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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 September 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)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of November
7, 2000 was 51,297,630.
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INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999............................... 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months ended
September 30, 2000 and September 30, 1999................ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and September 30, 1999... 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... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 14
Item 2. Changes in Securities and Use of Proceeds.................... 14
Item 3. Defaults Upon Senior Securities.............................. 14
Item 4. Submission of Matters to a Vote of Security Holders.......... 14
Item 5. Other Information............................................ 14
Item 6. Exhibits and Reports on Form 8-K............................. 14
SIGNATURES ........................................................... 15
EXHIBIT INDEX ......................................................... 16
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETRO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 129,239 $ 7,450
Marketable securities ................................ 176,048 37,887
Trade accounts receivable, net ....................... 11,740 6,925
Inventory, net ....................................... 19,664 7,909
Prepaid expenses and other ........................... 2,170 814
--------- ---------
Total current assets ............................ 338,861 60,985
Equipment and leasehold improvements ...................... 5,902 4,569
Long-term marketable securities ........................... 79,610 --
Other assets .............................................. 916 260
--------- ---------
Total assets .................................... $ 425,289 $ 65,814
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital
leases ............................................. $ 6,374 $ 6,764
Trade accounts payable ............................... 10,497 5,064
Accrued liabilities .................................. 9,398 4,740
--------- ---------
Total current liabilities ....................... 26,269 16,568
Long-term debt and capital leases, net of current
portion ................................................. 1,722 3,633
Deferred facilities rent .................................. 45 57
--------- ---------
Total liabilities ............................... 28,036 20,258
--------- ---------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock ......................................... 503,324 146,490
Note receivable from shareholder ..................... -- (800)
Deferred stock compensation .......................... (2,506) (3,730)
Accumulated other comprehensive income ............... 522 --
Accumulated deficit .................................. (104,087) (96,404)
--------- ---------
Total shareholders' equity ...................... 397,253 45,556
--------- ---------
Total liabilities and shareholders' equity ...... $ 425,289 $ 65,814
========= =========
See accompanying notes to condensed consolidated financial statements.
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NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues ................................... $ 20,520 $ 5,156 $ 46,478 $ 10,494
Cost of revenues ........................... 15,034 4,077 34,675 8,248
-------- -------- -------- --------
Gross profit ............................... 5,486 1,079 11,803 2,246
-------- -------- -------- --------
Operating expenses:
Research and development ............... 5,631 5,092 17,107 14,275
Sales and marketing .................... 2,771 1,332 7,341 3,895
General and administrative ............. 2,922 1,450 7,211 4,553
Amortization of deferred stock
compensation ......................... 255 298 815 807
-------- -------- -------- --------
Total operating expenses ......... 11,579 8,172 32,474 23,530
-------- -------- -------- --------
Loss from operations ....................... (6,093) (7,093) (20,671) (21,284)
Other income, net .......................... 6,299 102 12,988 4
-------- -------- -------- --------
Net income (loss) .......................... $ 206 $ (6,991) $ (7,683) $(21,280)
======== ======== ======== ========
Basic net earnings (loss) per share ........ $ 0.00 $ (0.27) $ (0.16) $ (1.52)
======== ======== ======== ========
Shares used to compute basic net
earnings (loss) per share ............... 50,892 25,613 49,013 14,026
======== ======== ======== ========
Diluted net earnings (loss) per share ...... $ 0.00 $ (0.27) $ (0.16) $ (1.52)
======== ======== ======== ========
Shares used to compute diluted net
earnings (loss) per share ............... 55,999 25,613 49,013 14,026
======== ======== ======== ========
Pro forma basic and diluted net loss per
share ................................... $ (0.17) $ (0.55)
======== =======
Shares used to compute pro forma basic
and diluted net loss per share .......... 41,561 38,932
======== =======
See accompanying notes to condensed consolidated financial statements.
