-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A8kVmk+yBdYGj23CigBLq9AF/RcYQFF2LqjgyJHtco70jdpMuiQzF9V7XWI4zhrE GVkFpm6VaoI+itReh276jg== /in/edgar/work/20000811/0000891618-00-004320/0000891618-00-004320.txt : 20000921 0000891618-00-004320.hdr.sgml : 20000921 ACCESSION NUMBER: 0000891618-00-004320 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETRO CORP CENTRAL INDEX KEY: 0001087779 STANDARD INDUSTRIAL CLASSIFICATION: [3663 ] IRS NUMBER: 770395029 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26963 FILM NUMBER: 692074 BUSINESS ADDRESS: STREET 1: POST OFFICE BOX 3860 STREET 2: N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95134-1702 BUSINESS PHONE: 4082161500 MAIL ADDRESS: STREET 1: POST OFFICE BOX 3860 STREET 2: N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95134-1702 10-Q 1 e10-q.txt FORM 10-Q PERIOD ENDED JUNE 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________ to _________ COMMISSION FILE NUMBER 000-23387 NETRO CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 77-0395029 (State of incorporation) (IRS Employer Identification No.) 3860 NORTH FIRST STREET, SAN JOSE, CA 95134 (408) 216-1500 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Registrant's Common Stock as of August 11, 2000 was 50,653,734. ================================================================================ 2 INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2000 and June 30, 1999 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURE 16 EXHIBIT INDEX 17
3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETRO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2000 1999 ------------- ------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents ............................... $ 219,035 $ 7,450 Short-term investments .................................. 103,186 37,887 Trade accounts receivable, net .......................... 13,660 6,925 Inventory, net .......................................... 12,155 7,909 Prepaid expenses and other .............................. 1,496 814 ------------- ------------- Total current assets ............................ 349,532 60,985 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net ................. 5,251 4,569 LONG-TERM INVESTMENTS ..................................... 62,160 -- OTHER ASSETS .............................................. 280 260 ------------- ------------- Total assets .................................... $ 417,223 $ 65,814 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital Leases ............................................... $ 6,553 $ 6,764 Trade accounts payable .................................. 8,255 5,064 Accrued liabilities ..................................... 6,516 4,740 ------------- ------------- Total current liabilities ....................... 21,324 16,568 LONG-TERM DEBT AND CAPITAL LEASES, net of current portion .......................... 2,154 3,633 DEFERRED FACILITIES RENT .................................. 50 57 ------------- ------------- Total liabilities ............................... 23,528 20,258 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 4) SHAREHOLDERS' EQUITY: Common Stock ............................................ 500,771 146,490 Note receivable from shareholder ........................ -- (800) Deferred stock compensation ............................. (2,783) (3,730) Accumulated deficit ..................................... (104,293) (96,404) ------------- ------------- Total shareholders' equity ...................... 393,695 45,556 ------------- ------------- Total liabilities and shareholders' equity ...... $ 417,223 $ 65,814 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 NETRO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- REVENUES .................................................. $ 15,504 $ 3,196 $ 25,958 $ 5,338 COST OF REVENUES .......................................... 11,393 2,522 19,641 4,171 -------- -------- -------- -------- GROSS PROFIT .............................................. 4,111 674 6,317 1,167 -------- -------- -------- -------- OPERATING EXPENSES: Research and development ................................ 5,692 4,959 11,476 9,183 Sales and marketing ..................................... 2,530 1,231 4,570 2,563 General and administrative .............................. 2,373 1,351 4,289 3,103 Amortization of deferred stock compensation .................................... 263 341 560 509 -------- -------- -------- -------- Total operating expenses ........................ 10,858 7,882 20,895 15,358 -------- -------- -------- -------- LOSS FROM OPERATIONS ...................................... (6,747) (7,208) (14,578) (14,191) -------- -------- -------- -------- Other income (expense), net .............................. 5,928 (59) 6,689 (98) -------- -------- -------- -------- NET LOSS .................................................. $ (819) $ (7,267) $ (7,889) $(14,289) ======== ======== ======== ======== Basic and diluted net loss per share ...................... $ (0.02) $ (0.86) $ (0.16) $ (1.72) ======== ======== ======== ======== Shares used to compute basic and diluted net loss per share ................................................... 50,350 8,425 48,117 8,315 ======== ======== ======== ======== Pro forma basic and diluted net loss per share ...................................... $ (0.19) $ (0.38) ======== ======== Shares used to compute pro forma basic and diluted net loss per share .......................................... 