10-Q 1 f74826e10-q.txt FORM 10-Q PERIOD ENDED JUNE 30, 2001 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, 2001 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 0-26963 NETRO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 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 7, 2001 was 52,196,952. ================================================================================ 2 INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000........................................ 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000.............. 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000...................... 5 Notes to Condensed Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................ 16 Item 2. Changes in Securities and Use of Proceeds.................... 16 Item 3. Defaults Upon Senior Securities.............................. 16 Item 4. Submission of Matters to a Vote of Security Holders.......... 16 Item 5. Other Information............................................ 17 Item 6. Exhibits and Reports on Form 8-K............................. 17 SIGNATURES ........................................................... 18 EXHIBIT INDEX ......................................................... 19
2 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETRO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ ASSETS (unaudited) Current Assets: Cash and cash equivalents ............................. $ 99,320 $ 91,660 Marketable securities ................................. 130,927 185,904 Trade accounts receivable, net ........................ 4,779 13,532 Inventory, net ........................................ 6,381 27,994 Prepaid expenses and other ............................ 3,255 5,527 --------- --------- Total current assets ............................. 244,662 324,617 Equipment and leasehold improvements ....................... 8,026 6,896 Long-term marketable securities ............................ 106,889 89,351 Other assets ............................................... 2,618 889 --------- --------- Total assets ..................................... $ 362,195 $ 421,753 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital leases .. $ 1,801 $ 6,183 Trade accounts payable ................................ 3,176 9,116 Accrued liabilities ................................... 20,943 9,159 --------- --------- Total current liabilities ........................ 25,920 24,458 Long-term debt and capital leases, net of current portion .. 353 1,280 Deferred facilities rent ................................... 9 40 --------- --------- Total liabilities ................................ 26,282 25,778 --------- --------- Commitments and contingencies (Note 5) Shareholders' equity: Common stock .......................................... 505,534 503,667 Deferred stock compensation ........................... (1,452) (1,933) Accumulated other comprehensive income ................ 1,223 823 Accumulated deficit ................................... (169,392) (106,582) --------- --------- Total shareholders' equity ....................... 335,913 395,975 --------- --------- Total liabilities and shareholders' equity ....... $ 362,195 $ 421,753 ========= =========
See accompanying notes to condensed consolidated financial statements. 3 4 NETRO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues ............................................ $ 2,051 $ 15,504 $ 11,182 $ 25,958 Cost of revenues .................................... 21,182 11,393 51,885 19,641 -------- -------- -------- -------- Gross profit (loss) ................................. (19,131) 4,111 (40,703) 6,317 -------- -------- -------- -------- Operating expenses: Research and development ......................... 6,539 5,692 14,279 11,476 Sales and marketing .............................. 3,588 2,530 7,351 4,570 General and administrative ....................... 4,749 2,373 9,725 4,289 Amortization of deferred stock compensation ...... 227 263 455 560 -------- -------- -------- -------- Total operating expenses ................... 15,103 10,858 31,810 20,895 -------- -------- -------- -------- Loss from operations ................................. (34,234) (6,747) (72,513) (14,578) Other income, net .................................... 4,396 5,928 9,703 6,689 -------- -------- -------- -------- Net income(loss) ..................................... $(29,838) $ (819) $(62,810) $ (7,889) ======== ======== ======== ======== Basic and diluted net loss per share ................. $ (0.57) $ (0.02) $ (1.21) $ (0.16) ======== ======== ======== ======== Shares used to compute basic and diluted net loss per share ......................................... 52,074 50,350 51,992 48,117 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 5 NETRO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ......................................................... $ (62,810) $ (7,889) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................................. 1,890 1,175 Inventory provision ........................................... 29,700 525 Provision for doubtful accounts ............................... 2,000 600 Provision for contract losses ................................. 12,000 -- Loss on disposal of fixed assets .............................. 1,078 -- Amortization of deferred stock compensation ................... 