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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1999
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
NETRO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0395029
(State of incorporation) (IRS Employer Identification No.)
3860 NORTH FIRST STREET, SAN JOSE, CA 95134
(408) 216-1500
(Address, including zip code, and telephone
number, including area code, of Registrant's principal
executive offices)
-------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
EXPLANATORY NOTE: ALTHOUGH THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE
FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, THE REGISTRANT HAS
NOT BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
The number of shares outstanding of the Registrant's Common Stock as of
November 11, 1999 was 44,894,898.
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1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months ended
September 30, 1999 and September 30,1998 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and September 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Qualitative and Quantitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
EXHIBIT INDEX 17
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
NETRO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 23,377 $ 6,094
Short-term investments .................................. 30,577 9,034
Trade accounts receivable, net .......................... 5,029 1,150
Inventory ............................................... 6,813 4,315
Prepaid expenses and other .............................. 1,051 243
-------- --------
Total current assets ............................ 66,847 20,836
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net ................. 4,644 5,634
OTHER ASSETS .............................................. 252 318
-------- --------
Total assets .................................... $ 71,743 $ 26,788
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases .... $ 6,341 $ 3,872
Trade accounts payable .................................. 4,321 1,327
Accrued liabilities ..................................... 4,180 3,114
-------- --------
Total current liabilities ....................... 14,842 8,313
LONG-TERM DEBT AND CAPITAL LEASES,
net of current portion .......................... 3,997 4,547
DEFERRED FACILITIES RENT .................................. 53 35
-------- --------
Total liabilities ............................... 18,892 12,895
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS EQUITY:
Convertible Preferred Stock ............................. -- 81,073
Common Stock ............................................ 146,562 1,224
Note receivable from shareholder ........................ (800) (800)
Deferred stock compensation ............................. (4,027) --
Accumulated deficit ..................................... (88,884) (67,604)
-------- --------
Total shareholders' equity ...................... 52,851 13,893
-------- --------
Total liabilities and shareholders' equity ...... $ 71,743 $ 26,788
======== ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
3
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NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES .................................... $ 5,156 $ 566 $ 10,494 $ 3,839
COST OF REVENUES ............................ 4,077 2,523 8,248 6,796
------- ------- -------- --------
GROSS PROFIT (LOSS) ......................... 1,079 (1,957) 2,246 (2,957)
------- ------- -------- --------
OPERATING EXPENSES:
Research and development .................. 5,092 4,430 14,275 13,199
Sales and marketing ....................... 1,332 1,262 3,895 3,592
General and administrative ................ 1,450 990 4,553 2,890
Amortization of deferred stock
compensation ........................... 298 -- 807 --
------- ------- -------- --------
Total operating expenses .......... 8,172 6,682 23,530 19,681
------- ------- -------- --------
LOSS FROM OPERATIONS ........................ (7,093) (8,639) (21,284) (22,638)
Other income, net ......................... 102 38 4 356
------- ------- -------- --------
NET LOSS AND COMPREHENSIVE LOSS ............. $(6,991) $(8,601) $(21,280) $(22,282)
======= ======= ======== ========
Basic and diluted net loss per share ........ $ (0.27) $ (1.18) $ (1.52) $ (3.28)
======= ======= ======== ========
Shares used to compute basic and diluted
net loss per share ....................... 25,613 7,294 14,026 6,792
======= ======= ======== ========
Pro forma basic and diluted net loss per
share .................................... $ (0.17) $ (0.25) $ (0.55) $ (0.66)
======= ======= ======== ========
Shares used to compute pro forma basic
and diluted net loss per share ........... 41,561 34,890 38,932 33,953
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
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NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(21,280) $(22,282)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......................... 2,221 2,204
Provision for doubtful accounts ....................... 28 25
Amortization of deferred stock compensation ........... 807 --
Non-cash issuance of stock ............................ 328 --
Changes in operating assets and liabilities:
Trade accounts receivable ........................... (3,907) 925
Inventory ........................................... (2,498) (1,858)
Prepaid expenses and other .......................... (742) (255)
Trade accounts payable and accrued liabilities....... 4,078 105
-------- --------
Net cash used in operating activities ............ (20,965) (21,136)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements ........ (1,231) (2,561)
Purchases of short-term investments ...................... (56,642) (28,244)
Maturities of short-term investments ..................... 35,099 23,003
-------- --------
Net cash used in investing activities ............ (22,774) (7,802)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and capital
