1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
COMMISSION FILE NUMBER 000-23387
NETRO CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0395029
(State of incorporation) (IRS Employer Identification No.)
3860 NORTH FIRST STREET, SAN JOSE, CA 95134
(408) 216-1500
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
-------------------------------
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $255,405,412 on March 19,
2001, based on the average bid and asked price of the registrant's common stock
as reported on The Nasdaq Stock Market as of such date.
There were 52,075,532 shares of the registrant's common stock issued and
outstanding as of March 19, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with the registrant's 2001
Annual Meeting of Shareholders are incorporated by reference into Part III.
================================================================================
2
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Index to Financial Statements
3
3
PART I
ITEM 1. BUSINESS
Certain matters discussed in this Annual Report on Form 10-K contain
certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding our
business strategy, product capability, financial condition, results of operation
and business. The words "anticipate," "believe," "estimate," "expect," "plan,"
"intend" and similar expressions, as they relate to the Company, are intended to
identify forward-looking statements. Such statements reflect our current views
with respect to future events and involve known and unknown risks, uncertainties
and other factors including, but not limited to, economic, key employee,
competitive, regulatory, governmental and technological factors affecting the
Company's growth, operations, markets, products, services, licenses and other
factors discussed under the heading "Risk Factors" in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company cannot be sure that any of its expectations will be
realized. Factors that may cause actual results, performance or achievements of
the Company, or industry results, to differ materially from those contemplated
by such forward-looking statements, include, without limitation:
- We have a history of losses, including more significant than
expected losses in the fourth quarter of 2000, expect future
losses and may never achieve profitability.
- If we do not reduce our reliance on a single customer for most
of our revenues, our business and results of operations could be
adversely affected.
- If we cannot reduce our product costs, our results of operations
will suffer.
- If we do not succeed in developing relationships directly with
telecommunications service providers and in strengthening our
direct and indirect sales channels, our business will be harmed.
- The majority of service providers using our products are
emerging companies with unproven business models. If these
service providers do not succeed, there will be a more limited
market for our products.
- Intense competition in the market for communications equipment
could prevent us from increasing or sustaining revenues or
achieving or sustaining profitability.
- Due to our limited operating history, it is difficult to predict
future operating results or our stock price.
- We have a long sales cycle, which could cause our results of
operations and stock price to fluctuate.
- Many projects that include our products require system
integration expertise and third-party financing, which we are
unable to provide. If sources for system integration or
financing cannot be obtained as needed, service providers may
not select our products.
- Our products may contain defects that could harm our reputation,
be costly to correct, expose us to litigation and harm our
operating results.
- Our future operating results are dependent on the sales of a
single product line. If there are unexpected reductions in
revenues from this product, we will not have other products to
offset the negative impact on our operating results.
- Our business is subject to many factors that could cause our
quarterly operating results to fluctuate and our stock price to
be volatile.
- We depend on contract manufacturers. If these manufacturers are
unable to fill our orders on a timely basis, and we are unable
to find alternative sources, we may be unable to deliver
products to meet customer orders.
- If we do not develop new products and product features in
response to customer requirements or in a timely way, customers
will not buy our products.
- Because some of our key components are from sole source
suppliers or require long lead times, our business is subject to
unexpected interruptions, which could cause our operating
results to suffer.
4
4
- 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.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.
OVERVIEW
We are a leading provider of broadband, point-to-multipoint, wireless
access equipment. Telecommunications service providers use our equipment to
provide high-speed voice and data access to small and medium sized enterprises
around the world. We have been commercially shipping our point-to-multipoint
equipment since 1998 and believe that we have one of the largest and most mature
worldwide installed bases. We have designed the AirStar system to minimize the
costs of deployment and operation and to permit operators to offer a broad range
of voice, IP and data services. We currently offer complete solutions that
operate at frequencies licensed in every major geography in the world, including
Europe, Asia, North America and Central and South America, which we believe is a
significant competitive advantage. By offering a comprehensive line of available
frequencies which can all be managed by the same hub, we provide service
providers with a vehicle to develop a worldwide equipment strategy.
THE NETRO SOLUTION
The global telecommunications industry has experienced substantial
deregulation during the past several years. Simultaneously, the emergence of the
Internet and other telecommunications services has increased the demand from
enterprises for bandwidth. This deregulation has resulted in the emergence of
successful competitive long distance service providers around the world.
However, until now, deregulation has failed to produce competition for local
voice and data access services because of the cost of installing a separate
wire-based access network. Even in markets where deregulation has compelled
access to the incumbent service provider's network, the cost and complexity of
establishing a network based on a competitor's infrastructure has limited the
success of competitive service providers.
Broadband wireless technology enables a competitive service provider to
bypass the incumbent service provider's network with an economical,
high-bandwidth solution. Netro's AirStar solution is a high-quality, flexible
system that allows service providers to deploy wireless telecommunications
services cost effectively and rapidly.
Our AirStar system is designed to provide the following benefits to service
providers:
- DYNAMIC BANDWIDTH ALLOCATION AND CARRIER CLASS VOICE AND DATA
SERVICE. Many existing high-speed connection technologies are
optimized for either voice or data traffic. Voice traffic
requires fixed-speed, low-capacity transmissions, while data
traffic requires variable-speed, high-capacity transmissions.
Consequently, network operators wishing to carry both types of
traffic often must choose among setting aside capacity to
service peak transmission data traffic requirements, allowing
degradation of service during heavy usage, or servicing a
smaller number of subscribers. In contrast, service providers
using the AirStar system can support voice and high-speed data
from the same system without these performance compromises. Our
AirStar system employs our proprietary transmission protocol,
CellMAC, which enables flexible and dynamic sharing of capacity
among a number of subscribers and services. Additionally,
AirStar allows service providers to offer symmetrical high-speed
services, with peak transmission rates of up to 16 Mbps to meet
the needs of many business users that send and receive large
files for e-mail, application hosting, intranet access and
e-commerce. We expect to offer peak transmission rates of up to
28 Mbps during 2001.
5
5
- COST-EFFECTIVE DEPLOYMENT AND OPERATION. AirStar's
cost-effective deployment allows a service provider to compete
effectively in providing its customers with high-speed
telecommunications services. By employing a point-to-multipoint
architecture, one AirStar hub radio can serve multiple
subscriber radios, which results in lower total radio costs than
architectures in which each radio can communicate with only one
other radio. AirStar also uses an advanced technology that
allows voice and data traffic to be transmitted in adjacent time
slots. This architecture reduces duplicate network hardware
components such as modems, and thus further lowers overall
system costs. In addition, a significant portion of the cost to
build an AirStar network is directly related to subscriber
growth, allowing the service provider to incur costs
concurrently with the subscriber growth. To add subscribers in a
sector, a provider simply installs equipment at the subscriber's
premises and activates the service remotely. Finally, the
AirStar system allows a service provider to optimize the use of
radio frequencies and the deployment of equipment by expanding
effective transmission capacity.
- QUALITY OF SERVICE AND RELIABILITY. Service providers using
AirStar can deploy voice and data services at different price
points to different market segments with the option for
guaranteed quality of service levels and up to 99.999%
availability. AirStar can prioritize transmissions depending on
their source and type, and fill available transmission capacity
with lower priority transmissions. Furthermore, the AirStar
system is engineered to enable service providers to offer the
same high reliability and availability for services that
traditional service providers have historically offered for
voice services. Reliability is accomplished through an error
correction algorithm, redundancy and comprehensive network
management software.
- GLOBAL MARKET COVERAGE. We currently offer products to address
licensed frequencies in Europe, Asia, North America and Central
and South America. We are also in the process of adapting our
product to additional frequencies to address new markets and new
spectrum auctions ongoing in our existing markets. By offering a
comprehensive line of available frequencies which can all be
managed by the same hub, we provide service providers with a
vehicle to develop a worldwide equipment strategy.
- RAPID TIME TO MARKET. Service providers using AirStar can
achieve rapid time to market for integrated voice and high-speed
data connections through AirStar's efficient installation,
network management software and ability to dynamically allocate
capacity among subscribers. Service providers that we target
have typically committed a high level of capital investment to
enter the high-speed wireless telecommunications services
market, and thus are focused on quickly realizing a return on
their investment. Our AirStar system is scalable and allows
service providers to rapidly offer new services to existing or
incremental subscribers within a coverage area by a simple
software command and a radio installation that is automatically
configured by the base station with little technician
intervention. By installing one AirStar base station, the
service provider can attain coverage of many potential
subscribers. For example, a typical cell at 26 GHz, the
frequency of our current highest-volume product, can cover
ranges from 5 to 15 square miles, depending on local conditions,
and has a transmission capacity of over 600 Mbps. Compared to
other high-speed, wire-based technologies that often require
lengthy and expensive upgrades before offering service or do not
support integrated voice and symmetrical data services, AirStar
allows a service provider to rapidly deploy integrated voice and
high-speed data services as demand warrants.
STRATEGY
Our objective is to be the leading worldwide supplier of broadband
wireless, high-speed equipment used by telecommunications service providers. Key
elements of our strategy include the following:
LEVERAGE EXISTING VOLUME DEPLOYMENTS. We believe that AirStar is one of the
most mature point-to-multipoint broadband wireless access systems with the
largest worldwide installed base. We have deployed the AirStar in several
commercial networks worldwide including in Germany, Spain, Portugal, Poland and
Argentina. We intend to leverage our successful commercial deployments at
existing service providers by extending our sales into the networks that those
same service providers are establishing in other countries and by using these
customers as reference accounts for new service providers.
REDUCE PRODUCT COSTS. We believe that a key element to enabling the market
for broadband wireless access is to reduce the cost per customer served and
improve the business case for the service provider. We are currently in the
process of several cost reduction initiatives, including purchasing and volume
related efficiencies, engineering cost
6
6
reductions and radical redesigns all of which, we believe, will improve our
financial performance and, more importantly, expand the addressable market.
ENABLE SERVICE PROVIDER BUSINESS MODELS. We intend to continue to focus our
product development efforts on features that would enable service providers to
deploy differentiated, profitable services to their business subscribers. Our
AirStar platform can allocate capacity dynamically because it integrates a
number of technical capabilities, including millimeter wave radio design, data
networking and network management software. We believe integrating these
capabilities is highly complex, and we intend to leverage our technology
expertise to introduce new products and features rapidly and cost effectively.
The AirStar system allows service providers to deploy voice and data services to
additional subscribers rapidly and cost effectively when demand warrants. We
intend to offer new features that will enable service providers to further
differentiate their services. For example, we expect to introduce support for
additional voice and data services and peak transmission rates of up to 28 Mbps
in 2001. However, we cannot assure that we will be successful in releasing this
product enhancement within the timeframe currently anticipated. Similarly,
AirStar's design enables us to reuse protocol software and many common
networking elements. As a result, the introduction of products in a new
frequency typically requires only relatively simple modifications in the radio
elements rather than the extensive development time and costs of entirely
redesigned equipment.
BUILD DIRECT SALES AND CUSTOMER ADVOCACY INFRASTRUCTURE. We believe the
best way to increase product sales and overall market acceptance of the AirStar
system is through the development of a direct sales and customer advocacy
infrastructure that allows systems integrators to participate in the product
offering process while permitting our own personnel to directly touch the
customer base. During 2000, approximately 89% of our revenues were derived from
sales through systems integrators such as Lucent and Siemens. We believe that
systems integrators will continue to represent a majority of our revenues in
2001; however, we believe that certain customers are better and more profitably
served directly. We plan to hire additional sales and customer advocacy
personnel and add additional internal infrastructure to support direct sales. We
also plan to continue to work closely with our system integrators and service
providers as well as third-party service and installation organizations to
enable them to provide their own primary and secondary tiers of support for the
AirStar system while our engineers and customer service personnel will provide
backup support on a 24-hour, 7-day basis.
PRODUCTS
The AirStar system is deployed in a hub and spoke layout. The 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. The system schedules transmissions from each customer
on a packet-by-packet basis. The hub prioritizes the
transmissions and allocates just enough bandwidth or time slots
to complete the transfer of each packet.
The equipment is integrated through our AirView Link Explorer network
management software, which is typically used at the service provider's switching
center, where it remotely monitors and manages the customer premise and hub
equipment. The table below shows the coverage statistics for a typical
installation and configuration of one hub under common local conditions in the
geographic regions where we expect many of our products to be deployed.
FREQUENCY COVERAGE AREA (SQ. MILES)
------------------------- ------------------------------
3.5 GHz 100-400
10 GHz 110-275
26 GHz 5-15
28 GHz 4-11
38 GHz 2-6
7
7
TECHNOLOGY
We believe we have developed industry-leading technologies including
CellMAC software and hardware implementations, an advanced networking
architecture, radio transmission technology and networking software
capabilities. We first commercialized these technologies in the form of our
AirStar family of products by focusing on the service provider's needs. Key
technology elements of the AirStar system include the following:
CELLMAC PROTOCOL. We believe our proprietary CellMAC protocol maximizes the
benefit of our point-to-multipoint architecture, and advanced peak traffic
management techniques. CellMAC schedules transmissions from each subscriber in
very small increments. It allows subscribers to request additional capacity from
the base station for peak demand data services through a capacity reservation
mechanism that requires little wasted radio frequency. The base station can
prioritize the requests according to service level agreements and allocates just
enough capacity or time slots to enable the transfer of each transmission.
Traffic from each subscriber terminal shares the capacity, as necessary, to
fulfill the quality of service for each subscriber.
ATM ARCHITECTURE. We have implemented an air interface that utilizes
asynchronous transfer mode, or ATM, to efficiently combine voice and data onto a
single stream. CellMAC is our implementation of this protocol over the air. We
believe that we are using the only standardized technology that can transport
voice and data traffic simultaneously and maintain a guaranteed quality of
service for each traffic type. Using this architecture, capacity for services
can be provided based on average throughput requirements rather than peak
throughput requirements. As a result, the capacity of the transmission is
increased, resulting in better use of radio frequency and thus lower equipment
expenditures.