455 560 Changes in operating assets and liabilities: Trade accounts receivable .................................. 6,750 (7,335) Inventory .................................................. (8,087) (4,771) Prepaid expenses and other ................................. 3,793 (702) Trade accounts payable and accrued liabilities ............. (6,141) 4,960 --------- --------- Net cash used in operating activities ...................... (19,372) (12,877) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements ................ (4,111) (1,857) Purchase of equity investment .................................... (1,500) -- Purchases of marketable securities ............................... (210,461) (168,244) Maturities of marketable securities .............................. 246,561 40,785 --------- --------- Net cash provided by (used in) investing activities ........ 30,489 (129,316) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable and sale-leaseback ....... -- 1,070 transactions Payments on notes payable and capital leases ..................... (5,309) (2,760) Proceeds from issuance of common stock, net of issuance costs .... 1,893 354,699 Repayments of notes receivable from shareholder .................. -- 800 Repurchases of common stock ...................................... -- (31) --------- --------- Net cash provided by (used in) financing activities ........ (3,416) 353,778 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ........ (41) -- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 7,660 211,585 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 91,660 7,450 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 99,320 $ 219,035 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest ........................................... $ 497 $ 577 ========= =========
See accompanying notes to condensed consolidated financial statements. 5 6 NETRO CORPORATION 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 and reincorporated into Delaware in June 2001. Netro is a leading provider of broadband wireless access equipment used by telecommunications service providers to provide businesses with high-speed voice and data access and to provide mobile service operators with infrastructure applications. 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 accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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, 2001 and 2000 have been included. The unaudited condensed consolidated financial statements include the accounts of Netro Corporation and its subsidiaries in Germany, France and Israel. All material intercompany accounts and transactions have been eliminated in consolidation. Results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2001. 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, 2000 filed with the Securities and Exchange Commission. The condensed balance sheet at December 31, 2000 is derived from audited financial statements as of that date. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES 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 marketable securities. Investments with maturities greater than one year are classified as long-term marketable securities. The Company's investments, which mature at various dates through June 2003, consist of government and corporate debt securities and are classified as either "available-for-sale" or "held-to-maturity." "Available-for-sale" investments are stated at fair value, with unrealized gains and losses recorded in Accumulated Other Comprehensive Income in the balance sheet. "Held-to-maturity" investments are stated at amortized cost. INVENTORY Inventory, which includes materials and labor, is stated at the lower of cost (first-in, first-out) or market and consists of the following (in thousands): 6 7
JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Raw materials ..... $ 1,106 $ 8,118 Work-in-process ... 138 3,840 Finished goods .... 5,137 16,036 ------- ------- $ 6,381 $27,994 ======= =======
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. Shares of common stock issuable pursuant to warrants and other stock option plans are excluded from diluted net loss per share for periods in which there is a loss as they would be antidilutive. The total number of options and warrants excluded from the diluted net loss per share computation for the three and six months ended June 30, 2001 and 2000 were as follows (in thousands):
2001 2000 ----- ----- Shares issuable pursuant to warrants to purchase common stock ..... 57 57 Shares issuable under stock option plans .......................... 6,718 6,685 ----- ----- 6,775 6,742 ===== =====
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2001 2000 2001 2000 --------- ------- --------- -------- Net loss ................................................... $ (29,838) $ (819) $ (62,810) $ (7,889) ========= ======= ========= ======== Weighted average shares of common stock outstanding used to compute basic and diluted net loss per share .... 52,074 50,350 51,992 48,117 ========= ======= ========= ======== Basic and diluted net loss per share ....................... $ (0.57) $ (0.02) $ (1.21) $ (0.16) ========= ======= ========= ========
