquired the rights to 24 MHz of BRS spectrum in Las Vegas and began work on the test network. In 2004, Old NextWave Wireless acquired preferred stock representing a 50% equity interest in CYGNUS Communications, Inc., a company engaged in the development of wireless communications hardware. Among other reasons, to separate the new prospective BRS spectrum wireless technology business from the PCS business of the rest of the NextWave Telecom group, NTI formed a new subsidiary, NextWave Broadband, to be the operating company for the BRS business. The capitalization of a new wireless technology company was discussed with the stakeholders of the NextWave Telecom group and was made part of the plan of reorganization described below.

 

Plan of Reorganization and Verizon Wireless Transaction

 

On March 1, 2005, the Bankruptcy Court confirmed the plan of reorganization of the NextWave Telecom group, including Old NextWave Wireless. In December 2004, Old NextWave Wireless was converted from a corporation to a limited liability company. The plan of reorganization was funded with the proceeds from the sale of NextWave Telecom and its subsidiaries (other than Old NextWave Wireless) to Verizon Wireless for $3.0 billion, in addition to previous PCS spectrum sales to Cingular Wireless, Verizon Wireless and MetroPCS. The plan of reorganization provided for the payment in full of all the creditors of the NextWave Telecom group and the funding of Old NextWave Wireless as a new wireless broadband technology company to be distributed to equityholders, together with an aggregate distribution of $2.6 billion in cash and $149 million principal amount of our Non-Recourse Secured Notes. Prior to the consummation of the plan of reorganization, NTI and its subsidiaries entered into a global settlement agreement with the FCC resolving all outstanding claims of the FCC.

 

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In connection with the sale of NextWave Telecom and its subsidiaries to Verizon Wireless, we agreed to indemnify NextWave Telecom and its subsidiaries against all pre-closing liabilities of NextWave Telecom and its subsidiaries and against any violation of the Bankruptcy Court injunction against persons having claims against NextWave Telecom and its subsidiaries, with no limit on the amount of such indemnity.

 

A total of $165 million was held in escrow (the “Escrow Amount”) in order to satisfy any amounts due to Verizon Wireless in the event that the consolidated net loss of the NextWave Telecom group for the taxable year commencing on January 1, 2005, and ending on April 13, 2005 is, subject to certain adjustments, less than $1.362 billion, to cover any tax deficiencies for the pre-closing tax period, and to cover other indemnifiable losses relating to NextWave Telecom and its subsidiaries, as described above. As part of the plan of reorganization, we issued $149 million of Non-Recourse Secured Notes to the former equityholders of NextWave Telecom. The notes bear no interest and mature on April 13, 2055. Any claims under the notes will only be satisfied by any released Escrow Amount, net of payments due to the FCC.

 

Following the completion of the review by the Internal Revenue Service (the “IRS Review”) of the existence of any consolidated net losses, on December 6, 2006, Verizon and AirTouch Cellular, the assignee of Verizon, entered into an agreement (i) to settle the amounts payable under the Escrow Account as a result of the IRS Review, and (ii) to release the Escrow Amount plus accrued interest on the terms described herein. We are not currently aware of any other indemnifiable losses that remain following the effective date of the sale to Verizon, and Verizon has not made any related claims therefor.

 

As a result, we and AirTouch Cellular agreed that AirTouch Cellular is entitled to receive $6,638,165 of the Escrow Amount. We are entitled to receive approximately $153.85 million of the proceeds from the Escrow Account, including accrued interest. In addition, the Federal Communications Commission ("FCC") is entitled to receive approximately $16.13 million of funds held in escrow, including approximately $823,000 held under a separate escrow, pursuant to a December 2004 stipulation entered into between NextWave and the FCC.

 

Under the terms of the indenture governing the note, the portion of the Escrow Amount that we are entitled to receive must be applied to redeem, pro rata, the notes. Accordingly, the parties have provided that the full amount of the $153.85 million, or approximately 103.5% of the face amount of the notes, will be paid directly into an escrow account that will fund the redemption of the notes.

 

The holders of the notes will receive a notice of redemption from us pursuant to the terms of the indenture governing the notes within 10 business days of the date the Escrow Amount is released. The Indenture requires that holders be given 30 days notice prior to any redemption date. This requirement may be waived by a majority in aggregate principal amount of the notes, and we will provide the opportunity for the holders to provide such a waiver with the notice of redemption.

 

Inception of a Wireless Technology Company

 

The following steps were taken to organize Old NextWave Wireless as a new wireless technology company as part of the plan of reorganization:

 

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The NextWave Telecom group abandoned substantially all of its PCS networks, technology and fixed assets, except the PCS spectrum licenses to be acquired by Verizon Wireless.

 

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NTI and its subsidiaries transferred all of their remaining non-PCS assets to NextWave Broadband, except cash and the PCS spectrum licenses to be acquired by Verizon Wireless. The assets contributed primarily consisted of property and equipment not desired by Verizon Wireless, having a fair market value of less than $10 million.

 

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NextWave Broadband was transferred to Old NextWave Wireless.

 

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Old NextWave Wireless retained its investment in CYGNUS preferred stock and convertible notes, as well as wireless licenses useful for its new technology broadband business with a value of approximately $33.6 million.

 

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NTI and its subsidiaries, including Old NextWave Wireless, obtained an order providing a release of claims pursuant to Section 1141 of the Bankruptcy Code. To the extent that such release did not eliminate all liabilities of the NextWave Telecom group, NextWave Wireless assumed and agreed to indemnify Verizon Wireless against such liabilities.

 

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NTI and its subsidiaries (other than Old NextWave Wireless) were sold to Verizon Wireless for $3.0 billion.

 

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Membership units of NextWave were distributed to the former stockholders of NTI, which distribution was exempt from registration under the Securities Act pursuant to Section 1145 of the Bankruptcy Code. Upon this distribution, on April 13, 2005, Old NextWave Wireless emerged as NextWave Wireless.

 

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Simultaneously with the distribution, NextWave was capitalized with $550 million of cash proceeds from the sale to Verizon Wireless and prior PCS spectrum license sales.

 

·

Pursuant to the plan, the NTI stockholders received the undivided interests in the underlying assets of Old NextWave Wireless as part of their consideration for the redemption of their NTI shares, which was followed by the deemed contribution of these undivided interests to NextWave in return for membership interests in NextWave.

 

Our Recent and Pending Acquisitions

 

Since our emergence as a new wireless technology company, we have made several strategic investments and acquisitions, including most significantly:

 

·

In July 2005 we acquired all of the outstanding shares of PacketVideo Corporation for approximately $46.6 million in cash.

 

·

Since our emergence as a wireless technology company, we have consummated transactions to acquire licensed spectrum rights, including subsequent lease obligations, for amounts totaling $418.8 million, including our acquisition of WCS Wireless Inc., which holds spectrum covering 188.8 million persons, or POPs, in the Central, Western, and Northeastern United States, for $160.5 million. In addition, pursuant to the AWS auction, we were declared the winning bidder for 154 spectrum licenses, which are currently pending approval by the FCC, for an aggregate bid of $115.5 million. If the FCC approves the grant of these licenses, our spectrum portfolio would then cover approximately 247 million persons.

 

Corporate Conversion Merger

 

To enable our planned listing on The Nasdaq Global Market, NextWave Wireless LLC’s Board of Managers and a majority in interest of NextWave Wireless LLC’s members approved the conversion of the Company from a Delaware limited liability company to a Delaware corporation. The corporate conversion was effected on November 13, 2006 through the merger of a wholly owned subsidiary of ours with and into NextWave Wireless LLC. Our common stock is currently quoted on the Over-the-Counter Bulletin Board. We have applied for the listing of our common stock on The Nasdaq Global Market under the symbol “WAVE.” In the merger, NextWave Wireless LLC’s equity holders received one share of our common stock for every six membership interests that they held. No fractional shares of our common stock were issued in connection with the corporate conversion merger. Instead, holders of LLC interests who would otherwise have been entitled to a fraction of a share of common stock were paid cash equal to $1.00 per LLC interest not exchanged for a whole share of our common stock. Each holder of NextWave Wireless LLC’s limited liability interests own the same percentage of the outstanding equity of the Company before and immediately after the corporate conversion merger. In addition, we assumed NextWave Wireless LLC’s obligations under all stock option plans of the Company and its subsidiaries.

 

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Legal Proceedings

 

Proceedings Under Chapter 11 of the Bankruptcy Code

 

On June 8, 1998, NextWave Personal Communications Inc., NextWave Power Partners Inc., NextWave Partners Inc. and Old NextWave Wireless, all direct and indirect wholly-owned subsidiaries of NextWave Telecom Inc., filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. On December 23, 1998, NextWave Telecom Inc. filed its voluntary petition, in order to implement an overall corporate restructuring. On March 1, 2005, the Bankruptcy Court confirmed the Third Joint Plan of Reorganization dated January 21, 2005. The cornerstone of the Plan of Reorganization was the sale of NextWave Telecom and its subsidiaries, excluding Old NextWave Wireless, to Verizon Wireless for approximately $3.0 billion. Pursuant to the Plan of Reorganization, on April 13, 2005, all non-PCS assets and liabilities of the NextWave Telecom group were contributed to Old NextWave Wireless, and Old NextWave Wireless was capitalized with $550 million in cash. Through this process, Old NextWave Wireless was reconstituted as a company with a new capitalization and a new wireless technology business plan. All claims made in connection with the Chapter 11 case have been resolved except for Finney v. NextWave, which is described below. See “Item 1. Business-Our History”

 

Finney v. NextWave

 

United States ex rel. Finney v. NextWave Telecom Inc. is a qui tam action filed in federal court in the Southern District of New York, with a corresponding administrative claim in bankruptcy court. Finney (the relator) alleges principally that NTI and other defendants, including NextWave Wireless, failed to disclose the existence of a federal statute - the Federal Credit Reform Act - to various agencies of the federal government and to the federal courts. She asserts that decisions issued by the bankruptcy court, the U.S. Court of Appeals for the D.C. Circuit, and the Supreme Court of the United States in connection with the NextWave Telecom group’s reorganization efforts were all flawed because they overlooked the relevance of that statute. She alleges that NTI and the other defendants should be held liable because it failed to bring the statute to the attention of these government agencies and courts and seeks damages of more than $9 billion.

 

The defendants filed a motion to dismiss on numerous grounds, including that the government was well aware of the existence of the Act, that it is not a false claim to fail to inform the government of the existence of a federal statute, that Finney’s claim was effectively a collateral challenge to the decisions of the bankruptcy court and the Supreme Court, and that the action is barred by virtue of the Global Settlement with the FCC and the consummation of the Verizon Wireless acquisition and the bankruptcy reorganization.

 

On February 24, 2006, the district court issued an order adopting the defendants’ principal arguments and proposing to dismiss the complaint in its entirety. Prior to dismissing, the district court asked the United States for its consent, and, on March 2, 2006, the United States consented to dismissal. On April 21, 2006, the District Court ruled that defendants were entitled to an award of legal fees. The court has referred the matter to a Magistrate to fix the amount of the fee award. Finney has now filed a notice of appeal to the United States Court of Appeals for the Second Circuit.

 

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On or about October 31, 2006, the parties entered into a settlement agreement that provides for the dismissal with prejudice of Finney’s Second Circuit appeal in exchange for Old NextWave’s agreement to reimburse $350,000 of Finney’s legal fees. Under the settlement agreement, which provides for mutual releases resolving all disputes between the parties, the parties also agreed to file a joint motion with the District Court that would dismiss the case with prejudice, vacate the dismissal order, and waive Defendants right to attorneys fees under the Court’s fee award. The United States has given its consent to the dismissal with prejudice and the payment of legal fees. The settlement was presented to the Bankruptcy Court for approval and dismissal of all claims alleged by Finney on November 1, 2006. We expect that the settlement will be approved on November 9, 2006. Following approval of the settlement agreement by the Bankruptcy Court, the parties will file the dismissal papers with the Second Circuit and the District Court. The $350,000 payment of attorneys fees will be made from funds reserved under Old NextWave Wireless’s chapter 11 plan for the payment of administrative claims and other expenses and, therefore, does not have any impact on NextWave’s consolidated balance sheets or consolidated statements of operations.

 

Other Litigation

 

We are currently a party to various other legal proceedings that arise in the ordinary course of our business. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flows or overall trends in results of operations, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. For example, we are currently engaged in a dispute relating to a lease of EBS spectrum covering approximately 1 million POPs in the Toms River, New Jersey geographic area. The lessor has claimed that we are in breach of the terms of the lease and that the lease has been terminated. We believe that these claims are without merit, and, in any event, any adverse resolution would not have a material adverse effect on our business, results of operations or financial condition.

 

Properties

 

We lease three facilities in the San Diego area, including our principal executive offices, containing an aggregate of 92,347 square feet. The terms of two of these leases include options to extend and the third does not expire until 2010. We also lease two locations in Henderson, Nevada. We plan to replace those leased facilities with an owned 30,000 square foot facility that is currently being constructed. We maintain other leased offices in various locations that are not material.

 

We believe that our properties are adequate for our business as presently conducted.

 

Available Information

 

We are a reporting registrant under the Securities Exchange Act of 1934, as amended. Our principal executive offices are located at 12670 High Bluff Drive, San Diego, California 92130. The telephone number of our principal executive offices is (858) 480-3100. Our website address is http://www.nextwave.com. The information included on our website is not included as a part of, or incorporated by reference into, this registration statement.

 

We will make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we have filed or furnished such material to the Securities and Exchange Commission.

 

You may read and copy any materials we file with the SEC at the SEC’s Public Reference room at 100 F Street., NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by call the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and formation statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

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MANAGEMENT

 

Our Directors and Executive Officers

 

The following table sets forth names, ages and positions of the persons who are our directors and executive officers as of December 1, 2006. NextWave has a classified board of directors. The board is divided into three classes, with one class standing for election each year for three-year terms and until successors of such class have been elected and qualified. The term of the Class I Directors expires in 2007; the term of the Class II Directors expires in 2008; and the term of the Class III Directors expires in 2009. Each class is as nearly equal in numbers as possible.

 

Name		Age		Position
Allen Salmasi		52		Chairman of the Board of Director, Class III Director, Chief Executive Officer and President
Frank A. Cassou		49		Executive Vice President - Corporate Development and Chief Legal Counsel, Secretary, Class I Director
George C. Alex		46		Executive Vice President - Chief Financial Officer
Roy D. Berger		48		Executive Vice President - Chief Marketing Officer
Kevin M. Finn		65		Executive Vice President - Chief Compliance Officer, Class II Director
Mark Kelley		46		Executive Vice President - Chief Division Officer
Richard Kornfeld		46		Executive Vice President - Chief Strategy Officer
Jim Madsen		46		Executive Vice President - Chief Business Development Officer
David B. Needham		49		President, Network Solutions Group
R. Andrew Salony		54		Executive Vice President - Chief Administration Officer
Kenneth Stanwood		45		President and Chief Executive Officer - CYGNUS Communications
Lindsay A. (Butch) Weaver, Jr.		53		Executive Vice President and Fellow
Douglas F. Manchester (1)(2)(3)		64		Class III Director
Jack Rosen (3)		60		Class II Director
Robert T. Symington (1)(2)		42		Class III Director
William H. Webster (1)(2)(3)		82		Class I Director

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Nominating and Corporate Governance Committee.