37,973 37,628 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 NETRO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................ $ (7,889) $ (14,289) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................ 1,175 1,635 Provision for doubtful accounts ...................... 600 28 Amortization of deferred stock compensation .......... 560 509 Non-cash issuance of Preferred Stock ................. -- 162 Changes in operating assets and liabilities: Trade accounts receivable .......................... (7,335) (1,411) Inventory .......................................... (4,246) (336) Prepaid expenses and other ......................... (702) (282) Trade accounts payable and accrued liabilities ..... 4,960 1,254 --------- --------- Net cash used in operating activities ........... (12,877) (12,730) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements ....... (1,857) (997) Purchases of investments ................................ (168,244) (25,955) Maturities of investments ............................... 40,785 18,099 --------- --------- Net cash used in investing activities ........... (129,316) (8,853) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable and sale-leaseback transactions ........................... 1,070 3,256 Payments on notes payable and capital leases ............ (2,760) (1,836) Proceeds from issuance of Preferred Stock, net of issuance costs ......................................... -- 16,673 Proceeds from issuance of Common Stock, net of issuance costs ......................................... 354,699 397 Repayments of notes receivable from shareholder .......... 800 -- Repurchases of Common Stock .............................. (31) (4) --------- --------- Net cash provided by financing activities ....... 353,778 18,486 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... 211,585 (3,097) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............ 7,450 6,094 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 219,035 $ 2,997 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest .................................. $ 577 $ 513
See accompanying notes to condensed consolidated financial statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS: Netro Corporation (collectively, with its subsidiaries, the "Company") was incorporated in California on November 14, 1994. Netro is a leading provider of broadband wireless access equipment to competitive communications service providers worldwide. Netro's AirStar broadband access system derives its price-performance benefits from dynamic bandwidth allocation and a point-to-multipoint architecture that provides integrated voice and high-speed packet data services. The Company operates in one business segment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements at June 30, 2000 and June 30, 1999 have been included. The unaudited condensed consolidated financial statements include the accounts of Netro Corporation and its wholly owned subsidiaries. Results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2000. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission. The condensed balance sheet at December 31, 1999 is derived from audited financial statements as of that date. CASH AND CASH EQUIVALENTS AND INVESTMENTS Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of less than three months. Investments with maturities greater than three months and less than one year are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments. The Company's investments consist of government and corporate debt securities and are classified as "held-to-maturity." Accordingly, these investments, which mature at various dates through May 2002, are valued using the amortized cost method. INVENTORY Inventory includes materials and labor, is stated at the lower of cost (first-in, first-out) or market and consists of the following (in thousands):
JUNE 30, DECEMBER 31, 2000 1999 ------------- ------------- Raw materials .......................... $ 6,589 $ 3,865 Work-in-process ........................ 2,771 2,185 Finished goods ......................... 2,795 1,859 ------------- ------------- $ 12,155 $ 7,909 ============= =============
7 NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE Basic and diluted net loss per share has been computed using the weighted average number of shares of common stock outstanding. Potential common shares from the conversion of convertible preferred stock and the exercise of stock options and warrants are excluded from diluted net loss per share because they would be antidilutive. The total number of options, warrants, and preferred stock excluded from diluted net loss per share computation for the three and six months ended June 30, 2000 and 1999 were as follows (in thousands):
2000 1999 ----- ------ Shares of convertible preferred stock ......... -- 29,902 Shares issuable pursuant to warrants to purchase common stock ...................... 57 57 Shares issuable under stock option plans ...... 6,685 5,785 ----- ------ 6,742 35,744 ===== ======
