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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 March 31, 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 000-23387
NETRO CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0395029
(State of incorporation) (IRS Employer Identification No.)
3860 NORTH FIRST STREET, SAN JOSE, CA 95134
(408) 216-1500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
-------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of May 7,
2001 was 52,070,451.
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INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
2000................................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 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..................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 15
Item 2. Changes in Securities and Use of Proceeds...................................... 15
Item 3. Defaults Upon Senior Securities................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............................ 15
Item 5. Other Information.............................................................. 15
Item 6. Exhibits and Reports on Form 8-K............................................... 15
SIGNATURES ............................................................................. 16
EXHIBIT INDEX .......................................................................... 17
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETRO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 97,637 $ 91,660
Marketable securities .............................. 152,009 185,904
Trade accounts receivable, net ..................... 6,376 13,532
Inventory, net ..................................... 14,860 27,994
Prepaid expenses and other ......................... 3,443 5,527
--------- ---------
Total current assets .......................... 274,325 324,617
Equipment and leasehold improvements .................... 8,921 6,896
Long-term marketable securities ......................... 107,538 89,351
Other assets ............................................ 879 889
--------- ---------
Total assets .................................. $ 391,663 $ 421,753
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital leases $ 6,126 $ 6,183
Trade accounts payable ............................. 4,810 9,116
Accrued liabilities ................................ 14,072 9,159
--------- ---------
Total current liabilities ..................... 25,008 24,458
Long-term debt and capital leases, net of current portion 716 1,280
Deferred facilities rent ................................ 24 40
--------- ---------
Total liabilities ............................. 25,748 25,778
--------- ---------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock ....................................... 505,484 503,667
Deferred stock compensation ........................ (1,679) (1,933)
Accumulated other comprehensive income ............. 1,664 823
Accumulated deficit ................................ (139,554) (106,582)
--------- ---------
Total shareholders' equity .................... 365,915 395,975
--------- ---------
Total liabilities and shareholders' equity .... $ 391,663 $ 421,753
========= =========
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
MARCH 31,
-----------------------
2001 2000
-------- --------
Revenues ........................................ $ 9,131 $ 10,454
Cost of revenues ................................ 30,703 8,248
-------- --------
Gross profit .................................... (21,572) 2,206
-------- --------
Operating expenses:
Research and development .................... 7,740 5,784
Sales and marketing ......................... 3,763 2,040
General and administrative .................. 4,976 1,916
Amortization of deferred stock compensation . 228 297
-------- --------
Total operating expenses .............. 16,707 10,037
-------- --------
Loss from operations ............................ (38,279) (7,831)
Other income, net ............................... 5,307 761
-------- --------
Net loss ........................................ $(32,972) $ (7,070)
======== ========
Basic and diluted net loss per share ............ $ (0.64) $ (0.15)
======== ========
Shares used to compute basic and diluted net loss
per share ................................... 51,901 45,883
======== ========
See accompanying notes to condensed consolidated financial statements.