Allen Salmasi has served as our Chairman of the Board, Chief Executive Officer and President since our inception. Previously, Mr. Salmasi served as Chairman and CEO of NTI, which he founded in 1995 and subsequently sold to Verizon Wireless in 2005. Prior to NTI, Mr. Salmasi was a member of the Board of Directors, President of the Wireless Telecommunications Division, and Chief Strategic Officer of QUALCOMM Inc. He joined QUALCOMM in 1988 as a result of the merger of QUALCOMM and Omninet Corporation, which Mr. Salmasi founded in 1984. He initiated and led the development of CDMA technologies, standards and the associated businesses at QUALCOMM until 1995. At Omninet, he conceived and led the development of the first OmniTRACS system, which provides two-way messaging and position reporting services to mobile users. From 1979 to 1984, Mr. Salmasi held several technical and management positions at the National Aeronautics and Space Administration Jet Propulsion Laboratory. Mr. Salmasi received two B.S. degrees in Electrical Engineering and Management Economics from Purdue University in 1977. He received his M.S. degrees in Electrical Engineering from Purdue University in 1979 and Applied Mathematics from the University of Southern California in 1983, respectively. He completed his course work at the University of Southern California towards a Ph.D. degree in Electrical Engineering.

 

Frank A. Cassou is our Executive Vice President, Corporate Development and Chief Legal Counsel and our Secretary. Mr. Cassou held similar positions at NTI, which he joined in 1996. Mr. Cassou has served as a Director since our inception. Prior to joining NextWave, Mr. Cassou was a partner at the law firm of Cooley Godward LLP, where he practiced corporate law representing telecommunications and technology companies. He was outside corporate counsel to QUALCOMM from June 1991 through February 1996, representing the company in its public financing and acquisition transactions, licensing agreements and the formation of strategic partnerships.

 

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George C. Alex serves as our Chief Financial Officer. Mr. Alex joined NextWave Telecom in 2001 as Senior Vice President, Finance. Formerly, he was Chief Financial Officer of Network Plus Corp., an integrated communications provider and a Managing Director of Prudential Securities, where he headed the telecommunications practice. During his career as an investment banker, Mr. Alex completed transactions that raised more than $20 billion for his clients and executed M&A assignments in excess of $6 billion.

 

Roy D. Berger serves as our Chief Marketing and Corporate Communications Officer. Mr. Berger joined NTI in 1996 as Vice President, Business Planning and subsequently served in a number of executive marketing and business development positions. Prior to joining NextWave, Mr. Berger spent ten years at NYNEX, where he held senior management positions in both the telecommunications and computer retailing/distribution divisions, including Vice President-Personal Communication Services and Vice President-Marketing for NYNEX Mobile Communications. Before joining NYNEX, Mr. Berger held senior management positions with several leading companies in the personal computer retailing industry.

 

Kevin M. Finn serves as our Chief Compliance Officer and as a Director. Mr. Finn joined NTI in 1995 where he was formerly Senior Vice President, Special Projects. From 1992 until 1995, Mr. Finn served as President of Marin-Finn Industries, Inc. Prior to that, he served as Vice President and General Manager of Densitron Technology plc., and from 1986 to 1988, Mr. Finn was Executive Vice President of Omninet Inc. Mr. Finn was a Vice President of Sony Corporation of America and General Manager of its Component Products Division from 1983 to 1987.

 

Mark Kelley serves as the Chief Division Officer of NextWave Broadband’s Advanced Technology Group. Mr. Kelley has more than 25 years experience in engineering, communication systems planning and analysis. Prior to joining NextWave in 2005, Mr. Kelley was Chief Technical Officer of Leap Wireless. Formerly, he served as Vice President of Wireless System Design for QUALCOMM, where he was responsible for all wireless infrastructure system design activities, including radio and fixed network system planning, project engineering and the development of QUALCOMM’s commercial CDMA network planning software product. As a Director of Planning for Wireless Design Firm LLC, Mr. Kelley led the design of the world’s first GSM system in Germany. Earlier in his career, Mr. Kelley developed custom ASICs at Hughes Microelectronics. Mr. Kelley holds a Bachelor of Science degree in Electrical Engineering from San Diego State University.

 

Richard Kornfeld serves as our Chief Strategy Officer. Before joining us, Mr. Kornfeld was the CEO of Staccato Communications, Inc. Prior to this, Mr. Kornfeld was the Vice President and General Manager of Texas Instruments’ Wireless Center responsible for the Wireless Chipset Business. He joined Texas Instruments through the acquisition of Dot Wireless, Inc., which he co-founded and served as the Chairman, CEO and President. Prior to founding Dot Wireless, Mr. Kornfeld had been a founding member of NTI, where he was the Senior Vice President and General Manager of the Consumer Products division. Previously, Mr. Kornfeld was Vice President of Engineering at QUALCOMM, Inc. During his 10-year tenure, he helped QUALCOMM grow from a 20-person startup to a world leader in telecommunications, currently employing more than 7,000 people. Prior to QUALCOMM, Mr. Kornfeld held various technical positions at M/A-Com Linkabit. Mr. Kornfeld is a graduate from the School of Engineering, University of California.

 

Jim Madsen serves as our Chief Business Development Officer. Formerly, Mr. Madsen held several executive management positions at NTI which he co-founded in 1995. From 1989 to 1995, at QUALCOMM, Mr. Madsen headed CDMA Business Development where he led the company’s PCS business development, marketing and sales initiatives, and also served as Director of Marketing for OmniTRACS’ satellite data communications business and was responsible for worldwide VLSI components business development and marketing. Mr. Madsen earned his S.B. in mechanical engineering from the Massachusetts Institute of Technology and his M.B.A. from Stanford University.

 

David B. Needham is the President of NextWave Broadband’s Network Solutions Group. He was formerly the Chief Operating Officer for NTI and has been with NextWave since 1996. Prior to joining NextWave, Mr. Needham served as President and Chief Operating Officer of GE Capital-ResCom. From 1992 to 1994, Mr. Needham served as President of MetroCel Cellular Telephone Company, a joint-venture cellular telecommunications company owned by AT&T Wireless and Airtouch Communications serving the Dallas-Fort Worth area. While at MetroCel, Mr. Needham led the development and commercial launch of Voice Touch, the wireless industry’s first voice-activated switch product, and MetroCel Connect, one of the first wireless direction and information services. From 1989 to 1991, Mr. Needham served as District General Manager for the California Valley and Nevada cellular operations of McCaw Cellular Communications. Mr. Needham earned a Bachelor of Arts degree from Harvard University and a Masters in Business Administration from Harvard Business School.

 

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R. Andrew Salony is our Chief Administrative Officer and is responsible for Corporate Planning, Administration and Human Resources. Since joining NTI in 1996, Mr. Salony has served in numerous executive management roles, including Senior Vice President of Marketing, Strategy, Business Development and Human Resources. Prior to his tenure at NextWave, Mr. Salony was a Senior Partner and Managing Director of the wireless division at Warren, Morris and Madison Ltd., a leading boutique executive search firm specializing in telecommunications and entertainment. He began his wireless telecommunications career in 1982 with Communication Industries, where he held executive positions in sales, marketing and general management in the company’s cellular and paging operations. Mr. Salony remained with the company—which was sold to US West in 1986—until 1993, serving as General Manager of the Southern California Region.

 

Kenneth Stanwood serves as President and Chief Executive Officer of CYGNUS Communications. He was previously CTO of Ensemble Communications which produced LMDS equipment and provided key technology to 802.16 and WiMAX. As a representative of Ensemble, he was one of the founders of the WiMAX Forum and served on its board of directors. Ken served as vice-chair of IEEE 802.16 for three years and has been involved with 802.16 and ETSI BRAN for over 7 years. He was a primary designer of the 802.16 MAC layer. He holds 13 patents and numerous patent applications, all related to broadband wireless access. He received his MS degree from Stanford University.

 

Lindsay A. (Butch) Weaver, Jr. serves as Executive Vice President and Fellow. Mr. Weaver joined QUALCOMM in January 1986. Immediately prior to joining NextWave , Butch Weaver served as Executive Vice President - Engineering of QUALCOMM and one of five QUALCOMM Fellows. Over the last twenty years, his responsibilities at QUALCOMM included leading the development of the OmniTRACS system, leading the development of the CDMA-based wireless technology, and co-leading the overall Engineering Department. Prior to joining QUALCOMM, Mr. Weaver held positions of Engineer through Assistant Vice President at Linkabit. While at Linkabit, he led many developments including the VideoCipher system that enabled the first retail satellite TV distribution in the U.S. He holds over 50 U.S. Patents in areas ranging from CDMA cellular system design to digital frequency synthesizers. Mr. Weaver graduated from MIT with his Bachelors and Masters Degrees in Electrical Engineering and Computer Science.

 

Douglas F. Manchester has served on our Board of Directors since our inception. He is also chairman of Manchester Financial Group, LP. Douglas Manchester (Papa Doug) is one of San Diego’s leading private developers.

 

Jack Rosen has served on our Board of Directors since our inception. Mr. Rosen is chief executive of several commercial and residential real estate firms and the current Chairman of the American Jewish Congress. In addition, Mr. Rosen oversees a wide array of healthcare, cosmetic and telecommunications business ventures throughout the US, Europe and Asia. Active in international government and political affairs, Mr. Rosen has participated in numerous commissions and councils for President Bush and former President Clinton. Mr. Rosen is currently a member of the Council on Foreign Relations and the U.S.-Israel Bi-National Commission on Housing and Community Development.

 

Robert T. Symington has served on our Board of Directors since our inception. Mr. Symington is a Portfolio Manager at Avenue Capital Group. Mr. Symington, through his prior management positions at M.D. Sass and Resurgence Asset Management, was an early investor in NTI. He earned his Bachelor of Arts in English Literature from Dickinson College and his M.B.A. in Finance and Accounting from Cornell University’s Johnson Graduate School of Management.

 

William H. Webster has served on our Board of Directors since our inception. Judge Webster is a consulting partner in Milbank, Tweed, Hadley & McCloy LLP’s Washington office, where he specializes in arbitration, mediation and internal investigation. Prior to joining Milbank in 1991, Judge Webster began a long and illustrious career in public service. Judge Webster was U.S. Attorney for the Eastern District of Missouri, then a member of the Missouri Board of Law Examiners. In 1970, he was appointed a judge of the U.S. District Court for the Eastern District of Missouri, and then elevated to the U.S. Court of Appeals for the Eighth Circuit. Judge Webster resigned the judgeship to head the Federal Bureau of Investigation. In 1987, he was sworn in as Director of the Central Intelligence Agency. He led the CIA until his retirement from public office in 1991. Judge Webster has received numerous awards for public service and law enforcement and holds honorary degrees from several colleges and universities. Judge Webster currently serves as Vice Chairman of the Homeland Security Advisory Council.

 

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Indemnification of Directors and Officers

 

We have adopted provisions in our certificate of incorporation and bylaws that limit the liability of our directors and officers for any loss, claim or damage incurred by reason of any act or omission performed or omitted by such person on our behalf and in good faith and in a manner reasonably believed to be within the scope of the authority conferred on such person by our bylaws. However, a director or officer will be liable (i) for any breach of such individual’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not performed or omitted in good faith or involved intentional misconduct or a knowing violation of the law; (iii) for unlawful payments of a dividend or unlawful stock purchases or redemptions under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which such person received an improper personal benefit.

 

To the extent not prohibited by law, we will advance the costs incurred by or on behalf of any director or officer in connection with any indemnified loss within 20 days after we receive a detailed statement providing reasonable documentation of such costs and providing a written undertaking stating that such person will repay all advanced costs if it is later determined that such individual was entitled to indemnification by us. We believe that the limitation of liability provision in our bylaws will facilitate our ability to continue to attract and retain qualified individuals to serve as managers and officers.

 

Family Relationships

 

There are no family relationships between or among any of our directors and executive officers.

 

Committees of the Board of Directors

 

Our board of directors has three standing committees: the audit committee, the nominating and corporate governance committee and the compensation committee.

 

The primary purpose of the audit committee is to:

 

·

assist the board’s oversight of:

 

·

the integrity of our financial statements;

 

·

our compliance with legal and regulatory requirements;

 

·

the application of our codes of conduct and ethics as established by the board of directors;

 

·

our independent auditors’ qualifications, engagement, compensation and performance, their conduct of the annual audit of our financial statements, and their engagement to provide any other services; and

 

·

the performance of our system of internal controls;

 

·

prepare the report required to be prepared by the committee pursuant to SEC rules; and

 

·

maintain and oversee procedures for addressing complaints about accounting matters.

 

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Messrs. Manchester, Symington and Webster serve on the audit committee. Mr. Manchester serves as chairman of the audit committee. Mr. Symington qualifies as an independent “audit committee financial expert” as such term has been defined by the SEC in Item 401(h)(2) of Regulation S-K. In accordance with the rules of Nasdaq and the relevant federal securities laws and regulations, each member of our audit committee is independent within the meaning of such rules.

 

The primary purpose of the nominating and corporate governance committee is to:

 

·

identify and to recommend to the board individuals qualified to serve as directors of our company and on committees of the board;

 

·

review corporate governance on a regular basis;

 

·

review and recommend changes to the size of the Board;

 

·

review the manner in which conflicts of interest are addressed; and

 

·

recommend to the Board any changes in director compensation.

 

Messrs. Manchester, Rosen and Webster serve on the nominating and corporate governance committee. Mr. Webster serves as the chairman of the nominating and corporate governance committee. Each member of the nominating and corporate governance committee is independent within the meaning of the rules of Nasdaq and the relevant federal securities laws and regulations.

 

The primary purpose of the compensation committee is to:

 

·

review CEO and other executive officer compensation at least annually;

 

·

review and approve any annual performance objectives;

 

·

review and recommend to the Board equity based plans and review all grants under such plans;

 

·

review any employee retirement or other benefit plans and recommend any desired changes to the Board; and

 

·

prepare the annual report on compensation to be included in the proxy statement.

 

Messrs. Manchester, Symington and Webster serve on the compensation committee. Mr. Symington serves as chairman of the compensation committee. Each member of the compensation committee is independent within the meaning of the rules of Nasdaq and the relevant federal securities laws and regulations.

 

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EXECUTIVE COMPENSATION

The following table presents information regarding compensation paid by us from inception (April 13, 2005) during the fiscal year ended December 31, 2005 to our Chief Executive Officer and each of our other six most highly compensated executive officers during our most recently completed fiscal year. These executives, together with Allen Salmasi, are referred to as the “named executive officers” elsewhere in this registration statement.

 

					Annual Compensation									Long-Term Compensation
Name and Principal Position		Year			Salary ($)			Bonus ($)			Other Annual Compensation ($) (1)			Awards
														Securities Underlying Options/SARs (#)
Allen Salmasi, Chief Executive Officer			2005			399,577			—			—			416,666
Frank A. Cassou, Chief Legal Counsel			2005			274,095			—			—			333,333
George C. Alex, Chief Financial Officer			2005			193,008			—			—			250,000
R. Andrew Salony, Chief Administration Officer			2005			188,237			—			26,281			250,000
Roy D. Berger, Chief Marketing Officer			2005			186,287			—			—			250,000
Jim Madsen, Chief Business Development Officer			2005			186,287			—			—			250,000
David B. Needham, Chief Division Officer			2005			186,287			—			26,048			250,000

(1)	Amounts shown in this column represent housing and car allowances paid to the named executive officers in connection with temporary relocations.

 

Stock Option Grants in Fiscal 2005

 

The following table sets forth information regarding stock options granted for the named executive officers during the fiscal year ended December 31, 2005.