On March 17, 2000, the Company completed a public offering and issued 4,504,111 shares of common stock upon the closing of the offering. The pro forma net loss per share computation has been appropriately weighted to reflect this issuance. Pro forma basic and diluted net loss per share is calculated assuming the conversion of convertible preferred stock into an equivalent number of shares of common stock, as if the shares had converted on the dates of their issuance. The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- HISTORICAL: Net loss .............................................. $ (819) $ (7,267) $ (7,889) $(14,289) ======== ======== ======== ======== Weighted average shares of common stock outstanding ..................................... 50,350 9,043 48,117 8,604 Less: Weighted average shares of common stock subject to repurchase ............................. -- (618) -- (289) -------- -------- -------- -------- Weighted average shares used to compute basic and diluted net loss per share ........................ 50,350 8,425 48,117 8,315 ======== ======== ======== ======== Basic and diluted net loss per share .................. $ (0.02) $ (0.86) $ (0.16) $ (1.72) ======== ======== ======== ======== PRO FORMA: Net loss .............................................. $ (7,267) $(14,289) ======== ======== Shares used above ..................................... 8,425 8,315 Pro forma adjustment to reflect weighted average effect of assumed conversion of convertible preferred stock ................................... 29,548 29,313 -------- -------- Weighted average shares used to compute pro forma basic and diluted net loss per share .............. 37,973 37,628 ======== ======== Pro form basic and diluted net loss per share ......... $ (0.19) $ (0.38) ======== ========
8 2. SHAREHOLDERS' EQUITY: PUBLIC OFFERING On August 24, 1999, the Company completed its initial public offering of 5,750,000 shares of common stock at a public offering price of $8.00 per share. The offering resulted in net proceeds to the Company of $41.6 million after payment of the underwriter's commission and deduction of offering expenses. Simultaneously with the closing of the initial public offering, all of the Company's then outstanding convertible preferred stock was automatically converted into an aggregate of 29,902,283 shares of common stock. On March 17, 2000, the Company completed a public offering for the sale of 6,000,000 shares of common stock at a price of $82.50 per share. Of the 6,000,000 shares offered, the Company sold 4,504,111 shares and selling shareholders sold 1,495,889 shares. The offering resulted in net proceeds to the Company of $352.3 million after payment of the underwriter's commission and other offering expenses. 3. DEBT AND CAPITAL LEASES: The following table summarizes obligations under long-term debt and capital leases (in thousands):
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Borrowings under bank line of credit ........ $ 3,568 $ 4,338 Secured note payable to lender, due in monthly installments of $90,942 with interest at 12.5% ......................... 1,518 1,882 Capital leases, due through 2003 ............ 3,621 4,177 -------- -------- 8,707 10,397 Less: current portion ....................... (6,553) (6,764) -------- -------- $ 2,154 $ 3,633 ======== ========
In January 1998, the Company entered into a bank line of credit under which up to $6,000,000 is available for borrowings and letters of credit. This arrangement was renewed in September 1999 and expires in January 2001. Borrowings are limited to an aggregate amount equaling approximately 80% and 90% of domestic and foreign eligible trade accounts receivables, respectively, and 50% of eligible foreign inventories. The line of credit is secured by the Company's outstanding trade accounts receivable and inventory. The borrowings under the line are due in January 2001 and accrue interest at the 30-day LIBOR rate plus 2.25% or the bank's prime rate, at the Company's option. Under the agreement, the Company must comply with certain financial and other covenants. As of June 30, 2000, borrowings outstanding under this agreement were $3,568,000 and amounts utilized for outstanding letters of credit were $275,000. In June 1999, the Company entered into an equipment lease agreement, under which the Company can finance equipment purchases of up to $3,000,000. As of June 30, 2000, the Company had borrowed approximately $2,334,835 under this agreement. The Company's right to make additional borrowings under this lease line expired in June 2000. 9 4. COMMITMENTS AND CONTINGENCIES: COMMITMENTS The Company has outstanding a standby letter of credit of $320,000 to secure certain of the Company's warranty obligations to one customer. The letter of credit is secured by a certificate of deposit for $125,000. The letter of credit is subject to draw if the Company fails to meet its obligations to the customer. 5. SEGMENT REPORTING: In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company adopted SFAS No. 131 in fiscal 1998. SFAS No. 131 establishes standards for disclosures about operating segments, products and services, geographic areas and significant customers. The Company is organized and operates as one operating segment: the design, development, manufacturing, marketing and selling of broadband wireless point-to-multipoint access systems. 