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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, 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 November
2, 2001 was 52,532,005.
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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, 2001 and December 31, 2000................. 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000 ..................................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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............... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................... 18
Item 2. Changes in Securities and Use of Proceeds ........................................................... 18
Item 3. Defaults Upon Senior Securities ..................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................................................. 19
Item 5. Other Information ................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K .................................................................... 19
SIGNATURES .................................................................................................. 20
EXHIBIT INDEX ............................................................................................... 21
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETRO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $77,910 $91,660
Marketable securities.............................. 132,098 185,904
Trade accounts receivable, net..................... 2,333 13,532
Inventory, net..................................... 5,128 27,994
Prepaid expenses and other......................... 3,547 5,527
-------- --------
Total current assets.......................... 221,016 324,617
Equipment and leasehold improvements.................... 7,914 6,896
Long-term marketable securities......................... 124,423 89,351
Other assets............................................ 2,250 889
-------- --------
Total assets.................................. $355,603 $421,753
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital leases $1,593 $6,183
Trade accounts payable............................. 1,761 9,116
Accrued liabilities................................ 21,216 9,159
-------- --------
Total current liabilities..................... 24,570 24,458
Long-term debt and capital leases, net of current portion 250 1,280
Deferred facilities rent................................ 11 40
-------- --------
Total liabilities............................. 24,831 25,778
-------- --------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock....................................... 506,459 503,667
Deferred stock compensation........................ (1,224) (1,933)
Accumulated other comprehensive income............. 1,968 823
Accumulated deficit................................ (176,431) (106,582)
-------- --------
Total shareholders' equity.................... 330,772 395,975
-------- --------
Total liabilities and shareholders' equity.... $355,603 $421,753
======== ========
See accompanying notes to condensed consolidated financial statements.
3
NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues ........................................... $ 6,043 $ 20,520 $ 17,225 $ 46,478
Cost of revenues ................................... 5,074 15,034 56,959 34,675
-------- -------- -------- --------
Gross profit (loss) ................................ 969 5,486 (39,734) 11,803
-------- -------- -------- --------
Operating expenses:
Research and development ....................... 5,678 5,631 19,957 17,107
Sales and marketing ............................ 2,739 2,771 10,090 7,341
General and administrative ..................... 3,278 2,922 13,003 7,211
Amortization of deferred stock compensation .... 228 255 683 815
-------- -------- -------- --------
Total operating expenses ................. 11,923 11,579 43,733 32,474
-------- -------- -------- --------
Loss from operations ............................... (10,954) (6,093) (83,467) (20,671)
Other income, net .................................. 3,915 6,299 13,618 12,988
-------- -------- -------- --------
Net income(loss) ................................... $ (7,039) $ 206 $(69,849) $ (7,683)
======== ======== ======== ========
Basic net income (loss) per share .................. $ (0.13) $ 0.00 $ (1.34) $ (0.16)
======== ======== ======== ========
Shares used to compute basic net income
(loss) per share ................................ 52,328 50,892 52,102 49,013
======== ======== ======== ========
Diluted net income (loss) per share ................ $ (0.13) $ 0.00 $ (1.34) $ (0.16)
======== ======== ======== ========
Shares used to compute diluted net income
(loss) per share .............................. 52,328 55,999 52,102 49,013
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................ $ (69,849) $ (7,683)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................................ 2,947 1,844
Inventory provision .......................................................... 29,700 964
Provision for doubtful accounts .............................................. 2,000 700
Provision for contract losses ................................................ 12,000 --
Loss on disposal of fixed assets ............................................. 1,122 --
Amortization of deferred stock compensation .................................. 683 815
Changes in operating assets and liabilities:
Trade accounts receivable ................................................. 9,199 (5,515)
Inventory ................................................................. (6,834) (12,719)
Prepaid expenses and other ................................................ 3,667 (5,019)
Trade accounts payable and accrued liabilities ............................ (7,267) 10,079
--------- ---------
Net cash used in operating activities ..................................... (22,632) (16,534)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ............................... (5,127) (3,177)
Purchase of equity investment ................................................... (1,500) --
Purchases of marketable securities .............................................. (303,557) (291,659)
Maturities of marketable securities ............................................. 321,989 77,417
--------- ---------
Net cash provided by (used in) investing activities ....................... 11,805 (217,419)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and sale-leaseback transactions ......... 121 1,083
Proceeds from issuance of common stock, net of issuance costs ................... 2,818 357,274
Repayments of notes receivable from shareholder ................................. -- 800
Repurchases of common stock ..................................................... -- (31)
Payments on notes payable and capital leases .................................... (5,741) (3,384)
--------- ---------
Net cash provided by (used in) financing activities ....................... (2,802) 355,742
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ....................... (121) --
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................... (13,750) 121,789
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 91,660 7,450
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 77,910 $ 129,239
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest .......................................................... $ 555 $ 862
========= =========
See accompanying notes to condensed consolidated financial statements.