PEAK DEMAND AND MILLIMETER WAVE RADIO TECHNOLOGY. Since our inception, we
have worked extensively on radio designs and volume manufacturing processes to
create robust yet cost-effective radios that support advanced radio technology
and peak demand transmission capabilities. The current AirStar radios are our
third generation design and we are in the process of developing a fourth
generation design.
CARRIER CLASS MANAGEMENT SOFTWARE. Our software architecture and use of
object-oriented design principles for both real-time and network management
software are key to making our AirStar software modular and adjustable to
additional communications protocols. Our software extends the ability of the
AirStar system to enable the inter-working of voice protocols and support the
concentration of voice traffic.
SALES AND MARKETING
Our principal sales channel is through system integrators. During 2000, 89%
of our revenues were from the indirect sales channel. We currently have OEM
relationships with Lucent, Nokia, Siemens and Motorola, as well as a joint
selling relationship with Cisco. We are in the process of revising our
relationship with Lucent to be less reliant on our OEM relationship. While we
believe that this will have a long-term beneficial effect on us, it may have the
effect of causing our short-term financial results to fluctuate.
We target key strategic accounts with our direct sales force, which has
become an increasingly important part of our sales strategy. In determining
which accounts are appropriate for direct sales, we try to identify those that
are key early adopters that can help drive our product feature sets in a manner
that will better address the needs of the marketplace as a whole. These
customers usually have the ability to install, integrate, service and maintain
their systems themselves.
We have sales representatives in Brazil, China, France, Germany, Panama,
Singapore, Spain and the United Kingdom, as well as in Florida, Georgia,
Maryland and in our corporate headquarters in San Jose, California. We sell our
products indirectly through worldwide system integrators and local resellers in
addition to through our direct sales force. In addition, we offer installation
and maintenance services through our system integration partners and third-party
installation and support organizations.
Regardless of the distribution channel that services the account, our
direct sales force maintains contact with the service provider and the system
integrator account team. This contact keeps us close to the evolving needs of
the service providers and helps ensure that we are well positioned within each
account. In some markets, we have established distribution relationships with
local resellers that also provide support and maintenance to the service
providers they cover.
8
8
Our marketing group provides marketing support services for our executive
staff, our direct sales force and for our system integrators and resellers.
Through our marketing activities, we provide technical and strategic sales
support to our direct sales personnel and system integrators or resellers
including in-depth product presentations, technical manuals, sales tools,
pricing, marketing communications, marketing research, trademark administration
and other support functions.
Our marketing group is also responsible for product management activities
throughout each product's lifecycle. These include the definition of product
features, approval of product releases, specification of enhancements to our
product and service offerings and determination of future product platforms.
CUSTOMERS
We target service providers worldwide that have rights to wireless spectrum
suitable for high-speed services or are planning to acquire rights to deliver
high-speed services to subscribers. In most cases our sales are to our system
integrators or to distributors that in turn sell to service providers. The
AirStar system is currently deployed in 67 locations in 37 countries worldwide.
Sales to our largest customer represented approximately 86% of our total
revenues in 2000. Sales to our largest three customers represented approximately
77% of our total revenues in 1999. Sales to our four largest customers
represented approximately 68% of our total revenues in 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OPERATIONS AND MANUFACTURING
Our manufacturing activities, based in our San Jose facility, consist
primarily of prototype manufacturing, final testing and system staging. Our
strategy is to outsource manufacturing to contract manufacturers, which have the
expertise and ability to achieve cost reductions associated with volume
manufacturing and to respond quickly to customer orders while maintaining high
quality standards. This also serves to turn some of our fixed costs into
variable costs and enables us to enjoy the purchasing efficiencies of these
larger manufacturers. We have manufacturing contracts in place with Solectron
California Corporation, Microelectronics Technology Inc. of Taiwan, Natsteel
Electronics, Vidar-SMS and Optomic Microwaves, Ltd.. Microelectronics Technology
Inc. and Optomic Microwaves manufacture millimeter wave radio equipment,
Solectron manufactures both millimeter wave radio equipment and digital system
components and Natsteel Electronics and Vidar SMS manufacture digital systems
components.
Our operations and manufacturing groups facilitate technology transfer
between our research and development group and the contract manufacturers. We
may also use our manufacturing operation to expedite the sales cycle before the
full product is released to external manufacturers.
RESEARCH AND DEVELOPMENT
We believe that our extensive experience designing and implementing
high-quality network and radio components and system software has enabled us to
develop high-value integrated systems solutions. As a result of these
development efforts, we believe we have created an industry-leading platform for
cost-effective high-speed wireless voice and data delivery with dynamic
allocation of capacity.
We believe that our future success depends on our continued investment in
research and development in core radio, networking and software technologies,
and we expect to continue to invest a significant portion of revenues in this
area. Our research and development expenses for 2000, 1999 and 1998 were $24.3
million, $19.3 million and $16.1 million, respectively. We are committed to an
ongoing new product development program that is based on an assessment of
service providers' needs and technological changes in the communications market.
We are currently investing significant resources in enhancing our network
management software, integrating base station components, extending the
capabilities, frequencies and capacity of AirStar's transmission, improving
performance and accelerating cost reduction. In addition, we have recently
established a research and development subsidiary in Israel, called Bungee
Communications, Inc.
CUSTOMER ADVOCACY
A high level of continuing service and support is critical to our objective of
developing long-term customer relationships. We consolidate all aspects of our
customer service, satisfaction and quality assurance initiatives into a
9
9
customer advocacy group. Our customer advocacy organization is based in our
San Jose headquarters. We also have a customer support presence in Germany and
the United Kingdom. Our customer advocacy organization in San Jose serves as the
interface to our research and development group to highlight certain problems
and also provides information about customers' needs to the marketing and
research and development organizations. Our customer support model consists of
three tiers of support:
- local problem isolation, which provides for on-site problem
identification and resolution of relatively simple issues;
- fault isolation and repair, which provides for consultation and
instruction by technicians trained by product experts; and
- expert level support from product engineering experts for the
resolution of problems not remedied by the first two levels of
support.
Our main focus is to provide system integrators and first-tier support
partners with the ability to provide local support worldwide to service
providers, including training, spare parts, maintenance and installation. As
most of the hands-on support is provided through system integrators, local
resellers, service and installation partners, or the service providers
themselves, we focus on offering various training courses to enable system
integrators, service and installation partners and service providers to perform
both local problem isolation and fault isolation and repair. Currently, the
majority of our service and support activities are related to training and
installation support for service providers. These services are provided directly
at customer installations by our customer advocacy group or remotely by our San
Jose headquarters team.
We have a number of flexible hardware and software maintenance and customer
support programs available for products beyond the applicable warranty period,
depending on our customer preferences. In the case of trials, we offer an
evaluation support package, where training, installation and acceptance testing
are delivered within specific time frames. These activities are usually
performed on-site by our personnel. As more trials begin carrying commercial
traffic, we will migrate the support capabilities to off-hours, 24-hour, 7-day
support, and continue to provide expert level support for service providers and
system integrators.
COMPETITION
The market for high-speed, wireless, point-to-multipoint telecommunications
equipment is rapidly evolving and highly competitive. Increased competition is
likely to result in price reductions, shorter product life cycles, longer sales
cycles and loss of market share, any of which would adversely affect our
business. As a provider of high-speed wireless telecommunications equipment, we
compete with a number of large telecommunications equipment suppliers including
Alcatel, Ericsson, Hughes, Marconi, and Nortel, as well as with smaller
independent and start-up companies. As a technology for providing high-speed
telecommunications services, high-speed wireless solutions compete with other
high-speed wire-based solutions, such as digital subscriber lines, fiber optic
cable, cable modems, T1 lines leased from traditional telecommunications service
providers and satellite technologies.
We expect competition to persist and intensify in the future. Many of our
competitors are substantially larger than we are and have significantly greater
financial, sales, marketing, technical, manufacturing and other resources and
more established distribution channels. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, sale
and financing of their products than we can. Our competitors may also attempt to
influence the adoption of standards that are not compatible with our current
architecture. Our larger, more established competitors may have more influence
with standards setting bodies than we do. If standards other than ours are
adopted, this may require us to incur additional development and integration
costs and may delay our sales efforts.
Some of our competitors may make strategic acquisitions or establish
cooperative relationships to increase their ability to gain customer market
share rapidly. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. We also expect that other
companies may enter our market with better products and technologies. If any
technology that is competing with ours is more reliable, faster or less
expensive or has other advantages over our technology, then the demand for our
products and services would decrease, which would seriously harm our business.
10
10
We expect our competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that may
supplant or provide lower cost alternatives to our products. To be competitive,
we must continue to invest significant resources in research and development,
sales and marketing and customer support. We cannot be sure that we will have
sufficient resources to make these investments or that we will be able to make
the technological advances necessary to be competitive. As a result, we may not
be able to compete effectively against our competitors.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. We presently have four issued U.S.
patents, with additional applications in process. AirView, AirMAN and AirStar
are our registered trademarks. CellMAC, Netro and the Netro logo are our
trademarks. Other trademarks, trade names or service marks appearing in this
report belong to their holder.
Despite our efforts to protect our proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. In addition, the
laws of some foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Attempts may be made to copy or
reverse engineer aspects of our products or to obtain and use information that
we regard as proprietary. Accordingly, we may not be able to protect our
proprietary rights against unauthorized third-party copying or use. Furthermore,
policing the unauthorized use of our products is difficult. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others. This litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our future
operating results.
EMPLOYEES
As of December 31, 2000, we employed approximately 246 full-time employees
and 35 contract personnel. Our full-time employees and contract personnel
include 82 people in operations and manufacturing, 109 in engineering, 61 in
sales, marketing and customer advocacy, and 29 in finance and administration.
None of our employees is represented by collective bargaining agreements, and we
consider relations with our employees to be good.
ITEM 2. PROPERTIES
We sublease an approximately 100,000 square foot facility in San Jose,
California, which we use for executive offices and for administrative,
engineering, product development, manufacturing and sales and marketing
purposes. The sublease for this facility expires in September 2001. We are
currently in the process of negotiating a 5-year extension to the lease at this
facility. We also maintain leases for executive office space in China, France,
Germany, Israel and Singapore which do not represent material financial
obligations.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
INFORMATION
(a) Market Information
The following table shows the high and low bid prices of our Common Stock
for each quarterly period since the date of our initial public offering in
August 1999 as reported on The Nasdaq Stock Market:
HIGH LOW
---- ---
1999
- ----
Third Quarter (ended 9/30/99) $ 45.75 $ 8.00
Fourth Quarter (ended 12/31/99) 51.00 22.00
2000
- ----
First Quarter (ended 3/31/00) 119.63 32.94
Second Quarter (ended 6/30/00) 77.13 22.64
Third Quarter (ended 9/30/00) 85.88 43.50
Fourth Quarter (ended 12/31/00) 60.88 6.31
The closing price of our Common Stock on The Nasdaq Stock Market on March
19, 2001 was $5.47.
Future stock prices may be subject to volatility, particularly on a
quarterly basis. Any shortfall in revenues or net income from amounts expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of our stock.
(b) Holders
Our Common Stock is traded on the Stock Market under the symbol NTRO. As of
March 19, 2001, the Company had approximately 12,491 shareholders of record.
(c) Dividends
We have not paid dividends on its Common Stock at any time and have no
present plans to do so in the future.
12
12
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and the related notes and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. The statement of operations
data for the years ended December 31, 2000, 1999 and 1998, and the balance sheet
data as of December 31, 2000 and 1999, are derived from our audited consolidated
financial statements included elsewhere in this Form 10-K. The statement of
operations data for the years ended December 31, 1997 and 1996 and the balance
sheet data as of December 31, 1998, 1997 and 1996 are derived from our audited
consolidated financial statements not included in this Form 10-K. The historical
results presented below are not necessarily indicative of the results to be
expected for any future fiscal year. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues............................ $ 68,527 $18,185 $ 5,438 $ 5,601 $ 731
Cost of revenues.................... 52,096 14,874 9,640 8,273 619
-------- ------- ------- ------- -------
Gross profit (loss)................. 16,431 3,311 (4,202) (2,672) 112
-------- ------- -------- ------- -------
Operating expenses:
Research and development......... 24,265 19,307 16,143 15,289 10,446
Sales and marketing.............. 10,455 5,794 4,819 3,776 1,293
General and administrative....... 9,812 6,259 3,968 3,500 1,189
Amortization of deferred stock
compensation................... 1,064 1,104 -- -- --
-------- ------- ------- ------- -------
Total operating expenses...... 45,596 32,464 24,930 22,565 12,928
-------- ------- ------- ------- -------
Loss from operations................ (29,165) (29,153) (29,132) (25,237) (12,816)
Other income, net................... 18,987 353 304 703 643
-------- ------- ------- ------- -------
Net loss............................ $(10,178) $(28,800) $(28,828) $(24,534) $(12,173)
-------- -------- -------- -------- -------
Basic and diluted net loss per share $ (0.21) $ (1.31) $ (4.07) $ (5.11) $ (4.66)
Shares used to compute basic and
diluted net loss per share........ 49,639 21,988 7,087 4,798 2,610
Pro forma basic and diluted net loss
per share......................... $ (0.71)
Shares used to compute pro forma
basic and diluted net loss
per share......................... 40,616
DECEMBER 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
marketable securities .................. $277,564 $ 45,337 $ 15,128 $ 25,706 $ 13,913
Working capital .......................... 300,159 44,417 12,523 25,657 12,687
Total assets ............................. 421,753 65,814 26,788 37,708 19,833
Long-term debt and capital leases,
net of current portion .................. 1,280 3,633 4,547 4,209 556
Total shareholders' equity ............... 395,975 45,556 13,893 27,005 16,127
13
13
BASIC NET DILUTED NET
INCOME INCOME
NET INCOME (LOSS) PER (LOSS) PER
REVENUE GROSS PROFIT (LOSS) SHARE SHARE
------- ------------ ---------- --------- -----------
SELECTED QUARTERLY DATA
1999
First Quarter ......... $ 2,142 $ 493 $(7,022) $ (0.86) $ (0.86)
Second Quarter ........ 3,196 674 (7,267) (0.86) (0.86)
Third Quarter ......... 5,156 1,079 (6,991) (0.27) (0.27)
Fourth Quarter ........ 7,691 1,065 (7,520) (0.17) (0.17)
2000
First Quarter ......... $10,454 $ 2,206 $(7,070) $ (0.15) $ (0.15)
Second Quarter ........ 15,504 4,111 (819) (0.02) (0.02)
Third Quarter ......... 20,520 5,486 206 0.00 0.00
Fourth Quarter ........ 22,049 4,628 (2,495) (0.05) (0.05)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following management's discussion and analysis of
financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes contained elsewhere in
this report.