 

Individual Grants
Name		Number of Securities Underlying Options/SARs Granted (#) (1)			% of Total Options/SARs Granted to Employees in Fiscal 2005			Exercise or Base Price ($/Sh)			Expiration Date			Grant Date Present Value ($) (2)
Allen Salmasi			416,666			6.9		$	6.00			4/12/15			259,500
Frank A. Cassou			333,333			5.5		$	6.00			4/12/15			207,600
George C. Alex			250,000			4.1		$	6.00			4/12/15			155,700
R. Andrew Salony			250,000			4.1		$	6.00			4/12/15			155,700
Roy D. Berger			250,000			4.1		$	6.00			4/12/15			155,700
Jim Madsen			250,000			4.1		$	6.00			4/12/15			155,700
David B. Needham			250,000			4.1		$	6.00			4/12/15			155,700

(1)

The options granted to the named executive officers vest in equal monthly installments over four years, with the first monthly vesting occurring May 13, 2005. The options will fully vest on April 13, 2009. In the event of certain changes in control, including in the event we are acquired by merger or asset sale, each option will vest and become exercisable unless the option is assumed or replaced by the acquiring entity. The options are exercisable only by the named executive officers during their lifetime, or by the person to whom their rights pass by will or the laws of descent and distribution. The options are exercisable to purchase shares of NextWave restricted stock, which are subject to forfeiture prior to their vesting.

 

(2)

Based on the grant date present value of $0.1038 per option share which was derived using the Black-Scholes option model, which is not intended to forecast future appreciation of our common share price. The Black-Scholes model was used with the following assumptions: dividend yield of 0%; expected volatility of 0%; risk-free interest rate of 3.71%; and expected lives of 2.9 years.

 

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Option Exercises in 2005 and Year-End Option Values

 

The following table sets forth the number of shares of common stock subject to stock options and/or SARs and the value of such options held by each of our named executive officers as of December 31, 2005.

 

Aggregated Option/SAR Exercises in Last Fiscal Year

and FY-End Option/SAR Values

 

								Number of Securities Underlying Unexercised Options/SARs at FY-End (#):						Value of Unexercised In-the-Money Options/SARs at FY-END($):
Name		Shares Acquired on Exercise (#)			Value Realized ($)			Exercisable			Unexercisable			Exercisable			Unexercisable
Allen Salmasi,			-			-			69,444			347,222			-			-
Frank A. Cassou,			-			-			55,555			277,777			-			-
George C. Alex,			-			-			41,666			208,333			-			-
R. Andrew Salony			-			-			41,666			208,333			-			-
Roy D. Berger,			-			-			41,666			208,333			-			-
Jim Madsen			-			-			41,666			208,333			-			-
David B. Needham			-			-			41,666			208,333			-			-

Equity Incentive Plans

 

Below is a summary of NextWave Wireless Inc.’s equity incentive plans. As a result of the corporate conversion merger, NextWave Wireless LLC and CYGNUS Communications, Inc. became our wholly owned subsidiaries and we assumed the obligation of NextWave Wireless LLC to issue its equity securities pursuant to the Stock Incentive Plan (formerly known as the NextWave Wireless LLC 2005 Units Plan) and the CYGNUS Plan.

 

2005 Stock Incentive Plan

 

Purpose

 

The NextWave Wireless Inc. 2005 Stock Incentive Plan (the “Plan”) is intended to promote the interests of our company by encouraging our officers, employees, non-employee directors and consultants by providing them with opportunities to acquire or increase their equity interests and to develop a sense of proprietorship in our development and financial success.

 

Shares Available

 

The Plan makes available for Awards an aggregate of 12,500,000 shares of common stock, subject to certain adjustments. If an Award is cancelled, expires, reacquired by the Company pursuant to any forfeit or otherwise terminated, in whole or in part, any rights to acquire the shares allocable to the unexercised or unvested portion of such Award will again be available for the purposes of the Plan. If a participant pays for any Award through the delivery of previously acquired shares, the number of shares available shall be increased by the number of shares delivered by the participant. Any shares delivered pursuant to an Award may only be authorized and unissued shares and, unless permitted under Delaware law, may not be treasury shares. No fractional shares shall be issued under the Plan.

 

Eligibility for Participation

 

Employees, directors and consultants to us or any of our affiliates are eligible to participate in the Plan. The selection of participants is within the sole discretion of our Compensation Committee.

 

Administration

 

The Plan is administered by the Compensation Committee. Grants of Awards to members of the Compensation Committee must be ratified by the board of directors. The Compensation Committee has full power and authority under the plan to: (i) designate participants; (ii) determine the type of Awards to be granted to a participant; (iii) determine the number of shares to be covered by in connection with an Award; (iv) determine the terms and conditions of any Award; (v) determine under what circumstances Awards may be settled, exercised, canceled or forfeited; (vi) determine whether other amounts payable with respect to an Award should be deferred either automatically, at the election of the holder or of the Compensation Committee; (vii) interpret and administer the Plan; (viii) establish or waive such rules and regulations and appoint agents for the proper administration of the Plan; and (ix) make any other determination and take any other action it deems necessary or desirable for the administration of the Plan.

 

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Types of Awards

 

The Plan provides for the grant of any or all of the following types of benefits: (1) options, including nonqualified stock options; (2) restricted shares; (3) performance awards; (4) bonus shares; (5) phantom shares; and (6) other share-based awards (collectively, “Awards”). Awards may be granted singly or in combination as determined by the Compensation Committee. As of the date of this registration statement, the Compensation Committee has only granted options to purchase common stock under the Plan and has not utilized any other form of equity-based grant.

 

Under the Plan, the Compensation Committee may grant Awards in the form of options to purchase shares of common stock, which may be nonqualified options. The Compensation Committee has discretion to determine the participants and number of shares subject to the option, the time and method of the option’s exercise, and the exercise price per share subject to the option; however, the exercise price shall not be less than 100% of the “Fair Market Value” of a share of common stock on the date the option is granted. For purposes of the Plan, “Fair Market Value” means the closing sale price of a share of common stock on the applicable date (or on the last preceding trading date if the shares were not traded on such date) as reported in The Wall Street Journal, or other reporting service approved by the Compensation Committee. If our common stock is not publicly tradable at the time a determination of its Fair Market Value is required to be made, Fair Market Value shall be determined in good faith by the Compensation Committee.

 

The Plan also authorizes the Compensation Committee to grant restricted shares. A restricted share is a common stock award prior to the lapse of restriction thereon, which shall not be less than three years. Expect as otherwise determined by the Compensation Committee or the terms of the award that created the restricted share, if a participant’s employment is terminated during the applicable restricted period, all restricted shares will be forfeited by the participant and reacquired by the company. Once the applicable restrictions have lapsed or otherwise been satisfied, the Compensation Committee shall promptly issue the holder of the restricted shares unrestricted shares.

 

Compensation Committee Interlocks and Insider Participation

 

Our compensation committee is comprised of Messrs. Manchester, Symington and Webster. None of the members of our compensation committee have at any time been one of our officers or employees. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. Mr. Symington was appointed to the compensation committee on April 27, 2006, replacing Mr. Salmasi, who resigned in connection with the Company’s registration of its securities under the Securities Exchange Act of 1934. From our inception on April 13, 2005 to April 27, 2006, Allen Salmasi, our Chairman and Chief Executive Officer, was a member of the compensation committee.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On July 18, 2005, NextWave issued options to purchase 500,000 LLC interests to Manchester Financial Group LP (“Manchester Financial”) as consideration for services rendered in connection with NextWave’s acquisition of certain licensed spectrum leases. The options were exercised on July 10, 2006 at an exercise price of $1.00 per interest. Douglas (Papa Doug) Manchester, a member of our Board of Directors, is the controlling shareholder of the general partner of Manchester Financial.

 

Code of Business Conduct and Ethics

 

Our Board of Directors has adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees. A copy of our Code of Business Conduct and Ethics   is available on our website at www.nextwave.com. We will also provide a copy of our Code of Business Conduct and Ethics, without charge, to any stockholder who so requests in writing.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth certain information regarding the beneficial ownership of our outstanding common stock by:

 

·

each person or entity known to beneficially own more than 5% of our outstanding common stock;

 

·

each of our directors and executive officers; and

 

·

all of our directors and executive officers as a group.

 

Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. The table also includes the number of shares underlying options and warrants that are exercisable within 60 days. Shares subject to these options and warrants are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding such options or warrants, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person. Immediately after giving effect to the corporate conversion merger, there will be 82,207,649 shares outstanding held by approximately 1,400 holders of record.

 

Except as otherwise indicated, the persons named in the table below have sole voting and investment power with respect to all shares held by them. Unless otherwise indicated, the address for each executive officer and director listed below is c/o NextWave Wireless Inc., 12670 High Bluff Drive, San Diego, California 92130.

 

		Securities Beneficially Owned
Name and Address of Beneficial Owner		Shares Beneficially Owned			Percentage of Shares Outstanding
Principal Securityholders:
Navation (1)			15,093,874			18.4	%
Manchester Financial Group, LP (2)			9,641,530			11.7	%
Resurgence Asset Management (3)			4,718,847			5.7	%
Midtown Acquisitions LLC (4)			4,590,373			5.6	%
Directors and Executive Officers:
Allen Salmasi (5)			23,963,967			29.1	%
Frank A. Cassou (6)			3,785,328			4.6	%
George C. Alex (7)			780,932			*
Roy D. Berger (8)			853,994			1.0	%
Kevin M. Finn (9)			1,219,051			1.5	%
Mark Kelley (10)			309,331			*
Richard Kornfeld (11)			268,127			*
Jim Madsen (12)			870,592			1.1	%
David B. Needham (13)			714,073			*
R. Andrew Salony (14)			850,268			1.0	%
Kenneth Stanwood (15)			212,319			*
Lindsay A. (Butch) Weaver, Jr.			0			*
Douglas F. Manchester (16)			9,641,530			11.7	%
Jack Rosen (17)			216,832			*
Robert T. Symington (18)			70,681			*
William H. Webster (19)			166,666			*
All directors and officers as a group (16 persons)			43,923,691			53.6	%

* Represents beneficial ownership of less than 1%.

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(1)	The address for Navation, Inc. is c/o Mr. Alain Tripod, 15, rue Général-Dufour, Case Postale 5556, CH - 1211 Genéve 11, Switzerland.

 

(2)	The address for Manchester Financial Group LP is One Market Place, 33rd Floor, San Diego, California 92101.

 

(3)

Represents shares owned by funds and accounts managed by, or invested side by side with, Resurgence Asset Management, L.L.C. (“RAM”), Resurgence Asset Management International, LLC (“RAMI”), and Re/Enterprise Asset Management, LLC (“REAM”, and together with RAM and RAMI, the “Resurgence Companies”). In their capacity as investment advisors and/or general partners, each of the Resurgence Companies exercises voting and investment power over the shares owned by the funds and accounts managed by each of them, respectively. Each of the Resurgence Companies is owned by M.D. Sass Investors Services, Inc. (“MD Sass”). Martin D. Sass serves as Chairman and Chief Executive Officer of MD Sass and each of the Resurgence Companies. Each of the Resurgence Companies and Mr. Sass disclaim beneficial ownership of the securities owned by the entities they advise. The address of the Resurgence Companies is 10 New King Street, White Plains, NY 10604.

 

(4)

Mr. Thomas L. Kempner, Jr. , Marvin H. Davidson, Stephen M. Dowicz, Scott E. Davidson, Michael J. Leffell, Timothy I. Levart, Robert J. Brivio, Eric P. Epstein, Anthony A. Yoseloff and Avram Z. Friedman have voting and/or investment control over the shares held by Midtown Acquisition LLC. The address for Midtown Acquisition LLC is c/o MH Davidson & Co., 885 Third Avenue, Suite 3300, New York, New York 10022.

 

(5)

Allen Salmasi is Chief Executive Officer of Navation, Inc. Mr. Salmasi may be deemed to beneficially own the shares of common stock held or record by Navation, Inc. Represents shares held by Allen Salmasi directly and indirectly through Navation, Inc. Includes 528,082 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(6)	Includes 387,783 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(7)

Represents shares held by George C. Alex directly and indirectly through each of George C Alex Grantor Retained Annuity Trust and The Alex Family Foundation. Includes 297,772 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(8)	Includes 255,775 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(9)	Represents shares held by Kevin M. Finn directly and indirectly through KFMF Co. Includes 255,775 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(10)	Includes 249,999 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(11)	Includes 250,000 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(12)	Represents shares held by Jim Madsen directly and indirectly through Jarrah Inc. Includes 255,775 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

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(13)	Includes 255,775 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(14)	Includes 255,775 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(15)

Represents shares held by Kenneth Stanwood directly and indirectly through The K&G Stanwood Family Trust. Includes 1.490,037 shares underlying options to purchase CYGNUS common stock, which upon the expected quotation of our common stock on the Over-the-Counter Bulletin Board, will convert into 37,975 shares underlying options to purchase our common stock. Includes 166,544 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(16)

Represents shares held by Douglas F. Manchester directly and indirectly through each of Manchester Financial Group, LP and Manchester Grand Resorts, LP. Includes 250,000 shares underlying options to purchase CYGNUS common stock, which upon the expected quotation of our common stock on the Over-the-Counter Bulletin Board, will convert into 12,743 shares underlying options to purchase our common stock. Includes 71,076 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(17)	Includes 41,666 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(18)	Includes 49,999 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

(19)	Includes 58,333 shares underlying options that are exercisable to purchase restricted stock, which are subject to forfeiture prior to their vesting.

 

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SELLING STOCKHOLDERS

 

The selling stockholders may from time to time offer and sell any or all of the shares of our common stock set forth below pursuant to this prospectus. When we refer to “selling stockholders” in this prospectus, we mean the persons listed in the table below, and the pledges, donees, permitted transferees, assignees, successors and others who later come to hold any of the selling stockholders’ interests in shares of our common stock other than through a public sale.

 

The following table sets forth, as of the date of this prospectus, the name of the selling stockholders for whom we are registering shares for resale to the public, and the number of shares of common stock that each selling stockholder may offer pursuant to this prospectus. Unless otherwise noted, the purchase warrants exercisable for common stock held by the selling stockholders were acquired from us in the private placement that was completed on July 17, 2006. The shares of common stock offered by the selling stockholders were issued pursuant to exemptions from the registration requirements of the Securities Act. The selling stockholders represented to us that they were accredited investors and were acquiring our warrants exercisable for our common stock, for investment and had no present intention of distributing the common stock. We have agreed to file a registration statement covering the common stock received by the selling stockholders. We have filed with the Securities and Exchange Commission, under the Securities Act, a Registration Statement on Form S-1 with respect to the resale of the common stock from time to time by the selling stockholders, and this prospectus forms a part of that registration statement. The purchasers were investment funds and other institutional investors, including affiliates of Avenue Capital Group, among others. Robert T. Symington, a member of our Board of Directors, is a Portfolio Manager at Avenue Capital Group. Neither Mr. Symington nor Avenue Capital Group or its affiliates received any compensation in connection with the financing.

 

Based on the information provided to us by the selling stockholders and as of the date the same was provided to us, assuming that the selling stockholders sell all of the shares of our common stock beneficially owned by them that have been registered by us and do not acquire any additional shares during the offering, the selling stockholders will not own any shares other than those appearing in the column entitled “Number of Shares of Common Stock Owned After the Offering.” We cannot advise you as to whether the selling stockholders will in fact sell any or all of such shares of common stock. In addition, the selling stockholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time and from time to time, the shares of our common stock in transactions exempt from the registration requirements of the Securities Act after the date on which it provided the information set forth on the table below.