5
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 in November 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 September 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 nine months ended September 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.
6
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 September 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):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Raw materials ........... $ 1,335 $ 8,118
Work-in-process ......... 1,098 3,840
Finished goods .......... 2,695 16,036
------- -------
$ 5,128 $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. Issuable shares with a strike price below the average
market price of the common stock are potentially dilutive. Potentially dilutive
weighted-average shares for the three and nine months ended September 30, 2001
and 2000 were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
----- ----- ----- -----
Shares issuable pursuant to
warrants to purchase common stock ......... -- 57 -- 57
Shares issuable under stock option plans .... 575 5,050 1,346 5,323
----- ----- ----- -----
575 5,107 1,346 5,380
===== ===== ===== =====
Total weighted-average options and warrants excluded from the diluted
net loss per share computation for the three and nine months ended September 30,
2001 and 2000 were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
----- ----- ----- -----
Shares issuable pursuant to warrants
to purchase common stock ................. 57 -- 57 57
Shares issuable under stock option plans .... 7,048 1,656 7,553 6,899
----- ----- ----- -----
7,105 1,656 7,610 6,956
===== ===== ===== =====
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
7
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2001 2000 2001 2000
----------- ---------- ------------ --------
Net income (loss) ......................... $ (7,039) $ 206 $ (69,849) $ (7,683)
=========== ========== ============ ========
Weighted average shares of common stock
outstanding used to compute basic
net earnings (loss) per share ........... 52,328 50,892 52,102 49,013
=========== ========== ============ ========
Basic net earnings (loss) per share ....... $ (0.13) $ 0.00 $ (1.34) $ (0.16)
=========== ========== ============ ========
Dilutive adjustments to basic weighted
average shares outstanding:
Dilutive effect of employee stock
options ............................... -- 5,107 -- --
----------- ---------- ------------ --------
Diluted weighted average shares
outstanding ........................... 52,328 55,999 52,102 49,013
=========== ========== ============ ========
Diluted net earnings(loss) per share ...... $ (0.13) $ 0.00 $ (1.34) $ (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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2001 2000 2001 2000
----------- ---------- ------------ --------
Net income (loss) ......................... $ (7,039) $ 206 $ (69,849) $ (7,683)
Unrealized gains on marketable
securities .............................. 864 522 1,292 522
Foreign currency translation adjustments... (119) -- (147) --
----------- ---------- ------------ --------
Comprehensive income (loss) ............... $ (6,294) $ 728 $ (68,704) $ (7,161)
=========== ========== ============ ========
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):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2001 2000 2001 2000
----------- ---------- ------------ --------
Research and development .................. $ 118 $ 124 $ 356 $ 383
Sales and marketing ....................... 65 57 194 209
General and administrative ................ 45 74 133 223
----------- ---------- ------------ --------
Amortization of deferred stock
compensation ............................ $ 228 $ 255 $ 683 $ 815
=========== ========== ============ ========
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
8
other terms of options granted under the Cancel and Re-grant Program will be
substantially the same as the cancelled options.
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.