This management's discussion and analysis of financial condition and
results of operations contains 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.
Please read the section of this 10-K entitled "Risk Factors" and our other
Securities Exchange Commission filings discuss some of the important risk
factors that may affect our business, results of operations and financial
condition. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
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. 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. None of our 2000 revenues, approximately 2% of our
1999 revenues and 47% of our 1998 revenues were derived from sales of the AirMAN
system. 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
14
14
- 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. As of December 31, 2000, we had deployed our equipment
with 67 customers in 37 countries.
We sell our products indirectly through worldwide system integrators and
local resellers in addition to through a direct sales force. Our sales to system
integrators comprised approximately 89%, 64% and 16% of revenues in 2000, 1999
and 1998, respectively. Due to ongoing realignments of our relationships with
certain of our system integrator partners we expect this percentage to decline
in 2001 which will require us to improve and expand our internal sales, customer
advocacy and administration functions. As a result of these realignments we
could experience further order delays or fail to secure expected additional
orders and, therefore, revenues in the first quarter of 2001 could be adversely
affected.
Sales to our largest system integrator customer represented approximately
86% of our total revenues in 2000. Due to changes in ordering practices by this
customer in late 2000, significant orders expected in the last quarter of 2000
were delayed, causing our revenues and results of operations to be lower than
market expectations for that period. Because of these changes in ordering
practices, we believe that our revenues for the first quarter of 2001 will be
lower than our revenues for the last quarter of 2000. Sales to our largest three
customers represented approximately 77% of our total revenues in 1999. Sales to
our four largest customers represented approximately 68% of our total revenues
in 1998. 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 2001 and in the future.
International revenues represented approximately 12%, 43% and 76% of total
revenues in 2000, 1999 and 1998, respectively. 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 have manufactured a small fraction of our products at our San Jose
headquarters in 1998, 1999 and 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 maintain a small
facility for prototype production in support of our research and development
efforts.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES. Current revenues primarily consist of product revenues from the
sale of the AirStar system. Revenues increased to $68.5 million in 2000 from
$18.2 million in 1999, due principally to increased AirStar system sales.
Substantially all of the revenues for these years were generated from
installations in international locations. Sales to major customers were as
follows:
% OF TOTAL
REVENUES REVENUES
-------------------- ---------------
2000 1999 2000 1999
-------- --------- ------ ------
(in thousands)
Imed Link * $ 1,792 * 10%
Lucent $ 59,220 10,426 86% 57
NTL * 1,767 * 10
-------- -------- ------ ------
Aggregate amount from 10% or greater
customers $ 59,220 $13,985 86% 77%
======== ======= ====== ======
* Sales less than 10%
GROSS PROFIT. Gross profit 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 increased to $16.4 million in 2000 from $3.3 million in 1999, due
to increased unit sales of
15
15
the AirStar product. Gross profit increased as a percentage of revenue to
24.0% in 2000 from 18.2% in 1999. This increase principally reflects the impact
of cost reduction. We have experienced substantial quarterly fluctuations in
gross profit in 1999 and 2000 after excluding the effect of one-time charges.
The principal drivers of the quarterly fluctuations were the product sales mix
and customer sales mix. In general, customer premise equipment sales result in
lower gross profit percentages than hub sales. We expect the sales of customer
premise equipment to continue to increase at a rate faster than hub sales,
resulting in reduced gross profit percentages during the first half of 2001 as
compared with the first half of 2000. 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 $24.3 million in 2000
from $19.3 million in 1999, primarily due to increases in personnel and related
compensation costs, prototype material expenses, third-party engineering charges
and expenses related to the release of new product features for the AirStar
system, and, to a lesser extent, the establishment of Bungee Communications,
Inc. as a research and development subsidiary based in Israel. We expect that
continued substantial investment in research and development will be critical to
attaining our strategic product and cost reduction objectives and, therefore, we
expect research and development costs to increase on a dollar basis in 2001.
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 $10.5 million in 2000 from $5.8 million in 1999. The increase was
primarily due to the significant expansion in sales, technical assistance and
field support personnel necessary to support both the pre-sale and post-sale
activities associated with the AirStar system. We expect these expenses to
continue to increase on an absolute basis as we invest in expanding our sales
and customer advocacy organizations and as the percentage of our sales to
systems integrators declines.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation costs and related expenses for executive, finance,
management information systems, human resources and administrative personnel.
These expenses also include professional fees, facilities and other general
corporate expenses. General and administrative expenses increased to $9.8
million in 2000 from $6.3 million in 1999. The increase was primarily due to
increases in personnel and related compensation costs, increased cost associated
with being a public company and increased reserves associated with higher
revenues. We expect that the growth of our operations as well as the increase in
direct sales activity will continue to require additional personnel and costs.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation results from the granting of stock options to employees with
exercise prices per share determined to be below the estimated fair values per
share of our common stock at dates of grant. The deferred compensation that
results is being amortized to expense over the vesting periods of the individual
options, generally four years. We have recorded total deferred stock
compensation of $4.8 million through December 31, 2000. Amortization of deferred
stock compensation was $1.1 million for 2000 and 1999.
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 $19.0 million in 2000 from $353,000 in 1999
primarily due to higher interest income earned on higher average cash balances.
NET LOSS. Net loss decreased to $10.2 million in 2000 from $28.8 million in
1999 principally due to higher interest income and gross profit, offset in part
by increased operating expenses.
INCOME TAXES. We have incurred a net loss for each period since inception.
As of December 31, 2000, we had Federal and State net operating loss carry
forwards of approximately $91.8 million and $22.5 million, respectively, which
expire at various dates through 2021. Due to the uncertainty of future
profitability, a valuation allowance equal to the deferred tax asset has been
recorded. Certain changes in ownership resulting from the sales of Common Stock
will
16
16
limit the future annual realization of the tax net operating loss carry
forwards. We have paid no material income taxes to date.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Revenues increased to $18.2 million in 1999 from $5.4 million in
1998, due principally to increased AirStar system sales, which were slightly
offset by the final phase-out of AirMAN sales. Substantially all of the revenues
for these years were generated from installations in international locations.
Sales to major customers were as follows:
% OF TOTAL
REVENUES REVENUES
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
(in thousands)
Alpine-Energie * $1,480 * 27%
Imed Link $1,792 - 10% -
Lucent 10,426 873 57 16
NTL 1,767 * 10 *
Pele-Phone * 541 * 10
Siemens * 799 * 15
-------- -------- ------- -------
Aggregate amount from 10% or greater
customers $13,985 $3,693 77% 68%
======== ======== ======= =======
* Sales less than 10%
GROSS PROFIT (LOSS). Gross profit increased to a profit of $3.3 million in
1999 from a loss of $4.2 million in 1998, principally due to increased AirStar
system sales, which typically have a higher margin than predecessor products.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$19.3 million in 1999 from $16.1 million in 1998, primarily due to increases in
personnel and related compensation costs, prototype material expenses,
third-party engineering charges and expenses related to the release of new
product features for the AirStar system. Gross research and development expenses
which reflect expenses prior to the effect of third party research and
development funding increased to $19.9 million in 1999 from $17.0 million in
1998.
SALES AND MARKETING. Sales and marketing expenses increased to $5.8 million
in 1999 from $4.8 million in 1998. The increase was primarily due to the
significant expansion in sales, technical assistance and field support personnel
necessary to support both the pre-sale and post-sale activities associated with
the AirStar system.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $6.3 million in 1999 from $4.0 million in 1998. The increase was primarily
due to deferred compensation charges, increased rent and overhead expenses
associated with additional facilities, as well as the increased cost associated
with being a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation results from the granting of stock options to employees with
exercise prices per share determined to be below the estimated fair values per
share of our common stock at dates of grant. The deferred compensation that
results is being amortized to expense over the vesting periods of the individual
options, generally four years. We have recorded total deferred stock
compensation of $4.8 million through December 31, 1999. Amortization of deferred
stock compensation was $1.1 million in 1999.
OTHER INCOME, NET. Other income, net increased to $353,000 in 1999 from
$304,000 in 1998 primarily due to higher interest income earned on higher
average cash balances partially offset by increased interest expense resulting
from greater utilization of secured equipment loans and lease and bank financing
for working capital.
NET LOSS. Net loss was relatively constant at $28.8 million from 1998 to
1999 principally due to higher gross profit, offset by increased operating
expenses.
INCOME TAXES. We have incurred a net loss for each period since inception
and have paid no material income taxes to date.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, cash and cash equivalents were $91.7 million,
short-term marketable securities were $185.9 million and long term marketable
securities were $89.4 million. We have a $6 million bank line of credit. As of
17
17
December 31, 2000, borrowings outstanding were $3.6 million and amounts
utilized for outstanding letters of credit were $240,000 under the bank line of
credit. 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. The 30-day LIBOR rate at December 31, 2000 was 8.8% and the bank's
prime rate at December 31, 2000 was 9.5%. Capital lease obligations were $2.9
million at December 31, 2000. Operating lease obligations through 2002 were
$909,000 at December 31, 2000.
Cash used in operating activities was $33.0 million in 2000 due to
increases in inventory, prepaid expenses and the net loss. Cash used in
operating activities was $29.1 million for the year ended December 31, 1999,
primarily due to the net loss, partially offset by non-cash charges.
Cash used in investing activities was $238.5 million for the year ended
December 31, 2000, primarily due to excess cash invested in marketable
securities. Cash used in investing activities was $30.6 million for the year
ended December 31, 1999, primarily due to excess cash invested in short-term
marketable securities.
Cash provided by financing activities was $355.8 million and $61.0 million
for the years ended December 31, 2000 and 1999, respectively. Cash provided by
financing activities for both periods was primarily due to issuances of stock
and, to a lesser extent, capital lease and bank financing. Cash provided by
financing activities in 2000 and 1999 includes net proceeds of $352.3 million
and $41.6 million related to our follow-on offering in March 2000 and our
initial public offering in August 1999, respectively.
In March 2000 we completed a follow-on public offering. Of the six million
shares of common stock offered, we sold 4,504,111 shares and selling
shareholders sold 1,495,889, at a price of $82.50 per share. We received net
aggregate proceeds of approximately $352.3 million after deducting underwriting
discounts and commissions and estimated offering costs.
The capital required for volume manufacturing is being committed by our
contract manufacturers. We provide six or twelve month forecasts to our contract
manufacturers. We generally commit to purchase products to be delivered within
the most recent 60 days covered by these forecasts with cancellation fees. As of
December 31, 2000, we had committed to make purchases totaling $11.0 million
from these manufacturers in the next 60 days. In addition, in specific instances
we may agree to assume liability for limited quantities of specialized
components with lead times beyond this 60-day period.
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.
In future periods, we generally anticipate significant increases in our
working capital needs on a period-to-period basis. In preparation for potential
increases in revenues, we expect higher levels of inventory and trade accounts
receivable. While we also expect an increase in trade accounts payable and other
liabilities, we do not expect that they will offset the increases in inventory
and trade accounts receivable. If revenues do not increase, the impact on
working capital would be increased.
We believe that our current cash and cash equivalents balances, 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.
ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued Financial
Standards Board Interpretation No. 44. "Accounting for Certain Transactions
Involving Stock Compensation -- an Interpretation of APB No. 25" ("FIN 44"). FIN
44 addresses the application of APB No. 25 to clarify, among other issues, (a)
the definition of employee for APB No. 25 purposes, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the Company's financial position or results of operations.
18
18
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." This bulletin summarizes certain
of the SEC's views in applying accounting principles generally accepted in the
U.S. to revenue recognition in financial statements. The Company adopted SAB 101
effective January 2000. The adoption of SAB 101 did not have a material effect
on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which 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 charged against earnings in each period. In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133
until fiscal years beginning after June 15, 2000. To date, the Company has not
entered into any derivative financial instrument contracts. Thus, the Company
anticipates that SFAS No. 133 will not have a material impact on its
consolidated financial statements.
RISK FACTORS
In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business and prospects and may
cause our actual future business, results of operations and financial condition
to differ materially from forward-looking statements made in this report.
WE HAVE A HISTORY OF LOSSES, INCLUDING MORE SIGNIFICANT THAN EXPECTED LOSSES IN
THE FOURTH QUARTER OF FISCAL 2000, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY
As of December 31, 2000, we had an accumulated deficit of $106.6 million,
and we expect to continue to incur net losses. We incurred net losses of
approximately $10.2 million, $28.8 million and $28.8 million in 2000, 1999 and
1998, respectively. We anticipate continuing to incur significant sales and
marketing, research and development and general and administrative expenses and,
as a result, we will need to generate significantly higher revenues to achieve
profitability. To date, we have funded our operations primarily through the sale
of equity securities. Our financial results prior to 1999 were largely based on
sales of AirMAN, a predecessor product, which we discontinued in September 1998.
