Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 June 30, 2002

OR

o

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 000-26963

NETRO CORPORATION

3860 North First Street, San Jose, CA 95134
(408) 216-1500
(Address, including zip code, and telephone number, including area code,
of Registrant’s principal executive offices)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

The number of shares outstanding of the Registrant’s Common Stock as of July 31, 2002 was 61,153,326.

1

Table of Contents

INDEX

						Page No.
PART I.				FINANCIAL INFORMATION
Item 1.				Financial Statements:
				Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 (unaudited)			3
				Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 (unaudited)			4
				Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (unaudited)			5
				Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			25
PART II.				OTHER INFORMATION
Item 1.				Legal Proceedings			27
Item 2.				Changes in Securities and Use of Proceeds			28
Item 3.				Defaults Upon Senior Securities			28
Item 4.				Submission of Matters to a Vote of Security Holders			29
Item 5.				Other Information			29
Item 6.				Exhibits and Reports on Form 8-K			29
SIGNATURES							31
EXHIBIT INDEX							32

2

Table of Contents

Part I: Financial Information

NETRO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

				June 30,				December 31,
				2002				2001
ASSETS
Current Assets:
	Cash and cash equivalents			$	107,503			$	90,494
	Marketable securities				80,021				115,950
	Trade accounts receivable, net				5,909				3,683
	Inventory, net				7,046				6,874
	Prepaid expenses and other				2,753				2,832
		Total current assets			203,232				219,833
Equipment and leasehold improvements, net					10,587				7,796
Long-term marketable securities					90,612				119,858
Acquired intangible assets, net					25,023				—
Other assets					2,251				2,234
		Total assets		$	331,705			$	349,721
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Current portion of long-term debt and capital leases			$	359			$	1,272
	Trade accounts payable				4,214				1,649
	Accrued liabilities				26,868				25,789
		Total current liabilities			31,441				28,710
Long-term debt and capital leases, net of current portion					—				64
Deferred facilities rent					193				71
		Total liabilities			31,634				28,845
Commitments and contingencies (Note 8)
Stockholders’ Equity:
	Common stock				536,739				506,329
	Deferred stock compensation				(397	)			(831	)
	Accumulated other comprehensive income				535				1,264
	Accumulated deficit				(236,806	)			(185,886	)
		Total stockholders’ equity			300,071				320,876
		Total liabilities and stockholders’ equity		$	331,705			$	349,721

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

				Three months ended								Six months ended
				June 30,								June 30,
				2002				2001				2002				2001
Revenues				$	5,681			$	2,051			$	10,689			$	11,182
Cost of revenues					4,654				21,182				9,049				51,885
Gross profit (loss)					1,027				(19,131	)			1,640				(40,703	)
Operating expenses:
	Research and development				8,472				6,539				15,695				14,279
	Sales and marketing				3,909				3,588				7,600				7,351
	General and administrative				5,885				4,749				12,169				9,725
	Amortization of deferred stock compensation				162				227				342				455
	Amortization of acquired intangible assets				2,743				—				3,128				—
	Acquired in-process research and development				—				—				17,600				—
		Total operating expenses			21,171				15,103				56,534				31,810
Loss from operations					(20,144	)			(34,234	)			(54,894	)			(72,513	)
Other income, net					1,676				4,396				4,031				9,703
Net loss before provision for income taxes					(18,468	)			(29,838	)			(50,863	)			(62,810	)
Provision for income taxes					21				—				57				—
Net loss				$	(18,489	)		$	(29,838	)		$	(50,920	)		$	(62,810	)
Basic and diluted net loss per share				$	(0.30	)		$	(0.57	)		$	(0.86	)		$	(1.21	)
Shares used to compute basic and diluted net loss per share					61,018				52,074				59,019				51,992

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

					Six months ended
					June 30,
					2002				2001
Cash flows from operating activities:
	Net loss				$	(50,920	)		$	(62,810	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				2,166				1,890
		Acquired in-process research and development				17,600				—
		Write-down of impaired assets				797				—
		Provision for excess and obsolete inventory				—				29,700
		Provision for doubtful accounts				—				2,000
		Provision for material-related commitments				—				12,000
		Loss on disposal of fixed assets				70				1,078
		Amortization of deferred stock compensation				342				455
		Amortization of acquired intangible assets				3,128				—
		Changes in operating assets and liabilities, net of acquisition of assets:
			Trade accounts receivable			(2,226	)			6,750
			Inventory			396				(8,087	)
			Prepaid expenses and other			1,994				3,793
			Trade accounts payable and accrued liabilities			467				(6,141	)
			Net cash used in operating activities			(26,186	)			(19,372	)
Cash flows from investing activities:
	Purchases of equipment and leasehold improvements					(3,184	)			(4,111	)
	Payment for acquisition of assets					(16,009	)			—
	Purchase of equity investment					—				(1,500	)
	Purchases of marketable securities					(94,991	)			(210,461	)
	Maturities of marketable securities					157,361				246,561
			Net cash provided by investing activities			43,177				30,489
Cash flows from financing activities:
	Payments on notes payable and capital leases					(977	)			(5,309	)
	Proceeds from issuance of common stock, net of issuance costs					982				1,893
			Net cash provided by (used in) financing activities			5				(3,416	)
Effect of exchange rate changes on cash and cash equivalents						13				(41	)
Net increase in cash and cash equivalents						17,009				7,660
Cash and cash equivalents, beginning of period						90,494				91,660
Cash and cash equivalents, end of period					$	107,503			$	99,320
Supplemental cash flow information
	Cash paid for interest				$	312			$	497
	Issuance of common stock related to acquisition of assets				$	29,520				—

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

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 and reincorporated in Delaware on June 19, 2001. Netro is a leading provider of broadband wireless equipment used by telecommunications service providers to provide businesses and residential customers with high speed voice and data access and used by mobile phone service providers for infrastructure applications. The Company operates in one business segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

     The Company has prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and in accordance with the rules and regulations of Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. These condensed consolidated financial statements are unaudited but reflect all adjustments (consisting of normal recurring adjustments) that are necessary in the opinion of management for a fair presentation of the Company’s financial position at June 30, 2002 and December 31, 2001, results of operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001.