COMPREHENSIVE INCOME Comprehensive income includes unrealized gains and losses on available-for-sale equity securities and foreign currency translation gains and losses that have been excluded from net income and reflected instead in shareholders' equity. For the periods presented, comprehensive income is calculated as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income (loss) .............................$(29,838) $ (819) $(62,810) $ (7,889) Unrealized gains on marketable securities ..... (317) -- 428 -- Foreign currency translation adjustments ...... (124) -- (28) -- -------- -------- -------- -------- Comprehensive income (loss) ...................$(30,279) $ (819) $(62,410) $ (7,889) ======== ======== ======== ========
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. For the periods presented, amortization is classified as follows (in thousands): 7 8
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2001 2000 2001 2000 ------ ------ ----- ----- Research and development ...................... $ 44 $ 74 $ 88 $150 Sales and marketing ........................... 118 122 238 258 General and administrative .................... 65 67 129 152 ---- ---- ---- ---- Amortization of deferred stock compensation ... $227 $263 $455 $560 ==== ==== ==== ====
3. SHAREHOLDERS' EQUITY: In March 2001, the Company effected a plan, under which employees holding options to purchase the Company's common stock with exercise prices in excess of $34.00 per share could choose to cancel those stock option grants in exchange for a commitment that options to purchase the same number of common shares will be granted in October 2001, provided that the participant has not terminated employment prior to such time (the "Cancel and Re-grant Program"). Options granted under the Cancel and Re-grant Program will have an exercise price equal to the fair value of the Company's common stock on the date of the new grant, and will vest according to the original vesting terms, which are typically 1/4(th) after one year and 1/48(th) per month thereafter, beginning at the date of cancellation. All other terms of options granted under the Cancel and Re-grant Program will be substantially the same as the cancelled options. 4. DEBT AND CAPITAL LEASES: The following table summarizes obligations under long-term debt and capital leases (in thousands):
JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Borrowings under bank line of credit ................. $ -- $ 3,568 Secured note payable to lender, due in monthly installments of $90,942 with interest at 12.5% .... -- 975 Capital leases, due through 2003 ..................... 2,154 2,920 ------- ------- Total long-term debt and capital leases .............. 2,154 7,463 Less: current portion ............................... (1,801) (6,183) ------- ------- $ 353 $ 1,280 ======= =======
In January 1998, the Company entered into a bank line of credit under which up to $10,000,000 is available for borrowings and letters of credit. This arrangement was renewed in December 2000 and expires in January 2002. 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 trade accounts receivable and inventory. The borrowings under the line are due in January 2002 and accrue interest at the 30-day LIBOR rate plus 1.5% or the bank's prime rate, at the Company's option. Under the agreement, the Company must comply with certain financial and other covenants. In April 2001, the Company paid off the outstanding balance in full. As of June 30, 2001, there were no borrowings outstanding under this agreement and amounts utilized for outstanding letters of credit were $240,000. 5. COMMITMENTS AND CONTINGENCIES: COMMITMENTS The Company has outstanding a standby letter of credit for $240,000 to secure certain of the Company's warranty obligations to one customer. The letter of credit is secured by a certificate of deposit for $80,000. The letter of credit is subject to draw if the Company fails to meet its obligations to the customer. 8 9 In July 2001, the Company issued a letter of credit for $2.0 million as a security deposit for the Company's San Jose, California office space. The letter of credit is subject to draw if the Company fails to meet its obligations under the facilities lease. 6. 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. 7. RECENT ACCOUNTING GUIDANCE: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which, as amended, requires companies to value derivative financial instruments, including those used for hedging foreign currency exposures, at current market value with the impact of any change in market value being recognized either in current earnings or in other comprehensive income, depending on the use of the derivative and whether the hedging instrument is effective or ineffective when hedging changes in fair value or cash flows. The Company adopted SFAS No. 133 effective January 2001. As the Company, to date, has not entered into any derivative financial instrument contracts and does not engage in hedging activities, the adoption of SFAS No. 133 did not have a material impact on its financial position or results of operations. In July 2001, the FASB issued SFAS No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment applying a fair-value based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. As the Company has no goodwill recorded on the books, these pronouncements are not expected to have a material impact on its financial position or results of operations. 