 

Name of Selling Stockholder

Number of Shares of Common Stock Owned Prior to the Offering

Number of Shares of Common Stock Issued or Issuable Upon the Exercise of Warrants (1)

Total Number of Securities Owned Prior to the Offering

Total Number of Securities Owned Being Registered

Number of Shares of Common Stock Owned After the Offering

Percentage of Common Stock Owned After the Offering (2)

—

—

—

—

—

—

 

(1) Unless otherwise indicated, the warrants represented are exerciseable at $0.01 per share of our common stock.

 

(2) Unless otherwise indicated, assumes that each selling stockholder will resell all of the shares of our common stock offered hereunder. Applicable percentage of ownership is based on 82,207,649 shares of our common stock outstanding as of December 1, 2006, together with securities exerciseable for, or convertible into, shares of common stock within 60 days of December 1, 2006.

 

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DESCRIPTION OF CAPITAL STOCK

 

General

 

As of December 1, 2006, we have 82,207,649 shares of our common stock outstanding held by approximately 1,400 holders of record. Our authorized capital stock consists of 400,000,000 shares of common stock, par value $0.001 per share and 25,000,000 shares of preferred stock, par value $0.001 per share.  The outstanding shares of our common stock will be fully paid and non-assessable. As of December 1, 2006, there are 17,319,249 shares reserved for future issuance, of which 14,873,435 will be reserved for issuance upon the exercise of granted and outstanding options and warrants and 2,445,814 will be available for future option grants. In addition, shares of our common stock have become issuable pursuant to the CYGNUS Plan and the PacketVideo Corporation 2005 Equity Incentive Plan (the “PacketVideo Plan”). See “Subsidiary Option Plans” below.

 

A description of our common stock appears below.

 

Common Stock

 

Dividend Rights. Holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board of directors may determine from time to time

 

Voting Rights. Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our certificate of incorporation. This means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

 

No Preemptive, Conversion or Redemption Rights. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

 

Right to Receive Liquidation Distributions. Upon our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Each outstanding share of common stock is fully paid and nonassessable.

 

Anti-Takeover Effects of Delaware Law and the Certificate of Incorporation and Bylaws of NextWave Wireless Inc.

 

The provisions of Delaware law, as well as our certificate of incorporation and bylaws described below may have the effect of delaying, deferring or discouraging another party from acquiring control of our company.

 

Delaware Law

 

Effective upon the listing of our common stock on The Nasdaq Global Market, our company will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, those provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: the transaction is approved by the board of directors before the date the interested stockholder attained that status; upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or on or after the date the business combination is approved by the board of directors and authorized at a meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

 

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Section 203 defines business combination to include the following: any merger or consolidation involving the corporation and the interested stockholder; any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

 

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons. A Delaware corporation may opt out of this provision either with an express provision in its original certificate of incorporation or in an amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out, and do not currently intend to opt out of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

 

Certificate of Incorporation and Bylaws

 

Our certificate of incorporation and bylaws will provide that:

 

·

our directors serve staggered, three-year terms and accordingly, pursuant to Delaware law, can only be removed with cause;

 

·

no action can be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws, and stockholders may not act by written consent;

 

·

our board of directors will be expressly authorized to make, alter or repeal our bylaws, and our stockholders will be able to make, alter or repeal our bylaws by a vote of 66-2/3% of the issued and outstanding voting shares;

 

·

any vacancies on the board of directors would be filled by a majority vote of the board;

 

·

our board of directors will be authorized to issue preferred stock without stockholder approval; and

 

·

we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.

 

Subsidiary Option Plans

 

After the completion of the corporate merger, 6,629,495 options issued under the CYGNUS Plan were converted into options to purchase shares of our common stock using a ratio of 0.05097 per share of our common stock for each CYGNUS share, subject to adjustment for stock splits and similar events.

 

In connection with our acquisition of PacketVideo, PacketVideo adopted the PacketVideo Plan. The PacketVideo Plan makes up to 11,000,000 shares of PacketVideo common stock available for option and other awards to employees and consultants of PacketVideo. These awards allow employees and consultants of PacketVideo to retain incentives linked directly to PacketVideo’s equity value prior to our consummation of a public offering of our common stock by filing a registration statement on Form S-1 or an equivalent replacement form (an “IPO”). If we consummate an IPO, then each outstanding option issued under the PacketVideo Plan, exercised or not, will be automatically converted into an option to purchase shares of our common stock on a one-for-one basis, subject to adjustment for stock splits and similar events. The shares available for award under the PacketVideo Plan represent up to 16.5% of the fully diluted share capitalization of PacketVideo. If any options awarded under the PacketVideo Plan are exercised prior to the conversion of these options, PacketVideo would no longer be a wholly owned subsidiary. Following an IPO, the terms of converted awards under the PacketVideo Plan will continue to be governed by that plan based on the corporate conversion merger exchange ratio ultimately determined by NextWave Wireless LLC’s Board of Managers.

 

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Nasdaq Global Market Listing

 

We have applied for the listing of our common stock on The Nasdaq Global Market under the symbol “WAVE.”

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

 

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PLAN OF DISTRIBUTION

 

The Selling Stockholders (the “Selling Stockholders”) of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the Over-the-Counter Bulletin Board or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares:

 

·

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchases;

 

·

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

·

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

·

an exchange distribution in accordance with the rules of the applicable exchange;

 

·

privately negotiated transactions;

 

·

settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

 

·

broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

 

·

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

·

a combination of any such methods of sale; or

 

·

any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.

 

In connection with the sale of the common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholders have informed the Company that they do not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups that, in the aggregate, would exceed eight percent (8%).

 

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The Company is required to pay certain fees and expenses incurred by the Company incidental to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Because a Selling Stockholder may be deemed to be an “underwriter” within the meaning of the Securities Act, it will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.

 

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume limitations by reason of Rule 144(k) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

 

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LEGAL MATTERS

 

The validity of the shares of NextWave Wireless Inc. common stock offered hereby will be passed upon for NextWave Wireless Inc. by Weil, Gotshal & Manges LLP, New York, NY.

 

EXPERTS

 

Ernst & Young LLP, independent registered public accounting firm, has audited NextWave Wireless LLC’s consolidated financial statements and schedule at December 31, 2005, and for the period from April 13, 2005 (inception) to December 31, 2005, as set forth in their report. We have included NextWave Wireless LLC’s consolidated financial statements and schedule in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

 

The consolidated balance sheets of PacketVideo Corporation as of December 31, 2004 and 2003 and the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, have been included in the registration statement in reliance upon the report of Moss Adams LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

NextWave Wireless LLC has filed reports and other information with the Securities and Exchange Commission. As of November 13, 2006, we became a SEC reporting company as a successor to NextWave Wireless LLC. Copies of NextWave Wireless LLC’s and our reports and other information may be inspected and copied at the public reference facilities maintained by the SEC at SEC Headquarters, Public Reference Section, 100 F Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.

 

Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Section of the SEC at SEC Headquarters or by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports and other information regarding NextWave Wireless LLC. The address of the SEC website is http://www.sec.gov.

 

You should rely only on the information contained in this prospectus or on information to which NextWave has referred you. We have not authorized anyone else to provide you with any information.

 

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GLOSSARY OF SELECTED WIRELESS TERMINOLOGY

 

802.11 - a.k.a. Wi-Fi

 

802.11, commonly called Wi-Fi, refers to a set of wireless local area network standards developed by working group 11 of the IEEE. 802.11 technologies use an over-the-air interface to connect a device (e.g., Wi-Fi enabled laptop) to a Wi-Fi access point.

 

Access Point

 

A network device, or communication hub, that connects wireless devices to a wired LAN.

 

ASIC

 

Application Specific Integrated Circuit. A chip that is custom designed for a specific application rather than a general-purpose chip such as a microprocessor.

 

Bandwidth

 

In wireless communications, the width or capacity of a communications channel. Analog bandwidth is measured in hertz (Hz). Digital bandwidth is the volume of data that a channel can carry and is measured in bits per second (bps).

 

Base Station - a.k.a. Base Transceiver Station (BTS)

 

Often called a cell tower or a cell site, a base station is a location that establishes and manages radio links between the wireless network and the wireless devices. The base station includes equipment needed to transmit and receive radio signals (transceiver), antennas, and the electronics required to communicate with other network elements

 

Beamforming

 

Beamforming is a signal processing technique that uses arrays of transmitters or receivers to control the directionality of, or sensitivity to, a radio signal in order to improve the performance of a communications channel.

 

Broadband

 

Generic term for a high-speed digital connection. DSL, cable modems, and WiMAX are examples of broadband technologies.

 

CDMA

 

Code Division Multiple Access. A digital wireless technology that works by converting analog information, such as speech, into digital information, which is then transmitted as a radio signal over a wireless network.

 

Channel Card

 

A channel card is the digital basis for a Mobile WiMAX base station (BTS), providing functionality in the air-interface baseband (MAC and PHY) as well as the network-layer protocols required for mobility, security, radio-resource management, quality of service and service-flow management.

 

93

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Digital

 

A form of transmission that transforms analog signals, such as voice, into a series of electrical or optical pulses that represent the binary digits 0 and 1. This numerical data is then converted into various forms depending on the type of network, such as radio waves for wireless transmission, electronic pulses for a wired network or optical light waves for fiber optics.

 

FCC

 

Federal Communications Commission. The U.S. government agency responsible for regulation of the communications industry.

 

Frequency

 

The rate at which an electromagnetic waveform alternates. Usually measured in hertz (Hz), megahertz (MHz) or gigahertz (GHz).

 

GHz

 

Gigahertz. A measure of frequency equal to a billion hertz or a thousand megahertz (MHz). Gigahertz is often used to measure UHF (ultra-high frequency) or to express microprocessor clock speed in some computers.

 

Hot Spot

 

A location, such as a coffee shop, airport or bookstore, where an individual can establish a Wi-Fi connection. Hot spots offer limited coverage and generally require the individual to be within 100 yards in order to establish a connection. Hot spots may be provided by commercial Wi-Fi network operators or by local municipalities.

 

IEEE

 

Institute of Electrical and Electronics Engineers. A standards body responsible for developing computing and electronics standards. The IEEE developed the 802.11 standards for WLANs (wireless local area networks) that are widely followed today as well as the 802.16 (WiMAX) standards.

 

LAN

 

Local Area Network. A small communication network covering a limited area such as a portion of a building or a group of buildings.

 

MAC

 

Media Access Control Layer. Software that controls multiple access to shared radio spectrum and other resources. In WiMAX the design of the MAC was made to permit both high throughput as well as high quality of service simultaneous operation of multiple users. The MAC layer controls the scheduling of traffic, prioritization, bandwidth allocation, authentication, and security functions.

 

MHz

 

Megahertz. One million hertz or cycles per second. A measurement often used to describe the speed of digital and analog signals.

 

94

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MIMO

 

Multiple-Input-Multiple-Output. MIMO refers to a communication technique that uses multiple-antenna systems to improve channel throughput.

 

OEM

 

Original Equipment Manufacturer. A company that manufactures a device (often a consumer electronics product) that is sold to another company, which in turn sells the device to the end consumer under its own name.

 

OFDM

 

Orthogonal Frequency Division Multiplexing. A wireless communications technology and modulation technique that divides available spectrum into multiple radio frequency (RF) channels. In OFDM, a single transmitter transmits on many different, independent frequencies, which typically results in a signal with high resistance to interference.

 

OSI

 

Open Systems Interconnection. A reference model established by the ISO to provide a network design framework that allows equipment from different vendors to be able to communicate.

 

Packet

 

A digital “package” of data that enables efficient use of radio spectrum and routing over a network, such as the Internet or wireless networks. Each packet is numbered separately and includes the Internet address of the destination.

 

PCS

 

Personal Communications Services. Refers to the 1900 MHz cellular frequency band. More commonly used as a marketing term to describe digital wireless services regardless of the particular frequency band being used.

 

PHY

 

Physical Layer. Transmits raw bits of data by establishing and terminating connections to a networked communications resource. Refers to network hardware, physical cabling or a wireless connection. Considered layer one of the seven-layer OSI (Open Systems Interconnection) model of data communications.

 

POP

 

Persons of Population. POPs refers to the total population that resides within the geographic boundaries of one or more spectrum licenses.

 

Protocol

 

Within the context of data communications, a specific set of rules related to data transmission between two devices. Protocols set standard procedures that enable different types of data devices to recognize and communicate with each other.

 

95

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Quality of service

 

A measure of network transmission reliability and efficiency. Quality of service is commonly used by network operators to indicate a higher level of service guarantee to customers.

 

RFIC

 

Radio Frequency Integrated Circuits. Part of the front-end of the radio system that receives a digital radio signal, converts it in frequency and modifies it for further processing.

 

Service Provider

 

A “carrier” or “network operator” that provides mobile telecommunication services.

 

SDR

 

Software Defined Radio. A base station silicon product that performs the same functions as a mobile ASIC, but at the base station side of a wireless network. It functions as the heart of a base station system by granting access to hundreds of simultaneous users and managing their operation.

 

VoIP

 

Voice Over Internet Protocol. The routing of voice conversations, sent as digital packets of data, over the Internet or other IP network.

 

WAN

 

Wide Area Network. A geographically dispersed telecommunications network. A WAN may be privately owned or rented, but the term usually refers to a public network.

 

Wi-Fi

 

Short for “Wireless Fidelity” and another name for WLAN (wireless local area network). Normally associated with the IEEE 802.11 set of wireless local area network standards. Allows a mobile user to connect to a local area network (LAN) through a wireless connection. Wi-Fi has been deployed in airports, universities, bookstores, coffee shops, office campuses and private residences.

 

WiMAX

 

Wireless Interoperability for Microwave Access. The term WiMAX is used to indicate products based on the 802.16 set of standards adopted by the Institute of Electronical and Electronic Engineers (“IEEE”).

 

Wireless Spectrum

 

A band of frequencies in which wireless signals travel carrying voice and data.

 

WLAN

 

Wireless Local Area Network. Allows a mobile user to connect to a local area network (LAN) through a wireless connection. The most popular WLAN technology is Wi-Fi which has been deployed in airports, universities, bookstores, coffee shops, office campuses and private residences.

 

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INDEX TO FINANCIAL STATEMENTS

			Page
NextWave Wireless LLC:
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005			F-2
Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2006, for the Three Months Ended September 30, 2005 and for the period from Inception (April 13, 2005) to September 30, 2005			F-3
Consolidated Statement of Members’ Equity for the Nine Months Ended September 30, 2006			F-4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and for the period from Inception (April 13, 2005) to September 30, 2005			F-5
Notes to Condensed Consolidated Financial Statements			F-6
Audited Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm			F-25
Consolidated Balance Sheet as of December 31, 2005			F-26
Consolidated Statement of Operations for the period from Inception (April 13, 2005) to December 31, 2005			F-27
Consolidated Statement of Members’ Equity for the period from Inception (April 13, 2005) to December 31, 2005			F-28
Consolidated Statement of Cash Flows for the period from Inception (April 13, 2005) to December 31, 2005			F-29
Notes to Consolidated Financial Statements			F-30
Schedule II - Valuation and Qualifying Accounts			F-50
Unaudited Pro Forma Condensed Combined Statement of Operations for the period from Inception (April 13, 2005) to December 31, 2005			F-51
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations			F-52
PacketVideo Corporation:
Report of Moss Adams LLP, Independent Registered Public Accounting Firm			F-54
Consolidated Balance Sheets as of December 31, 2004 and 2003			F-55
Consolidated Statement of Operations for the Years Ended December 31, 2004 and 2003			F-56
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended to December 31, 2004 and 2003			F-57
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003			F-58
Notes to Consolidated Financial Statements			F-59

Financial Statement Schedules: Financial statements schedules other than those appearing on page F-50 are omitted as they are not applicable, are not required, or the information is included in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.

