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 to these securities was as follows (in thousands):

     The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

COMPREHENSIVE LOSS

     Comprehensive loss includes unrealized gains and losses on available-for-sale equity securities and foreign currency translation gains and losses that have been excluded from net loss and reflected instead in stockholders’ equity. For the periods presented, comprehensive loss is calculated as follows (in thousands):

8

Table of Contents

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived” Assets. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. These new rules on asset impairment supersede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and portions of APB Opinion 30, “Reporting the Results of Operations”. This statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying value. This statement also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. The adoption of this statement had no impact on the Company’s results of operations, financial position or cash flows.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion 30 will now be used to classify those gains and losses. SFAS 145 also amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS No. 145 affecting Statement 4 are effective for fiscal years beginning after May 15, 2002; the provisions of SFAS No. 145 affecting Statement 13 are effective for transactions occurring after May 15, 2002; all other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. The Company does not believe that the adoption of this statement will have a material impact on its results of operations, financial position or cash flows.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 eliminates the definition and requirement for recognition of exit costs in Emerging Issues Task Force Issue No. 94-3 pursuant to which a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe that the adoption of this statement will have a material impact on its results of operations, financial position or cash flows.

3. CONCENTRATIONS OF CREDIT RISK:

     Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables, cash equivalents, and marketable securities. With respect to trade receivables, the Company performs ongoing credit evaluations of its customers’ financial condition. Additionally, the Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other available information. At June 30, 2002 approximately 66 percent of the Company’s trade accounts receivable balance was represented by three customers.

     Although the Company does not require collateral on certain accounts receivable on sales to large, well-established companies, it does require standby letters of credits or prepayments on certain sales to foreign and smaller companies. As of June 30, 2002 the Company had overdue accounts receivable of $2.9 million, of which $2.1 million was due from companies in Argentina. Of the amounts due from Argentina, $1.1 million was included in deferred revenue at June 30, 2002 and $1.0 million relates to revenue which was recognized during 2001. Argentina has suffered significant political and economic dislocations in periods subsequent to those in which revenue related to receivables of approximately $1.0 million was recognized. Subsequent to June 30, 2002, the Company agreed to sell approximately $0.2 million of

9

Table of Contents

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.

     With respect to cash equivalents and 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. SEGMENT REPORTING:

     The Company is organized and operates as one operating segment dedicated to the design, development, manufacturing, marketing and selling of broadband wireless point-to-multipoint access systems. Revenues by geographic segment were as follows:

		Revenues (in thousands)																% of Total Revenues
		Three months ended								Six months ended								Three months ended								Six months ended
		June 30,								June 30,								June 30,								June 30,
		2002				2001				2002				2001				2002				2001				2002				2001
Latin America		$	871			$	832			$	1,557			$	4,552				15	%			41	%			14	%			41	%
Europe			3,563				890				7,561				1,597				63				43				71				14
Middle East/Africa			376				2				391				474				7				—				4				4
Asia			479				93				492				93				8				5				5				1
International			5,289				1,817				10,001				6,716				93				89				94				60
United States			392				234				688				4,466				7				11				6				40
		$	5,681			$	2,051			$	10,689			$	11,182				100	%			100	%			100	%			100	%

     In prior periods, substantially all of the Company’s U.S. revenues were related to products sold through systems integrators and local resellers who resold the products to end customers located outside of the U.S. However, for the three months ended June 30, 2002, substantially all of the Company’s U.S. revenues were sold to end customers located inside the U.S.

5. NON-RECURRING CHARGES:

     Included in general and administrative expenses for the six months ended June 30, 2002 are $1.8 million in non-recurring charges related to various initiatives undertaken by the Company to reduce its cost structure. The Company closed Bungee Communications, Inc., the Company’s Israeli engineering entity, and reduced its workforce in its San Jose, California headquarters location. The charges included the termination of approximately 49 employees, the termination of the Bungee office lease and the write-down of assets associated with the Bungee operations. The following table summarizes the activity related to the non-recurring charges for the six months ended June 30, 2002 (in thousands):

     The remaining liability primarily relates to severance costs for two employees and additional charges associated with the closure of Bungee Communications, Inc. which will be paid in 2002.

6. ACQUISITION OF ASSETS:

     On February 12, 2002, the Company acquired AT&T Wireless’ fixed wireless development team, a license to intellectual property, inventory, equipment and proprietary software assets. The technology was originally developed

10

Table of Contents

under the code name “Project Angel”. The acquisition was accounted for as a purchase of assets. The purchase price was allocated based on the estimated fair values of the assets acquired. The purchase consideration was approximately $48.8 million, consisting of 8.2 million shares of the Company’s common stock, valued at approximately $29.5 million, approximately $16.0 million in cash and transaction costs of approximately $3.3 million.

     A total of $45.7 million of the purchase consideration was allocated to intangible assets, including $24.9 million of developed and core technology, $17.6 million of in-process research and development costs, and $3.2 million of other intangibles, which include the acquired workforce, technical synergies and the competitive advantage in providing a one-stop fixed broadband wireless solution for its customers. The remaining $3.1 million of purchase consideration was allocated to fixed assets ($2.5 million) and inventory ($0.6 million). Acquired in-process research and development costs represent research and development projects relating to conforming the product to international standards and expanding product capacity. These projects had not yet reached technological feasibility and, accordingly, this amount was expensed in the first quarter of 2002. The value of acquired in-process technology was computed using a discounted cash flow analysis on the anticipated income stream of the related product revenues. This analysis was conducted by an independent appraisal firm based on management’s forecast of future revenues, cost of revenues, and operating expenses related to the purchased technologies. The intangible assets are being amortized over a three-year estimated useful life based on the product life cycle of the acquired technology.