4. DEBT AND CAPITAL LEASES:
The following table summarizes obligations under long-term debt and
capital leases (in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Borrowings under bank line of credit ................. $ -- $ 3,568
Secured note payable to lender, due in
monthly installments of $91 with interest
at 12.5% .......................................... -- 975
Note payable to BIRD Foundation ...................... 121 --
Capital leases, due through 2003 ..................... 1,722 2,920
------- -------
Total long-term debt and capital leases .............. 1,843 7,463
Less: current portion ............................... (1,593) (6,183)
------- -------
$ 250 $ 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 September 30, 2001,
there were no borrowings outstanding under this agreement and amounts utilized
for outstanding letters of credit were $2.2 million.
In September 2001, the Company entered into an agreement with the
Israel-United States Binational Industrial Research and Development Foundation
(BIRD) under which BIRD agreed to fund certain research and development
activities jointly undertaken by the Company and Bungee Communications, its
Israeli subsidiary. According to terms of the agreement, the Company will pay
back the funding based on the revenue stream from the funded research and
development activities at a rate based on the U.S. Consumer Price Index plus
12.5% for each additional year past the first year required to pay back the
funding. No interest is due under the agreement if the funding is paid back
during the first year of the relevant revenue stream. At September 30, 2001, the
Company had received $121,000 of a maximum of $800,000 expected under the
agreement.
9
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.
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.
CONTINGENCIES
Coates Litigation. On or around October 5, 2001, C. Robert Coates, a
holder of shares of the Company's common stock, commenced an action in the
Delaware Chancery Court against the Company, the former Netro Corporation, which
was incorporated in California ("Netro California"), and the members of the
Company's board of directors. The complaint in the action makes a number of
allegations relating to the approval by the shareholders of Netro California of
the merger transaction by which the Company's state of incorporation was changed
from California to Delaware, including that the disclosures to shareholders in
connection with that proposed transaction were incomplete or misleading in
various respects. The complaint also alleges that the adoption by the Company's
board of directors of a shareholder rights plan sometime after that merger
transaction was in violation of Delaware law. The complaint seeks (1) to
invalidate or rescind the merger transaction or, in the alternative, to obtain
an order directing a new shareholder vote on that transaction; (2) to invalidate
or reform the Company's certificate of incorporation and by-laws to eliminate
certain alleged "anti-takeover provisions" contained in them; (3) to have the
shareholder rights plan declared invalid or to obtain an order compelling the
directors to redeem the rights distributed to the Company's shareholders
thereunder; (4) to recover monetary damages in an unspecified amount, as well as
plaintiff's attorneys' fees and expenses in bringing the action. The action is
in its earliest stages. The Company and the other defendants believe the claims
asserted by Mr. Coates in the action are without merit, and they intend
vigorously to defend themselves against those claims.
Soto-Gonzalez Litigation. On or around August 23, 2001, Ramiro
Soto-Gonzalez, who alleges that he was a former shareholder of the Company's
common stock, commenced a purported class action lawsuit in the U.S. District
Court for the Southern District of New York against the Company, certain
officers and directors of the Company ("Individual Defendants"), and Dain
Rauscher, Inc., FleetBoston Robertson Stephens, Inc., and Merrill Lynch, Pierce,
Fenner and Smith, Inc. ("Underwriter Defendants") (collectively "defendants").
The Soto-Gonzalez action is one of more than 800 lawsuits currently pending in
the U.S. District Court for the Southern District of New York against more than
140 different issuers, certain officers and directors of these issuers and more
than 40 different underwriters arising out of initial public offerings occurring
between December 1997 and December 2000.
The complaint in the Soto-Gonzalez action makes a number of allegations
relating to the initial public offering of Company's common stock in August
1999, including that the disclosures made in connection with that offering were
incomplete or misleading in various respects. The complaint alleges, among other
things, that the defendants failed to disclose that the Underwriter Defendants:
(1) charged the Company excessive commissions and inflated transaction fees in
violation of the securities laws and regulations; and (2) allowed certain
investors to take part in the Company's initial public offering in exchange for
promises that these investors would purchase additional shares in the
after-market for the purpose of inflating and maintaining the market price of
the Company's common stock. The complaint seeks to certify a class of
shareholders who purchased the Company's common stock between August 18, 1999
and December 6, 2000, and to recover monetary damages from defendants in an
unspecified amount, as well as plaintiff's attorneys' fees and expenses in
bringing the action. The action is in its earliest stages. The Company and the
Individual Defendants believe the claims asserted by Mr. Soto-Gonzalez in the
action are without merit, and they intend vigorously to defend themselves
against those claims.