 

F-1

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NEXTWAVE WIRELESS LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

			September 30, 2006			December 31, 2005
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	25,371		$	93,649
Short-term investments			196,801			365,582
Accounts receivable, net of allowance for doubtful accounts of $300 and $391, respectively			5,728			3,712
Deposits for wireless spectrum bids			142,866			5,400
Prepaid expenses and other current assets			9,494			4,175
Total current assets			380,260			472,518
Restricted investments			76,792			—
Wireless spectrum licenses, net			374,137			45,467
Goodwill			32,829			24,782
Other intangible assets, net			16,306			18,100
Property and equipment, net			16,796			11,092
Other assets			8,279			7,815
Total assets		$	905,399		$	579,774
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable		$	2,369		$	3,406
Accrued expenses			19,465			5,152
Current portion of long-term obligations			2,681			2,200
Deferred revenue			2,867			4,103
Current tax liability			40			417
Other current liabilities and deferred credits			961			822
Total current liabilities			28,383			16,100
Deferred income tax liabilities			67,673			13
Long-term deferred credits and reserves			8,243			8,293
Long-term obligations, net of current portion			292,310			14,934
Minority interest in subsidiary			884			1,070
Commitments and contingencies
Members’ equity:
Membership interests; 492,583 and 488,672 interests issued and outstanding as of September 30, 2006 and December 31, 2005, respectively			619,966			589,354
Accumulated other comprehensive loss			(571	)		(832	)
Retained deficit			(111,489	)		(49,158	)
Total members’ equity			507,906			539,364
Total liabilities and members’ equity		$	905,399		$	579,774

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-2

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NEXTWAVE WIRELESS LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

			Three Months Ended September 30,						Nine Months Ended September 30,			Inception (April 13, 2005) to September 30,
			2006			2005			2006			2005
Revenues		$	8,051		$	1,202		$	22,055		$	1,350
Operating expenses:
Cost of revenues			4,568			1,934			10,452			2,019
Engineering, research and development			11,455			5,100			34,289			8,013
General and administrative			14,896			6,603			35,528			9,890
Sales and marketing			2,992			1,185			7,144			1,185
Purchased in-process research and development			—			6,600			1,648			6,600
Total operating expenses			33,911			21,422			89,061			27,707
Loss from operations			(25,860	)		(20,220	)		(67,006	)		(26,357	)
Other income (expense)
Interest income			3,419			3,934			9,803			7,404
Interest expense			(9,010	)		(352	)		(9,684	)		(656	)
Other income and expense, net			(26	)		123			98			146
Total other income (expense), net			(5,617	)		3,705			217			6,894
Loss before income taxes and minority interest			(31,477	)		(16,515	)		(66,789	)		(19,463	)
Income tax benefit (provision)			(93	)		(145	)		116			(145	)
Minority interest			265			7			1,136			7
Net loss		$	(31,305	)	$	(16,653	)	$	(65,537	)	$	(19,601	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-3

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NEXTWAVE WIRELESS LLC

CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY

(in thousands) (unaudited)

 

			Membership Interests						Accumulated Other Comprehensive			Retained			Total Members’
			Units			Amount			Loss			Deficit			Equity
Balance at December 31, 2005			488,672		$	589,354		$	(832	)	$	(49,158	)	$	539,364
Units issued for business acquisition			1,558			1,558			—			—			1,558
Units issued for unit options exercised			1,353			1,353			—			—			1,353
Sale of restricted units			1,000			1,000			—			—			1,000
Share-based compensation			—			3,548			—			—			3,548
Fair value of warrants to be issued in connection with the issuance of 7% Senior Secured Notes			—			24,600			—			—			24,600
Accumulated deficit of variable interest entity eliminated upon acquisition by NextWave			—			—			—			3,206			3,206
Distributions to members			—			(1,447	)		—			—			(1,447	)
Unrealized net gains on investments			—			—			261			—			261
Net loss			—			—			—			(65,537	)		(65,537	)
Balance at September 30, 2006			492,583		$	619,966		$	(571	)	$	(111,489	)	$	507,906

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-4

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NEXTWAVE WIRELESS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)

 

		Nine Months Ended September 30, 2006			Inception (April 13, 2005) to September 30, 2005
OPERATING ACTIVITIES
Net loss		$	(65,537	)	$	(19,601	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			4,235			202
Amortization of intangible assets			3,752			1,773
Share-based compensation			3,548			677
Accretion of interest expense			4,643			611
Purchased in-process research and development			1,648			6,600
Loss on disposal of property and equipment			474			—
Losses incurred through strategic investment			1,041			—
Minority interest			(1,136	)		—
Other non-cash adjustments			872			(551	)
Changes in operating assets and liabilities:
Accounts receivable			(2,221	)		(178	)
Prepaid expenses and other current assets			(3,341	)		(4,351	)
Other assets			1,336			(184	)
Accounts payable and accrued liabilities			11,604			993
Deferred credits and reserves			(1,474	)		1,594
Net cash used in operating activities			(40,556	)		(12,415	)
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities			192,226			909,082
Proceeds from the sale of available-for-sale securities			452,951			—
Purchases of available-for-sale securities			(475,603	)		(1,186,220	)
Cash paid for business combination, net of cash acquired			(4,950	)		(46,621	)
Cash paid for wireless spectrum licenses			(397,817	)		(50	)
Purchase of property and equipment			(10,990	)		(3,474	)
Other, net			(1,866	)		—
Net cash used in investing activities			(246,049	)		(327,283	)
FINANCING ACTIVITIES
Proceeds from long-term obligations, net of costs to issue			295,098			—
Payments to restricted investments account securing long-term obligations			(77,324	)		—
Payments on long-term obligations			(2,374	)		(11	)
Cash distributions paid to members			(1,447	)		—
Proceeds from the sale of membership interests and subsidiary common stock			2,379			—
Proceeds from investment by joint venture partner			1,995			—
Net cash provided by (used in) financing activities			218,327			(11	)
Net decrease in cash and cash equivalents			(68,278	)		(339,709	)
Cash and cash equivalents, beginning of period			93,649			555,099
Cash and cash equivalents, end of period		$	25,371		$	215,390

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-5

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NEXTWAVE WIRELESS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. NextWave, Summary of Significant Accounting Policies and Significant Accounts

 

NextWave Wireless Inc., the successor to NextWave Wireless LLC (together with its subsidiaries, “NextWave”) is an early-stage wireless technology company engaged in the development of next-generation mobile broadband and wireless multimedia products, technologies and services. NextWave is developing proprietary chipsets and related network and device products based on the IEEE 802.16e WiMAX standard that it believes will significantly improve the performance and economics of fixed and mobile wireless broadband networks. A key design objective of its products and technologies is to improve the ability of mobile WiMAX to cost effectively handle the large volume of network traffic that it believes Voice Over Internet Protocol (“VoIP”) telephony, high speed web-surfing and next-generation wireless multimedia applications such as high resolution mobile TV, high fidelity streaming audio and interactive real-time gaming will generate. NextWave intends to sell and/or license its WiMAX certified products and technologies to network infrastructure and device manufacturers and network operators worldwide. To stimulate demand for products, NextWave plans to partner with service providers to build and operate shared mobile WiMAX networks that operate on its licensed spectrum and utilize network and device equipment which incorporate its products and technologies. In addition, through its PacketVideo subsidiary, NextWave is a global provider of embedded multimedia software for mobile phones. NextWave believes that its global deployments of mobile broadband networks and subscriber solutions, combined with its wireless multimedia software products and its spectrum assets, will offer wireless service providers, cable operators, multimedia content distributors, applications service providers and Internet service providers a platform to provide advanced wireless broadband services to their customers. To facilitate the deployment of its network products, NextWave has accumulated a spectrum footprint across the U.S. covering a population of approximately 206 million people, or POPs, that includes nine of the top ten and 15 of the top 20 markets which have population densities and demographics most suitable to wireless broadband in the U.S.

 

Corporate Conversion Merger

 

In order to convert NextWave Wireless LLC into a corporate form, the Board of Managers and a majority in interest of the holders of NextWave Wireless LLC membership units approved the merger of NextWave Wireless LLC with a wholly owned subsidiary of a newly formed Delaware corporation, NextWave Wireless Inc. On November 13, 2006, the corporate conversion merger was completed and NextWave Wireless LLC became a wholly-owned subsidiary of NextWave Wireless Inc. Under the terms of the merger agreement, NextWave Wireless Inc. issued shares of its common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of NextWave Wireless Inc. common stock for every six membership units of NextWave Wireless LLC that they held. Following the corporate conversion merger, NextWave Wireless LLC’s obligation to file periodic reports under the Securities Exchange Act of 1934 was suspended, and NextWave Wireless Inc. became the successor to NextWave Wireless LLC for Securities and Exchange Commission (“SEC”) reporting purposes.

 

Inception of NextWave Wireless LLC

 

NextWave Wireless Inc. (“Old NextWave Wireless”) was formed in 1996 as a wholly-owned operating subsidiary of NextWave Telecom, Inc. (“NTI”), which sought to develop a nationwide CDMA-based personal communication services (“PCS”) network. In 1998, Old NextWave Wireless, together with NTI and its other subsidiaries (the “NextWave Telecom group”), filed for protection under Chapter 11 of the United States Bankruptcy Code. In December 2004, Old NextWave Wireless was converted from a corporation to a limited liability company named NextWave Wireless LLC. On March 1, 2005, the Bankruptcy Court confirmed the plan of reorganization of the NextWave Telecom group. The cornerstone of the plan was the sale of NTI and its subsidiaries, excluding Old NextWave Wireless, to Verizon Wireless for approximately $3.0 billion. With the proceeds of the Verizon sale, as well as the proceeds of prior PCS spectrum license sales to Cingular Wireless, Verizon Wireless and MetroPCS, all creditors of the NextWave Telecom group were paid in full and the NTI equity holders received an aggregate cash distribution of approximately $2.6 billion. In addition, the plan provided for the capitalization and distribution to the NTI equity holders of NextWave Wireless LLC, a new wireless technology company. Pursuant to the plan, on April 13, 2005, the NextWave Telecom group abandoned substantially all of its PCS assets other than the spectrum licenses and all remaining non-PCS assets and liabilities were contributed to Old NextWave Wireless. Immediately thereafter limited liability company interests (“LLC Interests”) in NextWave Wireless LLC were distributed to the NTI equity holders and NextWave Wireless LLC was capitalized with $550.0 million in cash. Through this process, Old NextWave Wireless was reconstituted as a company with a new capitalization and a new wireless technology business plan. The significant underlying assets contributed to NextWave Wireless LLC included NTI’s residual cash referred to above, the common stock of NextWave Broadband Inc., the convertible Series A Preferred Stock and notes receivable from CYGNUS Communications, Inc. (“CYGNUS”), and wireless spectrum licenses from the Federal Communications Commission (“FCC”) useful to NextWave or its new wireless technology business. Pursuant to the plan, the NTI shareholders received undivided interests in the underlying assets of NextWave Wireless LLC as part of their consideration for the redemption of their NTI shares, which was followed by the deemed contribution of these undivided interests to NextWave Wireless LLC in return for unit membership interests.

 

F-6

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Financial Statement Preparation

 

The unaudited condensed consolidated financial statements have been prepared by NextWave according to the rules and regulations of the SEC, and therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements for the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly state the financial position, results of operations and cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements for the period from inception (April 13, 2005) to December 31, 2005, included in NextWave Wireless Inc.’s Amended Form S-4 filed with the United States Securities and Exchange Commission on November 7, 2006.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation and Strategic Investments

 

NextWave’s consolidated financial statements include the assets, liabilities and operating results of its wholly-owned and majority-owned subsidiaries as of September 30, 2006. NextWave’s operating results through January 2006 also include those of a variable interest entity in which NextWave was the primary beneficiary until February 2006, when NextWave acquired all of the remaining ownership interests of the entity and it became a wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Change in Fiscal Year End

 

NextWave’s Board of Managers approved a change, effective January 1, 2006, in NextWave’s fiscal year end and quarterly reporting periods from quarterly calendar periods ending on the Saturday nearest to December 31 of the current calendar year or the following calendar year. Normally, each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks. Fiscal year 2006 will be a 52-week year and the first 53-week year will occur in 2009. The three and nine month periods ended September 30, 2006 include 13 and 39 weeks, respectively.

 

F-7

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Comprehensive Loss

 

Accumulated other comprehensive income includes unrealized gains and loses that are excluded from the consolidated statement of operations and are reported as a separate component in members’ equity. Total comprehensive loss consists of the following: 

 

			Three Months Ended September 30,						Nine Months Ended September 30,			Inception (April 13, 2005) to September 30,
(in thousands)			2006			2005			2006			2005
Net loss, as reported		$	(31,305	)	$	(16,653	)	$	(65,537	)	$	(19,601	)
Unrealized net gain (loss) on investments			507			(409	)		261			(551	)
Total comprehensive loss		$	(30,798	)	$	(17,062	)	$	(65,276	)	$	(20,152	)

 

Recent Accounting Pronouncements

 

NextWave adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), effective January 1, 2006. SFAS 123R requires companies to expense the estimated fair value of employee stock options and similar awards. NextWave has adopted the provisions of SFAS 123R using the prospective transition method, whereby it will continue to account for unvested equity awards to employees outstanding at December 31, 2005 using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and apply SFAS 123R to all awards granted or modified after that date. In accordance with the transition rules of SFAS 123R, NextWave no longer provides the pro forma disclosures in reports issued for periods ending after December 31, 2005 as SFAS 123R precludes companies that use the minimum value method for pro forma disclosure from continuing to provide those pro forma disclosures for outstanding awards accounted for under the intrinsic value method of APB 25. Refer below to Employee Unit- and Share-Based Compensation for more discussion of the adoption of SFAS 123R.

 

In November 2005, the Financial Accounting Standards Board (“FASB”) issued staff position 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 address the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.

 

FSP 115-1 replaces the impairment evaluation guidance of Emerging Issues Task Force Issue (“EITF”) No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, with references to existing other-than-temporary impairment guidance. EITF 03-1’s disclosure requirements remain in effect, and are applicable for year-end reporting and for interim periods if there are significant changes from the previous year-end. FSP 115-1 also supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value,” and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made. FSP 115-1 applies to reporting periods beginning after December 15, 2005. FSP 115-1 did not have a material impact on NextWave’s results of operations, or cash flows for the nine months ended September 30, 2006.

 

In June 2006, the FASB Issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective for NextWave’s fiscal year beginning December 31, 2006, with earlier application permitted. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. NextWave’s management believes that adoption of this interpretation is not expected to have a material impact on its financial statements.

 

F-8

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Employee Unit- and Share-Based Compensation

 

NextWave adopted SFAS 123R on January 1, 2006. SFAS 123R requires the recognition of the fair value of unit- and share-based compensation in net income. NextWave recognizes unit- and share-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period. Prior to January 1, 2006, NextWave accounted for employee equity awards using APB 25 and related interpretations in accounting for unit- and share-based compensation.