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NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (7,683) $ (21,280)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 1,844 2,221
Provision for doubtful accounts ........................... 700 28
Amortization of deferred stock compensation ............... 815 807
Non-cash issuance of preferred stock ...................... -- 328
Changes in operating assets and liabilities:
Trade accounts receivable .............................. (5,515) (3,907)
Inventory .............................................. (11,755) (2,498)
Prepaid expenses and other ............................. (5,019) (742)
Trade accounts payable and accrued liabilities ......... 10,079 4,078
--------- ---------
Net cash used in operating activities .................. (16,534) (20,965)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ............ (3,177) (1,231)
Purchases of marketable securities ........................... (291,659) (56,642)
Maturities of marketable securities .......................... 77,417 35,099
--------- ---------
Net cash used in investing activities .................. (217,419) (22,774)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
sale-leaseback transactions ............................... 1,083 4,323
Payments on notes payable and capital leases ................. (3,384) (2,404)
Proceeds from issuance of Preferred Stock, net of
issuance costs ............................................ -- 16,673
Proceeds from issuance of Common Stock, net of issuance
costs ..................................................... 357,274 42,434
Repayments of notes receivable from shareholder .............. 800 --
Repurchase of Common Stock ................................... (31) (4)
--------- ---------
Net cash provided by financing activities .............. 355,742 61,022
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 121,789 17,283
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 7,450 6,094
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 129,239 $ 23,377
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ....................................... $ 862 $ 792
========= =========
See accompanying notes to condensed consolidated financial statements.
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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. 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 September 30, 2000 and September 30, 1999 have been included.
The unaudited condensed consolidated financial statements include the
accounts of Netro Corporation and its subsidiaries.
Results of operations for the three and nine months ended September 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 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 2002, 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 includes materials and labor, is stated at the lower of cost
(first-in, first-out) or market and consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
Raw materials ..................... $ 8,479 $ 3,865
Work-in-process ................... 4,449 2,185
Finished goods .................... 6,736 1,859
------- -------
$19,664 $ 7,909
======= =======
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NET EARNINGS (LOSS) PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net earnings (loss) per share has been computed using
the weighted average number of shares of common stock outstanding. Potential
common shares from the exercise of stock options and warrants 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 diluted net
loss per share computation for the nine months ended September 30, 2000 and the
three and nine months ended September 30,1999 were as follows (in thousands):
2000 1999
----- -----
Shares issuable pursuant to warrants to purchase
common stock ..................................... 57 38
Shares issuable under stock option plans ............ 6,363 5,805
----- -----
6,420 5,843
===== =====
On August 24, 1999, the Company completed its initial public offering of
5,750,000 shares of common stock. Simultaneous 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. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2000 1999 2000 1999
-------- -------- ------- --------
HISTORICAL:
Net income (loss) ............................. $ 206 $ (6,991) $(7,683) $(21,280)
======== ======== ======= ========
Weighted average shares of common
stock outstanding ........................... 50,892 25,905 49,013 14,627
Less: Weighted average shares of
common stock subject to repurchase .......... -- (292) -- (601)
-------- -------- ------- --------
Basic weighted average shares
outstanding ................................. 50,892 25,613 49,013 14,026
======== ======== ======= ========
Basic net earnings (loss) per share ........... $ 0.00 $ (0.27) $ (0.16) $ (1.52)
======== ======== ======= ========
Dilutive adjustments to basic weighted
average shares outstanding:
Dilutive effect of employee stock
options ................................... 5,107 -- -- --
-------- -------- ------- --------
Diluted weighted average shares
outstanding ................................. 55,999 25,613 49,013 14,026
======== ======== ======= ========
Diluted net earnings (loss) per share ......... $ 0.00 $ (0.27) $ (0.16) $ (1.52)
======== ======== ======= ========
PRO FORMA:
Net loss ...................................... $ (6,991) $(21,280)
======== ========
Shares used above ............................. 25,613 14,026
Pro forma adjustment to reflect
weighted average effect of assumed
conversion of convertible preferred
stock ....................................... 15,948 24,906
-------- --------
Weighted average shares used to
compute pro forma basic and diluted
net loss per share .......................... 41,561 38,932
======== ========
Pro forma basic and diluted net loss
per share ................................... $ (0.17) $ (0.55)
======== ========
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COMPREHENSIVE INCOME
Comprehensive income includes unrealized gains and losses on available-for-sale
equity securities that have been excluded from net income and reflected instead
in shareholders' equity. For the periods presented, comprehensive income is
calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) ........................... $ 206 $ (6,991) $ (7,683) $(21,280)
Unrealized gains on securities .............. 522 -- 522 --
-------- -------- -------- --------
Comprehensive income (loss) ................. $ 728 $ (6,991) $ (7,161) $(21,280)
======== ======== ======== ========
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)
----------------------------
SEPTEMBER 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% ........................ 1,213 1,882
Capital leases, due through 2003 ............ 3,315 4,177
-------- --------
Total long-term debt and capital leases ..... 8,096 10,397
Less: current portion ...................... (6,374) (6,764)
-------- --------
$ 1,722 $ 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
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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 September 30, 2000, borrowings
outstanding under this agreement were $3,568,000 and amounts utilized for
outstanding letters of credit were $240,000.