8. SUBSEQUENT EVENTS: In July 2001, the Company adopted a stockholder rights plan. As a part of the plan, the Company has declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of August 16, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of a new series of participating preferred stock at an initial purchase price of $20.00 per unit. If a person or group acquires 15% or more of the Company's outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $20.00 exercise price, shares of the Company's common stock having twice the value of the exercise price. If, following an acquisition of 15% or more of the Company's common stock by a stockholder, the Company is involved in certain mergers or other business combinations each right will entitle the holder to purchase, in exchange for the exercise price, common stock of the other party to such transaction having twice the value of the exercise price. Holders who, as of the date of adoption of the plan, already hold more than 15% of the Company's common stock will not trigger any rights under the plan so long as neither they nor their affiliates or associates acquire more than 19.9% of the Company's common stock. The rights expire on July 23, 2011 unless extended by the Company's Board of Directors. 9 10 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 which include, but are not limited to, statements concerning projected revenues, expenses and gross profit, need for additional capital and market acceptance of our products. The forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors. 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 section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 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 broadband wireless access equipment used by telecommunications service providers to provide businesses with high-speed voice and data access and to provide mobile service operators with infrastructure applications. We were incorporated in California in 1994 and reincorporated in Delaware in 2001. We introduced our first product, the AirMAN system, in 1996. The AirMAN system was designed to provide a dedicated link to connect two high traffic nodes in a network. We discontinued AirMAN in September 1998. We began development of a second system, the AirStar system, in 1996. Currently, all of our revenues are derived from sales of the AirStar system. Unlike the AirMAN system, the AirStar system allows multiple subscribers to communicate with a single hub radio in a point-to-multipoint architecture using packet based technology. The AirStar system is comprised of two principal components: - Customer Premise Equipment, which includes an outdoor radio unit which sends and receives signals to and from the hub equipment, and an indoor unit, which connects to the end-user's telecommunications and/or data network; and - Hubs, which include several outdoor radio units that send and receive signals from multiple customer premise equipment units, and an indoor unit, which aggregates data from the outdoor units and interfaces to the telecommunications service provider's core network. We began initial sales of an early AirStar system in Europe in early 1998. Since then, we have increased our product offering to encompass multiple frequencies thereby expanding our geographic coverage to include Latin America, North America and Asia. We sell our products indirectly through worldwide system integrators and local resellers in addition to through a direct sales force. Our sales to systems integrators comprised approximately 51% and 91% for both the three and six months ended June 30, 2001 and 2000, respectively. Due to ongoing realignments of our relationships with certain of our system integrator partners we are uncertain what portion of revenues systems integrators will represent in future periods. However, in the event of continued significant direct sales, we will be required to improve and expand our internal sales, customer advocacy and administration functions. Furthermore, as a result of these realignments we could experience order delays and order cancellations or fail to secure expected additional orders and, therefore, revenues during the balance of 2001 could be adversely affected. We experienced such cancellations and loss of orders during the first and second quarters of 2001. Overall, our visibility regarding potential future revenues is unclear. Sales to our largest system integrator customer represented approximately 49% of our total revenues for both the three and six months ended June 30, 2001. Sales to two customers represented 49% and 30% of revenues for the three months ended June 30, 2001. Sales to one customer represented 89% of revenues for the three months ended June 30, 2000. Sales to two customers represented 49% and 31% for the six months ended June 30, 2001. Sales to one 10 11 customer represented 90% for the six months ended June 30, 2000. Due to the nature and size of our equipment sales, we expect that certain customers will continue to account for a significant portion of our total revenues for the remaining quarters of 2001 and in the future. International revenues represented approximately 89% of revenues for the three months ended June 30, 2001 and 60% for the six months ended June 30, 2001. However, substantially all of our domestic revenues are related to products sold to systems integrators which the system integrators have resold, or plan to resell, to end customers in international locations. We have adopted a strategy of outsourcing our manufacturing operations. While we manufactured a small fraction of our products at our San Jose headquarters from 1998 to early 2000, by the fourth quarter of 2000, we achieved a goal of outsourcing substantially all of our volume product manufacturing and assembly to contract manufacturers. We will continue to maintain a small facility for prototype production in support of our research and development efforts. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 REVENUES. Current revenues primarily consist of product revenues from the sale of the AirStar system. Revenues decreased to $2.1 million for the three months ended June 30, 2001 from $15.5 million for the same period in 2000. Revenues for the six months ended June 30, 2001 decreased to $11.2 million from $26.0 million for the same period in 2000. The decrease in revenues for each of the comparative periods was a result of delayed orders from current and potential service provider customers as well as cancelled orders from some of our system integrator partners. Substantially all of the revenues for these periods were generated from installations in international locations. GROSS PROFIT(LOSS). Gross profit(loss) represents total revenues less the cost of revenues. Cost of revenues consists of contract manufacturing costs, material costs, labor costs, manufacturing overhead, warranty reserves and other direct product costs. Gross profit(loss) decreased to a loss of $19.1 million for the three months ended June 30, 2001 from a gross profit of $4.1 million for the same period in 2000. Gross profit(loss) for the six months ended June 30, 2001 decreased to a loss of $40.7 million from a gross profit of $6.3 million for the same period in 2000. Gross profit as a percentage of revenues decreased to a negative 933% for the three months ended June 30, 2001 from a positive 27% for the same period in 2000. Gross profit percentage for the six months ended June 30, 2001 decreased to a negative 364% from a positive 24% for the same period in 2000. The decline in gross profit on a dollar basis as well as on a percentage basis for both of the comparative periods primarily reflects charges related to excess and obsolete inventory and other material-related commitments as well as an increase in the proportion of revenues coming from customer premise equipment as opposed to hub equipment, partially offset by an increase in the proportion of revenues from direct sales. These charges of $18.5 million and $41.7 million for the three and six months ended June 30, 2001, respectively, are related to increased inventory levels and other material commitments made in anticipation of significantly higher revenue volumes than those achieved. We have experienced substantial quarterly fluctuations in gross profit in past quarters. The principal drivers of the quarterly fluctuations, other than the inventory and material-related commitments in the first two quarters of 2001, are the product sales mix and the customer sales mix. In general, customer premise equipment sales result in lower gross profit percentages than hub sales. The unit ratio of customer premise equipment sales to hub sales was 32:1 and 37:1 for the three months and six months ended June 30, 2001, respectively. We expect the ratio of unit sales of customer premise equipment to hub unit sales to continue to be in excess of 20:1 in future periods. Sales to system integrators generate lower gross profit percentages than sales to direct customers. Sales to systems integrators represented 51% of revenues in both the first and second quarters of 2001. In addition, we expect average selling prices for our products to decline substantially during 2001. To the extent that we are unable to reduce our product costs at a rate faster than the rate at which average selling prices decline, gross profit as a percentage of revenues will continue to decline during the second half of 2001. We expect that the introduction of new customers, channel mix, product mix and declining average selling prices will result in fluctuations in our gross profits in future quarters. RESEARCH AND DEVELOPMENT. Research and development expenses consist of compensation costs, the cost of some software development tools, consultant fees and prototype expenses related to the design, development and testing of our products. Research and development expenses increased to $6.5 million for the three months ended June 11 12 30, 2001 from $5.7 million for the same period in 2000. The increase in research and development expenses was primarily due to an increased investment of $700,000 in Bungee Communications, our Israeli research and development subsidiary. Research and development expenses for the six months ended June 30, 2001 increased to $14.3 million from $11.5 million for the same period in 2000. The increase in research and development expenses was primarily due to an increased investment of $1.5 million in Bungee Communications and an increase of $800,000 in third-party engineering charges and expenses related to the release of new product features for the AirStar system. We expect research and development expenses to continue to increase on an absolute basis during future periods, but at a slower rate than in prior 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 $3.6 million for the three months ended June 30, 2001 from $2.5 million for the same period in 2000. Sales and marketing expenses for the six months ended June 30, 2001 increased to $7.4 million from $4.6 million for the same period in 2000. The increases were primarily due to an increase in personnel and related compensation costs related to an increase in sales and marketing personnel from 49 to 56 and increases in promotional expenses of $900,000 and $650,000 for the three and six months ended June 30, 2001, respectively. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of compensation costs and related expenses for executive, finance, management information systems, human resources and administrative personnel. These expenses also include professional fees, facilities and other general corporate expenses, such as charges for doubtful accounts. General and administrative expenses increased to $4.7 million for the three months ended June 30, 2001 from $2.4 million for the same period in 2000. The increase was primarily due to increased personnel and related costs related to an increase in general and administrative personnel from 20 to 26, severance expenses of $400,000 related to our reduction in work force effected June 30th, fixed assets disposals of $400,000 and increased facilities expenses of $600,000 associated with additional leased building space. General and administrative expenses increased to $9.7 million for the six months ended June 30, 2001 from $4.3 million for the same period in 2000. The increase was primarily due to increased personnel and related costs related to an increase in general and administrative personnel from 20 to 26, an increase of $1.6 million for doubtful account reserves, severance expenses of $400,000 related to our reduction in work force effected June 30th, fixed assets disposals of $400,000 and increased facilities expenses of $1,100,000 associated with additional leased building space. 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. A total of $4.8 million of deferred stock compensation was recorded in 1998 and 1999. Amortization of deferred stock compensation was $227,000 for the three months ended June 30, 2001, compared to $263,000 for the same period in 2000. Amortization of deferred stock compensation for the six months ended June 30, 2001 was $455,000, compared to $560,000 for the same period in 2000. For classification of amortization of deferred stock compensation, see note 2 of notes to consolidated financial statements. OTHER INCOME, NET. Other income, net, consists primarily of interest income earned on low-risk marketable securities and interest paid on outstanding debt. Other income, net decreased to $4.4 million for the three months ended June 30, 2001 from $5.9 million for the same period in 2000, due to the decrease in cash balances and a reduction in interest rates. Other income, net for the six months ended June 30, 2001 increased to $9.7 million from $6.7 million for the same period in 2000, due to greater interest earned as a result of higher average cash balances resulting from the proceeds of the follow-on offering in March 2000 and, to a lesser extent, a decrease in interest expense. NET INCOME (LOSS). Net loss increased to $29.8 million for the three months ended June 30, 2001 from $819,000 for the same period in 2000. Net loss for the six months ended June 30, 2001 increased to $62.8 million from $7.9 million for the same period in 2000. The increases in net loss are due primarily to the inventory and other material-related charges, in addition to decreases in revenues and 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. 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 again fall below the expectations of securities analysts and investors. In this event, the market price of our common stock could significantly decline. 12 13 Some of the factors that could affect our quarterly or annual operating results include the following: - We have a history of losses, including more significant than expected losses in the first two quarters of 2001, expect future losses and may never achieve profitability. - If we do not reduce our reliance on a single customer for most of our revenues, our business and results of operations could be adversely affected. - If we cannot reduce our product costs, our results of operations will suffer. - If we do not succeed in developing relationships directly with telecommunications service providers and in strengthening our direct and indirect sales channels, our business will be harmed. - The majority of service providers using our products are emerging companies with unproven business models. If these service providers do not succeed, there will be a more limited market for our products. - Intense competition in the market for communications equipment could prevent us from increasing or sustaining revenues or achieving or sustaining profitability. - Due to our limited operating history, it is difficult to predict future operating results or our stock price. - We have a long sales cycle, which could cause our results of operations and stock price to fluctuate. - Many projects that include our products require system integration expertise and third-party financing, which we are unable to provide. If sources for system integration or financing cannot be obtained as needed, service providers may not select our products. - Our products may contain defects that could harm