leases ............................................... 4,323 3,775
Payments on notes payable and capital leases ............. (2,404) (1,158)
Proceeds from issuance of Preferred Stock, net of
issuance costs ........................................ 16,673 15,196
Proceeds from issuance of Common Stock, net of
issuance costs ........................................ 42,434 209
Repurchases of Common Stock .............................. (4) (150)
-------- --------
Net cash provided by financing activities ........ 61,022 17,872
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................. 17,283 (11,066)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD ................................................... 6,094 15,688
-------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD ................................................... $ 23,377 $ 4,602
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 792 $ 565
Non-cash transactions:
Notes receivable from the issuance of Common Stock........ $ -- $ 800
Conversion of Preferred Stock to Common Stock in
connection with IPO ................................... $ 98,128 $ --
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
5
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NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Netro Corporation (collectively, with its subsidiaries, the "Company")
was incorporated in California on November 14, 1994. Netro is a leading provider
of broadband wireless access equipment to competitive communications service
providers worldwide. Netro's AirStar broadband access system derives its
price-performance benefits from dynamic bandwidth allocation and a
point-to-multipoint architecture that provides integrated voice and high-speed
packet data services. The Company operates in one business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the rules and regulations to Form 10-Q and
Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
statements at September 30, 1999 and for the three and nine months ended
September 30, 1999 and 1998 have been included.
The unaudited condensed consolidated financial statements include the
accounts of Netro Corporation and its wholly owned subsidiaries.
Results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of results that may be
expected for any other interim period or for the full fiscal year ending
December 31, 1999. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements and the accompanying
notes included in the Company's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission. The condensed balance sheet at December
31, 1998 is derived from audited financial statements as of that date.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of short-term, highly liquid
investments with original maturities of less than three months. The Company
classifies its short-term investments in debt securities as "held-to-maturity."
Accordingly, these investments, which mature at various dates through January
2000, are valued using the amortized cost method.
INVENTORY
Inventory includes materials and labor, is stated at the lower of cost
(first-in, first-out) or market and consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials................... $2,631 $3,204
Work-in-process.................. 2,198 474
Finished goods................... 1,984 637
------ ------
$6,813 $4,315
</TABLE>
6
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NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted average number of shares of common stock outstanding. Potential common
shares from 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 options, warrants, and preferred
stock excluded from diluted net loss per share computation for the three and
nine months ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
Shares of convertible preferred stock ......... -- 27,674
Shares issuable pursuant to warrants to
purchase common stock ...................... 38 29
Shares issuable under stock option plans ...... 5,805 4,832
----- ------
5,843 32,535
===== ======
</TABLE>
During the quarter ended September 30, 1999, the Company issued
5,750,000 shares of common stock and converted all of its outstanding preferred
stock to common stock upon the closing of the Company's initial public offering.
The pro forma net loss per share computation has been appropriately weighted to
reflect this issuance.
Pro forma basic and diluted net loss per share is calculated assuming
the conversion of convertible preferred stock into an equivalent number of
shares of common stock, as if the shares had converted on the dates of their
issuance.
The following table presents the calculation of basic and diluted and
pro forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
HISTORICAL:
Net loss ............................................. $(6,991) $(8,601) $(21,280) $(22,282)
======= ======= ======== ========
Weighted average shares of common
stock outstanding ................................ 25,905 9,181 14,627 8,362
Less: Weighted average shares of common stock
subject to repurchase ............................ (292) (1,887) (601) (1,570)
------- ------- -------- --------
Weighted average shares used to compute basic and
diluted net loss per share ....................... 25,613 7,294 14,026 6,792
======= ======= ======== ========
Basic and diluted net loss per share ................. $ (0.27) $ (1.18) $ (1.52) $ (3.28)
======= ======= ======== ========
PRO FORMA:
Net loss ............................................. $(6,991) $(8,601) $(21,280) $(22,282)
======= ======= ======== ========
Shares used above .................................... 25,613 7,294 14,026 6,792
Pro forma adjustment to reflect weighted average
effect of assumed conversion of convertible
preferred stock .................................. 15,948 27,596 24,906 27,161
------- ------- -------- --------
Weighted average shares used to compute pro forma
basic and diluted net loss per share ............. 41,561 34,890 38,932 33,953
======= ======= ======== ========
Pro form basic and diluted net loss per share ........