For 1999 and 2000, our financial results were largely based on customer trials
and commercial pilots of our AirStar product line. Although our AirStar revenues
have grown in recent quarters, our past results should not be relied on as
indications of future performance. We cannot be certain that we will realize
sufficient revenues to achieve profitability. Even if we ultimately do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. If our revenues grow more slowly than we anticipate,
if we fail to reduce our product costs quickly enough, or if our operating
expenses exceed our expectations and cannot be adjusted accordingly, our
business will be harmed.
IF WE CANNOT REDUCE OUR RELIANCE ON A SINGLE CUSTOMER FOR MOST OF OUR REVENUES,
OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
We have become increasingly dependent on Lucent, which is a system
integrator, for most of our revenues. Aggregate revenues from Lucent accounted
for approximately 86% and 57% of our revenues for 2000 and 1999, respectively.
Our own revenue expectations from Lucent were not met when Lucent did not
complete an order of our products within the timeframe we had anticipated. Thus,
due to our dependence on Lucent, we experienced and could continue to suffer
business and financial setbacks, miss analysts' expectations of revenue or
earnings levels and experience a decline in our stock price. In particular, due
to changes in ordering practices at Lucent, described below, we believe that our
revenues for the first quarter of 2001 could be lower than our revenues for the
last quarter of 2000.
Lucent recently announced several corporate restructuring initiatives. As a
result of these initiatives, the division with which we have historically
coordinated our efforts within Lucent was shut down. We are unsure what impact
this will have on the promotion and sale by Lucent of our products. Furthermore,
this will require us to establish direct relationships with Lucent's regional
sales teams. We cannot be assured of our ability to establish these
relationships.
19
19
To the extent that Lucent stops promoting or selling our products or we are
unable to establish effective relationships with Lucent's regional sales teams,
our results and business will suffer. Finally, as a result of this transition,
we will be required to develop many internal functions which have historically
been provided to us by Lucent, which could result in increased operating
expenses or an inability to properly serve potential customers while we develop
these skills.
There are a limited number of system integrators that have the financial
resources or technical expertise to sell, integrate and service our products
globally. We do not have exclusive relationships with any of our system
integrators and we do not require minimum purchase commitments. Therefore, if
any of our system integrators ceases to emphasize systems that include our
products, chooses to focus on alternative technologies or promotes products of
our competitors, our business and results of operations will be adversely
affected.
IF WE CANNOT REDUCE OUR PRODUCT COSTS, OUR RESULTS OF OPERATIONS WILL SUFFER
We expect that the average selling price for broadband wireless access
equipment will decline substantially during 2001. In addition, market acceptance
of our products will depend in part on reductions in the unit price of our
products. If we cannot reduce the cost of our products enough to keep pace with
the required price reductions, our product sales and/or our gross margins, and
consequently our results of operations, will suffer. We have experienced
significant delays in implementing cost reductions in the past and may continue
to experience delays in the future. In addition, we believe that the price for
high-speed wireless telecommunications equipment is driven by the prevailing
price for other high-speed connection technologies, especially the cost of
leasing a T1 connection from the traditional telecommunications service provider
in a given locale. The price of these leased connections has declined
significantly in many countries in the recent past, and could decline
significantly in the future. If this trend continues, service providers might be
more likely to use this kind of leased connection than to introduce new
technology such as our products, which would adversely affect our market share
and pricing.
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.
We believe that it is important to our ultimate success to decrease our
focus on selling to systems integrators and to develop a sales and customer
advocacy infrastructure that deals directly with the ultimate customer, the
telecommunications service provider. If we do not develop these direct contacts
with and sales to the service providers, we will not be able to diversify and
expand our customer base and will continue to depend on indirect sales through
systems integrators. In addition, failure to develop these contacts would
prevent us from building and maintaining the long-term relationships needed to
sustain our installed customer base. Our relationships with our current service
provider customers must also be maintained and strengthened so that we can
provide potential service provider customers with positive customer references.
Furthermore, if we are unable to expand our business with current service
provider customers as they extend their networks into other countries, our
business will be harmed.
In order to develop these relationships, we need to increase the size of
our direct sales and customer advocacy organizations. Qualified personnel are
difficult to find and training these personnel requires a significant time
commitment. It may take a substantial amount of time for new personnel to become
productive. To the extent we are unable to expand our direct sales force and
customer advocacy organizations, we will not be able to accomplish our goal of
developing and maintaining long-term relationships with service providers.
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
Most telecommunications service providers using our products are emerging
companies with unproven business models. If these new service providers do not
succeed, there will be only a limited market for our products. Many of the
service providers are under-capitalized and will require additional capital or
vendor financing to continue operations. Furthermore, the availability of
capital to these service providers has been substantially limited in the last
six months. The inability of emerging service providers to acquire and keep
customers, acquire radio frequency licenses, successfully raise needed funds or
respond to any trends such as price reductions for their services or diminished
demand for telecommunications services generally, could cause them to reduce
their capital spending on network
20
20
buildouts. If service providers defer or curtail their capital spending
programs, sales of our products might be impacted, which would have an adverse
effect on our business.
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
Some service providers using our products purchase them as a part of a
larger network deployment program that can require capital expenditures in the
hundreds of millions of dollars. In some circumstances, these service providers
require their equipment vendors to integrate equipment into these larger
networks and finance deployment. We will be unable to provide this integration
or financing and therefore will have to rely on the ability of our system
integrators or third parties to integrate or finance these transactions. In the
event that we are unable to identify distributors and system integrators that
are able to provide this integration or financing on our behalf, we would be
unable to compete for the business of some service provider accounts and our
business might be adversely affected.
INTENSE COMPETITION IN THE MARKET FOR COMMUNICATIONS EQUIPMENT COULD PREVENT US
FROM INCREASING OR SUSTAINING REVENUES OR ACHIEVING OR SUSTAINING PROFITABILITY
The market for high-speed, wireless, point-to-multipoint telecommunications
equipment is rapidly evolving and highly competitive. Increased competition is
likely to result in price reductions, shorter product life cycles, longer sales
cycles and loss of market share, any of which would adversely affect our
business. As a provider of high-speed wireless telecommunications equipment, we
compete with a number of large telecommunications equipment suppliers including
Alcatel, Ericsson, Hughes, Marconi, and Nortel, as well as with smaller
independent and start-up companies. As a technology for providing high-speed
telecommunications services, high-speed wireless solutions compete with other
high-speed wire-based solutions, such as digital subscriber lines, fiber optic
cable, cable modems, T1 lines leased from traditional telecommunications service
providers and satellite technologies.
We expect competition to persist and intensify in the future. Many of our
competitors are substantially larger than we are and have significantly greater
financial, sales, marketing, technical, manufacturing and other resources and
more established distribution channels. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, sale
and financing of their products than we can. Our competitors may also attempt to
influence the adoption of standards that are not compatible with our current
architecture. Our larger, more established competitors may have more influence
with standards setting bodies than we do. If standards other than ours are
adopted, this may require us to incur additional development and integration
costs and may delay our sales efforts.
Some of our competitors may make strategic acquisitions or establish
cooperative relationships to increase their ability to gain customer market
share rapidly. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. We also expect that other
companies may enter our market with better products and technologies. If any
technology that is competing with ours is more reliable, faster or less
expensive or has other advantages over our technology, then the demand for our
products and services would decrease, which would seriously harm our business.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that may
supplant or provide lower cost alternatives to our products. To be competitive,
we must continue to invest significant resources in research and development,
sales and marketing and customer support. We cannot be sure that we will have
sufficient resources to make these investments or that we will be able to make
the technological advances necessary to be competitive. As a result, we may not
be able to compete effectively against our competitors.
DUE TO OUR LIMITED OPERATING HISTORY, IT IS DIFFICULT TO PREDICT FUTURE
OPERATING RESULTS OR OUR STOCK PRICE
We have generated only limited revenues to date, and revenues from our
current AirStar product have been significant only in the past two years. Prior
to 1999, most of our revenues came from sales of a discontinued product line.
Due to our limited operating history with our current product line, it is
difficult for us to predict future results of operations. Investors in our
common stock must consider our operational and financial prospects in light of
our historical dependence on a discontinued product line.
WE HAVE A LONG SALES CYCLE, WHICH COULD CAUSE OUR RESULTS OF OPERATIONS AND
STOCK PRICE TO FLUCTUATE
Our sales cycles are long and unpredictable. As a result, our revenues may
fluctuate from quarter to quarter and fail to correspond with our expenses. This
would cause our operating results and stock price to fluctuate. System
integrators and service providers typically perform numerous tests and
extensively evaluate products before incorporating them into networks. The time
required for testing, evaluation and design of our products into the service
provider's network typically ranges from six to twelve months. If a service
provider decides to supply commercial service with our products,
21
21
it can take an additional six to twelve months before a service provider
commences deployment of our products. Some additional factors that affect the
length of our sales cycle include:
- testing and evaluation;
- acquisition of roof rights;
- deployment and planning of network infrastructure;
- complexity of a given network;
- scope of a given project;
- availability of radio frequency; and
- regulatory issues.
In addition, the delays inherent in our sales cycle raise additional risks
of service provider decisions to cancel or change their product plans. Our
business is adversely affected when a significant customer reduces or delays
orders during our sales cycle or chooses not to deploy networks incorporating
our products. For example, order delays by one of our customers in the last
quarter of 2000 caused our revenues and results of operations to be lower than
market expectations.
WE MAY PURCHASE SIGNIFICANT INVENTORY FOR PLANNED SALES WHICH DO NOT MATERIALIZE
In future periods, we generally anticipate significant increases in our
working capital needs due to planned revenue increases. In anticipation of these
expected revenues, we may purchase significant amounts of inventory and incur
significant payment obligations. Due to the long and unpredictable nature of our
sales cycle or other factors outside of our control, these anticipated future
revenues may not materialize. If the anticipated revenues do not materialize, we
could end up with inventory levels significantly in excess of our needs, which
could diminish our working capital and/or cause significant losses. We
experienced such an excess of inventory in the fourth quarter of 2000 as a
result of lower than expected revenues during that period.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD HARM OUR REPUTATION, BE COSTLY TO
CORRECT, EXPOSE US TO LITIGATION AND HARM OUR OPERATING RESULTS.
We and our customers have from time to time discovered defects in our
products and additional defects may be found in the future. If defects are
discovered, we may not be able to correct them in a timely manner or at all.
Defects and failures in our products could result in a loss of, or a delay in,
market acceptance of our products. In addition, defects in our products could
cause adverse publicity, damage our reputation and impair our ability to acquire
new customers. In addition, we may need to make significant capital expenditures
to eliminate defects from our products.
Moreover, because our products are used in critical telecommunications
networks, we may be subject to significant liability claims if our products do
not work properly. The provisions in our agreements with customers that are
intended to limit our exposure to liability claims may not preclude all
potential claims. In addition, any insurance policies we
22
22
have may not adequately limit our exposure with respect to such claims. We
warrant to our current customers that our products will operate in accordance
with specified customer requirements. If our products fail to conform to these
specifications, our customers could require us to remedy the failure or could
assert claims for damages. Liability claims could require us to spend
significant time and money in litigation or pay significant damages. Any such
claims, whether or not successful, would be costly and time-consuming to defend
and could seriously damage our reputation and our business.
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
We currently derive substantially all of our revenues from our AirStar
product line and expect that this will continue for the foreseeable future. If
there are unexpected changes in revenues from this product, we will not have
other products to offset the negative impact on our operating results. Many of
the risk factors listed in this section could negatively affect sales of our
product line. The market may not continue to demand our current product and we
may not be successful in developing or marketing any new or enhanced products.
Any reduction in the demand for our current product or our failure to
successfully develop or market and introduce new or enhanced products could
adversely affect our operating results and cause the price of our common stock
to decline.
OUR BUSINESS IS SUBJECT TO MANY FACTORS THAT COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO FLUCTUATE AND OUR STOCK PRICE TO BE VOLATILE
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. If our quarterly or annual operating
results do not meet the expectations of securities analysts and investors, the
trading price of our common stock could significantly decline. Some of the
factors that could affect our quarterly or annual operating results include:
- the timing and amount of, or cancellation or rescheduling of,
orders for our products, particularly large orders from system
integrators;
- our ability to develop, introduce, ship and support new products
and product enhancements and manage product transitions;
- announcements, new product introductions and reductions in price
of products offered by our competitors;
- a decrease in the average selling prices of our products;
- our ability to achieve cost reductions;
- our ability to obtain sufficient supplies of sole or limited
source components for our products;
- our ability to achieve and maintain production volumes and
quality levels for our products;
- the volume of products sold and the mix of distribution channels
through which they are sold;
- the loss of any one of our major customers or a significant
reduction in orders from those customers;
- increased competition, particularly from larger, better
capitalized competitors;
- fluctuations in demand for our products and services; and
- telecommunications and wireless market conditions and economic
conditions generally.
Due in part to factors such as the timing of product release dates,
purchase orders and product availability, significant volume shipments of
products could occur at the end of our fiscal quarter. Failure to ship products
by the end of a quarter may adversely affect our operating results. Furthermore,
in the fourth quarter of 2000 one of our principal customers restructured its
purchasing procedures, which resulted in substantial delays of the purchase of
our products and adversely affected our results of operations in that period. In
the future, our customers may delay delivery schedules or cancel their orders
without notice. Due to these and other factors, quarterly revenue, expenses and
results
23
23
of operations could vary significantly in the future, and period-to-period
comparisons should not be relied upon as indications of future performance.
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
We currently only manufacture prototypes of our products and perform
testing and staging at our own facilities. The remaining manufacturing is
performed by contact manufacturers. If our manufacturers are unable or unwilling
to continue manufacturing our products in required volumes, we would have to
identify and train acceptable alternative manufacturers, which could take as
long as six months and cause our results of operations to suffer.