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 September 30, 2000, the Company had borrowed approximately $2,335,000 under
this agreement. The Company's right to make additional borrowings under this
lease line expired in June 2000.
4. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company has outstanding a standby letter of credit for $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 $80,000. 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 "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.
7. SUBSEQUENT EVENTS:
In October 2000, the Company finalized and signed an agreement for the
creation of a majority-owned subsidiary in Israel, pursuant to which the Company
has invested $3.75 million in such subsidiary. This subsidiary will conduct
research and development and will be consolidated into the company's financial
results. The Company is obligated to invest up to an additional $26.25 million
in the subsidiary upon achievement of certain milestones.
Also in October 2000, the Company experienced a theft of approximately $2
million of inventory. This theft is believed to be fully covered by insurance.
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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, including regarding gross margins, research and
development, sales and marketing, general and administrative, and liquidity and
capital resources. 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
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, a
predecessor product, 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.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues. Current revenues primarily consist of product revenues from the
sale of the AirStar system. Revenues increased to $20.5 million for the three
months ended September 30, 2000 from $5.2 million for the same period in 1999.
Sales to one customer represented 81% of revenues for the three months ended
September 30, 2000. Sales to two customers represented 67% and 20% of revenues
for the three months ended September 30, 1999. For the nine months ended
September 30, 2000 our revenues increased to $46.5 million from $10.5 million
for the same period in 1999. Sales to one customer represented 86% of revenues
for the nine months ended September 30, 2000. Sales to three customers
represented 64%, 12% and 10% of revenues for the nine months ended September 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. Gross profit increased to $5.5 million for the three months
ended September 30, 2000 from $1.1 million for the same period in 1999. Gross
profit for the nine months ended September 30, 2000 was $11.8 million compared
to a gross profit of $2.2 million for the same period in 1999. Gross profit, as
a percentage of revenues, improved from 21% to 27% for the three months ended
September 30, 1999 and 2000, respectively, and from 21% to 25% for the nine
months ended September 30, 1999 and 2000, respectively. 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, offset in part by increasing fractions of customer premise equipment as
a percentage of overall shipments. 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,
partially or entirely, any cost
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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, the introduction of new products to
volume manufacturing, channel mix and product mix will result in fluctuations in
our gross profit margin 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 $5.6 million for
the three months ended September 30, 2000 from $5.1 million for the same period
in 1999. Research and development expenses increased to $17.1 million for the
nine months ended September 30, 2000 from $14.3 million for the same period in
1999. These increases in research and development expenses were primarily due to
an increase in research and development personnel, an increase in the number of
development projects and related third-party design charges. These projects
primarily consisted of the development of the AirStar system at 28, 26, 10 and
38 GHz. With continued investments in these areas and the introduction of the
Israeli research and development subsidiary, 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 $2.8 million for the three months ended September 30, 2000 from
$1.3 million for the same period in 1999. Sales and marketing expenses increased
to $7.3 million for the nine months ended September 30, 2000 from $3.9 million
for the same period in 1999. These increases in sales and marketing expenses
were 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,
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 $2.9
million for the three months ended September 30, 2000 from $1.5 million for the
same period in 1999. General and administrative expenses increased to $7.2
million for the nine months ended September 30, 2000 from $4.6 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 1999 included a reserve to settle an arbitration
claim from a contract manufacturer of the discontinued AirMan system. This
dispute was subsequently resolved resulting in a payment within the reserved
amount. 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 arises from employee stock options 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.