$ (0.17) $ (0.25) $ (0.55) $ (0.66)
======= ======= ======== ========
</TABLE>
7
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2. SHAREHOLDER'S EQUITY:
INITIAL PUBLIC OFFERING
On August 24, 1999, the Company completed its initial public offering of
5,750,000 shares of common stock at a public offering price of $8 per share. The
offering resulted in net proceeds to the Company of $42,780,000 after payment of
the underwriter's commission but before deduction of offering expenses.
Simultaneously with the closing of the initial public offering, all of the
Company's then outstanding convertible preferred stock was automatically
converted into an aggregate of 29,902,283 shares of common stock.
3. DEBT AND CAPITAL LEASES:
The following table summarizes obligations under long-term debt and
capital leases (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Borrowings under bank line of credit ....... $ 3,958 $1,839
Secured note payable to lender, due in
monthly installments of $90,942 with
interest at 12.5% ........................ 2,162 2,746
Capital leases, due through 2002 ........... 4,218 3,834
------- ------
10,338 8,419
Less: current portion ...................... (6,341) (3,872)
------- ------
$ 3,997 $4,547
======= ======
</TABLE>
In January 1998, the Company entered into a new bank line of credit
under which up to $6,000,000 is available for borrowings and letters of credit.
This arrangement was renewed in September 1999 and expires in January 2001.
Borrowings are limited to an aggregate amount equaling approximately 80% and 90%
of domestic and foreign eligible trade accounts receivables, respectively, and
50% of eligible foreign inventories. The line of credit is secured by the
Company's outstanding trade accounts receivable and inventory. The borrowings
under the line are due in January 2001 and accrue interest at the 30-day LIBOR
rate plus 2.25% or the bank's prime rate, at the Company's option. Under the
agreement, the Company must comply with certain financial and other covenants.
As of September 30, 1999, borrowings outstanding under this agreement were
$3,958,000 and amounts utilized for outstanding letters of credit were $300,000.
In March 1999, the Company entered into a new equipment lease agreement,
under which the Company can finance equipment purchases of up to $3,000,000. As
of September 30, 1999, the Company had leased equipment with a value of
approximately $1,684,000 under this agreement.
4. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company issued a standby letter of credit of $400,000 to secure
certain of the Company's warranty obligations to one customer. The letter of
credit is secured by a certificate of deposit for $100,000. The letter of credit
is subject to draw if the Company fails to meet its obligations to the customer.
CONTINGENCIES
In March 1999, one of the Company's former contract manufacturers filed
for binding arbitration in Santa Clara County, California with respect to a
dispute with the Company. The arbitration involves claims for approximately
$950,000 for amounts allegedly owed by the Company for inventory purchased by
the plaintiff in anticipation of the Company's projected demand. In June 1999,
the Company filed an answer and counterclaim alleging damages of approximately
$275,000 for product failures.
In November 1999, the parties signed an agreement in principle to settle
this dispute, which is presently being documented in final form. Under the
proposed settlement the Company will purchase certain component inventory for
cash. This proposed settlement is within amounts previously reserved for this
purpose in the Company's financial statements.
8
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5. SEGMENT REPORTING:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company adopted SFAS No. 131 in fiscal 1998. SFAS No. 131 establishes standards
for disclosures about operating segments, products and services, geographic
areas and significant customers. The Company is organized and operates as one
operating segment: the design, development, manufacturing, marketing and selling
of broadband wireless point-to-multipoint access systems.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The statements contained in
this report that are not purely historical are forward-looking statements,
including statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Our actual
results could differ substantially from those described in our forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the Management's Discussion and
Analysis and the Risk Factors section of our Registration Statement on Form S-1
declared effective on August 18, 1999 by the Securities and Exchange Commission
(File No. 333-81325). The following discussion should be read together with our
consolidated financial statements and related notes included elsewhere in this
Form 10-Q.