     The unaudited condensed consolidated financial statements include the accounts of Netro Corporation and its subsidiaries in Germany, France, Mexico and Israel. All material intercompany accounts and transactions have been eliminated in consolidation.

     Results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2002. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission. The condensed consolidated balance sheet at December 31, 2001 is derived from the Company’s audited financial statements as of that date.

CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES

     Cash and cash equivalents consist of short-term, highly liquid investments with original maturities at the time of purchase of three months or less. Investments with maturities greater than three months and less than or equal to one year are classified as short-term marketable securities. Investments with maturities greater than one year are classified as long-term marketable securities. The Company’s investments, which mature at various dates through April 2004, consist of government and corporate debt securities and are classified as either “available-for-sale” or “held-to-maturity.” “Available-for-sale” investments are stated at fair value, with unrealized gains and losses recorded in “Accumulated other comprehensive income” on the balance sheet. Unrealized gains at June 30, 2002 were $0.7 million. Unrealized gains at December 31, 2001 were $1.4 million. “Held-to-maturity” investments are stated at amortized cost. Realized gains or losses from sales of marketable securities are based on the specific identification method.

INVENTORY

     Inventory, which includes material and labor costs, is stated at the lower of cost (first-in, first-out) or market. The Company provides for estimated excess or obsolete inventory based upon assumptions about future demand for products

6

Table of Contents

and the conditions of the markets in which the products are sold. This provision to reduce inventory to net realizable value is reflected as a reduction to inventory in the accompanying condensed consolidated balance sheets. Significant management judgments and estimates must be made and used in connection with establishing this provision. Inventory consists of the following (in thousands):

EQUITY INVESTMENTS

     From time to time, the Company makes equity investments in third parties. Equity investments in companies in which the Company does not exercise a significant influence (generally those in which the Company owns less than 20 percent of the voting stock outstanding) are accounted for using the cost method. Equity investments in which the Company exercises a significant but not controlling influence are accounted for using the equity method. Equity investments in which the Company exercises a controlling influence (generally those in which the Company owns more than 50 percent of the voting stock outstanding) are accounted for on a consolidated basis. Currently, there is one investment accounted for under the cost method. All other equity investments have been consolidated. Management evaluates all investments on an ongoing basis by comparing the carrying value to the fair value of such investments. The Company recognizes an impairment loss based on the excess of the carrying value over the fair value in the period in which such impairment occurs, with the reduction in value charged to expense.

ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS

     The Company periodically evaluates whether events and circumstances have occurred which indicate that the carrying value of its long-lived assets may not be recoverable. In the recent past, many telecommunications equipment companies with significant long-lived intangible assets resulting from acquisition activity have recorded significant charges associated with write-off of those long-lived assets. If the Company determines an asset has been impaired, the impairment charge is recorded based on the excess of the carrying value over the fair value of the impaired asset, with the reduction in value charged to expense. As of June 30, 2002, long-lived assets included $25.0 million of intangible assets related to the Company’s acquisition of Project Angel and $10.6 million of fixed assets and tenant improvements.

REVENUE RECOGNITION

     Revenues consist of sales made directly to end users and indirectly through systems integrators and local resellers. Revenues from product sales are recognized when all of the following conditions are met: the product has shipped, an arrangement exists with the customer and the right to invoice the customer exists, collection of the receivable is reasonably assured 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. If, when all other factors for revenue recognition have been met, management believes that the collectability of the related receivable is not assured, revenue recognition is deferred until such time as the amounts due have been collected. Some of the factors used in evaluating whether or not to defer revenue from a particular customer include:

	•		the customer’s liquid assets,
	•		actual and projected income statements for the customer,
	•		actual and projected cash flows for the customer,
	•		management’s estimate of the customer’s ability to secure future financing,
	•		the nature of the customer’s stockholder and lender base,
	•		the political and economic environment in the country in which the customer operates, and
	•		other intangible factors.

7

Table of Contents

     As of June 30, 2002, the outstanding deferred revenue balance was $1.8 million, of which $1.1 million was related to shipments to companies in Argentina. Argentina has suffered significant political and economic dislocations in periods subsequent to those in which the equipment related to such deferred revenue was shipped. Subsequent to June 30, 2002, the Company agreed to sell approximately $0.2 million of additional equipment to a customer in Argentina on extended terms, in consideration for, among other things, the repayment of $1.0 million of overdue accounts receivable from that customer and a note payable for all other outstanding amounts. All revenue related to the $0.2 million sales to Argentina will be deferred in the periods in which it is shipped.

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 the Company’s common stock at dates of grant. For the periods presented, amortization related to employees associated with the following operational functions (in thousands):

NET LOSS PER SHARE

     Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding. Potential common shares from the exercise of stock options and warrants are excluded from diluted net loss per share because they would be antidilutive. The total number of shares excluded from diluted net loss per share relating