Other Income, net. Other income, net, consists primarily of interest
income earned on low-risk investments and interest paid on outstanding debt.
Other income, net increased to $6.3 million for the three months ended September
30, 2000 from $102,000 for the same period in 1999. Other income, net increased
to $13.0 million for the nine months ended September 30, 2000 from $4,000 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 proceeds
of the public offerings.
Net Income(Loss). Net income of $206,000 for the three months ended
September 30, 2000 improved compared to a net loss of $7.0 million for the same
period in 1999. Net loss decreased to $7.7 million for the nine months ended
September 30, 2000 from $21.3 million for the same period in 1999. The
improvements over the prior year were primarily due to an increase in gross
profit and interest income, which were partially offset 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
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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 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;
- 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;
- A decrease in the average selling prices of our products; and
- Changes in the product and channel mix of our product shipments.
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 September 30, 2000, cash and cash equivalents were $129.2 million,
short-term marketable securities were $176.0 million and long-term marketable
securities were $79.6 million. We have a $6.0 million bank line of credit. As of
September 30, 2000, borrowings outstanding were $3.6 million 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. 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.
We are currently negotiating the terms and conditions of an extension to this
facility. 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 $16.5 million for the nine months
ended September 30, 2000 and $21.0 million for the same period in 1999. Cash
used for operations for the nine months ended September 30, 2000 was primarily
due to the net loss and increases in inventory, trade accounts receivable and
prepaid expenses, partially offset by an increase in trade accounts payable and
non-cash charges. Cash used for operations for the nine months ended September
30, 1999 was primarily due to the net loss, partially offset by non-cash
charges.
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Cash used in investing activities was $217.4 million for the nine months
ended September 30, 2000 and $22.8 million for the same period in 1999. Cash
used in investing activities for both periods was primarily due to excess cash
invested in marketable securities, partially offset by maturities of marketable
securities.
Cash provided by financing activities was $355.7 million for the nine
months ended September 30, 2000 and $61.0 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.
In August 2000, the Company signed an extension of the company's
manufacturing agreement with Microelectronics Technology Inc., in which the
Company committed to purchase approximately $50 million worth of radios from
July 2000 through December 2001. In addition, we provide six or twelve-month
forecasts to our other 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 September 30, 2000, we had committed to
make purchases totaling $15.6 million from these manufacturers in the next 60
days. Additionally, 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 also committed to purchase approximately $6 million of equipment
from one of our contract manufacturers in the event we don't place orders to
utilize this equipment.
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.
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 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 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. Substantially all of our revenues are earned in U.S. dollars.
Operating expenses incurred by our German, French, and Israeli 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
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.
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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.
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT DESCRIPTION
NO.
------- ----------------------------------------------
10.1 Preferred Stock Purchase Agreement between
the Company and Bungee Communications,
Inc., dated October 27, 2000
10.2 Option Agreement among the Company, Bungee
Communications, Inc., and SSY, LLP, dated
October 27, 2000
10.3* Amendment Agreement to the manufacturing and
Engineering Services Agreement between
the Company and Microelectronics
Technology, Inc., dated August 29, 2000
27.1 Financial Data Schedule
- ----------------
* Confidential treatment requested.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Netro Corporation during the quarter
ended September 30, 2000.
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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: November 13, 2000
By: /s/ SANJAY K. KHARE
---------------------------------------------
Sanjay K. Khare
Vice President, Finance and Administration,
Chief Financial Officer and Assistant
Secretary
(Principal Financial Officer)
By: /s/ MICHAEL T. EVERETT
---------------------------------------------
Michael T. Everett
Former Executive Vice President, Finance,
Chief Financial Officer and Assistant
Secretary
By: /s/ LISA A. EVINS
---------------------------------------------
Lisa A. Evins
Vice President of Finance
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------
10.1 Preferred Stock Purchase Agreement between
the Company and Bungee Communications,
Inc., dated October 27, 2000
10.2 Option Agreement between the Company and
Bungee Communications, Inc., dated
October 27, 2000
10.3* Amendment Agreement to the manufacturing and
Engineering Services Agreement between
the Company and Microelectronics
Technology, Inc., dated August 29, 2000
27.1 Financial Data Schedule
- -------------------
* Confidential treatment requested.
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