Our experience with these manufacturers provides us with no basis to
project their delivery schedules, yields or costs. In addition, few
manufacturers produce radios like ours on a large scale. It is possible that a
source may not be available to us when needed, and we may not be able to satisfy
our production requirements at acceptable prices and on a timely basis, if at
all. Any significant interruption in supply would affect the allocation of
products to customers, which in turn could have an adverse effect on our
business. In addition, by outsourcing our manufacturing we are less able to
control the quality of our finished products.
IF WE DO NOT MEET PRODUCT INTRODUCTION DEADLINES, OUR BUSINESS WILL BE HARMED
Our inability to develop new products or product features on a timely
basis, or the failure of new products or product features to achieve market
acceptance, could adversely affect our business. We have experienced design and
manufacturing difficulties that have delayed our development, introduction or
marketing of new products and enhancements which has caused us to incur
unexpected expenses. For example, the first trial shipments of AirStar were
delayed for almost one year due to technical problems. In addition, some of our
customers have conditioned their future purchases of our products on the
addition of product features. In the past we have experienced delays in
introducing new features. For example, we intended to introduce base radio units
that supported smaller sectors and a new release of our network management
software in 1999, but the release of both of these features did not occur until
the middle of 2000. We also cannot assure that we will be successful in our
efforts to release product enhancements enabling significantly higher peak
transmission rates than we currently offer. Furthermore, in order to compete in
many markets, we will have to develop different versions of our existing
products that operate at different frequencies and comply with diverse, new or
varying governmental regulations in each market.
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
Many of our key components have long lead times, are purchased from sole
source vendors for which alternative sources are not currently available, and
are complex to manufacture. In the event of a reduction or interruption of
supply, or a degradation in quality, as many as six months could be required
before we would begin receiving adequate supplies from alternative suppliers, if
any. As a result, product shipments could be delayed and our revenues and
results of operations would suffer. If we receive a smaller allocation of
component parts than is necessary to manufacture products in quantities
sufficient to meet customer demand, customers could choose to purchase competing
products and we could lose market share.
For example, we purchase our base station shelf from Cisco Systems, Inc.
under an agreement that terminates in June 2002. Cisco has recently acquired
interests in companies with high-speed wireless technology, and we cannot be
certain that Cisco will continue to supply us after the termination of the
current agreement. In addition, we purchase most of our electronic boards for
base station equipment from Solectron, one of our contract manufacturers, and
other components from other sole source and long lead time vendors.
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
24
24
Our future success is substantially dependent on whether high-speed
wireless telecommunications equipment gains market acceptance as a means to
provide telecommunications voice and data services. All of our products are
based on this technology. In the event that service providers adopt technologies
other than the high-speed wireless technology that we offer, we may not be able
to sustain or grow our business. Service providers continuously evaluate
alternative high-speed access technologies, including wire-based technologies
such as digital subscriber lines, cable modems, fiber optic cable and T1
connections leased from the traditional service providers in a given locale, as
well as different wireless technologies. In addition, widespread acceptance of
our technology may be hindered by inherent technological limitations, such as a
need for a clear line-of-sight for transmissions and a reduction in coverage
radius in areas that experience heavy rain.
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 our sales are to grow, we must sell our products in many different
countries. Many countries require communications equipment used in their country
to comply with unique regulations, including safety regulations, radio frequency
allocation schemes and standards. If we cannot develop products that work with
different standards, we will be unable to sell our products. If compliance
proves to be more expensive or time consuming than we anticipate, our business
would be adversely affected. Some countries have not completed their radio
frequency allocation process and therefore we do not know the standards with
which we would be forced to comply. We have not completed all activities
necessary to comply with existing regulations and requirements in most of the
countries in which we intend to sell our products. Furthermore, standards and
regulatory requirements are subject to change. If we fail to anticipate or
comply with these new standards, our business and results of operations will be
adversely affected.
IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR
BUSINESS WOULD BE ADVERSELY AFFECTED
Sales of products which were ultimately deployed internationally accounted
for 96% and 79% of our revenues in 2000 and 1999, respectively. In addition,
most equipment purchased by domestic customers has been shipped to international
service providers. Our international operations are subject to a number of risks
and uncertainties, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or
economic conditions, particularly in emerging markets;
- trade protection measures and import or export licensing
requirements;
- potentially less effective protection of intellectual property;
- the difficulties and costs of obtaining regulatory approvals for
our products;
- unexpected changes in regulatory requirements; and
- legal uncertainties regarding liability, tax, tariffs and other
trade barriers.
Any of these factors could have an adverse impact on our existing
international operations and business or impair our ability to expand into
international markets.
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
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights to technologies and in various
jurisdictions that are important to our business. Any claims could be
time-consuming, result in costly litigation, divert the efforts of our technical
and management personnel, cause product shipment delays or require us to enter
into royalty or licensing agreements, any of which could have an adverse effect
on our operating results. Royalty or licensing agreements, if required, may not
be available on terms acceptable to us, if at all. In addition, in our sales
agreements, we agree to indemnify our customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties.
25
25
LINE-OF-SIGHT LIMITATIONS INHERENT TO BROADBAND WIRELESS PRODUCTS MAY LIMIT
DEPLOYMENT OPTIONS AND HAVE AN ADVERSE AFFECT ON OUR SALES.
Broadband wireless products require a direct line-of-sight between
antennas, potentially limiting the ability of our customers to deploy them in a
cost-effective manner. Because of line-of-sight limitations, service providers
often install broadband wireless equipment on the rooftops of buildings and on
other tall structures. Telecommunications service providers must generally
secure roof rights from the owners of each building or other structure on which
our products are installed. Any inability to obtain roof rights easily and cost
effectively may cause a delay in deployment and increase the installation cost
of our products or may cause customers not to choose to install broadband
wireless equipment.
IF WE ARE UNABLE TO HIRE OR RETAIN OUR PERSONNEL, WE MIGHT NOT BE ABLE TO
OPERATE OUR BUSINESS SUCCESSFULLY
The loss of the services of any key personnel or our inability to hire new
personnel could restrict our ability to compete effectively. Competition for
qualified personnel in our industry and in the Silicon Valley is intense, and we
may not be successful in attracting and retaining these personnel. There are
only a limited number of people with the requisite skills, particularly people
with millimeter wave radio expertise. We are also dependent on the continued
contributions of our principal sales, engineering and management personnel, many
of whom would be difficult to replace. We currently do not maintain key person
life insurance on any of our key executives.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY HEDGING INSTRUMENTS. We transact business in various
foreign currencies and, accordingly, we are subject to exposure from adverse
movements in foreign currency exchange rates. To date, the effect of changes in
foreign currency exchange rates on revenues and operating expenses have not been
material. Basically, all of our revenues are earned in U.S. dollars. Operating
expenses incurred by our 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
$350.8 million of marketable securities at December 31, 2000 by approximately
$3.5 million.
26
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................... 28
Financial Statements:
Consolidated Balance Sheets.......................................... 29
Consolidated Statements of Operations................................ 30
Consolidated Statements of Shareholders' Equity...................... 31
Consolidated Statements of Cash Flows................................ 32
Notes to Consolidated Financial Statements........................... 33-44
27
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Netro Corporation:
We have audited the accompanying consolidated balance sheets of Netro
Corporation (a California corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Netro
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed under
Schedule II is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 19, 2001
28
28
NETRO CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 91,660 $ 7,450
Short-term marketable securities .................... 185,904 37,887
Trade accounts receivable, net of allowances of
$608 and $150, respectively ....................... 13,532 6,925
Inventory, net ...................................... 27,994 7,909
Prepaid expenses and other .......................... 5,527 814
--------- ---------
Total current assets ........................... 324,617 60,985
Equipment and leasehold improvements, net ................ 6,896 4,569
Long-term marketable securities .......................... 89,351 --
Other assets ............................................. 889 260
--------- ---------
Total assets ................................... $ 421,753 $ 65,814
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital
leases ............................................ $ 6,183 $ 6,764
Trade accounts payable .............................. 9,116 5,064
Accrued liabilities ................................. 9,159 4,740
--------- ---------
Total current liabilities ...................... 24,458 16,568
Long-term debt and capital leases, net of current
portion ................................................ 1,280 3,633
Deferred facilities rent ................................. 40 57
--------- ---------
Total liabilities .............................. 25,778 20,258
--------- ---------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value:
Authorized -- 5,000,000 shares
Outstanding -- no shares ..................... -- --
Common stock, no par value:
Authorized -- 100,000,000 shares
Outstanding -- 51,546,412 and 44,912,773
shares at December 31, 2000 and 1999,
respectively ............................... 503,667 146,490
Note receivable from shareholder .................... -- (800)
Deferred stock compensation ......................... (1,933) (3,730)
Accumulated other comprehensive income .............. 823 --
Accumulated deficit ................................. (106,582) (96,404)
--------- ---------
Total shareholders' equity ..................... 395,975 45,556
--------- ---------
Total liabilities and shareholders' equity ..... $ 421,753 $ 65,814
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
29
29
NETRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Revenues .................................... $ 68,527 $ 18,185 $ 5,438
Cost of revenues ............................ 52,096 14,874 9,640
-------- -------- --------
Gross profit (loss) ......................... 16,431 3,311 (4,202)
-------- -------- --------
Operating expenses:
Research and development ................ 24,265 19,307 16,143
Sales and marketing ..................... 10,455 5,794 4,819
General and administrative .............. 9,812 6,259 3,968
Amortization of deferred stock
compensation .......................... 1,064 1,104 --
-------- -------- --------
Total operating expenses .......... 45,596 32,464 24,930
-------- -------- --------
Loss from operations ........................ (29,165) (29,153) (29,132)
Other income, net
Interest income ......................... 20,112 1,522 1,260
Interest expense ........................ (1,125) (1,169) (956)
-------- -------- --------
Total other income, net ........... 18,987 353 304
-------- -------- --------
Net loss .................................... $(10,178) $(28,800) $(28,828)
======== ======== ========
Basic and diluted net loss per share ........ $ (0.21) $ (1.31) $ (4.07)
======== ======== ========
Shares used to compute basic and diluted
net loss per share ...................... 49,639 21,988 7,087
======== ======== ========
Pro forma basic and diluted net loss per
share.................................... $(0.71)
========
Shares used to compute pro forma basic
and diluted net loss per share........... 40,616
=========
The accompanying notes are an integral part of these consolidated
financial statements.
30
30
NETRO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK RECEIVABLE DEFERRED
------------------- --------------------- FROM STOCK
SHARES AMOUNT SHARES AMOUNT SHAREHOLDER COMPENSATION
------ ------ ------ ------ ----------- ------------
BALANCE, DECEMBER 31, 1997 25,711,771 $ 65,437 8,078,957 $ 344 $ - $ -
Net loss and comprehensive loss - - - - - -
Exercise of stock options for cash - - 389,677 226 - -
Issuance of Common Stock for cash - - 5,396 11 - -
Repurchase of Common Stock for cash - - (343,792) (157) - -
Issuance of Common Stock for note receivable - - 400,000 800 (800) -
Issuance of Series D Convertible Preferred
Stock for cash, net of issuance costs of $84 2,020,464 15,636 - - - -
----------- ------- -------- --------- ------ -------
BALANCE, DECEMBER 31, 1998 27,732,235 81,073 8,530,238 1,224 (800) -
Net loss and comprehensive loss
Exercise of stock options for cash - - 731,124 757 - -
Deferred stock compensation - - - 4,834 - (4,834)
Repurchase of Common Stock for cash - - (21,666) (4) - -
Issuance of Series D Convertible Preferred
Stock for cash, net of issuance costs of $48 2,149,254 16,673 - - - -
Issuance of Series D Convertible
Preferred Stock for services rendered 20,794 162 - - - -
Issuance of Common Stock in initial
public offering, net of issuance costs - - 5,750,000 41,605 - -
Conversion of preferred stock to Common
Stock in connection with the IPO (29,902,283) (97,908) 29,902,283 97,908 - -
Issuance of Common Stock for services rendered - - 20,794 166 - -
Amortization of deferred stock compensation - - - - - 1,104
----------- ------- -------- --------- ------ -------
BALANCE, DECEMBER 31, 1999 - - 44,912,773 146,490 (800) (3,730)
Net loss - - - - - -
Unearned gain on held securities - - - - - -
Comprehensive loss
Repayment of note from shareholder - - - - 800 -
Exercise of stock options for cash - - 1,905,062 3,953 - -
Shares issued under ESPP Plan - - 240,092 1,664 - -
Repurchase of Common Stock for cash - - (15,626) (31) - -
Issuance of Common Stock in public
offering, net of issuance costs - - 4,504,111 352,324 - -
Amortization of deferred stock compensation - - - (733) - 1,797
----------- ------- -------- --------- ------ -------
BALANCE, DECEMBER 31, 2000 - $ - 51,546,412 $ 503,667 $ - $ (1,933)
=========== ======== ========== ========= ==== =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
INCOME DEFICIT INCOME EQUITY
------ ------- ------ ------
BALANCE, DECEMBER 31, 1997 $ - $ (38,776) $ 27,005
Net loss and comprehensive loss - (28,828) (28,828) (28,828)
=======
Exercise of stock options for cash - - 226
Issuance of Common Stock for cash - - 11
Repurchase of Common Stock for cash - - (157)
Issuance of Common Stock for note receivable - - -
Issuance of Series D Convertible Preferred -
Stock for cash, net of issuance costs of $84 - - 15,636
----- ---------- ---------
BALANCE, DECEMBER 31, 1998 - (67,604) 13,893
Net loss and comprehensive loss (28,800) (28,800) (28,800)
=======
Exercise of stock options for cash - - 757
Deferred stock compensation - - -
Repurchase of Common Stock for cash - - (4)
Issuance of Series D Convertible Preferred -
Stock for cash, net of issuance costs of $48 - - 16,673
Issuance of Series D Convertible
Preferred Stock for services rendered - - 162
Issuance of Common Stock in initial
public offering, net of issuance costs - - 41,605
Conversion of preferred stock to Common
Stock in connection with the IPO - - -
Issuance of Common Stock for services rendered - - 166
Amortization of deferred stock compensation - - 1,104
----- ---------- ---------
BALANCE, DECEMBER 31, 1999 - (96,404) 45,556
Net loss - (10,178) (10,178) (10,178)
Unearned gain on held securities 823 - 823 823
-------
Comprehensive loss (9,355)
=======
Repayment of note from shareholder - - 800
Exercise of stock options for cash - - 3,953
Shares issued under ESPP Plan - - 1,664
Repurchase of Common Stock for cash - - (31)
Issuance of Common Stock in public -
offering, net of issuance costs - - 352,324
Amortization of deferred stock compensation - - 1,064
----- ---------- ---------
BALANCE, DECEMBER 31, 2000 $ 823 $ (106,582) $ 395,975
===== =========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
31
31
NETRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (10,178) $ (28,800) $ (28,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .......................... 2,383 2,789 3,065
Provision for doubtful accounts ........................ 800 78 462
Loss on disposal of fixed assets ....................... 90 -- --
Amortization of deferred stock compensation ............ 1,064 1,104 --
Non-cash issuance of preferred stock ................... -- 328 --
Changes in operating assets and liabilities:
Trade accounts receivable ............................ (7,407) (5,853) 545
Inventory ............................................ (20,085) (3,594) (388)
Prepaid expenses and other ........................... (8,147) (513) (159)
Trade accounts payable, accrued liabilities and
other .............................................. 8,454 5,385 (566)
--------- --------- ---------
Net cash used in operating activities ................ (33,026) (29,076) (25,869)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements .......... (4,800) (1,724) (3,183)
Purchase of equity investment .............................. (450) -- --
Purchases of marketable securities ......................... (406,960) (72,952) (34,085)
Maturities of marketable securities ........................ 173,670 44,099 35,089
--------- --------- ---------
Net cash used in investing activities ................ (238,540) (30,577) (2,179)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and
sale-leaseback transactions ............................. 1,083 5,833 4,553
Payments on notes payable and capital leases ............... (4,017) (3,855) (1,795)
Proceeds from issuance of Preferred Stock, net of
issuance costs .......................................... -- 16,673 15,636
Proceeds from issuance of Common Stock, net of issuance
costs ................................................... 357,941 42,362 237
Repayments of notes receivable from shareholder ............ 800 -- --
Repurchase of Common Stock ................................. (31) (4) (157)
--------- --------- ---------
Net cash provided by financing activities ............ 355,776 61,009 18,474
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 84,210 1,356 (9,574)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 7,450 6,094 15,668
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 91,660 $ 7,450 $ 6,094
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ..................................... $ 1,045 $ 1,016 $ 802
Non-cash transactions:
Notes receivable from the issuance of Common Stock .... -- -- $ 800
Conversion of Preferred Stock to Common Stock in
connection with IPO ................................. -- $ 97,908 --
The accompanying notes are an integral part of these consolidated
financial statements.