 

NextWave has adopted the provisions of FAS 123R using the prospective transition method, whereby it will continue to account for nonvested equity awards to employees outstanding at December 31, 2005 using APB 25, and apply FAS 123R to all awards granted or modified after that date. In accordance with the transition rules of SFAS 123R, NextWave no longer provides the pro forma disclosures in reports issued for periods ending after December 31, 2005 as FAS 123R precludes companies that used the minimum value method for pro forma disclosure from continuing to provide those pro forma disclosures for outstanding awards accounted for under the intrinsic value method of APB 25.

 

Under the provisions of SFAS 123R, NextWave recognized $0.5 million and $2.2 million in employee share-based compensation expense for the three and nine months ended September 30, 2006, respectively. NextWave utilized the Black-Scholes valuation model for estimating the fair value of stock awards issued during the nine months ended September 30, 2006, to employees at the date of grant, with the following weighted-average assumptions for each of three separate option plans administered by NextWave and two of its subsidiaries for the nine months ended September 30, 2006:

 

			NextWave Wireless LLC 2005 Units Plan			CYGNUS Communications, Inc. 2004 Stock Option Plan			PacketVideo Corporation 2005 Equity Incentive Plan
Weighted average risk-free interest rate			4.82	%		4.37	%		4.91	%
Weighted average expected life (in years)			3.2			4.1			3.7
Expected stock price volatility			50	%		50	%		50	%
Expected dividend yield			0	%		0	%		0	%
Annualized forfeiture rate			10	%		10	%		10	%
Weighted average fair value of options granted		$	0.39		$	0.13		$	0.42

The risk-free interest rates are based on the implied yield available on U.S. Treasury constant maturities in effect at the time of the grant with remaining terms equivalent to the respective expected terms of the options. As none of the plans have sufficient history for estimating the term from grant date to full exercise of the option, NextWave has considered expected terms applied, in part by peer companies to determine the expected life of each grant. Expected volatility is based on an average of peer companies’ expected volatilities due to lack of trading history of NextWave membership units or its subsidiaries’ shares. The dividend yield of zero is based on the fact that NextWave has never paid cash dividends and has no present intention to pay cash dividends.

 

NextWave has assumed an annualized forfeiture rate of 10% for its options based on a combined review of industry and employee turnover data, as well as an analytical review performed of historical pre-vesting forfeitures occurring over the previous year. Under the true-up provisions of SFAS 123R, NextWave will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture rate is higher than estimated.

 

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. This model does not consider the employment, transfer or vesting restrictions that are inherent in NextWave’s employee unit and stock options. Use of an option valuation model, as required by SFAS 123R, includes highly subjective assumptions based on long-term predictions and average life of each unit and stock option grant. Because NextWave’s unit- and share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect NextWave’s estimate of the fair values, in NextWave’s opinion, existing valuation models may not be reliable single measures of the fair values of NextWave’s unit- and share-based payments.

 

F-9

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Total compensation cost of options granted since January 1, 2006 but not yet vested, as of September 30, 2006, was $5.8 million, which is expected to be recognized over a weighted average period of 3.6 years.

 

Share-based compensation expense of $0.1 million and $0.2 million was recognized during the three and nine months ended September 30, 2006, respectively, for membership interests issued to employee shareholders of one of the CYGNUS subsidiaries, stemming from a prior acquisition, for the attainment of certain product development milestones. The share based payments were recognized as compensation expense in accordance with EITF 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.”

 

Reclassifications

 

To conform to the current presentation in the financial statements for September 30, 2006, a reclassification of $5.4 million in deposits for wireless spectrum bids was made from prepaid expenses and other current assets to deposits for wireless spectrum bids and a reclassification of $13,000 was made from long-term deferred credits and reserves to deferred income tax liabilities in the condensed consolidated balance sheet at December 31, 2005. These reclassifications had no effect on reported current assets, total liabilities or the consolidated statement of cash flows.

 

2. Composition of Certain Financial Statement Items

 

Short-Term Investments

 

Available-for-sale marketable securities consist of the following:

 

(in thousands)			September 30, 2006			December 31, 2005
U.S. state governments, agencies and municipal securities		$	176,807		$	280,734
U.S. Treasury and agency obligations			19,994			54,666
Corporate notes			—			30,182
Total short-term investments		$	196,801		$	365,582

 

Restricted Investments

 

Restricted investments at September 30, 2006 is comprised of $76.8 million in a restricted collateral account, of which $75.0 million is required to be maintained at all times while the 7% Senior Secured Notes remain outstanding.

 

Restricted investments in marketable securities consist of the following:

 

(in thousands)			September 30, 2006
U.S. Treasury and agency obligations		$	35,065
Corporate notes			25,471
U.S. state governments, agencies and municipal securities			16,256
Total restricted investments		$	76,792

 

F-10

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Wireless Licenses, Goodwill and Other Intangible Assets

 

Intangible assets consist of the following:

 

						September 30, 2006									December 31, 2005
(dollars in thousands)						Weighted Average Life (in Years			Gross Carrying Amount			Accumulated Amortization			Weighted Average Life (in Years)			Gross Carrying Amount			Accumulated Amortization
Amortized intangible assets:
Leased wireless spectrum licenses						14.2		$	51,137		$	3,310			15.0		$	31,347		$	1,510
Purchased technology						7.0			8,600			1,476			7.0			8,600			555
Purchased customer base						8.0			5,700			856			8.0			5,700			321
Non-compete agreements						4.0			2,800			1,029			4.0			2,800			537
Other						6.5			174			7			3.0			16			3
								$	68,411		$	6,678					$	48,463		$	2,926
Intangible assets not subject to amortization:
Wireless spectrum licenses								$	326,310								$	15,630
Goodwill									32,829									24,782
Purchased tradenames and trademarks									2,400									2,400
								$	361,539								$	42,812

The $8.0 million increase in goodwill in the consolidated balance sheets from December 31, 2005 to September 30, 2006, resulted primarily from current year business acquisitions. In July 2006, NextWave completed its acquisition of WCS Wireless, Inc. which resulted in the addition of $228.3 million of wireless spectrum licenses not subject to amortization. The acquisition of WCS Wireless, Inc. was accounted for as an acquisition of assets rather than as an acquisition of a business based on guidance under EITF 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”. The value assigned to the wireless spectrum includes the cash purchase price of $160.5 million, associated legal costs of $0.1 million, and $67.7 million in associated deferred tax liabilities as determined in accordance with EITF 98-11, “Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations”. During the nine months ended September 30, 2006, NextWave acquired other licensed spectrum rights for $82.4 million in cash.

 

Estimated aggregate amortization expense is expected to be $4.0 million for the remainder of 2006, and $15.8 million, $7.8 million, $4.8 million, $4.5 million and $24.8 million for the years ending December 31, 2007, 2008, 2009, 2010 and thereafter, respectively.

 

Property and Equipment

 

Property and equipment, net, consist of the following:

 

(in thousands)			Estimated Useful life (in years)			September 30, 2006			December 31, 2005
Furniture and equipment			2-10		$	11,865		$	7,071
Purchased software			2-3			7,184			3,459
Leasehold improvements			1-5			1,788			879
Construction in progress			N/A			829			380
						21,666			11,789
Less accumulated depreciation						(4,870	)		(697	)
Total property and equipment, net					$	16,796		$	11,092

 

F-11

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3. Business Combinations

 

Investment in Inquam Broadband Holding, Inc.

 

On January 6, 2006, NextWave acquired 51% of the equity securities of newly formed Inquam Broadband Holding, Ltd. (“INQUAM”) for 1.3 million Euros, or $1.6 million. NextWave also has the right to designate three of the five members of the board of directors. The primary reason for the investment is to provide NextWave with an entry into the wireless broadband telecommunications market in Germany. Under the subscription and shareholder agreement, NextWave has agreed to provide additional funding up to 1.4 million Euros, or approximately $1.7 million, of which $0.5 million has been funded through September 30, 2006. NextWave also has the option to acquire a 51% interest in a subsidiary of Inquam BMR GP, the holder of the remaining 49% interest in INQUAM, for 9.7 million Euros, or approximately $12.3 million, subject to adjustment for changes in liabilities or subsequent funding provided to the subsidiary by INQUAM. The option expires in February 2007.

 

INQUAM and its wholly-owned subsidiary are included in NextWave’s consolidated financial statements from the date of the acquisition.

 

Acquisition of CYGNUS

 

On February 2, 2006, NextWave acquired all of the outstanding shares of common stock of CYGNUS and the minority interests of one of its subsidiaries, which are already included in the consolidated financial statements as NextWave is deemed to be the primary beneficiary in accordance with FIN 46(R). The total cost of the acquisition was determined as follows:

 

(in thousands)
Advances to CYGNUS, including interest		$	18,145
Accumulated CYGNUS losses while consolidated in accordance with FIN 46R			(8,550	)
Conversion of convertible preferred stock into common stock			1,884
Membership interests issued			1,558
Cash paid			53
Less cash acquired			(4,190	)
Total acquisition cost		$	8,900

 

Under the purchase method of accounting, the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as follows:

 

(in thousands)
Accounts receivable		$	196
Prepaid expenses and other current assets			511
Property and equipment			704
Goodwill			8,223
Deposits and other noncurrent assets			658
Accounts payable, accrued expenses and other current liabilities			(613	)
Unfavorable lease liability			(692	)
Long-term obligations			(87	)
Total acquisition cost		$	8,900

 

F-12

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In connection with the acquisition, NextWave recorded an unfavorable lease liability of $0.7 million resulting from the exit of a duplicate facility leased by CYGNUS. The facility was subsequently subleased, resulting in a $0.4 million reduction in the liability. Activity for this liability is as follows:

 

(in thousands)			Opening Balance Sheet Accrual			Adjustment to Goodwill			Balance at September 30, 2006
Unfavorable lease liability		$	692		$	(374	)	$	318

 

The excess of the purchase price over the acquired net tangible assets of $7.8 million has been preliminarily allocated to goodwill in the consolidated balance sheet and will be allocated between goodwill and identifiable intangible assets once NextWave has completed a purchased intangible asset valuation which is expected to be completed in December 2006. The related impact from value assigned to in-process research and development costs or to amortization expense, if any, will be adjusted on a prospective basis.

 

In connection with the acquisition of the minority interests of one of CYGNUS’ subsidiaries, NextWave agreed to pay $0.4 million and $0.5 million in cash, and issue 0.2 million and 0.2 million in membership interests to certain employee shareholders in December 2006 and December 2007, respectively, or earlier if certain product development milestones are attained. These payments are amortized as compensation expense over the period earned in accordance with EITF 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.” Compensation expense totaled $0.3 million and $0.7 million during the three and nine months ended September 30, 2006, respectively. The remaining cash portion of $0.5 million is recorded as deferred compensation and is included in prepaid and other current assets and other noncurrent assets in the consolidated balance sheet at September 30, 2006. The fair value of the membership interests will be remeasured at the end of each reporting period until issued, when the final fair value is determined. Unamortized estimated stock-based compensation totaled $0.2 million at September 30, 2006, and will be charged to the results of operations with an offsetting increase to membership interests in the consolidated balance sheet over the remaining service periods.

 

Other Acquisitions

 

During the nine months ended September 30, 2006, NextWave completed two acquisitions. The results of operations have been included in the accompanying condensed consolidated financial statements from the respective dates of the acquisitions.

 

The aggregate purchase price of these acquisitions was $6.2 million, consisting of $4.8 million in cash, including acquisition costs of $0.1 million, future earnout and holdback payments totaling $1.0 million and the assumption of debt totaling $0.3 million. The excess of purchase price over the acquired net tangible assets was $6.4 million at September 30, 2006, of which $4.8 million has been allocated to goodwill and $1.6 million has been expensed as in-process research and development costs during the nine months ended September 30, 2006.

 

F-13

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4. Long-Term Obligations

 

Long-term obligations consist of the following at September 30, 2006 and December 31, 2005:

 

(dollars in thousands)		September 30, 2006			December 31, 2005
7% Senior Secured Notes, $350,000 due 2010, net of unamortized discount and fair value of warrants of $73,604, interest payable semiannually in January and July each year		$	276,396		$	—
Wireless spectrum lease, imputed interest at 8%, due 2019, net of unamortized discounts of $8,281 and $9,353, respectively, with three renewal options for 15 years each			15,919			17,047
Wireless spectrum lease, imputed interest at 8%, due 2015, net of unamortized discount of $1,036, with five renewal options for 10 years each			2,356			—
Research and development funding due to Tekes, the National Technology Agency of Finland, interest at 3%, due annually in December through 2008			320			—
Industrial research assistance contribution from the Canadian government, paid in full August 2006			—			87
			294,991			17,134
Less current portion			(2,681	)		(2,200	)
		$	292,310		$	14,934

 

Future payments due on these obligations at September 30, 2006, are as follows:

 

(in thousands)
Fiscal Years Ending,
2006 (remaining three months)		$	261
2007			2,680
2008			2,685
2009			2,175
2010			352,175
Thereafter			17,936
			377,912
Less unamortized discounts			(82,921	)
Less current portion			(2,681	)
Total long-term obligations		$	292,310

On July 17, 2006, NextWave issued 7% Senior Secured Notes due 2010 (the “Notes”) in the aggregate principal amount of $350.0 million. The Notes were issued at a fifteen percent (15%) original issue discount, resulting in gross proceeds of $297.5 million. NextWave will be obligated to pay the Notes at their full face value of $350.0 million on July 17, 2010 and interest of 7% per annum, payable semiannually in January and July each year commencing January 15, 2007. After the payment of transaction related expenses, NextWave received net proceeds of $295.1 million available for the sole purpose of financing spectrum acquisitions and leases. Costs incurred to issue the Notes, which totaled $2.4 million, have been deferred and included in other assets in the consolidated balance sheet and are amortized over the term of the Notes using the effective interest method. The unamortized balance of the issuance costs was $2.3 million at September 30, 2006.

 

The purchasers of the Notes were investment funds and other institutional investors, including affiliates of Avenue Capital Group, among others. Robert T. Symington, a member of NextWave’s Board of Managers, is a Portfolio Manager at Avenue Capital Group. Neither Mr. Symington nor Avenue Capital Group or its affiliates received any compensation in connection with the financing. The Notes are guaranteed by certain of NextWave’s subsidiaries, including NextWave Broadband and PacketVideo. In addition, after NextWave’s anticipated corporate conversion merger with and into a wholly owned limited liability company subsidiary of NextWave Wireless Inc., a new corporation formed under the laws of the State of Delaware, the Notes will be guaranteed by NextWave Wireless Inc. No scheduled principal payments will be due on the Notes before the maturity date of July 17, 2010. The Notes are pre-payable at NextWave’s option at specified premiums to the principal amount that will decline over the term of the Notes from 105% to 100%, plus a make-whole amount applicable until July 17, 2008. The obligations under the Notes are secured by first priority liens on certain pledged equity interests, FCC licenses, spectrum leases, securities accounts and proceeds of any of the foregoing. NextWave is required to maintain $75.0 million in cash or cash equivalents from funds other than the proceeds of the Notes in a restricted collateral account at all times while the Notes remain outstanding. The purchase agreement contains representations and warranties, affirmative and negative covenants (including, without limitation, NextWave’s obligation to (i) maintain in full force and effect its FCC licenses and spectrum leases, (ii) to use the note proceeds for the acquisition of spectrum, not to exceed $0.25 per MHz-POP, (iii) not to become liable to any additional indebtedness, subject to certain exceptions including the ability to enter into spectrum leases or to incur $25.0 million of acquired company debt or purchase money indebtedness and (iv) not make restricted payments to holders of subordinated debt or equity securities, including dividends) that are customary in similar types of transactions. The purchase agreement also contains customary events of default and additional events of default including, (i) NextWave’s failure to consummate the corporate conversion merger by December 31, 2006, (ii) NextWave’s failure to file a shelf registration statement with the SEC within 30 days of the consummation of the corporate conversion merger, and (iii) upon the termination, cancellation or rescission of any FCC license owned or leased by NextWave and necessary for its operation of a wireless communications system). If NextWave does not complete its anticipated corporate conversion merger on or prior to November 14, 2006, then the per annum interest rate on the Notes shall be equal to 12% during the period from November 14, 2006 to the date on which the corporate conversion merger actually occurs.