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NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (32,972) $ (7,070)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................. 889 565
Inventory provision ....................................... 16,700 150
Provision for doubtful accounts ........................... 2,000 100
Loss on disposal of fixed assets .......................... 17 --
Amortization of deferred stock compensation ............... 228 297
Changes in operating assets and liabilities:
Trade accounts receivable .............................. 5,161 (4,780)
Inventory .............................................. (3,566) (725)
Prepaid expenses and other ............................. 2,934 (135)
Trade accounts payable and accrued liabilities ......... 617 1,429
--------- ---------
Net cash used in operating activities .................. (7,992) (10,169)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ............. (2,946) (401)
Purchases of marketable securities ............................ (116,111) (2,954)
Maturities of marketable securities ........................... 131,711 37,865
--------- ---------
Net cash provided by investing activities .............. 12,654 34,510
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and sale-leaseback
transactions ............................................... -- 759
Payments on notes payable and capital leases .................. (621) (609)
Proceeds from issuance of Common Stock, net of issuance costs . 1,843 353,874
Repayments of notes receivable from shareholder ............... -- 800
--------- ---------
Net cash provided by financing activities .............. 1,222 354,824
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ...... 93 --
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................... 5,977 379,165
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 91,660 7,450
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 97,637 $ 386,615
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ........................................ $ 283 $ 275
========= =========
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 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 March 31, 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 months ended March 31, 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 March 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):
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MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Raw materials . $ 565 $ 8,118
Work-in-process 959 3,840
Finished goods 13,336 16,036
------- -------
$14,860 $27,994
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NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the weighted
average number of shares of common stock outstanding. Potential common shares
from the 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 three months ended March 31, 2001 and 2000
were as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
------- -------
Shares issuable pursuant to warrants to purchase common stock...... 57 57
Shares issuable under stock option plans........................... 1,790 7,026
------- -------
1,847 7,083
======= =======
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
-------- ---------
Net loss ............................................... $(32,972) $ (7,070)
======== ========
Weighted average shares of common stock outstanding used
to compute basic and diluted net loss per share ...... 51,901 45,883
======== ========
Basic and diluted net loss per share ................... $ (0.64) $ (0.15)
======== ========
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
MARCH 31,
------------------------
2001 2000
-------- --------
Net income (loss)................................ $(32,972) $(7,070)
Unrealized gains on marketable securities........ 745 --
Foreign currency translation adjustments......... 96 --
-------- -------
Comprehensive income (loss)...................... $(32,131) $(7,070)
======== =======
3. SHAREHOLDERS' EQUITY:
In March 2001, the Company's Board of Directors approved 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
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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):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Borrowings under bank line of credit................. $ 3,568 $ 3,568
Secured note payable to lender, due in monthly 730 975
installments of $90,942 with interest at 12.5%...
Capital leases, due through 2003..................... 2,544 2,920
------- -------
Total long-term debt and capital leases.............. 6,842 7,463
Less: current portion............................... (6,126) (6,183)
------- -------
$ 716 $ 1,280
======= =======
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 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. As of March 31, 2001,
borrowings outstanding under this agreement were $3,568,000 and amounts utilized
for outstanding letters of credit were $240,000. The Company paid all
obligations under the line of credit in full in April 2001. See Note 8.
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.
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 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
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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.
8. SUBSEQUENT EVENTS:
As of March 31, 2001, the Company was out of compliance with the
established profitability requirements relating to its line of credit. The
outstanding balance due on the line of credit was paid in full in April 2001.
In April 2001, the Company's Board of Directors approved the
reincorporation of the Company into Delaware and, pending shareholder approval,
the Company expects to reincorporate in Delaware.
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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 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 1994 and 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 92% for the three months
ended March 31, 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
further order delays or fail to secure expected additional orders and,
therefore, revenues during the balance of 2001 could be adversely affected.
Overall, our visibility regarding potential future revenues is unclear.
Sales to our largest system integrator customer represented approximately
48% of our total revenues for the three months ended March 31, 2001. Due to
major realignments by this customer, significant orders placed during the first
quarter of 2001 were canceled, causing our revenues and results of operations to
be lower than equity analyst expectations for that period. Sales to two
customers represented 48% and 39% of revenues for the three months ended March
31, 2001. Sales to one customer represented 92% of revenues for the three months
ended March 31, 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.