6. RECENT ACCOUNTING GUIDANCE: In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 and related interpretations summarize the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. We are required to apply the guidance in SAB No. 101 to our financial statements no later than our fourth quarter of fiscal 2000. We currently are reviewing the impact of SAB No. 101 on our revenue recognition policy and the related impact on our consolidated financial statements. At this time, we do not believe SAB No. 101 will have a material impact on our financial position or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock Compensation--an interpretation of APB Opinion No. 25" (FIN 44). FIN 44 is effective July 1, 2000. The interpretation clarifies the application of APB Opinion No. 25 for certain issues, specifically, (a) the definition of an employee, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) fixed stock option or award, and (d) the accounting for an exchange or stock compensation awards in a business combination. We do not anticipate that the adoption of FIN 44 will have a material impact on our financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ substantially from those described in our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Risk Factors section of our Registration Statement on Form S-1 declared effective on March 17, 2000 by the Securities and Exchange Commission (File No. 333-30738) and those discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K 10 for the fiscal year ended December 31, 1999. The following discussion should be read together with our consolidated financial statements and related notes included elsewhere in this Form 10-Q. OVERVIEW We are a leading provider of wireless broadband access equipment used by telecommunications service providers to provide businesses with high-speed voice and data access. The Company's product, the AirStar system, allows multiple subscribers to communicate with a single base station radio in a point-to-multipoint architecture using packet based technology. We began initial sales of an early 26 GHz AirStar system in Europe in early 1998. With the successful trial shipments of the AirStar system, we discontinued AirMAN in September 1998. We shipped the first trial AirStar systems for 26 GHz in the third quarter of 1998. We then shipped a trial version of a 10 GHz AirStar product in November 1998. Based on our success in field trials and the receipt of limited quantities of AirStar subsystems from our contract manufacturers, we made the 26 GHz AirStar product commercially available in January 1999 and the 10 GHz AirStar product commercially available in October 1999. However, the products were, and continue to be, available only in limited quantities due to manufacturing and capacity constraints. Additionally, we shipped a trial version of a 38 GHz product in September 1999 and a trial version of a 28 GHz AirStar product in June of 2000. 11 RESULTS OF OPERATIONS THREE and SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Revenues. Current revenues primarily consist of product revenues from the sale of the AirStar system. Revenues increased to $15.5 million for the three months ended June 30, 2000 from $3.2 million for the same period in 1999. Sales to one customer represented 89% of revenues for the three months ended June 30, 2000. Sales to one customer represented 67% of revenues for the three months ended June 30, 1999. For the six months ended June 30, 2000 our revenues increased to $26.0 million from $5.3 million for the same period in 1999. Sales to one customer represented 90% of revenues for the six months ended June 30, 2000. Sales to two customers represented 60% and 20% of revenues for the six months ended June 30, 1999. The increase in revenues for each of the comparative periods was a result of increasing unit sales of the AirStar products. Substantially all of the revenues for these periods were generated from installations in international locations. Gross Profit (loss). Gross profit increased to $4.1 million for the three months ended June 30, 2000 from $674,000 for the same period in 1999. Gross profit for the six months ended June 30, 2000 was $6.3 million compared to a gross profit of $1.2 million for the same period in 1999. Gross profit, as a percentage of revenues, improved from 22% for the six months ended June 30, 1999 to 24% for the six months ended June 30, 2000. The increase in gross profit on a percentage basis was primarily due to lower unit costs associated with the implementation of design and manufacturing related cost reduction efforts. We are pursuing cost reductions in our products but also expect continued decreases in the average sales prices of our products. It is anticipated that these future price decreases could offset, at least partially, any cost reductions that we achieve. The customer sales mix and product sales mix also influence our gross profit margin. Sales to indirect (OEM) customers generate lower gross profit margins than sales to direct customers. Base station sales generate more favorable gross profit margins than subscriber sales. We expect that the introduction of new customers, channel mix and product mix will result in fluctuations in our gross profit margin in future quarters. Research and Development. Research and development expenses increased to $5.7 million for the three months ended June 30, 2000 from $5.0 million for the same period in 1999. Research and development expenses increased to $11.5 million for the six months ended June 30, 2000 from $9.2 million for the same period in 1999. This increase in research and development expenses was primarily due to an increase in research and development personnel, number of development projects and related third-party design and consulting charges. These projects primarily consisted of the development of the AirStar system at 28, 26, 10 and 38 GHz. We expect research and development expenses to continue to increase on an absolute basis during future periods. Sales and Marketing. Sales and marketing expenses consist primarily of compensation costs, commissions, travel and