 

F-14

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The net proceeds from the Notes were used to acquire WCS Wireless, Inc. for $160.5 million and two new Educational Broadband Service (“EBS”) leases for $22.1 million. Concurrently with the Notes placement, NextWave paid a $142.8 million deposit to the FCC to qualify for the Advanced Wireless Service (“AWS”) spectrum band auction, of which $110.0 million was funded with the remaining proceeds from the Notes. In September 2006, NextWave was declared the winning bidder for 154 spectrum licenses for an aggregate bid of $115.5 million. Accordingly, $27.3 million of NextWave’s initial deposit was not used and was returned to NextWave in October 2006.

 

In connection with the issuance of the Notes, NextWave Wireless Inc. entered into a warrant agreement with the purchasers of the Notes, which will become operative after the corporate conversion merger, whereby NextWave Wireless Inc. will issue common stock warrants to purchase an aggregate of 5% of NextWave Wireless Inc.’s shares of common stock, as of the date of the corporate conversion merger and before giving effect to the exercise of any warrant. The warrants will have an exercise price of $0.01 per share (subject to certain adjustments as set forth in the warrant agreement) and are exercisable at any time from the date of issuance until July 15, 2009, and have anti-dilution protection provisions. The shares of NextWave Wireless Inc. underlying the warrants are also entitled to registration rights that obligate NextWave Wireless Inc. to file a shelf registration statement within 30 days following the corporate conversion merger, and use its commercially reasonable efforts to have the shelf registration statement become or declared effective within 60 days from its filing. The holders of warrants will be entitled to continuous shelf registration rights for a period of two years from the date that such shelf registration is declared effective by the SEC. NextWave Wireless Inc. is required to bear the expenses of the shelf registration. The fair value of the warrants is estimated at $24.6 million which is being accreted along with the discount to the note balance and amortized over the life of the Notes to interest expense using the effective interest method. The measurement date for the fair value of the warrants is July 17, 2006 and will be estimated until the corporate conversion merger occurs which will enable the determination of the final number of warrants.

 

In addition to the lease obligations, beginning in 2009, the first lease agreement listed in the table above provides for the payment of royalties based on .25% of NextWave’s gross revenues, subject to an annual cap of $1.8 million. The second lease agreement listed in the table above, beginning in 2007 and extending through any renewal periods, provides for the payment of royalties based on 0.25% of gross revenues, subject to a cap of 100% of the annual rent for years 2006-2020, a cap of 150% of the annual rent for years 2021-2035 and no cap during any remaining lease years.

 

F-15

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5. Income Taxes

 

The provision for income taxes during interim quarterly reporting periods is based on NextWave’s estimate of the annual effective tax rate for the full fiscal year. NextWave determines the annual effective tax rate based upon its estimated “ordinary” income (loss), which is its annual income (loss) from continuing operations before tax, excluding unusual or infrequently occurring items. Significant management judgment is required in projecting NextWave’s annual income and determining its annual effective tax rate. NextWave provides for income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense and any deferred income tax expense resulting from temporary differences arising from differing treatments of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. Deferred tax assets are also established for the expected future tax benefits to be derived from net operating loss and tax credit carryforwards.

 

NextWave must then assess the likelihood that its deferred tax assets will be recovered from future taxable income. To the extent that NextWave believes it is more likely than not that its deferred tax assets will not be recovered, it must establish a valuation allowance. NextWave considers all available evidence, both positive and negative, to determine the need for a valuation allowance, including its historical operating losses. NextWave has recorded a full valuation allowance on its net deferred tax asset balances for all periods presented because of uncertainties related to utilization of the deferred tax assets. Deferred tax liabilities associated with wireless licenses cannot be considered a source of taxable income to support the realization of deferred tax assets, because these deferred tax liabilities will not reverse until some indefinite future period. The deferred tax liability and the related assigned value of certain wireless license assets were determined in accordance with EITF 98-11.

 

6. Commitments and Contingencies

 

Acquisitions of Wireless Spectrum

 

In July 2006, NextWave paid a $142.8 million deposit to the FCC to qualify for the AWS auction. In September 2006, NextWave was declared the winning bidder for 154 spectrum licenses for an aggregate bid of $115.5 million. Accordingly, $27.3 million of NextWave’s initial deposit was not used and was returned to NextWave in October 2006. The purchase of the licenses by NextWave are subject to final FCC approval, which is expected in the fourth quarter of 2006.

 

During the three months ended September 2006, NextWave entered into lease and lease purchase agreements for wireless spectrum that were pending final approval from the FCC at September 30, 2006. The lease agreements have a maximum term of 30 years, including renewals, and will require monthly and annual payments. Amounts paid as deposits for these agreements totaled $0.1 million during the three and nine months ended September 30, 2006. Estimated future lease obligations due under the terms of these agreements at September 30, 2006 are as follows:

 

(in thousands)
Fiscal Years Ending,
2006 (remaining three months)		$	6,811
2007			278
2008			282
2009			286
2010			290
Thereafter			6,262
		$	14,209

 

F-16

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Services and Other Agreements

 

NextWave enters into non-cancelable software license agreements and agreements for the purchase of software development and engineering services to facilitate and expedite the development of software modules and applications required in its WiMAX development activities. The services agreements contain provisions for minimum commitments based on the number of team members and their respective billing rates. Amounts paid under these contracts, which expire on various dates through 2008, totaled $0.7 million and $2.1 million during the three and nine months ended September 30, 2006, respectively. Estimated future minimum payments due under the terms of these agreements at September 30, 2006, are as follows: 

(in thousands)
Fiscal Years Ending,
2006 (remaining three months)		$	4,102
2007			4,972
2008			7,121
Total		$	16,195

 

Business Acquisition

 

In September 2006, NextWave signed a Share Purchase Agreement to acquire all of the shares of TwonkyVision, GmbH for cash of 2.7 million Euros, or $3.1 million. The acquisition was completed in October 2006 and will be accounted for in the fourth quarter of 2006 using the purchase method of accounting whereby the total purchase price, including any transaction expenses, will be allocated to tangible and intangible assets acquired based upon their respective fair values.

 

Capital Expenditures

 

In July 2005, NextWave entered into a purchase agreement for an office building in Henderson, Nevada for $8.2 million. Construction is estimated to be completed during the first quarter of 2007, at which time NextWave expects to occupy the facility and the purchase price will be due and payable. NextWave estimates that related interior construction, fixtures and furniture costs will approximate $3.6 million and will be payable in the fourth quarter of 2006.

 

Operating Leases

 

NextWave leases its office and research facilities, cell sites and certain office equipment under noncancellable operating leases expiring on various dates through 2011. NextWave recognizes rent expense on a straight-line basis over the respective lease terms. As a result, any differences between recognized rent expense and required upfront rental payments upon execution that reduce future rental payments is recorded as unapplied prepaid rent and any difference between rent expense and rent payments that are reduced by cash or rent abatements is recognized as deferred rent. At September 30, 2006, unapplied prepaid rent totaled $0.3 million and is included in prepaid expenses and other current assets in the consolidated balance sheet, and deferred rent totaled $0.6 million and is included in other current liabilities and long-term deferred credits and reserves in the consolidated balance sheet.

 

Certain commitments have renewal options extending through the year 2013. Rent expense under these operating leases was $1.8 million and $5.0 million for the three and nine months ended September 30, 2006. Sublease income totaled $0.4 million and $1.2 million for the three and nine months ended September 30, 2006.

 

F-17

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Future minimum lease payments under noncancellable operating leases, net of sublease rentals at September 30, 2006, are as follows:

 

(in thousands)		Lease Commitments			Sublease Rentals			Net
Fiscal Years Ending,
2006 (remaining three months)		$	1,432		$	(761	)	$	671
2007			5,995			(1,099	)		4,896
2008			5,580			(198	)		5,382
2009			4,077			—			4,077
2010			2,473			—			2,473
Thereafter			49			—			49
		$	19,606		$	(2,058	)	$	17,548

 

Indemnification of NextWave Telecom Inc. and Verizon Wireless Corp.

 

In connection with the sale of NTI and its subsidiaries to Verizon Wireless Inc. (“Verizon”), NextWave agreed to indemnify NTI and its subsidiaries against all pre-closing liabilities of NTI and its subsidiaries and against any violation of the Bankruptcy Court injunction against persons having claims against NTI and its subsidiaries, with no limit on the amount of such indemnity. NextWave is not currently aware of any such liabilities that remain following the plan of reorganization, and Verizon has not made any indemnity claims.

 

A total of $171.2 million is currently held in escrow (the “Escrow Amount”) in order to satisfy any amounts due to Verizon in the event that the consolidated net loss of the NextWave Telecom group for the taxable year commencing on January 1, 2005, and ending on April 13, 2005 is, subject to certain adjustments, less than $1.362 billion, to cover any tax deficiencies for the pre-closing tax period, and to cover other indemnifiable losses relating to NTI and its subsidiaries, as described above. The Escrow Amount will be released in accordance with the escrow agreement upon the expiration of the applicable statute of limitations (including extensions thereof) relating to the tax matters addressed above. In addition, if at any time the Escrow Amount exceeds the amount, in the reasonable judgment of Verizon, of the potential remaining indemnifiable losses described above, or if former equity holders of NTI have a final resolution with the IRS with respect to certain tax matters, such excess will be released. Verizon has a first-priority perfected security interest in the Escrow Amount.

 

To the extent that former equity holders of NTI are ultimately entitled to receive $80.8 million of the Escrow Amount, the FCC will, in accordance with the terms of the global settlement agreement entered into in connection with the plan of reorganization, be entitled to a sharing payment equal to 20% of any additional amounts to be released thereafter, up to a total potential sharing payment of $16.8 million. The first $0.8 million of the sharing payment will be paid to the FCC from a separate sharing payment escrow previously established for the benefit of the FCC. Any Escrow Amount that former equity holders of NTI are entitled to receive in excess of amounts payable to the FCC must be applied to redeem, pro rata, the $149.0 million of Non-Recourse Secured Notes issued as part of the plan of reorganization and described below. Accordingly, NextWave is merely a conduit to distribute amounts, if any, to the former equity holders of NTI and the FCC and will not receive any of the Escrow Amount.

 

As part of the plan of reorganization, NextWave issued $149.0 million of Non-Recourse Secured Notes to the former equity holders of NTI. The Non-Recourse Secured Notes bear no interest and mature on April 13, 2055. Any claims under the Non-Recourse Secured Notes will only be satisfied by any released Escrow Amount, net of payments due to the FCC. In the event the escrow is terminated before the maturity date and all released amounts have been paid to the note holders, any Non-Recourse Secured Notes then outstanding will be null, void and of no effect. No holder of any Non-Recourse Secured Notes will have any recourse against NextWave or its assets or its affiliates, except to the extent that NextWave receives any portion of the released Escrow Amount or otherwise does not comply with the indenture governing the notes or the related agreements.

 

NextWave has not included in the accompanying financial statements any amounts related to the Non-Recourse Secured Notes and the Escrow Amount due to their contingent nature and the inability to estimate the amount, if any, that will be released from escrow or paid to redeem the Non-Recourse Secured Notes.

 

F-18

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Legal Proceedings

 

Finney v. NextWave

 

United States ex rel. Finney v. NextWave Telecom Inc. is a qui tam action filed in federal court in the Southern District of New York, with a corresponding administrative claim in bankruptcy court. Finney (the relator) alleges principally that NTI and other defendants, including NextWave Wireless, failed to disclose the existence of a federal statute - the Federal Credit Reform Act - to various agencies of the federal government and to the federal courts. She asserts that decisions issued by the bankruptcy court, the U.S. Court of Appeals for the D.C. Circuit, and the Supreme Court of the United States in connection with the NextWave Telecom group’s reorganization efforts were all flawed because they overlooked the relevance of that statute. She alleges that NTI and the other defendants should be held liable because it failed to bring the statute to the attention of these government agencies and courts and seeks damages of more than $9 billion.

 

The defendants filed a motion to dismiss on numerous grounds, including that the government was well aware of the existence of the Act, that it is not a false claim to fail to inform the government of the existence of a federal statute, that Finney’s claim was effectively a collateral challenge to the decisions of the bankruptcy court and the Supreme Court, and that the action is barred by virtue of the Global Settlement with the FCC and the consummation of the Verizon acquisition and the bankruptcy reorganization.

 

On February 24, 2006, the district court issued an order adopting the defendants’ principal arguments and proposing to dismiss the complaint in its entirety. Prior to dismissing, the district court asked the United States for its consent, and, on March 2, 2006, the United States consented to dismissal. On April 21, 2006, the District Court ruled that defendants were entitled to an award of legal fees. The court has referred the matter to a Magistrate to fix the amount of the fee award.

 

On or about October 31, 2006, the parties entered into a settlement agreement that provides for the dismissal with prejudice of Finney’s Second Circuit appeal in exchange for Old NextWave Wireless’s agreement to reimburse $350,000 of Finney’s legal fees. Under the settlement agreement, which provides for mutual releases resolving all disputes between the parties, the parties also agreed to file a joint motion with the District Court that would dismiss the case with prejudice, vacate the dismissal order, and waive Defendants right to attorneys fees under the Court’s fee award. The United States has given its consent to the dismissal with prejudice and the payment of legal fees. The settlement was presented to the Bankruptcy Court for approval and dismissal of all claims alleged by Finney on November 1, 2006. The settlement was approved by the Bankruptcy Court on November 9, 2006, whereafter the parties filed the joint motion to dismiss Finney’s appeal with the Second Circuit. Following the dismissal of Finney’s appeal by the Second Circuit, the $350,000 payment of attorneys fees will be made from funds reserved under Old NextWave Wireless’s chapter 11 plan for the payment of administrative claims and other expenses and, therefore, does not have any impact on NextWave’s consolidated balance sheets or consolidated statements of operations.

 

Other Disputes

 

NextWave currently is a party to various other legal proceedings that arise in the ordinary course of NextWave’s business. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on NextWave’s financial position, cash flows or overall trends in results of operations, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. For example, NextWave is currently engaged in a dispute relating to a lease of EBS spectrum covering approximately 1 million POPs in the Tom’s River, New Jersey geographic area. The lessor has claimed that NextWave is in breach of the terms of the lease and has also claimed that the lease has been terminated. While NextWave believes these claims are without merit, any adverse resolution would not have a material adverse effect on NextWave’s business, results of operations or financial condition. 

 

F-19

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7. Equity Compensation Plans

 

NextWave Wireless LLC 2005 Units Plan

 

NextWave’s 2005 Units Plan provides for the issuance of nonqualified unit options, or restricted, performance-based, bonus, phantom or other unit-based awards to board managers, employees and consultants to NextWave. Each common unit represents one membership interest in NextWave. The prices, terms and conditions of the options and awards are established by the compensation committee of the board of managers at the time of each grant. Outstanding options generally vest over four years and have a maximum term of 10 years. In June 2006, the NextWave board of managers and members holding a majority of NextWave’s membership interests approved an amendment to the plan to provide an additional 20.0 million interests for awards under the plan. At September 30, 2006, NextWave may issue up to 73,647,000 membership units under this plan, of which 59,551,000 are granted and outstanding options and 14,096,000 are available for future grants.