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
10
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 its balance sheet, these pronouncements are
not expected to have a material impact on its financial position or results of
operations.
8. SUBSEQUENT EVENT:
On October 26, 2001, the Company granted 1,209,584 options to purchase
the Company's common stock at the fair market value of $3.07 per share in
accordance with the Company's Cancel and Re-grant Program. For a further
discussion of the Company's Cancel and Re-grant Program, see note 3 of notes to
consolidated financial statements.
11
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 and began deriving
revenue from the AirStar system in 1998. 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, each of which
sends and receives 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 original equipment manufacturers
(OEMs) and local resellers in addition to through a direct sales force. Our
sales to OEMs comprised approximately 13% and 38% of revenue for the three and
nine months ended September 30, 2001, respectively. Our sales to OEMs comprised
approximately 84% and 87% of revenue for the three and nine months ended
September 30, 2000, respectively. Due to ongoing realignments of our
relationships with certain of our OEM partners we are uncertain what portion of
revenues OEMs 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 OEM customer represented approximately 13% and 36%
of our total revenues for the three and nine months ended September 30, 2001,
respectively. Sales to four customers represented 36%, 34%, 13% and 11% of
revenues for the three months ended September 30, 2001. Sales to one customer
represented 82% of revenues
12
for the three months ended September 30, 2000. Sales to three customers
represented 36%, 33% and 13% for the nine months ended September 30, 2001. Sales
to one customer represented 86% for the nine months ended September 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 62% of revenues for the
three months ended September 30, 2001 and 61% for the nine months ended
September 30, 2001. However, substantially all of our domestic revenues are
related to products sold to OEMs and direct resellers who 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
REVENUES. Current revenues primarily consist of product revenues from
the sale of the AirStar system. Revenues decreased to $6.0 million for the three
months ended September 30, 2001 from $20.5 million for the same period in 2000.
Revenues for the nine months ended September 30, 2001 decreased to $17.2 million
from $46.5 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 OEM 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 decreased to $1 million for the three months
ended September 30, 2001 from $5.5 million for the same period in 2000. Gross
profit as a percentage of revenues decreased to 16% for the three months ended
September 30, 2001 from 27% for the same period in 2000. The quarterly decline
in gross profit on a dollar basis as well as on a percentage basis primarily
reflects an increase in the proportion of revenues coming from customer premise
equipment as opposed to hub equipment and a sales volume insufficient to fully
absorb internal operations expenses, partially offset by an increase in the
proportion of revenues from direct sales and the sale of $250,000 of inventory
which had previously been written off. Gross profit(loss) for the nine months
ended September 30, 2001 decreased to a loss of $39.7 million from a gross
profit of $11.8 million for the same period in 2000. Gross profit percentage for
the nine months ended September 30, 2001 decreased to a negative 231% from a
positive 25% for the same period in 2000. The decline in gross profit for the
nine months ended September 30, 2001 on a dollar basis as well as on a
percentage basis 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 and a sales volume insufficient to fully absorb internal operations
expenses, partially offset by an increase in the proportion of revenues from
direct sales. These charges of $41.7 million for the nine months ended September
30, 2001 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 12:1 and
24:1 for the three months and nine months ended September 30, 2001,
respectively. We expect the ratio of unit sales of customer premise equipment to
hub unit sales to be in excess of 25:1 in future periods. Sales to OEMs generate
lower gross profit percentages than sales to direct customers. Sales to OEMs
represented 51% of revenues in both the first and second quarters of 2001 and
13% of revenues in the third quarter of 2001. In addition, we expect average
13
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 $5.7 million for the
three months ended September 30, 2001 from $5.6 million for the same period in
2000. The increase in research and development expenses was primarily due to an
increase in personnel and related compensation costs of $600,000 due mainly to
an increased investment in Bungee Communications, our Israeli research and
development subsidiary, partially offset by a decrease of $500,000 in
third-party engineering charges, prototype and other expenses related to the
timing of the development and release of new product features for the AirStar
system. Research and development expenses for the nine months ended September
30, 2001 increased to $20.0 million from $17.1 million for the same period in
2000. The increase in research and development expenses was primarily due to an
increase in personnel and related compensation costs of $3.2 million due mainly
to an increased investment in Bungee Communications, partially offset by a
decrease of $400,000 in third-party engineering charges, prototype and other
expenses related to the timing of the development and release of new product
features for the AirStar system.