32
32
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries in Germany, France and Israel. All intercompany accounts
and transactions have been eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Company's subsidiaries is the local
currency. Gains and losses resulting from the translation of the financial
statements into U.S. dollars have not been material to date.
Foreign exchange gains and losses resulting from foreign currency
transactions were not material in any of the periods presented.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly liquid investments
with original maturities of less than three months.
Marketable Securities:
The Company classifies its marketable securities as either
"available-for-sale" or "held-to-maturity." "Available-for-sale" securities are
stated at fair value, with unrealized gains and losses recorded as Accumulated
other comprehensive income, while "held-to-maturity" securities are stated at
amortized cost. Realized gains or losses from the sales of marketable securities
are based on the specific identification method.
33
33
At December 31, 2000 and 1999, marketable securities consisted of the
following (in thousands):
UNREALIZED
----------------------
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- -------- -------- ----------
2000
Available-for-sale:
Commercial Paper $154,054 $ 27 $ (26) $154,055
Corporate Bonds 76,907 501 (4) 77,404
Government Securities 96,621 333 (8) 96,946
Time Deposits and Other Bank Obligations 18,349 -- -- 18,349
-------- -------- -------- --------
TOTAL AVAILABLE-FOR-SALE 345,931 861 (38) 346,754
======== ======== ======== ========
HELD-TO-MATURITY
U.S. Government Securities 4,020 -- -- 4,020
-------- -------- -------- --------
TOTAL HELD-TO-MATURITY 4,020 -- -- 4,020
======== ======== ======== ========
1999
HELD-TO-MATURITY
U.S. Government Securities 37,887 -- -- 37,887
-------- -------- -------- --------
TOTAL HELD-TO-MATURITY 37,887 -- -- 37,887
======== ======== ======== ========
"Held-to-maturity" marketable securities matured in January 2001. The
contractual maturities of "available-for-sale" marketable securities are as
follows:
FAIR VALUE
----------
0-1 year 286,929
1-2 year 59,825
-------
346,754
=======
Approximately $78,855,000 of the total marketable securities were included
in cash and cash equivalents at December 31, 2000. The remainder was classified
as short-term marketable securities or long-term marketable securities.
Approximately $3,336,000 of accrued interest was also included in short-term and
long-term marketable securities at December 31, 2000. There were no marketable
securities included in cash and cash equivalents at December 31, 1999.
Inventory
Inventory, which includes material and labor costs, is stated at the lower
of cost (first-in, first-out) or market and consists of the following (in
thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Raw materials............... $ 8,118 $3,865
Work-in-process............. 3,840 2,185
Finished goods.............. 16,036 1,859
----------- -----------
$27,994 $7,909
=========== ===========
Equipment and Leasehold Improvements
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. Leasehold improvements are recorded at cost and are amortized over
the estimated lives of the improvements or the term of the lease, whichever is
shorter. Maintenance and repairs that do not improve or extend the life of
assets are expensed as incurred.
34
34
Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," capitalization of software development costs
begins upon the establishment of technological feasibility of the product. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenues, estimated economic life and changes in software
and hardware technology. Amounts that could have been capitalized under this
statement after consideration of the above factors were immaterial and,
therefore, no software development costs have been capitalized by the Company to
date.
Revenue Recognition
The Company recognizes revenue pursuant to Staff Accounting Bulletin No.101
"Revenue Recognition in Financial Statements." Accordingly, revenues from
product sales are generally recognized when all of the following conditions are
met: the product has shipped, an arrangement exists with the customer and the
Company has the right to invoice the customer, collection of the receivable is
probable and the Company has fulfilled all of its material contractual
obligations to the customer. Provisions are made at the time of revenue
recognition for estimated warranty costs.
Research and Development
Research and development costs are expensed as incurred and consist
primarily of payroll costs, other direct expenses and overhead. The Company
received no third-party research and development funding in 2000 and $625,000 in
1999. The Company offset research and development expenses with the funding when
agreed-upon milestones were met.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share
Historical net loss per share was calculated under SFAS No. 128, "Earnings
per Share." Basic and diluted net loss per share on a historical basis is
computed using the weighted average number of shares of common stock
outstanding. Potential common shares from the conversion of convertible
preferred stock and exercise of stock options and warrants are excluded from
diluted net loss per share because they would be antidilutive. The total number
of shares excluded from diluted net loss per share relating to these securities
was as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
----------- ----------- -------------
Options..................... 4,893,563 4,408,949 32,453,093
Warrants.................... 57,028 57,028 37,747
----------- ----------- -------------
4,950,591 4,465,977 32,490,840
=========== =========== =============
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, convertible preferred stock and common stock issued or granted for
nominal consideration prior to the anticipated effective date of an initial
public offering must be included in the calculation of basic and diluted net
loss per share as if they had been outstanding for all periods presented.
Pro forma basic and diluted net loss per share is calculated assuming the
conversion of convertible preferred stock into an equivalent number of shares of
common stock, as if the shares had converted on the dates of their issuance.
The following table presents the calculation of historical and pro forma
net loss per share (in thousands, except per share data):
35
35
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
HISTORICAL:
Net loss .................................... $(10,178) $(28,800) $(28,828)
======== ======== ========
Weighted average shares of common stock
outstanding ............................ 49,639 22,059 8,227
Less: Weighted average shares of common
stock subject to repurchase ............ -- (71) (1,140)
-------- -------- --------
Weighted average shares used to compute
basic and diluted net loss per share ... 49,639 21,988 7,087
======== ======== ========
Basic and diluted net loss per share ..... $ (0.21) $ (1.31) $ (4.07)
======== ======== ========
PRO FORMA:
Net loss.................................. $(28,800)
========
Shares used above......................... 21,988
Pro forma adjustment to reflect weighted
average effect of assumed conversion of
convertible preferred stock ............ 18,628
--------
Weighted average shares used to compute pro
forma basic and diluted net loss per share 40,616
========
Pro forma basic and diluted net loss per
share................................... $ (0.71)
========
Stock-Based Compensation Plans
Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applies Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for stock options.
In March 2000, the Financial Accounting Standards Board issued Financial
Standards Board Interpretation No. 44. "Accounting for Certain Transactions
Involving Stock Compensation -- an Interpretation of APB No. 25" ("FIN 44"). FIN
44 addresses the application of APB No. 25 to clarify, among other issues, (a)
the definition of employee for APB No. 25 purposes, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material effect on the Company's financial position or results of operations.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which 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 charged against earnings in each period. In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of SFAS No. 133" to defer the effective date of SFAS No. 133
until fiscal years beginning after June 15, 2000. To date, the Company has not
entered into any derivative financial instrument contracts. Thus, the Company
anticipates that SFAS No. 133 will not have a material impact on its
consolidated financial statements.
3. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash
equivalents, short-term marketable securities and long-term marketable
securities. As of December 31, 2000 and 1999, approximately 94% and 85%,
respectively, of the Company's trade accounts receivable balance was represented
by two customers and three customers, respectively. Although the Company does
not require collateral on accounts receivable because the majority of the
Company's customers are large, well-established companies, it requires standby
letters of credits or prepayments on certain sales to foreign and smaller
companies. The Company provides reserves for credit losses and such losses have
been insignificant in all periods presented in the
36
36
accompanying consolidated financial statements. With respect to cash
equivalents, short-term marketable securities and long-term marketable
securities, the Company has cash investment policies that limit the amount of
credit exposure to any one issuer and restrict placement of these investments to
issuers evaluated as creditworthy.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consisted of the following (in
thousands):
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Engineering and test equipment ...................... $ 11,381 $ 9,126
Office and computer equipment ....................... 3,618 3,182
Furniture and fixtures .............................. 439 461
Leasehold improvements .............................. 281 246
-------- --------
$ 15,719 $ 13,015
Less: Accumulated depreciation and amortization ..... (8,823) (8,446)
-------- --------
Equipment and leasehold improvements, net ........... $ 6,896 $ 4,569
======== ========
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------ ------
Accrued payroll and related benefits .... $2,915 $1,494
Warranty reserve ........................ 2,824 1,264
Customer deposits ....................... 503 858
Other ................................... 2,917 1,124
------ ------
Total ......................... $9,159 $4,740
====== ======
6. DEBT AND CAPITAL LEASES:
The following table summarizes obligations under long-term debt and capital
leases (in thousands):
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Borrowings under bank line of credit ...... $ 3,568 $ 4,338
Secured note payable to lender, due in
monthly installments of $90,942 with
interest at 12.5% ....................... 975 1,882
Capital leases, due through 2003 .......... 2,920 4,177
-------- --------
7,463 10,397
Less: current portion ..................... (6,183) (6,764)
-------- --------
$ 1,280 $ 3,633
======== ========
In January 1998, the Company entered into a bank line of credit under which
up to $6,000,000 is available for borrowings and letters of credit. This
arrangement was renewed in September 1999 and 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 outstanding 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. The 30-day LIBOR rate at December 31, 2000 was 8.8% and the
bank's prime rate at December 31, 2000 was 9.5%. Under the agreement, the
Company must comply with certain financial and other covenants.
As of December 31, 2000, borrowings outstanding under this agreement were
$3,568,000 and amounts utilized for outstanding letters of credit were $240,000.
In 1997, the Company borrowed $3,750,000 from a lender to finance purchases
of fixed assets. The loan accrues interest at 12.5% per annum from the date of
borrowing, and is secured by a purchase money lien on the equipment financed.
The remaining principal of $975,000 is due in 2001.
A significant portion of the Company's machinery and equipment is leased
under agreements accounted for as capital leases. The cost of equipment under
capital leases included in property and equipment at December 31, 2000 and 1999
was approximately $5,793,000 and $6,590,000, respectively.
37
37
In March 1999, the Company entered into an equipment lease agreement, under
which the Company can finance equipment purchases of up to $3,000,000. As of
December 31, 2000, the Company had borrowed approximately $2,335,000 against
this agreement. The Company's right to make additional borrowings under this
lease line expired in June 2000. See Note 9 for information regarding warrants
issued as part of this agreement.
Future minimum lease payments under all noncancelable capital lease
agreements as of December 31, 2000, are summarized as follows (in thousands):
2001 ....................................................... 1,959
2002 ....................................................... 1,251
2003 ....................................................... 65
-------
Total minimum lease payments ............................... 3,275
Less: amount representing interest at 10.3% to 13.8% ....... (355)
-------
Present value of lease payments ............................ $ 2,920
=======
7. COMMITMENTS AND CONTINGENCIES:
Commitments
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements expiring at various dates through 2002. Future
minimum lease payments under all noncancelable operating lease agreements as of
December 31, 2000, are summarized as follows (in thousands):
2001 ......................... 902
2002 ......................... 7
----
$909
====
Rent expense for the operating leases was approximately $1,401,000,
$1,361,000 and $922,000 in 2000, 1999, and 1998, respectively.
The Company had outstanding a standby letter of credit of $240,000 to
secure the Company's warranty obligations to one customer relating to a
discontinued product. The letter of credit is secured by a certificate of
deposit for $125,000. The letter of credit is subject to draw if the Company
fails to meet its obligation for liquidated damages to the customer for
downtime.