 

The following table summarizes the status of the NextWave plan at September 30, 2006 and activity during the nine months ended September 30, 2006:

 

			Options (in thousands)			Weighted Average Exercise Price per Unit			Weighted Average Remaining Contractual Term (in Years)			Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2005			37,383		$	1.00
Granted			25,418		$	1.00
Exercised			(1,353	)	$	1.00
Forfeited			(1,897	)	$	1.00
Outstanding at September 30, 2006			59,551		$	1.00			9.0		$	—
Exercisable at September 30, 2006			59,551		$	1.00			9.0		$	—

 

The following table summarizes the status of NextWave’s unvested options as of September 30, 2006 and changes during the nine months ended September 30, 2006:

 

			Options (in thousands)			Weighted Average Grant Date Fair Value per Unit
Unvested at December 31, 2005			31,310		$	—(1)
Granted			25,418		$	0.37
Vested			(13,147	)	$	0.12(1)
Forfeited			(1,839	)	$	0.06(1)
Early exercise of unvested options			(35	)	$	0.17(1)
Unvested at September 30, 2006			41,707		$	0.18(1)

 

(1)

The weighted average grant date fair value per unit includes options granted prior to January 1, 2006 which have no grant date fair value assigned as NextWave has adopted the provisions of FAS 123R using the prospective transition method, whereby it continues to account for unvested equity awards to employees outstanding at December 31, 2005 using APB 25, and apply FAS 123R to all awards granted or modified after that date.

 

NextWave received cash from the exercise of stock options under this plan of $1.4 million, with no related tax benefits, during the nine months ended September 30, 2006. Upon option exercises under this plan, NextWave issues new NextWave Wireless LLC membership interests.

 

CYGNUS Communications, Inc. 2004 Stock Option Plan

 

The CYGNUS 2004 Stock Option Plan provides for the granting of stock options to eligible employees, directors and consultants of CYGNUS. The prices, terms and conditions of the options are determined by the board of directors of CYGNUS at the time of each grant. Outstanding options generally vest over four years and have a maximum term of 10 years. At September 30, 2006, CYGNUS may issue up to 8,523,000 shares of common stock of CYGNUS under this plan, of which 6,629,000 are granted and outstanding options and 1,894,000 are available for future grants.

 

F-20

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The following table summarizes the status of the CYGNUS plan at September 30, 2006 and activity during the nine months ended September 30, 2006:

 

			Options (in thousands)			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)			Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2005			7,465		$	0.11
Granted			30		$	0.31
Exercised			(257	)	$	0.10
Forfeited			(609	)	$	0.11
Outstanding at September 30, 2006			6,629		$	0.11			5.9		$	1,277
Exercisable at September 30, 2006			4,863		$	0.11			6.2		$	930

 

The following table summarizes the status of CYGNUS’ unvested options as of September 30, 2006 and changes during the nine months ended September 30, 2006:

 

			Options (in thousands)			Weighted Average Grant Date Fair Value per Share
Unvested at December 31, 2005			5,963		$	—(1	)
Granted			30		$	0.13
Vested			(1,821	)	$	—(1	)
Forfeited			(601	)	$	—(1	)
Unvested at September 30, 2006			3,571		$	—(1	)

 

(1)

The weighted average grant date fair value per share includes options granted prior to January 1, 2006 which have no grant date fair value assigned as NextWave has adopted the provisions of FAS 123R using the prospective transition method, whereby it continues to account for unvested equity awards to employees outstanding at December 31, 2005 using APB 25, and apply FAS 123R to all awards granted or modified after that date.

 

NextWave received cash from the exercise of stock options under this plan of $26,000, with no related tax benefits during the nine months ended September 30, 2006. Upon option exercises under this plan, NextWave issues new shares of CYGNUS stock. The CYGNUS 2004 Stock Option Plan was amended in February 2006 to provide for the conversion of each CYGNUS option into .30584 shares of NextWave common stock upon the occurrence of a conversion event which includes the U.S. Securities and Exchange Commission’s declaration of a Form 10 effective in conjunction with an effective listing on a public securities exchange, or the sale, public offering or liquidation of NextWave ownership interests. At the time of conversion, the exchange will be accounted for as a modification under SFAS 123R and could result in additional compensation expense.

 

PacketVideo 2005 Equity Incentive Plan

 

The PacketVideo 2005 Equity Incentive Plan provides for the issuance of stock options, stock bonuses or restricted stock to employees, directors and consultants of PacketVideo or its affiliates. Outstanding options generally vest over four years, and have a maximum term of 10 years. In September 2006, the PacketVideo board of directors approved an amendment to the plan to provide an additional 1,750,000 shares for awards under the plan. At September 30, 2006, PacketVideo may issue up to 11,000,000 shares of common stock of PacketVideo under this plan, of which 9,103,000 are granted and outstanding options and 1,897,000 are available for future grants.

 

F-21

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The following table summarizes the status of the PacketVideo plan at September 30, 2006 and activity during the nine months ended September 30, 2006:

 

		Options (in thousands)			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)			Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2005			8,225		$	1.00
Granted			1,145		$	1.00
Forfeited			(267	)	$	1.00
Outstanding at September 30, 2006			9,103		$	1.00			5.9		$	—
Exercisable at September 30, 2006			2,337		$	1.00			5.8		$	—

 

The following table summarizes the status of PacketVideo’s unvested options as of September 30, 2006 and changes during the nine months ended September 30, 2006:

 

			Options (in thousands)			Weighted Average Grant Date Fair Value per Share
Unvested at December 31, 2005			8,225		$	—(1	)
Granted			1,145		$	0.42
Vested			(2,314	)	$	—(1	)
Forfeited			(267	)	$	0.03(1	)
Unvested at September 30, 2006			6,789		$	0.07(1	)

 

(1)

The weighted average grant date fair value per share includes options granted prior to January 1, 2006 which have no grant date fair value assigned as NextWave has adopted the provisions of FAS 123R using the prospective transition method, whereby it continues to account for unvested equity awards to employees outstanding at December 31, 2005 using APB 25, and apply FAS 123R to all awards granted or modified after that date.

 

There were no exercises of stock options under this plan during the nine months ended September 30, 2006. Upon option exercises under this plan, NextWave issues new shares of PacketVideo stock. Upon consummation of a public offering of common stock by NextWave using a Form S-1 or replacement form registration statement, each outstanding option will be converted into an equivalent option to purchase shares of common stock to be issued by NextWave, subject to any conversion ratios. At the time of conversion, the exchange will be accounted for as a modification under SFAS 123R and could result in additional compensation expense.

 

Non-Employee Unit-Based Compensation

 

In July 2006, NextWave issued options to purchase 1,000,000 membership interests of NextWave from its 2005 Units Plan to the chairman of its Technical Developments Steering Committee, a technical advisor, at an exercise price of $1.00 per membership interest. The Steering Committee was established to advise NextWave on its technology strategy and to assist in the research, development and analysis of NextWave’s technology. At September 30, 2006, 42,000 of the options were vested and the remaining 958,000 options vest in equal monthly installments through July 2010. Stock-based compensation expense related to these options was measured using the fair value method as prescribed by SFAS No. 123(R) and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” and totaled $11,000 during the three and nine months ended September 30, 2006. The fair value assigned to the vested options was estimated at the date of vesting and, for the unvested options, at September 30, 2006, using the Black-Scholes option-pricing model based on the following weighted average assumptions: contractual option term of eight years, expected volatility of 50%, expected dividend yield of zero and a risk-free rate of 4.64%, resulting in a weighted average fair value of $0.60 per option. The fair value of the unvested options will be remeasured at the end of each reporting period until vested, when the final fair value of each vested increment is determined. Unamortized estimated stock-based compensation totaled $0.6 million at September 30, 2006, and will be charged to the results of operations with an offsetting increase to membership interests in the consolidated balance sheet over the remaining vesting periods. No options were exercised during the nine months ended September 30, 2006, and all of the options expire in July 2016.

 

F-22

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Under a related Subscription Agreement, the technical advisor purchased 1,000,000 restricted membership interests in July 2006 for $1.00 per membership interest. NextWave has the right to repurchase these interests at $1.00 per membership interest. This right lapses in equal monthly amounts through July 2010 while the technical advisor continues to provide services under the Steering Committee Agreement. If the Steering Committee Agreement is terminated, no further lapse of the repurchase rights will occur, provided that if NextWave terminates the Steering Committee Agreement, other that for material breach by the advisor, the right of repurchase will lapse in twelve monthly installments from the respective termination date. At September 30, 2006, NextWave had the right to repurchase 958,000 of the interests and 42,000 of the repurchase rights had lapsed. Stock-based compensation expense related to these restricted interests was measured using the fair value method as prescribed by SFAS No. 123(R) and EITF 96-18, and totaled $21,000 during the three and nine months ended September 30, 2006. The fair value assigned to the restricted interests was estimated at the date the repurchase rights lapsed and, for the interests still subject to repurchase, at September 30, 2006, using the Black-Scholes option-pricing model based on the following weighted average assumptions: contractual option term of two years, expected volatility of 50%, expected dividend yield of zero and a risk-free rate of 4.61%, resulting in a weighted average fair value of $0.29 per interest. The fair value of the interests still subject to repurchase will be remeasured at the end of each reporting period until the repurchase rights lapse, when the final fair value of each monthly increment is determined. Unamortized estimated stock-based compensation totaled $0.3 million at September 30, 2006, and will be charged to the results of operations with an offsetting increase to membership interests in the consolidated balance sheet over the remaining periods in which the repurchase rights lapse. No restricted interests were repurchased during the nine months ended September 30, 2006.

 

In September 2005, NextWave issued warrants to purchase 3,000,000 membership interests of NextWave to Station 4, LLC, a strategic advisor, at an exercise price of $1.00 per membership interest. At September 30, 2006, 2,000,000 of the warrants were vested and the remaining 1,000,000 warrants vest on September 1, 2007. Stock-based compensation expense related to these warrants was measured using the fair value method as prescribed by SFAS No. 123(R) and EITF 96-18, and totaled $0.1 million and $0.3 million during the three and nine months ended September 30, 2006. The fair value assigned to the vested increments of this warrant was estimated at the date of vesting and, for the unvested increments, at September 30, 2006, using the Black-Scholes option-pricing model based on the following weighted average assumptions: contractual option term of 4.0 years, expected volatility of 50%, expected dividend yield of zero and a risk-free rate of 4.46%, resulting in a weighted average fair value of $0.44 per warrant unit. The fair value of the unvested increments will be remeasured at the end of each reporting period until vested, when the final fair value of the vesting increment is determined. Unamortized estimated stock-based compensation totaled $0.4 million at September 30, 2006, and will be charged to the results of operations with an offsetting increase to membership interests in the consolidated balance sheet over the remaining vesting periods. No warrants were exercised during the nine months ended September 30, 2006, and all of the warrants expire on September 1, 2010.

 

Under a related advisory services agreement, the advisor earned warrant exercise credits of $416,665 on January 15, 2006, and continues to earn $83,333 on the first day of each month thereafter, through the date of expiration of the agreement in September 2008. The warrant exercise credits are earned based on the passage of time during which the services agreement is in effect, and as of September 30, 2006, $1.1 million credits were earned. The warrant exercise credits are not payable in cash under any circumstances and may be used only as credits against the exercise price of the warrants when the advisor elects to exercise the warrants. If the warrant does not vest because the advisory services agreement has been terminated, the advisor will lose any warrant exercise credits that cannot be applied to exercise vested warrants. The warrants will be exercisable for shares of common stock of NextWave Wireless Inc. following the corporate conversion merger. During the three and nine months ended September 30, 2006, expense related to the warrant exercise credits totaled $0.3 million and $0.8 million, respectively. Unamortized expense totaled $1.9 million at September 30, 2006, and will be charged to the results of operations with an offsetting increase to membership interests in the consolidated balance sheet over the remaining vesting periods. Under the agreement, in the event that the advisor makes a significant contribution to a transaction in which NextWave acquires the use of a substantial amount of certain types of spectrum as specified in the agreement, NextWave would issue to the advisor 5,000,000 in membership interests upon the completion of such transaction.

 

F-23

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8. Supplemental Cash Flow Information

 

Supplemental disclosure of cash flow information for the nine months ended September 30, 2006 and for the period from inception (April 13, 2005) to September 30, 2005 is as follows:

 

(in thousands)			Nine Months Ended September 30, 2006			Inception (April 13, 2005) to September 30, 2005
Cash paid for taxes		$	109		$	145
Cash paid for interest			—			—
Noncash investing and financing activities:
Fair value of warrants issued in connection with the issuance of 7% Senior Secured Notes			24,600			—
Wireless spectrum licenses acquired with lease obligations			2,478			—
Membership interests issued for business acquisitions			1,558			—

9. Subsequent Events

 

Corporate Conversion Merger

 

On November 13, 2006, NextWave completed a corporate conversion merger, whereby a wholly-owned subsidiary of NextWave Wireless Inc. was merged with and into NextWave Wireless LLC. As a result of the merger, NextWave Wireless LLC became a wholly-owned subsidiary of NextWave Wireless Inc. Under the terms of the merger agreement, NextWave Wireless Inc. issued shares of its common stock to holders of NextWave Wireless LLC’s membership units in exchange for all of the outstanding membership units of NextWave Wireless LLC, with NextWave Wireless LLC unitholders receiving one share of NextWave Wireless Inc. common stock for each six membership units of NextWave Wireless LLC that they held. The corporate conversion merger was approved by a majority in interest of the holders of NextWave Wireless LLC membership units.

 

On November 13, 2006, in connection with the corporate conversion merger, NextWave Wireless Inc. assumed the obligations under the NextWave 2005 Units Plan and the CYGNUS 2004 Stock Option Plan. As a result, options to purchase NextWave Wireless LLC membership interests under the NextWave Plan were converted into options to purchase shares of common stock of NextWave Wireless Inc., subject to an exchange ratio of one share of NextWave Wireless Inc. common stock for six NextWave Wireless LLC membership interests. Options to purchase CYGNUS common stock under the CYGNUS Plan were converted into options to purchase shares of common stock of NextWave Wireless Inc., subject to an adjustment to account for the six-to-one exchange ratio of the corporate conversion merger. Upon consummation of a public offering of common stock by NextWave using a Form S-1 or replacement form registration statement, each outstanding option under the PacketVideo 2005 Equity Incentive Plan will be converted into an equivalent option to purchase .16667 shares of common stock of NextWave Wireless Inc.

 

As of September 30, 2006, none of the membership units reported in these financial statements have been converted.

 

F-24

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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

 

To the Board of Directors and Members

of NextWave Wireless LLC

 

We have audited the accompanying consolidated balance sheet of NextWave Wireless LLC and subsidiaries as of December 31, 2005, and the related consolidated statement of operations, changes in members’ equity, and cash flows for the period from April 13, 2005 (date of inception) through December 31, 2005. Our audit also included the financial statement schedule listed in the Index to Financial Statements. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our 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 the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NextWave Wireless LLC and subsidiaries at December 31, 2005, and the consolidated results of its operations and its cash flows for the period from April 13, 2005 (date of inception) through December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

San Diego, California

April 24, 2006,

except for the final paragraph of Note 1 and paragraph 3 of Note 2,

as to which the date is

June 22, 2006

F-25

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NEXTWAVE WIRELESS LLC