our reputation, be costly to correct, expose us to litigation and harm our operating results. - Our future operating results are dependent on the sales of a single product line. If there are unexpected reductions in revenues from this product, we will not have other products to offset the negative impact on our operating results. - Our business is subject to many factors that could cause our quarterly operating results to fluctuate and our stock price to be volatile. - We depend on contract manufacturers. If these manufacturers are unable to fill our orders on a timely basis, and we are unable to find alternative sources, we may be unable to deliver products to meet customer orders. - If we do not develop new products and product features in response to customer requirements or in a timely way, customers will not buy our products. - Because some of our key components are from sole source suppliers or require long lead times, our business is subject to unexpected interruptions, which could cause our operating results to suffer. - If high-speed wireless telecommunications technology or our implementation of this technology is not accepted by service providers, we will not be able to sustain or grow our business. - Because we must sell our products in many countries that have different regulatory schemes, if we cannot develop products that work with different standards, we will be unable to sell our products. - If we are unable to manage our international operations effectively, our business would be adversely affected. - Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products in particular markets. - Line-of-sight limitations inherent to broadband wireless products may limit deployment options and have an adverse affect on our sales. - If we are unable to hire or retain our key personnel, we might not be able to operate our business successfully. 13 14 For more information on the risks related to our Company, see the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2000. 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, 2001, cash and cash equivalents were $99.3 million, short-term marketable securities were $130.9 million and long-term marketable securities were $106.9 million. We have a $10.0 million bank line of credit. As of June 30, 2001, there were no borrowings outstanding and amounts utilized for outstanding letters of credit were $240,000 under this agreement. The line of credit is secured by eligible outstanding accounts receivable and inventory. Any borrowings under the line would accrue interest at the 30-day LIBOR plus 1.5% or the bank's prime rate, at our option. Capital lease obligations were $2.2 million at June 30, 2001. Future operating lease obligations were $22.2 million at June 30, 2001. Cash used in operating activities was $19.4 million for the six months ended June 30, 2001 and $12.9 million for the same period in 2000. Cash used in operations for the six months ended June 30, 2001 was primarily due to the net loss, adjusted for the inventory and contract loss provisions and increases in inventory accounts payable and accrued liabilities, partially offset by decreases in trade accounts receivable and prepaid expenses. Cash used in operations for the six months ended June 30, 2000 was primarily due to the net loss and increases in trade accounts receivable and inventory, partially offset by increases in accounts payable and accrued liabilities. Cash provided by investing activities was $30.5 million for the six months ended June 30, 2001, while cash used for investing activities for the same period in 2000 was $129.3 million. Cash provided by investing activities for the six months ended June 30, 2001 was due primarily to net maturities of marketable securities, partially offset by capital equipment purchases. Cash used in investing activities for the six months ended June 30, 2000 was primarily due to purchases of marketable securities. Cash used for financing activities was $3.4 million for the six months ended June 30, 2001, while cash provided from financing activities was $353.8 million for the same period in 2000. Cash used for financing activities for the six months ended June 30, 2001 was primarily due to payments on the bank line of credit and capital leases. Cash provided by financing activities for the six months ended June 30, 2000 was primarily due to the issuance of common stock in connection with the follow-on offering. 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. 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. We have no other material commitments. 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 laboratory and test equipment for research and development. We believe that our cash and cash equivalents balances, short-term and long-term marketable securities 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 marketable securities. 