OVERVIEW
We are a leading provider of wireless networking equipment used by
telecommunications service providers to provide businesses with high-speed
telecommunications connections. We were incorporated in 1994 and introduced our
first product, the AirMAN system, in 1996. Recognizing the competitiveness of
the market for AirMAN products, we decided to devote substantially all of our
product development efforts to the AirStar product from 1996 onward. The AirMAN
system was designed to provide a dedicated link to connect two high traffic
nodes in a network. Unlike the AirMAN system, the AirStar system allows multiple
subscribers to communicate with a single base station radio in a
point-to-multipoint architecture requiring more advanced technology. We began
initial sales of an early 26 GHz AirStar system in Europe in early 1998. With
the successful trial shipments of the AirStar system, we discontinued AirMAN in
September 1998. We shipped the first trial AirStar systems for 26 GHz in the
third quarter of 1998. We then shipped a trial version of a 10 GHz AirStar
product in November 1998. Based on our success in field trials and the receipt
of limited quantities of AirStar subsystems from our first contract
manufacturer, Solectron California Corporation, we made the 26 GHz AirStar
product commercially available in January 1999. However, the product was, and
continues to be, available only in limited quantities due to manufacturing and
capacity constraints.
Revenues. Our current revenues primarily consist of product revenues
from the sale of the AirStar system. Revenues from product sales are generally
recognized when all of the following conditions are met: the product has
shipped, the Company has the right to invoice the customer, collection of the
receivable is probable and the Company has fulfilled all of its contractual
obligations to the customer.
Cost of Revenues. Our cost of revenues consists of contract
manufacturing costs, material costs, compensation costs, manufacturing overhead,
warranty reserves and other direct product costs.
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. Our policy is to expense all research and development expenses as
incurred. For certain projects we receive third-party research and development
funding, which is offset against the related expenses. Gross research and
development expenses are costs incurred before offset from third-party research
and development funding.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation costs, commissions, travel and related expenses for marketing,
sales and field service support personnel, as well as product management, trade
show and promotional expenses.
9
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General and Administrative. General and administrative expenses consist
primarily of compensation costs and related expenses for executive, finance,
management information systems, human resources and administrative personnel.
These expenses also include professional fees, facilities and other general
corporate expenses.
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 September 30, 1999.
Other Income (Expense), Net. Other income (expense), net consists
primarily of interest income earned on low-risk, short-term investments and
interest paid on outstanding debt.
Income Taxes. We have not recorded any provision for income taxes for
any of the periods presented because we have generated net losses since
inception.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Revenues increased to $5.2 million for the three months ended
September 30, 1999 from $566,000 for the same period in 1998. Sales to two
customers represented 67% and 20% of revenues, for the three months ended
September 30, 1999. Sales to four customers represented 30%, 24%, 22% and 15% of
revenues, for the three months ended September 30, 1998. For the nine months
ended September 30, 1999 our revenues increased to $10.5 million from $3.8
million for the same period in 1998. Sales to three customers represented 64%,
12% and 10% of revenues, for the nine months ended September 30, 1999. Sales to
four customers represented 39%, 18%, 14% and 11% of revenues, for the nine
months ended September 30, 1998. The increase in revenues for each of the
comparative periods was a result of increasing unit sales of the AirStar
products. Substantially all of the revenues for these periods were generated
from installations in international locations.
Gross Profit (loss). Gross profit increased to a profit of $1.1 million
for the three months ended September 30, 1999 from a loss of $2.0 million for
the same period in 1998. Gross profit for the nine months ended September 30,
1999 was $2.2 million compared to a gross loss of $3.0 million for the same
period in 1998. Gross profit, as a percentage of revenues, improved from
negative 77% for the nine months ended September 30, 1998 to 21% for the nine
months ended September 30, 1999. The increase in gross profit on a percentage
basis for each of the comparative periods was primarily due to lower unit costs
and lower labor costs associated with higher volume product sales. We are
pursuing cost reductions in our products but also expect continued decreases in
the average sales prices of our products. It is anticipated that these price
decreases could offset, at least partially, any cost reductions that we achieve.
Research and Development. Research and development expenses increased to
$5.1 million for the three months ended September 30, 1999 from $4.4 million for
the same period in 1998. Research and development expenses increased in the
quarter ended September 30, 1999 due to increases in third-party design,
consulting charges and usage of prototype materials with a small offset from
third party engineering funding. Research and development expenses increased to
$14.3 million for the nine months ended September 30, 1999 from $13.2 million
for the same period in 1998. This increase was primarily due to an increase in
our research and development personnel, number of development projects and
related third-party design and consulting charges with a small offset from third
party engineering funding. These projects primarily consisted of the development
of the AirStar system at 26, 10 and 38 GHz. We expect research and development
expenses to continue to increase on an absolute basis during future periods.