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
decreased to $2.7 million for the three months ended September 30, 2001 from
$2.8 million for the same period in 2000. The decrease in sales and marketing
expenses was due primarily to decreased personnel and related compensation costs
of $300,000 resulting from lower sales volumes, partially offset by an increase
in promotional expenses and other outside services of approximately $200,000.
Sales and marketing expenses for the nine months ended September 30, 2001
increased to $10.0 million from $7.3 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 average sales and marketing
personnel from 45 to 59 and increases of $800,000 in promotional expenses.
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 $3.3 million for the three months ended
September 30, 2001 from $2.9 million for the same period in 2000. The increase
was primarily due to increased facilities expenses of $600,000 associated with
additional leased building space and growth in our infrastructure and an
increase in director and officer insurance of $100,000, partially offset by
decreases in reserves of $300,000. General and administrative expenses increased
to $13.0 million for the nine months ended September 30, 2001 from $7.2 million
for the same period in 2000. The increase was primarily due to increased
personnel and related compensation costs related to an increase in general and
administrative personnel from 25 to 28, an increase of $1.3 million for doubtful
accounts reserves, severance expenses of $400,000 related to our reduction in
work force effected June 30, 2001, fixed assets disposals of $400,000, increased
facilities expenses of $1.7 million associated with additional leased building
space and growth in our infrastructure, in addition to increased director and
officer insurance of $100,000.
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 September 30, 2001,
compared to $255,000 for the same period in 2000. Amortization of deferred stock
compensation for the nine months ended September 30, 2001 was $683,000, compared
to $815,000 for the same period in 2000. For classification of amortization of
deferred stock compensation, see note 2 of notes to consolidated financial
statements.
14
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 $3.9 million for the three months ended
September 30, 2001 from $6.3 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 nine months ended September 30, 2001 increased to $13.6 million from
$13.0 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 $7.0 million for the three
months ended September 30, 2001 from a net income of $206,000 for the same
period in 2000, due primarily to the decrease in revenue. Net loss for the nine
months ended September 30, 2001 increased to $69.8 million from $7.7 million for
the same period in 2000, 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.
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.
- We do not have visibility on our future revenue. If we cannot
increase revenues, our business will be jeopardized.
- 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 OEM expertise
and third-party financing, which we are unable to provide. If
sources for OEM 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.
15
- 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.
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 September 30, 2001, cash and cash equivalents were $77.9 million,
short-term marketable securities were $132.1 million and long-term marketable
securities were $124.4 million. We have a $10.0 million bank line of credit. As
of September 30, 2001, there were no borrowings outstanding and amounts utilized
for outstanding letters of credit were $2.2 million 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 $1.7 million at September 30, 2001. Future operating lease
obligations were $22.0 million at September 30, 2001.
Cash used in operating activities was $22.6 million for the nine months
ended September 30, 2001 and $16.5 million for the same period in 2000. Cash
used in operating activities for the nine months ended September 30, 2001 was
primarily due to the net loss, adjusted for non-cash charges of $45.5 million,
including inventory, doubtful accounts and contract loss provisions, and, to a
lesser extent, the decrease in working capital of $1.2 million. Cash used in
operating activities for the nine months ended September 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 $11.8 million for the nine
months ended September 30, 2001, while cash used for investing activities for
the same period in 2000 was $217.4 million. Cash provided by investing
activities for the nine months ended September 30, 2001 was due primarily to net
maturities of marketable securities, partially offset by capital equipment
purchases. Cash used in investing activities for the nine months ended September
30, 2000 was primarily due to purchases of marketable securities.