related expenses for marketing, sales, customer advocacy and field service support personnel, as well as product management, trade show and promotional expenses. Sales and marketing expenses increased to $2.5 million for the three months ended June 30, 2000 from $1.2 million for the same period in 1999. Sales and marketing expenses increased to $4.6 million for the six months ended June 30, 2000 from $2.6 million for the same period in 1999. This increase in sales and marketing expenses was primarily due to an increase in personnel to support both the pre-sale and post-sale activities associated with the AirStar system. We expect sales and marketing expenses to continue to increase in future periods as we expand our sales, marketing, technical assistance and field capabilities necessary to support increased sales and product offerings. General and Administrative. General and administrative expenses consist primarily of compensation costs and related expenses for executive, finance, 12 management information systems, human resources and administrative personnel. These expenses also include professional fees, facilities and other general corporate expenses. General and administrative expenses increased to $2.4 million for the three months ended June 30, 2000 from $1.4 million for the same period in 1999. General and administrative expenses increased to $4.3 million for the six months ended June 30, 2000 from $3.1 million for the same period in 1999. The increases were primarily due to increased costs associated with being a public company and growth in our infrastructure. General and administrative expenses for June 30, 1999 included a reserve to settle an arbitration claim from a contract manufacturer of the discontinued Airman system. We expect the growth of our business and operation as a public company will require additional personnel and costs resulting in increases in our general and administrative expenses. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation results from the granting of stock options to employees with exercise prices per share determined to be below the estimated fair values per share of our common stock at dates of grant. The deferred compensation that results is being amortized to expense over the vesting periods of the individual options, generally four years. We have recorded total deferred stock compensation of $4.8 million through December 31, 1999. Other Income (expense), Net. Other income (expense), net consists primarily of interest income earned on low-risk investments and interest paid on outstanding debt. Other income, net increased to $5.9 million for the three months ended June 30, 2000 from an expense of $59,000 for the same period in 1999. Other income, net increased to $6.7 million for the six months ended June 30, 2000 from an expense of $98,000 for the same period in 1999. The increases were primarily due to greater interest earned as a result of higher average cash balances resulting from the public offerings' proceeds. Net Loss. Net loss decreased to $819,000 for the three months ended June 30, 2000 from $7.3 million for the same period in 1999. Net loss decreased to $7.9 million for the six months ended June 30, 2000 from $14.3 million for the same period in 1999. The decreases were primarily due to an increase in gross profit and interest income, which were partially offset in part by increases in operating expenses. We believe that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely on them to predict future performance. The amount and timing of our operating expenses may fluctuate significantly in the future as a result of a variety of factors. We face a number of risks and uncertainties encountered by early stage companies, particularly those in rapidly evolving markets such as the telecommunications and data communications equipment industries. We may not be able to address these risks and difficulties successfully. In addition, although we have experienced revenue growth recently, our revenue growth may not continue, and we may not achieve or maintain profitability in the future. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future. It is likely that in some future quarter our operating results will fall below the expectations of securities analysts and investors. In this event, the market price of our common stock could significantly decline. Some of the factors that could affect our quarterly or annual operating results include: - Our ability to reach the required production volumes and quality levels for our products; - Our ability to obtain sufficient supplies of sole source or long lead-time components for our products; - Our ability to achieve cost reductions; 13 - The size, timing and frequency of network buildouts, which are typically large and infrequent; - The timing and amount of, or cancellation or rescheduling of, orders for our products, particularly large orders from system integrators; - Our ability to introduce and support new products and to manage product transitions; and - A decrease in the average selling prices of our products. Our sales cycle, which is typically between six and twelve months, contributes to fluctuations in our quarterly operating results. Further, the emerging and evolving nature of the market for systems such as AirStar may lead prospective customers to postpone their purchasing decisions. Most of our expenses, such as employee compensation and lease payments for facilities and equipment, are relatively fixed in the near term. In addition, our expense levels are based, in part, on our expectations regarding future revenues. As a result, any shortfall in revenues relative to our expectations could cause significant changes in our operating results from quarter to quarter. Due to the foregoing factors, we believe period-to-period comparisons of our revenue levels and operating results are not meaningful. You should not rely on our quarterly revenues and operating results to predict our future performance. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, cash and cash equivalents were $219.0 million, short-term investments were $103.2 million and long-term investments were $62.2 million. We have a $6.0 million bank line of credit. As of June 30, 2000, borrowings outstanding were $3.6 million and amounts utilized for outstanding letters of credit were $275,000 under this agreement. The line of credit is secured by eligible outstanding accounts receivable and inventory. The borrowings under the line are due in January 2001 and accrue interest at the 30-day LIBOR plus 2.25% or the bank's prime rate, at our option. See note 3 of notes to condensed consolidated financial statements. In March 2000 the Company completed a public offering. Of the 6,000,000 shares of common stock offered, the Company sold 4,504,111 shares and selling shareholders sold 1,495,889, at a price of $82.50 per share. We received net aggregate proceeds of approximately $352.3 million after deducting underwriting discounts and commission and estimated offering costs. Cash used in operating activities was $12.9 million for the six months ended June 30, 2000 and $12.7 million for the same period in 1999. Cash used for operations for the six months ended June 30, 2000 was due to the net loss, an increase in trade accounts receivable and an increase in inventory purchases, partially offset by an increase in trade accounts payable and non-cash charges. Cash used for operations for the six months ended June 30, 1999 was primarily due to the net loss, partially offset by non-cash charges. Cash used in investing activities was $129.3 million for the six months ended June 30, 2000 and $8.9 million for the same period in 1999. Cash used in investing activities for both periods was primarily due to excess cash invested in investments. Cash provided by financing activities was $353.8 million for the six months ended June 30, 2000 and $18.5 million for the same period in 1999. Cash provided by financing activities for both periods were primarily due to the issuance of preferred and common stock. 14 We have no material commitments other than obligations under our credit facilities and operating and capital leases. Our future capital requirements will depend upon many factors, including the timing of research and product development efforts and expansion of our marketing efforts. We expect to continue to expend significant but smaller amounts on property and equipment related to the expansion of our facilities, and on research and development laboratory and test equipment, as the capital required for volume manufacturing is being committed by our contract manufacturers. We provide six or twelve-month forecasts to our contract manufacturers. We generally commit to purchase products to be delivered within the most recent 60 days covered by these forecasts with cancellation fees. As of June 30, 2000, we had committed to make purchases totaling $11.3 million from these manufacturers in the next 60 days. In addition, in specific instances we may agree to assume liability for limited quantities of specialized components with lead times beyond this 60-day period. In future periods, we generally anticipate significant increases in our working capital needs on a period-to-period basis primarily as a result of planned increased product revenues. In conjunction with the expected increases in revenues, we expect higher levels of inventory and trade accounts receivable. While we also expect an increase in trade accounts payable and other liabilities, we do not expect that they will offset the increases in inventory and trade accounts receivable. We believe that our cash and cash equivalents balances, short-term and long-term investments and funds available under our existing line of credit will be sufficient to satisfy our cash requirements for at least the next twelve months. Our management intends to invest our cash in excess of current operating requirements in interest-bearing, investment-grade securities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY HEDGING INSTRUMENTS. We transact business in various foreign currencies and, accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. To date, the effect of changes in foreign currency exchange rates on revenues and operating expenses have not been material. Basically, all of our revenues are earned in U.S. dollars. Operating expenses incurred by our German and French subsidiaries are denominated primarily in European currencies. We currently do not use financial instruments to hedge these operating expenses. We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. We do not use derivative financial instruments for speculative trading purposes. FIXED INCOME INVESTMENTS. Our exposure to market risks from changes in interest rates relates primarily to corporate debt securities. We place our investments with high credit quality issuers and, by policy, limit the amount of the credit exposure to any one issuer. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents; all investments with maturities of three months or greater and less than one year are considered to be short-term investments; all investments with maturities greater than one year are considered to be long-term investments. All investments are classified as held-to-maturity. The Company's investments consist of government and corporate debt securities and are classified as "held-to-maturity." 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is involved in various legal proceedings in the ordinary course of business. The Company is not currently involved in any litigation which, in management's opinion, would have a material adverse effect on its business, operating results or financial condition, however there can be no assurance that any such proceeding will not escalate or otherwise become material to the Company's business in the future. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On August 18, 1999, in connection with the Company's initial public offering, a Registration Statement on Form S-1 (No. 333-81325) was declared effective by the Securities and Exchange Commission, pursuant to which 5,750,000 shares of the Company's Common Stock were offered and sold for the account of the Company at a price of $8.00 per share, generating gross offering proceeds of $46.0 million. The managing underwriters were Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc. and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. The Company incurred the following expenses in connection with the offering:
Underwriting discounts and commissions $3,220,000 Other expenses 1,175,000 ---------- Total Expenses $4,395,000 ==========
All of such expenses were direct or indirect payments to others. The net offering proceeds to the Company after deducting the total expenses above were approximately $41,605,000. From August 18, 1999 to December 31, 1999, the Company used such net offering proceeds, in direct or indirect payments to others, as follows:
Investment in short-term, interest-bearing obligations $37,887,000 Working Capital 3,718,000 ----------- Total $41,605,000 ===========
Each of such amounts is a reasonable estimate of the application of the net offering proceeds. This use of proceeds does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. On March 17, 2000, in connection with the Company's public offering, a Registration Statement on Form S-1 (No. 333-30738) was declared effective by the Securities and Exchange Commission, pursuant to which 6,000,000 shares of the Company's Common Stock were offered and sold for the account of the Company at a price of $82.50 per share. Of the 6,000,000 shares sold in the offering, 4,504,111, shares were sold by the Company and 1,495,889 shares were sold by shareholders. The offering resulted in gross offering proceeds of $371.6 million. The managing underwriters were Goldman Sachs, Lehman Brothers, BancBoston Robertson Stephens Inc. and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. After deducting approximately $18.6 million in underwriting discounts and $725,000 in other related expenses, the net proceeds 16 of the offering were approximately $352.3 million. The $352.3 million has been invested in investment grade, interest bearing securities. The Company intends to use such remaining proceeds for capital expenditures and for general corporate purposes, including working capital to fund anticipated operating losses. ITEM 3. DEFAULT UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 25, 2000, the Company held its annual meeting of shareholders. The following summarizes the matters submitted to a vote of the shareholders: 1. The election of the following nominees to serve as members of the Board of Directors:
NOMINEE IN FAVOR WITHHELD --------------------- --------------------- ------------------- Thomas R. Baruch (35,559,454) (80,511) Irwin Federman (35,559,454) (80,511) Robert J. Wynne (35,559,454) (80,511)
2. The approval of the amendment of the Company's 1997 Directors' Stock Option Plan to increase the initial grant to new directors to 50,000 shares, vesting in four equal increments on the first four anniversaries of the date the director joins the board, and to increase the annual grant to all directors to 12,500 shares, vesting in full on the fourth anniversary of the date of grant: FOR (31,797,609) AGAINST (3,804,029) ABSTAIN (38,327) 3. The ratification of the appointment of Arthur Andersen LLP as the Independent Public Accountants of the Company for the fiscal year ending December 31, 2000: FOR (35,618,098) AGAINST (13,650) ABSTAIN (8,217) ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NO. DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by Netro Corporation during the quarter ended June 30, 2000. 17 NETRO CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETRO CORPORATION Date: August 10, 2000 By: /s/ MICHAEL T. EVERETT ------------------------------------------ Michael T. Everett Executive Vice President, Finance, Chief Financial Officer and Assistant Secretary (Principal Financial Officer) By: /s/ LISA A. EVINS ------------------------------------------ Lisa A. Evins Controller (Principal Accounting Officer) 18 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule EX-27.1 2 ex27-1.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 219,035 103,186 14,410 750 12,155 349,532 14,872 9,621 417,223 21,324 0 0 0 500,771 (107,076) 417,223 25,958 25,958 19,641 20,895 0 0 (6,689) (7,889) 0 (7,889) 0 0 0 (7,889) (0.16) (0.16)
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