In January 1999, the Company entered into an engineering service agreement
with one of its vendors for $728,000, which is payable in cash or stock at the
option of the Company. As of December 31, 2000, the Company had issued 41,588
shares of Common Stock with a value of $328,000. In November 1999, the Company
agreed to pay the remaining future obligations under this agreement in cash.
The capital required for volume manufacturing is being committed by our
contract manufacturers. We provide six or twelve month forecasts to our contract
manufacturers. We generally commit to purchase products to be delivered within
the most recent 60 days covered by these forecasts with cancellation fees. As of
December 31, 2000, we had committed to make purchases totaling $11.0 million
from these manufacturers in the next 60 days. In addition, in specific instances
we may agree to assume liability for limited quantities of specialized
components with lead times beyond this 60-day period.
Contingencies
In 1999, the Company reached a settlement agreement and mutual release
with a former contract manufacturer. Under the settlement the Company purchased
certain component inventory for cash. This settlement is within amounts
previously reserved for this purpose in the Company's financial statements.
Also in October 2000, the Company experienced a theft of approximately $2
million of inventory of which a substantial portion has been recovered. The net
losses are believed to be fully covered by insurance.
8. EMPLOYEE BENEFIT PLAN:
The Company maintains an employee savings plan for all of its full-time
employees. This plan qualifies under Section 401(k) of the Internal Revenue Code
(the "Code"). The plan allows employees to make pre-tax contributions in
specified percentages up to the maximum dollar limitations prescribed by the
Code. The Company has the option to contribute to the plan, but has not made
contributions to date.
38
38
9. CAPITAL STOCK:
Public Offerings
On August 24, 1999, the Company completed its initial public offering of
5,750,000 shares of common stock at a public offering price of $8 per share. The
offering resulted in net proceeds to the Company of $41.6 million.
Simultaneously with the closing of the initial public offering, all of the
Company's then outstanding convertible preferred stock was automatically
converted into an aggregate of 29,902,283 shares of common stock.
On March 17, 2000, the Company completed a public offering for the sale of
6,000,000 shares of common stock at a price of $82.50 per share. Of the
6,000,000 shares offered, the Company sold 4,504,111 shares and selling
shareholders sold 1,495,889 shares. The offering resulted in net proceeds to the
Company of $352.3 million.
Capital Stock
The Company's capital stock is divided into two classes: Common Stock and
Preferred Stock.
At December 31, 2000, 8,018,033 shares of Common Stock were reserved for
issuance, including 7,961,005 shares for issuance under the Company's stock
option plans, and 57,028 shares issuable upon the exercise of warrants to
purchase Common Stock.
During 1998, the Company issued 400,000 shares of Common Stock in exchange
for a full recourse note in the amount of $800,000. The note bore interest at
5.44% per annum and was repaid in February 2000.
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock. The board of directors will have the authority, without any
further vote or action by the shareholders:
- to issue the undesignated preferred stock in one or more series.
- to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated
preferred stock; and
- to fix the number of shares constituting any series and the
designation of that series.
The rights of the holders of the common stock are subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future.
Stock Option Plans
2000 Non-Executive Stock Option Plan
The 2000 non-executive stock option plan was adopted by the Board of
Directors in February 2000 and, unless terminated earlier by the Board of
Directors, will terminate in February 2010. It does not require shareholder
approval. The 2000 non-executive stock option plan provides for the grant of
nonstatutory stock options to non-executive employees of and consultants to the
Company. The purposes of the 2000 non-executive stock option plan are: to
attract and retain the best available personnel; to provide additional
incentives to our non-executive employees and consultants; and to promote the
success of the Company. The Company has reserved 2,000,000 shares for issuance
under the 2000 non-executive stock option plan, of which 179,000 shares remained
available for future grant as of December 31, 2000.
The compensation committee currently administers the 2000 non-executive
stock option plan. The administrator of the plan determines: the number of
shares subject to options, provided that no individual employee may receive
option grants for more than 1,000,000 shares; vesting schedules, which are
typically 1/4(th) after one year and 1/48(th) per month thereafter; exercise
prices, which must be at least 85% of the fair market value of our common stock;
the term of the options, which may not exceed ten years; and the transferability
of the options, which are generally non-transferable other than by will or the
laws of descent or distribution, unless otherwise determined by the
administrator. Options granted under the 2000 non-executive stock option plan
are only nonstatutory stock options. Executive officers of the Company may not
receive grants under the plan.
In the event of a change of control of the Company, outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The Company's board of directors
may amend, modify or terminate the 2000 non-executive stock option plan if the
amendment, modification or termination does not impair vesting rights of the
plan participants.
1999 Executive Stock Plan
39
39
The 1999 Executive Stock Plan was adopted by the board of directors in
April 1999 and approved by the shareholders in May 1999. A total of 1,195,000
shares of common stock has been reserved for issuance under the 1999 Executive
Stock Plan, of which 84,000 shares remained available for future option grants
as of December 31, 2000. Unless terminated earlier, the 1999 Executive Stock
Plan will terminate in April 2009. The 1999 Executive Stock Plan does not impose
an annual limitation on the number of shares subject to options that may be
issued to any individual employee.
The terms of options issued under the 1999 Executive Stock Plan are
generally the same as those that may be issued under the 1996 Stock Option Plan.
However, all options granted under the 1999 Executive Stock Plan may be
exercised immediately after the grant date, subject to the Company's right to
repurchase at cost any shares that remain unvested at the time of the optionee's
termination of employment. Options granted under the 1999 Executive Stock Plan
generally vest at the rate of 1/4th of the total number of shares subject to the
options twelve months after the date of grant and 1/48th of the total number of
shares subject to the options each month thereafter.
1997 Directors' Stock Option Plan
The 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted
by the Board of Directors in December 1997, amended in June 1999, and further
amended in May 2000. A total of 300,000 shares of common stock has been reserved
for issuance under the Directors' Plan, of which options to purchase 139,000
shares remained available for future option grant as of December 31, 2000. Under
the Directors' Plan, as amended, each individual who first becomes a
non-employee director after the effective date of the amendment will receive an
automatic initial grant of an option to purchase 50,000 shares of common stock
upon appointment or election. Initial grants to non-employee directors will vest
in four equal annual installments. The Directors' Plan also provides for annual
grants of options to purchase 12,500 shares of common stock on the first day of
each fiscal year to each non-employee director who has served on the Board of
Directors for at least six months. The annual grants to non-employee directors
will vest in full on the fourth anniversary of the date of grant. The per share
exercise price of all stock options granted under the Directors' Plan must be
equal to the fair market value of a share of the Company's common stock on the
date of grant of the option. Options granted under the Directors' Plan have a
term of ten years. However, unvested options will terminate when the optionee
ceases to serve as a director and vested options will terminate if they are not
exercised within 12 months after the director's death or disability or within 90
days after the director ceases to serve as a director for any other reason.
1995 and 1996 Stock Option Plans
During 1996, the Company established the 1996 Stock Option Plan (the "1996
Plan"). All shares previously available for issuance under the Company's 1995
Stock Option Plan are reserved for issuance under the 1996 Plan. As of December
31, 2000, 8,800,000 shares of Common Stock had been authorized for issuance
under the 1995 and 1996 Plan, of which 209,000 shares remained available for
future option grants. Under the 1996 Plan, the Company may grant incentive stock
options or nonstatutory stock options to employees, officers, directors and
consultants at an exercise price of not less than 100% of the fair market value
of the Common Stock on the date of grant, except that nonstatutory stock options
may be granted at 85% of such fair market value. Options granted generally
become exercisable at a rate of one-fourth of the shares subject to the option
at the end of the first year and 1/48 of the shares subject to the option at the
end of each calendar month thereafter. However, at the discretion of management,
the optionee may have the immediate right to exercise the option subject to a
restricted stock agreement that gives the Company the right to repurchase
unvested shares at the original issuance price in the event of termination of
employment. The maximum term of a stock option under the plans is ten years, but
if the optionee at the time of grant has voting power of more than 10% of the
Company's outstanding capital stock, the maximum term is five years. The number
of shares reserved for issuance under the 1996 stock option plan will be subject
to an automatic annual increase on the first day of each year beginning from
2001 through 2005 equal to the least of: 1) 750,000 shares, 2) 3% of our
outstanding common stock on the last day of the immediately preceding fiscal
year or 3) a number of shares determined by the administrator.
The following table summarizes option activity under all option plans
including the 2000 Non-Executive Stock Option Plan, the 1997 Director Stock
Option Plan, the 1999 Executive Stock Option Plan and the 1995 and 1996 Stock
Option Plans:
40
40
OPTIONS OUTSTANDING
-------------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
---------- ---------- --------------
Balance at December 31, 1997 ...... 848,300 4,037,325 $ 1.360
Authorized ........................ 500,000 -- --
Granted ........................... (1,605,800) 1,605,800 2.000
Exercised ......................... -- (389,677) 0.579
Terminated ........................ 570,337 (570,337) 1.555
Unvested shares repurchased ....... 248,667 -- 0.064
---------- ----------
Balance at December 31, 1998 ...... 561,504 4,683,111 1.621
Authorized ........................ 3,315,284 -- --
Granted ........................... (3,689,510) 3,689,510 11.835
Exercised ......................... -- (731,124) 1.020
Terminated ........................ 797,037 (797,037) 1.880
Unvested shares repurchased ....... 21,666 -- 0.194
---------- ----------
Balance at December 31, 1999 ...... 1,005,981 6,844,460 $ 7.178
Authorized ........................ 2,000,000 -- --
Granted ........................... (3,182,668) 3,182,668 37.025
Exercised ......................... -- (1,905,062)
Terminated ........................ 771,848 (771,848) 2.073
Unvested Shares Repurchased ....... 15,626 -- 18.347
---------- ----------
Balance at December 31, 2000 ...... 610,787 7,350,218 $ 20.424
========== ==========
Shares of common stock issued pursuant to options granted under the 1995
and 1996 stock option plans that had not vested at the date of employee
termination were repurchased by the Company at cost, as reflected in the table
above as "unvested shares repurchased." The repurchased shares were cancelled
and returned to the pool of options available for grant.
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING
------------------------------------------ NUMBER
EXERCISE CONTRACTUAL VESTED AND
PRICES NUMBER LIFE EXERCISABLE
--------------- ----------- ----------- ------------
$0.045 21,000 4.6 years 21,000
$0.20 76,884 5.4 years 76,884
$1.00-$1.50 102,501 5.9 years 101,218
$2.00 1,742,117 7.0 years 1,015,567
$3.50 997,350 7.4 years 490,266
$7.00-$8.00 527,147 8.5 years 157,483
$14.50-$19.56 988,738 9.9 years --
$21.81-$28.00 326,631 9.3 years 36,844
$34.31-$51.25 2,051,400 9.2 years 14,043
$54.38-$80.00 510,550 9.6 years --
$82.69 5,900 9.3 years --
--------- ---------
7,350,218 1,913,305
========= =========
In January 1996, the Company adopted the provisions of SFAS No. 123, which
calls for companies to measure employee stock compensation expense based on the
fair value method of accounting. As allowed by SFAS No. 123, the Company elected
the continued use of APB Opinion No. 25, with pro forma disclosure of net loss
determined as if the fair value method had been applied in measuring
compensation cost. Had compensation cost for the Company's stock based
compensation awards been determined under the fair value method consistent with
SFAS No. 123, the Company's net loss would have resulted in the following pro
forma amounts (in thousands, except per share data):
41
41
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
----------- ---------- ----------
As Reported:
Net loss................... $(10,178) $(28,800) $(28,828)
Net loss per share......... (0.21) (1.31) (4.07)
Pro Forma:
Net loss................... (27,000) (30,273) (29,079)
Net loss per share......... (0.54) (1.38) (4.10)
Weighted average fair value
of options granted during the
year......................... 69.45 18.78 2.48
Weighted average fair value
of purchase rights granted
during the year under the
employee stock purchase plan 21.55 2.97 --
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option valuation model with the following assumptions:
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ---------------- ----------------- -----------------
Risk-free interest rate ...... 5.03% - 6.70% 5.03% - 6.70% 5.87% - 6.09% 5.72% - 6.68%
Average Expected Life
of Option .................... 5 years 5 years 4 years 4 years
Dividend Yield ............... 0% 0% 0% 0%
Volatility of Common
Stock ........................ 0.01% 0.01% 90.0% 157.5%
The fair value of purchase rights granted under the Employee Stock Purchase
Plan is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999
------------- ----------
Risk-free interest rate .............. 5.89% - 6.31% 5.04%
Average expected life of option ...... 0.5 years 0.5 years
Dividend yield ....................... 0% 0%
Volatility of Common Stock ........... 157.5% 90.0%
1999 Employee Stock Purchase Plan
In June 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code. A total of 1,000,000 shares of
common stock have been reserved for issuance under the Purchase Plan. The number
of shares reserved for issuance under the Purchase Plan will be subject to an
automatic annual increase on the first day of each of 2001 through 2005 equal to
the least of: (1) 250,000 shares, (2) 1% of the outstanding common stock on the
last day of the immediately preceding fiscal year, or (3) a number of shares
determined by the administrator. The price of shares purchased under the plan
will be equal to 85% of the fair market value of the Common Stock on the first
or last day of the offering period, whichever is lower.
Deferred Stock Compensation
In connection with the grant of stock options to purchase 2,338,550 shares
of common stock with a weighted average exercise price of $2.84 per share to
employees during 1998 and 1999, the Company recorded deferred compensation of
$4,834,000, representing the difference between the estimated fair value of the
common stock and the aggregate option exercise price of such options at the date
of grant. This amount is presented as a reduction of shareholders' equity and
amortized ratably over the vesting period of the applicable options (generally
four years). Amortization expense related to deferred stock compensation was
$1,064,000 and $1,104,000 in 2000 and 1999, respectively. Amortization expense
related to deferred stock compensation was immaterial in 1998. Compensation
expense is decreased in the period of forfeiture for any accrued but unvested
compensation arising from the early termination of an option holder's services.