Sales and Marketing. Sales and marketing expenses remained relatively
constant at $1.3 million for the three months ended September 30, 1999 compared
to the same period in 1998. Increases in personnel to support both the pre-sale
and post-sale activities associated with the AirStar system was offset by a
reduction in trade show and associated travel and other expenses. Sales and
marketing expenses increased to $3.9 million for the nine months ended September
30, 1999 from $3.6 million for the same period in 1998. The increases were
principally due to the continued expansion in sales, technical assistance and
field support personnel necessary to support both the pre-sale and post-sale
activities. We expect sales and marketing expenses to continue to increase on an
absolute basis in future periods as we expand our sales, marketing, technical
assistance and field capabilities necessary to support increased sales and
product offerings.
10
<PAGE> 11
General and Administrative. General and administrative expenses
increased to $1.4 million for the three months ended September 30, 1999 from
$1.0 million for the same period in 1998. General and administrative expenses
increased to $4.6 million for the nine months ended September 30, 1999 from $2.9
million for the same period in 1998. The absolute increases were due to an
increase in rent expense resulting from additional office space assumed and the
growth in general and administrative personnel. We expect the growth of our
business and operation as a public company will require additional personnel and
costs resulting in increases in our general and administrative expenses.
Amortization of Deferred Stock Compensation. Amortization of deferred
stock compensation was $298,000 and $807,000 for the three and nine months ended
September 30, 1999, respectively. This amortization is due to deferred
compensation of approximately $4.8 million, related to stock options granted in
the year ended December 31, 1998 and the nine months ended September 30, 1999,
which we are amortizing over the vesting periods of the applicable options
beginning in 1999.
Other Income, Net. Other income, net increased to $102,000 for the three
months ended September 30, 1999 from $38,000 for the same period in 1998. This
increase was primarily due to greater interest earned on higher average cash
balances resulting from the initial public offering proceeds. Other income, net
decreased to $4,000 for the nine months ended September 30, 1999 from $356,000
for the same period in 1998. This decrease was primarily due to interest expense
incurred due to greater utilization of secured equipment loans and lease and
bank financing for working capital in addition to less interest earned on lower
average cash balances over the nine month period ended September 30, 1999.
Net Loss. Net loss decreased to $7.0 million for the three months ended
September 30, 1999 from $8.6 million for the same period in 1998. Net loss
decreased to $21.3 million for the nine months ended September 30, 1999 from
$22.3 million for the same period in 1998. This decrease was primarily due to an
increase in gross profit, which was offset in part by increases in operating
expenses and other expenses.
We believe that period-to-period comparisons of our operating results
are not necessarily meaningful. You should not rely on them to predict future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. We face a
number of risks and uncertainties encountered by early stage companies,
particularly those in rapidly evolving markets such as the telecommunications
and data communications equipment industries. We may not be able to address
these risks and difficulties successfully. In addition, although we have
experienced revenue growth recently, our revenue growth may not continue, and we
may not achieve or maintain profitability in the future.
Our quarterly and annual operating results have fluctuated in the past
and are likely to fluctuate significantly in the future. It is likely that in
some future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the market price of our common
stock could significantly decline.
Some of the factors that could affect our quarterly or annual operating
results include:
- Our ability to reach the required production volumes and quality
levels for our products;
- Our ability to obtain sufficient supplies of sole source or long
lead-time components for our products;
- Our ability to achieve cost reductions;
- The size, timing and frequency of network buildouts, which are
typically large and infrequent;
- The timing and amount of, or cancellation or rescheduling of, orders
for our products, particularly large orders from system integrators;
- Our ability to introduce and support new products and to manage
product transitions; and
- A decrease in the average selling prices of our products.
11
<PAGE> 12
Our sales cycle, which is typically between six and twelve months,
contributes to fluctuations in our quarterly operating results. Further, the
emerging and evolving nature of the market for systems such as AirStar may lead
prospective customers to postpone their purchasing decisions. In addition,
general concerns regarding year 2000 compliance may further delay purchase
decisions by prospective customers.