16
Cash used for financing activities was $2.8 million for the nine months
ended September 30, 2001, while cash provided from financing activities was
$355.7 million for the same period in 2000. Cash used for financing activities
for the nine months ended September 30, 2001 was primarily due to payments on
the bank line of credit and capital leases, partially offset by proceeds from
the issuance of common stock. Cash provided by financing activities for the nine
months ended September 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.
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 $319.5 million of marketable securities at September 30, 2001 by
approximately $3.2 million.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Coates Litigation. On or around October 5, 2001, C. Robert Coates, a
holder of shares of the Company's common stock, commenced an action in the
Delaware Chancery Court against the Company, the former Netro Corporation, which
was incorporated in California ("Netro California"), and the members of the
Company's board of directors. The complaint in the action makes a number of
allegations relating to the approval by the shareholders of Netro California of
the merger transaction by which the Company's state of incorporation was changed
from California to Delaware, including that the disclosures to shareholders in
connection with that proposed transaction were incomplete or misleading in
various respects. The complaint also alleges that the adoption by the Company's
board of directors of a shareholder rights plan sometime after that merger
transaction was in violation of Delaware law. The complaint seeks (1) to
invalidate or rescind the merger transaction or, in the alternative, to obtain
an order directing a new shareholder vote on that transaction; (2) to invalidate
or reform the Company's certificate of incorporation and by-laws to eliminate
certain alleged "anti-takeover provisions" contained in them; (3) to have the
shareholder rights plan declared invalid or to obtain an order compelling the
directors to redeem the rights distributed to the Company's shareholders
thereunder; (4) to recover monetary damages in an unspecified amount, as well as
plaintiff's attorneys' fees and expenses in bringing the action. The action is
in its earliest stages. The Company and the other defendants believe the claims
asserted by Mr. Coates in the action are without merit, and they intend
vigorously to defend themselves against those claims.
Soto-Gonzalez Litigation. On or around August 23, 2001, Ramiro
Soto-Gonzalez, who alleges that he was a former shareholder of the Company's
common stock, commenced a purported class action lawsuit in the U.S. District
Court for the Southern District of New York against the Company, certain
officers and directors of the Company ("Individual Defendants"), and Dain
Rauscher, Inc., FleetBoston Robertson Stephens, Inc., and Merrill Lynch, Pierce,
Fenner and Smith, Inc. ("Underwriter Defendants") (collectively "defendants").
The Soto-Gonzalez action is one of more than 800 lawsuits currently pending in
the U.S. District Court for the Southern District of New York against more than
140 different issuers, certain officers and directors of these issuers and more
than 40 different underwriters arising out of initial public offerings occurring
between December 1997 and December 2000.
The complaint in the Soto-Gonzalez action makes a number of allegations
relating to the initial public offering of Company's common stock in August
1999, including that the disclosures made in connection with that offering were
incomplete or misleading in various respects. The complaint alleges, among other
things, that the defendants failed to disclose that the Underwriter Defendants:
(1) charged the Company excessive commissions and inflated transaction fees in
violation of the securities laws and regulations; and (2) allowed certain
investors to take part in the Company's initial public offering in exchange for
promises that these investors would purchase additional shares in the
after-market for the purpose of inflating and maintaining the market price of
the Company's common stock. The complaint seeks to certify a class of
shareholders who purchased the Company's common stock between August 18, 1999
and December 6, 2000, and to recover monetary damages from defendants in an
unspecified amount, as well as plaintiff's attorneys' fees and expenses in
bringing the action. The action is in its earliest stages. The Company and the
Individual Defendants believe the claims asserted by Mr. Soto-Gonzalez in the
action are without merit, and they intend vigorously to defend themselves
against those claims.
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
18
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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
3.4 Amended and Restated Bylaws of the Company
10.1 Form of Indemnification Agreement among the Company and Officers
and Directors
19
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: November 12, 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)
20
EXHIBIT INDEX
3.4 Amended and Restated Bylaws of the Company
10.1 Form of Indemnification Agreement among the Company and Officers
and Directors.
21