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International revenues represented approximately 53% of revenues for the
three months ended March 31, 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 MONTHS ENDED MARCH 31, 2001 AND 2000
REVENUES. Current revenues primarily consist of product revenues from the
sale of the AirStar system. Revenues decreased to $9.1 million for the three
months ended March 31, 2001 from $10.5 million for the same period in 2000. The
decrease in revenues was a result of delayed orders from current and potential
service provider customers as well as cancelled orders from some of our system
integration 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 $21.6 million
for the three months ended March 31, 2001 from a gross profit of $2.2 million
for the same period in 2000, due primarily to one-time charges of approximately
$23.2 million related to excess and obsolete inventory and other
material-related commitments. These charges are related to inventory and other
material commitments made in anticipation of significantly higher revenue
volumes than those achieved. Gross profit as a percentage of revenues decreased
to a negative 236% for the three months ended March 31, 2001 from a positive 21%
for the same period in 2000. The decline on a percentage basis reflects the
charges related to the inventory and material commitments described above 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
revenues from direct sales. 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 quarter 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. We expect the percentage of sales of
customer premise equipment in future quarters to increase relative to hub sales,
resulting in reduced gross profit percentage. Sales to system integrators
generate lower gross profit percentages than sales to direct customers. 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 $7.7 million for the
three months ended March 31, 2001 from $5.8 million for the same period in 2000.
The increase in research and development expenses were primarily due to an
increased investment in Bungee Communications, our Israeli research and
development subsidiary, as well as increases in third-party engineering charges
and expenses related to our upcoming product releases. 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 $3.8 million for the three months ended March 31, 2001 from $2.0
million for the same period in 2000. The increase was primarily due to an
increase in personnel and related costs to support both the pre-sale and
post-sale activities associated with the AirStar system.
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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 $5.0 million for the three months ended
March 31, 2001 from $1.9 million for the same period in 2000. The increase was
primarily due to a $2.0 million charge for doubtful accounts, in addition to
increased personnel and related costs and facilities expenses due to the growth
of our infrastructure.
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 $228,000 for the three months ended March 31, 2001, compared to
$297,000 for the same period in 2000.
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 increased to $5.3 million for the three months ended
March 31, 2001 from $761,000 for the same period in 2000. The increase was
primarily 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.
NET LOSS. Net loss increased to $33.0 million for the three months ended
March 31, 2001 from $7.1 million for the same period in 2000. The increase in
net loss is due primarily to the approximately $23.2 million in one-time
inventory and other material-related charges, in addition to increases in
operating expenses, partially offset by an increase in interest income.
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.
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 quarter 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.
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- 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 personnel, we might not be able
to operate our business successfully.
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 March 31, 2001, cash and cash equivalents were $97.6 million,
short-term marketable securities were $152.0 million and long-term marketable
securities were $107.5 million. We have a $6.0 million bank line of credit. As
of March 31, 2001, 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 2002 and accrue interest at the
30-day LIBOR plus 1.5% or the bank's prime rate, at our option. We paid all
obligations under this line of credit in full in April 2001. Capital lease
obligations were $2.5 million at March 31, 2001. Operating lease obligations
were $976,000 at March 31, 2001.
Cash used in operating activities was $8.0 million for the three months
ended March 31, 2001 and $10.2 million for the same period in 2000. Cash used
for operations for the three months ended March 31, 2001 was primarily due to
the net loss, adjusted for the provision for doubtful accounts and decreases in
inventory, accounts receivable and prepaid expenses. Cash used for operations
for the three months ended March 31, 2000 was primarily due to the net loss and
an increase in accounts receivable, partially offset by non-cash charges.
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Cash provided by investing activities was $12.7 million for the three
months ended March 31, 2001 and $34.5 million for the same period in 2000. Cash
provided by investing activities for both periods was primarily due to
maturities of marketable securities, partially offset by excess cash invested in
marketable securities.
Cash provided by financing activities was $1.2 million for the three
months ended March 31, 2001 and $354.8 million for the same period in 2000. Cash
provided by financing activities for the three months ended March 31, 2001 was
primarily due to the issuance of common stock, partially offset by capital lease
repayments. Cash provided by financing activities for the three months ended
March 31, 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.
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
$341.3 million of marketable securities at March 31, 2001 by approximately $3.4
million.
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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.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Netro Corporation during the
quarter ended March 31, 2001.
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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: May 14, 2001
By: /s/ Sanjay K. Khare
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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)
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EXHIBIT INDEX
None
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