Most of our expenses, such as employee compensation and lease payments
for facilities and equipment, are relatively fixed in the near term. In
addition, our expense levels are based, in part, on our expectations regarding
future revenues. As a result, any shortfall in revenues relative to our
expectations could cause significant changes in our operating results from
quarter to quarter. Due to the foregoing factors, we believe period-to-period
comparisons of our revenue levels and operating results are not meaningful. You
should not rely on our quarterly revenues and operating results to predict our
future performance.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, cash and cash equivalents were $23.4 million
and short-term investments were $30.6 million. We have a $6.0 million bank line
of credit. As of September 30, 1999, borrowings outstanding were $4.0 million
and amounts utilized for outstanding letters of credit were $300,000 under this
agreement. The line of credit is secured by eligible outstanding account
receivable and inventory. The borrowings under the line are due in January 2001
and accrue interest at the 30-day LIBOR plus 2.25% or the bank's prime rate, at
our option. In addition, we have secured equipment financing with three lenders
of which $1.3 million was available as of September 30, 1999. As of September
30, 1999, $4.2 million remained outstanding under these arrangements. See note 3
of notes to condensed consolidated financial statements.
On August 24, 1999, we completed a public offering of 5,750,000 shares
of common stock at a public offering price of $8.00 per share. We received net
proceeds of $42.8 million, after the underwriting discount of approximately $3.2
million but before offering expenses. The proceeds from this offering have been
designated for general corporate expenses.
Cash used in operating activities was $21.0 million for the nine months
ended September 30, 1999 and $21.1 million for the same period in 1998. Cash
used for operations for both periods was primarily due to the net loss,
partially offset by non-cash charges.
Cash used in investing activities was $22.8 million for the nine months
ended September 30, 1999, primarily due to excess cash invested in short-term
investments. Cash used in investing activities was $7.8 million for the nine
months ended September 30, 1998, primarily due to excess cash invested in
short-term investments and capital equipment purchases.
Cash provided by financing activities was $61.0 million for the nine
months ended September 30, 1999. Cash provided by financing activities was $17.9
million for the nine months ended September 30, 1998. Cash provided by financing
activities for both periods were primarily due to issuances of preferred and
common stock and, to a lesser extent, capital lease and bank financing.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. Our future capital requirements
will depend upon many factors, including the timing of research and product
development efforts and expansion of our marketing efforts. We expect to
continue to expend significant but smaller amounts on property and equipment
related to the expansion of our facilities, and on research and development
laboratory and test equipment, as the capital required for volume manufacturing
is being committed by our contract manufacturers. 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 September 30, 1999, we had committed to
make purchases totaling $3.1 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.
In future periods, we generally anticipate significant increases in our
working capital needs on a period-to-period basis primarily as a result of
planned increased product revenues. In conjunction with the expected increases
in revenues, we expect higher levels of inventory and trade accounts receivable.
While we also expect an increase in trade accounts payable and other
liabilities, we do not expect that they will offset the increases in inventory
and trade accounts receivable.
We believe that our cash and cash equivalents balances, short-term
investments 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 short-term, interest-bearing, investment-grade securities.
12
<PAGE> 13
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in date code fields. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. Any of our computer
programs or hardware that have date-sensitive software or embedded chips and
have not been upgraded to comply with these year 2000 requirements may recognize
a date using "00" as the year 1900 rather that the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
General Readiness Assessment. The year 2000 problem affects the
computers, software and other equipment that we use, operate or maintain for our
operations. As a result, we have formalized our year 2000 compliance plan, to be
implemented by a team of our internal information technology staff responsible
for monitoring the assessment and remediation status of our year 2000 projects
and reporting that status to our executive staff. This project team is currently
assessing the potential effect and costs of remediating the year 2000 problem
for our internal systems. To date, we have not obtained verification or
validation from any independent third parties of our processes to assess and
correct any of our year 2000 problems or the costs associated with these
activities.
Assessment of Netro's Products. Beginning in 1998, we began assessing
the ability of our products to operate properly in the year 2000. We believe
that our current products are year 2000 compliant. Additionally, as we design
and develop new products, we subject them to testing for year 2000 compliance
and the ability to distinguish between various date formats. We expect to
continue to test our software and products for year 2000 compliance and
compliance when used with other standard operating systems or computer
platforms. Accordingly, we do not believe that the year 2000 issue presents a
material exposure as it relates to our products
Assessment of Internal Infrastructure. We believe that we have
identified most of the major computers, software applications and related
equipment used in connection with our internal operations that will need to be
evaluated to determine if they must be modified, upgraded or replaced to
minimize the possibility of a material disruption to our business. Based on a
review of our computer systems, we have determined that we will be required to
modify or replace some portions of our software so that those systems will
properly utilize dates beyond December 31, 1999. We presently believe that with
modifications or replacements of existing software through our maintenance
contracts with third-party vendors, year 2000 issues can be mitigated. We expect
to complete this process before December 31, 1999.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, telephone switches security systems and other common
devices, may be affected by the year 2000 problem. We are currently assessing
the potential effect and costs of remediating the year 2000 problem on our
office equipment and our facilities in San Jose, California. We expect to
complete this process before December 31, 1999.