14 15 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. Substantially all of our revenues are earned in U.S. dollars. Operating expenses incurred by our foreign subsidiaries are denominated primarily in local 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 marketable securities; all investments with maturities greater than one year are considered to be long-term marketable securities. All investments are classified as either "available for sale" or "held-to-maturity" and consist of government and corporate debt securities. The SEC's rule related to market risk disclosure requires that we describe and quantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes. We are exposed to changes in interest rates on our investments in marketable securities. All of our investments are in funds that hold investment grade commercial paper, treasury bills or other U.S. government obligations. This investment policy reduces our exposure to long-term interest rate changes. A hypothetical 100 basis point decline in short-term interest rates would reduce the annualized earnings on our $322.9 million of marketable securities at June 30, 2001 by approximately $3.2 million. 15 16 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. Effective June 19, 2001, the Company changed its state of incorporation from California to Delaware. The reincorporation was accomplished through a merger (the "Merger") of Netro Corporation, a California corporation ("Netro California"), into its wholly owned Delaware subsidiary of the same name ("Netro Delaware"). As a result of the Merger, each outstanding share of Netro California common stock, par value $.001 per share, was automatically converted into one share of Netro Delaware common stock, par value $.001 per share. The reincorporation proposal was approved by the Company's shareholders at the Company's 2001 annual meeting of shareholders, as held on May 31, 2001 and reconvened on June 1, 2001. In July 2001, the Company adopted a stockholder rights plan. As a part of the plan, the Company has declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of August 16, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of a new series of participating preferred stock at an initial purchase price of $20.00 per unit. If a person or group acquires 15% or more of the Company's outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $20.00 exercise price, shares of the Company's common stock having twice the value of the exercise price. If, following an acquisition of 15% or more of the Company's common stock by a stockholder, the Company is involved in certain mergers or other business combinations each right will entitle the holder to purchase, in exchange for the exercise price, common stock of the other party to such transaction having twice the value of the exercise price. Holders who, as of the date of adoption of the plan, already hold more than 15% of the Company's common stock will not trigger any rights under the plan so long as neither they nor their affiliates or associates acquire more than 19.9% of the Company's common stock. The rights expire on July 23, 2011 unless extended by the Company's Board of Directors. ITEM 3. DEFAULT UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 31, 2001, the Company held its annual meeting of shareholders. The meeting was adjourned and reconvened on June 1, 2001. The following summarizes the matters submitted to a vote of the shareholders: 1. The election of the following nominees to serve as members of Class II of the Board of Directors:
NOMINEE IN FAVOR AGAINST WITHHELD ABSTAIN --------------------- ----------- ---------- ----------- ---------- Gideon Ben-Efraim 47,150,239 1,039,727 -- -- Richard M. Moley 47,500,546 689,420 -- -- Sanford Robertson 47,503,125 686,841 -- --
The directors who continued after the meeting as members of Class I were Thomas R. Baruch, Irwin Federman and Robert J. Wynne. 16 17 2. The approval of the change of the Company's state of incorporation from California to Delaware:
IN FAVOR AGAINST WITHHELD ABSTAIN ------------- ----------- ------------ ----------- 26,283,352 7,108,011 14,735,931 62,672
3. The approval of the amendment of the Company's 1996 Stock Option Plan to increase the number of authorized shares under that plan by 1,500,000 shares, and to increase the automatic annual increase in shares added to the plan to the least of 1,500,000 shares, 3% of the outstanding common stock on the last day of the immediately preceding fiscal year or a number of shares determined by the administrator of the plan.
IN FAVOR AGAINST WITHHELD ABSTAIN ------------- ----------- ----------- ----------- 29,665,424 18,373,437 -- 151,105
4. The ratification of the appointment of Arthur Andersen LLP as the Independent Public Accountants of the Company for the fiscal year ending December 31, 2001:
IN FAVOR AGAINST WITHHELD ABSTAIN ------------- ----------- ------------ ----------- 47,918,098 236,762 -- 35,106
ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 3.1 Restated Certificate of Incorporation 3.2 Bylaws (b) Reports on Form 8-K. The Company filed a report on Form 8-K with the Securities and Exchange Commission on July 5, 2001, announcing its completion of the change of its state of incorporation from California to Delaware. The Company filed a report on Form 8-K with the Securities and Exchange Commission on July 24, 2001, announcing that its Board of Directors had adopted a Stockholder Rights Plan. 17 18 NETRO CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETRO CORPORATION Date: August 10, 2001 By: /s/ Sanjay K. Khare ------------------------------------------ Sanjay K. Khare Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Lisa A. Evins ------------------------------------------ Lisa A. Evins Vice President of Finance (Principal Accounting Officer) 18 19 EXHIBIT INDEX 3.1 Restated Certificate of Incorporation 3.2 Bylaws 19