42
42
Warrants
In connection with the Company's capital lease financing arrangements, the
Company issued warrants to its lessors as follows:
YEAR SHARE EXERCISE
CLASS OF STOCK GRANTED AMOUNT PRICE
- -------------- ------- ------ --------
Series C Preferred Stock ..... 1997 28,750 $ 7.00
Series D Preferred Stock ..... 1998 8,997 $ 7.78
Series D Preferred Stock ..... 1999 19,281 $ 7.78
Warrants to purchase 23,750 shares at $7.00 per share will expire in June
2002. Warrants to purchase 5,000 shares at $7.00 per share will expire in
September 2002. Warrants to purchase 8,997 shares at $7.78 per share will expire
in February 2003. Warrants to purchase 19,281 shares at $7.78 per share will
expire in March 2006. The fair value of the warrants was estimated at the date
of grant using the Black-Scholes model and the value was determined to be
immaterial.
All of the outstanding warrants to purchase Preferred Stock were converted
upon completion of the Company's initial public offering into warrants to
purchase shares of Common Stock on a one for one basis. As of December 31, 2000,
none of these warrants had been exercised.
10. INCOME TAXES:
The Company provides for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial statement and
income tax purposes. Valuation allowances are provided against assets that are
not likely to be realized.
The provision for income taxes differs from the expected tax benefit amount
computed by applying the statutory federal income tax rate of 34% to loss before
income taxes as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Federal statutory rate............ (34)% (34)% (34)%
State taxes, net of federal
benefit......................... (6) (6) (6)
Change in valuation allowance..... 40 40 40
--------- --------- ---------
--% --% --%
========= ========= =========
The major components of the net deferred tax asset were as follows (in
thousands):
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Net operating losses:
Federal ............................ $ 31,210 $ 28,723
State .............................. 1,314 1,412
Tax credit carryforwards ............. 6,775 4,551
Cumulative temporary differences:
Reserves ........................... 2,122 1,474
Research and development costs ..... 2,709 2,070
Start-up costs ..................... 508 508
Other .............................. 2,848 1,211
-------- --------
Total deferred tax asset ....... 47,486 39,949
Valuation allowance .................. (47,486) (39,949)
-------- --------
Net deferred tax asset ......... $ -- $ --
======== ========
The Company has established a valuation allowance for the total deferred
tax asset because, given the Company's limited operating history and accumulated
deficit, it is uncertain that the deferred tax asset will be realized.
As of December 31, 2000, the Company had Federal and State net operating
loss carry forwards of approximately $91,795,033 and $22,530,002, respectively.
The Company's net operating loss carry forwards expire at various dates
43
43
through 2021. Under current tax law, the net operating loss and tax credit
carry forwards available for use in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interest.
11. 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.
The Company sells its products indirectly through worldwide system
integrators and local resellers in addition to through a direct sales force.
Revenue by country based on sales to those customers before distribution to the
end customer was as follows:
YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
---- ---- ----
United States ...... 88% 57% 24%
Germany ............ -- -- 2%
Austria ............ -- -- 27%
United Kingdom ..... -- 10% 16%
Italy .............. -- 7% 15%
Israel ............. -- 2% 10%
Saudi Arabia ....... -- 10% --
Other .............. 12% 14% 6%
The following customers accounted for 10% or more of revenues in the periods
indicated:
YEARS ENDED
DECEMBER 31,
---------------------
2000 1999 1998
---- ---- ----
Customer A ................... -- * 27%
Customer B ................... 86% 57% 16%
Customer C ................... -- * 15%
Customer D ................... * * 10%
Customer E ................... * 10% *
Customer F ................... * 10% *
* Customer below 10% of revenues
12. SUBSEQUENT EVENT
In March 2001, the Company announced a plan, under which employees holding
options to purchase the Company's common stock may opt to cancel certain stock
option grants in exchange for a commitment that options to purchase the same
number of common shares will be granted in November 2001 with an exercise price
equal to the fair value of the Company's common stock on the date of the new
grant, 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 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.
In January 2001, the Company's Board of Directors approved a resolution to
reserve an additional 1,500,000 shares for issuance under the 2000 non-executive
stock option plan.
Subsequent to December 31, 2000, a customer of the Company has asserted
that it is investigating whether it is entitled to credits for certain purchases
made during 2000. The customer has not quantified the amounts of such potential
credits in its assertion. The Company does not believe that the customer is
entitled to any such credits.
44
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
The Company's Proxy Statement for its 2001 Annual Meeting of Shareholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, will be incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K and will provide the
information required under Part III (Items 10, 11, 12 and 13).
45
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements (including the Notes thereto) listed in
the Index to Consolidated Financial Statements are included in
Item 8 of Part II of this Form 10-K
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included herein:
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
3.3* Amended and Restated Articles of Incorporation of the
Registrant.
3.4* Amended and Restated Bylaws of the Registrant.
3.4.1 Certificate of Amendment of Bylaws of the Registrant,
dated as of April 28, 2000.
4.1* Form of the Registrant's common stock certificate.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Option Plan, as amended, and form of stock
option agreement and restricted stock purchase
agreement.
10.3* 1996 Stock Option Plan, as amended, and form of stock
option agreement and restricted stock purchase
agreement.
10.4**** 1997 Directors' Stock Option Plan, as amended, and
form of stock option agreement.
10.5* 1999 Executive Stock Plan and form of subscription
agreement.
10.6* 1999 Employee Stock Purchase Plan and form of
subscription agreement.
10.7* 1997 Directors' Stock Option Plan, as amended, and
form of stock option agreement.
10.8*** 2000 Non-Executive Option Plan and form of stock
option agreement.
10.9* Lease between Sobrato Interests II et al. and Pyramid
Technology Corporation dated August 29, 1979, and
first amendment.
10.9.1* Sublease between Registrant and Siemens Pyramid
Information Systems, Inc. dated December 15, 1997 and
amendment.
10.9.2* Landlord's consent to sublease.
10.10(+)* Global OEM Purchase Agreement between Registrant and
Lucent Technologies Inc.
10.11(+)* Manufacturing Agreement between Registrant and
Solectron California Corporation, dated May 31, 1998.
10.12(+)* Manufacturing and Engineering Services Agreement
between Registrant and Microelectronics Technology
Inc., dated January 11, 1999 and first amendment.
10.12.1 (++)*** Amendment Agreement to the Manufacturing and
Engineering Services Agreement between the
Company and Microelectronics Technology, Inc.,
Dated August 29, 2000.
10.13(+)* OEM Agreement between Registrant and Cisco Systems,
Inc., dated as of December 7, 1998.
10.13.1(+)* Technology Agreement between Registrant and Cisco
Systems, Inc., dated as of December 7, 1998.
46
46
10.13.2** Amendment No. 1 to OEM Agreement between Registrant
and Cisco Systems, Inc., dated as of January 20, 2000.
10.13.3 Amendment No. 2 to OEM Agreement between Registrant
and Cisco Systems, Inc., dated June 30, 2000.
10.13.4 Amendment No. 3 to OEM Agreement between Registrant
and Cisco Systems, Inc., dated March 15, 2001.
10.14* Employment Agreement between Registrant and Gideon
Ben-Efraim, and amendment.
10.15* Form of Change-of-Control Agreement.
10.16*** Preferred Stock Purchase Agreement between the
Company and Bungee Communications, Inc., dated
October 27, 2000.
10.17(++)*** Option Agreement between the Company and Bungee
Communications, Inc., dated October 27, 2000.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
- ---------------
* Incorporated by reference to our registration statement on Form S-1
(File No. 333-81325) initially filed with the SEC on June 22, 1999.
** Incorporated by reference to our registration statement on Form S-1
(File No. 333-30738) initially filed with the SEC on February 18, 2000.
*** Incorporated by reference to our quarterly filing on Form 10-Q (File No.
000-26963) initially filed with the SEC on November 14, 2000.
**** Incorporated by reference to our proxy statement on Schedule 14A (File
No. 000-26963) initially filed with the SEC on April 24, 2000.
+ Confidential treatment granted with respect to certain portions of this
Exhibit by order of the SEC dated August 18, 1999.
++ Confidential treatment granted with respect to certain portions of this
Exhibit by order of the SEC dated February 16, 2001.
47
47
NETRO CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE AT
THE BEGINNING CHARGED TO END OF THE
OF THE YEAR EXPENSES DEDUCTIONS YEAR
------------- ---------- ---------- ---------------
Allowance for Doubtful Accounts:
Year ended December 31, 1998........ $ 47 $ 462 $ -- $ 509
Year ended December 31, 1999........ 509 78 437 150
Year ended December 31, 2000........ $ 150 $ 800 $ 342 $ 608
Reserve for Warranty:
Year ended December 31, 1998........ $ 171 $1,833 $ 754 $1,250
Year ended December 31, 1999........ 1,250 621 607 1,264
Year ended December 31, 2000........ $1,264 $3,406 $1,846 $2,824
48
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 2001 By: /s/ Sanjay K. Khare
--------------------------------------------
Sanjay K. Khare
Vice President and Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ ----------------------------------- ---------------
/s/ Gideon Ben-Efraim Chairman of the Board of March 29, 2001
- ------------------------------ Directors and Chief Executive
(Gideon Ben-Efraim) Officer (Principal Executive
Officer)
/s/ Sanjay K. Khare Vice President and Chief March 29, 2001
- ------------------------------ Financial Officer (Principal
(Sanjay K. Khare) Financial Officer)
/s/ Lisa A. Evins Vice President of Finance March 29, 2001
- ------------------------------ (Principal Accounting Officer)
(Lisa A. Evins)
/s/ Richard M. Moley Chairman Emeritus of the Board March 29, 2001
- ------------------------------ of Directors
(Richard M. Moley)
/s/ Thomas R. Baruch Director March 29, 2001
- ------------------------------
(Thomas R. Baruch)
/s/ Irwin Federman Director March 29, 2001
- ------------------------------
(Irwin Federman)
/s/ Sanford Robertson Director March 29, 2001
- ------------------------------
(Sanford Robertson)
/s/ John L. Walecka Director March 29, 2001
- ------------------------------
(John L. Walecka)
/s/ Robert J. Wynne Director March 29, 2001
- ------------------------------
(Robert J. Wynne)
49
49
Exhibit List
3.3* Amended and Restated Articles of Incorporation of the
Registrant.
3.4* Amended and Restated Bylaws of the Registrant.
3.4.1 Certificate of Amendment of Bylaws of the Registrant,
dated as of April 28, 2000.
4.1* Form of the Registrant's common stock certificate.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Option Plan, as amended, and form of stock
option agreement and restricted stock purchase
agreement.
10.3* 1996 Stock Option Plan, as amended, and form of stock
option agreement and restricted stock purchase
agreement.
10.4**** 1997 Directors' Stock Option Plan, as amended, and
form of stock option agreement.
10.5* 1999 Executive Stock Plan and form of subscription
agreement.
10.6* 1999 Employee Stock Purchase Plan and form of
subscription agreement.
10.7* 1997 Directors' Stock Option Plan, as amended, and
form of stock option agreement.
10.8*** 2000 Non-Executive Option Plan and form of stock
option agreement.
10.9* Lease between Sobrato Interests II et al. and Pyramid
Technology Corporation dated August 29, 1979, and
first amendment.
10.9.1* Sublease between Registrant and Siemens Pyramid
Information Systems, Inc. dated December 15, 1997 and
amendment.
10.9.2* Landlord's consent to sublease.
10.10(+)* Global OEM Purchase Agreement between Registrant and
Lucent Technologies Inc.
10.11(+)* Manufacturing Agreement between Registrant and
Solectron California Corporation, dated May 31, 1998.
10.12(+)* Manufacturing and Engineering Services Agreement
between Registrant and Microelectronics Technology
Inc., dated January 11, 1999 and first amendment.
10.12.1 (++)*** Amendment Agreement to the Manufacturing and
Engineering Services Agreement between the
Company and Microelectronics Technology, Inc.,
Dated August 29, 2000.
10.13(+)* OEM Agreement between Registrant and Cisco Systems,
Inc., dated as of December 7, 1998.
10.13.1(+)* Technology Agreement between Registrant and Cisco
Systems, Inc., dated as of December 7, 1998.
50
10.13.2** Amendment No. 1 to OEM Agreement between Registrant
and Cisco Systems, Inc., dated as of January 20, 2000.
10.13.3 Amendment No. 2 to OEM Agreement between Registrant
and Cisco Systems, Inc., dated June 30, 2000.
10.13.4 Amendment No. 3 to OEM Agreement between Registrant
and Cisco Systems, Inc., dated March 15, 2001.
10.14* Employment Agreement between Registrant and Gideon
Ben-Efraim, and amendment.
10.15* Form of Change-of-Control Agreement.
10.16*** Preferred Stock Purchase Agreement between the
Company and Bungee Communications, Inc., dated
October 27, 2000.
10.17(++)*** Option Agreement between the Company and Bungee
Communications, Inc., dated October 27, 2000.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
- ---------------
* Incorporated by reference to our registration statement on Form S-1
(File No. 333-81325) initially filed with the SEC on June 22, 1999.
** Incorporated by reference to our registration statement on Form S-1
(File No. 333-30738) initially filed with the SEC on February 18, 2000.
*** Incorporated by reference to our quarterly filing on Form 10-Q (File No.
000-26963) initially filed with the SEC on November 14, 2000.
**** Incorporated by reference to our proxy statement on Schedule 14A (File
No. 000-26963) initially filed with the SEC on April 24, 2000.
+ Confidential treatment granted with respect to certain portions of this
Exhibit by order of the SEC dated August 18, 1999.
++ Confidential treatment granted with respect to certain portions of this
Exhibit by order of the SEC dated February 16, 2001.