Costs of Remediation. We estimate the total cost to us of completing any
required modifications, upgrades or replacements of our internal systems will
not exceed $100,000, most of which we expect to incur during calendar 1999. This
estimate is being monitored, and we will revise it, as additional information
becomes available. Based on the activities described above, we do not believe
that the year 2000 problem will have a material adverse effect on our business
or operating results. In addition, we have not deferred any material information
technology projects or equipment purchases as a result of our year 2000 problem
activities.
Suppliers. As part of our year 2000 plan, we have contacted third-party
suppliers of components and key subcontractors used in the delivery of our
products to identify and, to the extent possible, resolve issues involving the
year 2000 problem. However, we have limited or no control over the actions of
these third-party suppliers and subcontractors. Thus, while we expect that we
will be able to resolve any significant year 2000 problems with these third
parties, if these suppliers fail to resolve any year 2000 problems a material
disruption to the operation of our business may occur. Any failure on the part
of these third parties to resolve year 2000 problems with their systems in a
timely manner could have a material adverse effect on our business. We expect to
complete this process before December 31, 1999.
Most Likely Consequences of Year 2000 Problems. We expect to identify
and resolve all year 2000 problems that could materially adversely affect our
business operations before December 31, 1999. However, we believe that it is not
possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected. The number of devices and
systems that could be affected and the interactions among these devices and
systems are too numerous to address. In addition, no one can accurately predict
which year 2000 problem-related failures will occur or the severity, timing,
duration or financial consequences of these potential failures. As a result, we
believe that the following consequences are possible:
13
<PAGE> 14
- A significant number of operational inconveniences and
inefficiencies for us, our contract manufacturers and our customers that
will divert management's time and attention and financial and human
resources from ordinary business activities;
- Possible business disputes and claims, including claims under
our product warranty, due to year 2000 problems experienced by our
customers and incorrectly attributed to our products or performance,
which we believe will be resolved in the ordinary course of business;
and
- A few serious business disputes alleging that we failed to
comply with the terms of contracts or industry standards of performance,
some of which could result in litigation or contract termination.
Contingency Plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans before December 31, 1999. Depending on the systems affected, these plans
could include:
- Accelerated replacement of affected equipment or software;
- Short- to medium-term use of backup equipment and software or
other redundant systems;
- Increased work hours for our personnel or the hiring of
additional information technology staff; and
- The use of contract personnel to correct, on an accelerated
basis, any year 2000 problems that arise or to provide interim alternate
solutions for information system deficiencies.
Our implementation of any of these contingency plans could have a
material adverse effect on our business.
Disclaimer. The discussion of our efforts and expectations relating to
year 2000 compliance are forward-looking statements. Our ability to achieve year
2000 compliance, and the level of incremental costs associated therewith, could
be adversely affected by, among other things, the availability and cost of
contract personnel and external resources, third-party suppliers' abilities to
modify proprietary software and unanticipated problems not identified in the
ongoing compliance review.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Hedging Instruments. We transact business in various
foreign currencies and, accordingly, we are subject to exposure from adverse
movements in foreign currency exchange rates. To date, the effect of changes in
foreign currency exchange rates on revenues and operating expenses have not been
material. Basically, all of our revenues are earned in U.S. dollars. Operating
expenses incurred by our German subsidiary are denominated primarily in European
currencies. We currently do not use financial instruments to hedge these
operating expenses. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes.
Fixed Income Investments. Our exposure to market risks from changes in
interest rates relates primarily to corporate debt securities. We place our
investments with high credit quality issuers and, by policy, limit the amount of
the credit exposure to any one issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents; all investments with maturities of three
months or greater are classified as held-to-maturity and considered to be
short-term investments.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In March 1999, one of the Company's former contract manufacturers filed
for binding arbitration in Santa Clara County, California with respect to a
dispute with the Company. The arbitration involves claims for approximately
$950,000 for amounts allegedly owed by the Company for inventory purchased by
the plaintiff in anticipation of the Company's projected demand. In June 1999,
the Company filed an answer and counterclaim alleging damages of approximately
$275,000 for product failures.
In November 1999, the parties signed an agreement in principle to settle
this dispute, which is presently being documented in final form. Under the
proposed settlement the Company will purchase certain component inventory for
cash. This proposed settlement is within amounts previously reserved for this
purpose in the Company's financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 18, 1999, in connection with the Company's initial public
offering, a Registration Statement on Form S-1 (No. 333-81325) was declared
effective by the Securities and Exchange Commission, pursuant to which 5,750,000
shares of the Company's Common Stock were offered and sold for the account of
the Company at a price of $8.00 per share, generating gross offering proceeds of
$46.0 million. The managing underwriters were Merrill Lynch, Pierce, Fenner &
Smith Incorporated, BancBoston Robertson Stephens Inc. and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated. After deducting approximately
$3.2 million in underwriting discounts and $1.0 million in other related
expenses, the net proceeds of the offering were approximately $41.8 million. The
$41.8 million has been invested in investment grade, interest bearing
securities. The Company intends to use such remaining proceeds for capital
expenditures and for general corporate purposes, including working capital to
fund anticipated operating losses.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted a definitive proxy statement to its shareholders
of record as of June 30, 1999 for purposes of its Annual Meeting of
Shareholders, which was subsequently held on August 6, 1999. The matters voted
on and the results of such voting were as follows:
1. The election of Directors of the Company, to serve until the next
Annual Meeting of Shareholders or until their successors shall be
duly elected and qualified.
<TABLE>
<CAPTION>
BOARD'S NOMINEES FOR WITHHELD
---------------- --- --------
<S> <C> <C>
Richard M. Moley (22,441,161) (16,119,832)
Gideon Ben-Efraim (22,441,161) (16,119,832)
Thomas R. Baruch (22,441,161) (16,119,832)
Neal Douglas (22,441,161) (16,119,832)
Irwin Federman (22,441,161) (16,119,832)
John L. Walecka (22,441,161) (16,119,832)
</TABLE>
2. To approve the Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws of the Company to be filed with the
State of California upon the completion of the Company's initial
public offering.
FOR (22,441,161) AGAINST (0) ABSTAIN (16,119,832)
3. To approve the adoption of the Company's 1999 Employee Stock
Purchase Plan and the reservation of 1,000,000 shares of Common
Stock for issuance thereunder, plus an increase in shares in each of
fiscal years 2001, 2002, 2003, 2004 and 2005 of 250,000 shares of
Common Stock for issuance thereunder.
FOR (22,441,161) AGAINST (0) ABSTAIN (16,119,832)
15
<PAGE> 16
4. To approve the adoption of certain amendments to the Company's 1996
Stock Option Plan.
FOR (22,441,161) AGAINST (0) ABSTAIN (16,119,832)
5. To approve the adoption of certain amendments to the Company's 1997
Directors' Stock Option Plan.
FOR (22,441,161) AGAINST (0) ABSTAIN (16,119,832)
6. To ratify the appointment of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999.
FOR (22,441,161) AGAINST (0) ABSTAIN (16,119,832)
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Netro Corporation during the
quarter ended September 30, 1999.
NETRO CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETRO CORPORATION
Date: November 12, 1999 By: /s/ MICHAEL T. EVERETT
------------------------------------
Michael T. Everett
Executive Vice President, Finance, Chief
Financial Officer and Assistant
Secretary (Duly Authorized Officer
and Principal Financial and
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,377
<SECURITIES> 30,577
<RECEIVABLES> 5,129
<ALLOWANCES> 100
<INVENTORY> 6,813
<CURRENT-ASSETS> 66,847
<PP&E> 12,522
<DEPRECIATION> 7,878
<TOTAL-ASSETS> 71,743
<CURRENT-LIABILITIES> 14,842
<BONDS> 0
0
0
<COMMON> 146,562
<OTHER-SE> (93,711)
<TOTAL-LIABILITY-AND-EQUITY> 71,743
<SALES> 10,494
<TOTAL-REVENUES> 10,494
<CGS> 8,248
<TOTAL-COSTS> 23,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4)
<INCOME-PRETAX> (21,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,280)
<EPS-BASIC> (1.52)
<EPS-DILUTED> (1.52)
</TABLE>