7. DEBT AND CAPITAL LEASES:

     The following table summarizes obligations under long-term debt and capital leases (in thousands):

     In January 1998, the Company entered into a bank line of credit under which up to $10,000,000 is available for borrowings and letters of credit. This arrangement was renewed in December 2000, March 2001 and again in April 2002, and expires in January 2004. Borrowings are limited to an aggregate amount equaling approximately 80 percent of eligible domestic trade accounts receivable, 90 percent of eligible foreign trade accounts receivable and 50 percent of eligible inventories destined for foreign markets. The line of credit is secured by the Company’s trade accounts receivable and inventory. As of June 30, 2002, there were no borrowings outstanding under this agreement and amounts utilized for outstanding letters of credit were $6.6 million.

8. COMMITMENTS AND CONTINGENCIES:

COMMITMENTS

     The Company has outstanding a standby letter of credit for $240,000 to secure certain of the Company’s warranty obligations to one customer. The letter of credit is secured by a certificate of deposit for $80,000. The letter of credit is subject to draw if the Company fails to meet its warranty obligations to the customer.

     In addition, the Company has outstanding a letter of credit for $2.0 million ultimately expiring October 2006 as a security deposit for the Company’s San Jose, California office space. In February 2002, the Company issued a letter of credit for $4.2 million ultimately expiring July 2006 as a security deposit for the Company’s Redmond, Washington office space. These letters of credit are subject to draw if the Company fails to meet its obligations under the facilities leases.

CONTINGENCIES

     Coates Litigation. On or around October 5, 2001, C. Robert Coates, a holder of shares of the Company’s common stock, commenced an action in the Delaware Chancery Court against the Company, the former Netro Corporation, which was incorporated in California (“Netro California”), and the members of the Company’s board of directors, styled Coates v. Netro Corp., et al., C.A. No. 19154 (“Coates I”). The complaint in Coates I makes a number of allegations relating to the approval by the stockholders of Netro California of the merger transaction by which the Company’s state of incorporation was changed from California to Delaware, including that the disclosures to shareholders in connection

11

Table of Contents

with that proposed transaction were incomplete or misleading in various respects. The complaint also alleges that the adoption by the Company’s board of directors of a stockholder rights plan sometime after that merger transaction was in violation of Delaware law. The complaint seeks (1) to invalidate or rescind the merger transaction or, in the alternative, to obtain an order directing a new stockholder vote on that transaction; (2) to invalidate or reform the Company’s certificate of incorporation and bylaws to eliminate certain alleged “anti-takeover provisions” contained in them; (3) to have the stockholder rights plan declared invalid or to obtain an order compelling the directors to redeem the rights distributed to the Company’s stockholders thereunder; and (4) to recover monetary damages in an unspecified amount, as well as plaintiff’s attorneys’ fees and expenses in bringing the action.

     On November 30, 2001, defendants filed a motion to dismiss the complaint in Coates I for failure to state a claim. Mr. Coates served his answering brief responding to that motion on or around March 20, 2002, and on April 11, 2002, defendants served their reply brief. In addition, on or around October 30, 2001, Mr. Coates made a motion purportedly for partial summary judgment on two issues: first, that section 2.12 of the Company’s bylaws, relating to the business that may be brought before a special meeting of stockholders, allegedly is invalid and second, that the definition of “beneficial owner” in the Company’s rights plan allegedly unduly interferes with stockholders’ ability to convene a special meeting. Mr. Coates filed his opening brief in support of this motion on or around November 20, 2001; defendants served their responsive brief and supporting materials on December 21, 2001; and Mr. Coates served a reply brief on or around February 15, 2002. On August 6, 2002, oral argument on the defendant’s motion to dismiss and the plaintiff’s motion for partial summary judgment was heard before the Delaware Chancery Court. The Court has not yet ruled on the motions.

     On August 5, 2002, Mr. Coates filed a motion to supplement his complaint to add allegations that Netro’s board of directors breached their fiduciary duties by amending the stockholder rights plan to permit the tender offer and by preventing Netro stockholders from accepting the acquisition offer from Wyndcrest Holdings, LLC. The proposed supplement to the complaint seeks (1) to enjoin the defendants from allegedly “preventing Netro stockholders from receiving offers for their shares”; (2) to enjoin the defendants from alleged “selective application” of the stockholder rights plan; and (3) to recover monetary damages in an unspecified amount, as well as plaintiff’s attorneys’ fees and expenses in bringing the action. The defendants have not yet responded to the motion for leave to supplement the complaint, nor has the motion been granted by the Court at this time.

     Separately, on or around December 10, 2001, Mr. Coates filed a complaint in a second action that names as defendants the Company and certain members of its board of directors, styled Coates v. Netro Corp., et al., C.A. No. 19309 (“Coates II”). In the complaint in that action, Mr. Coates challenges a stock option cancellation and regrant program that was described in the 2001 proxy statement in connection with the approval by the stockholders of Netro California of an amendment to the Company’s 1996 stock option plan. Mr. Coates claims that the discussion in the proxy statement about the proposed amendment to the stock option plan and the stock option cancellation and regrant program was incomplete or misleading and that the stock option cancellation and regrant program violated the terms of the stock option plan, inter alia, because options were issued under that program with exercise prices at the then-prevailing market price for the Company’s common stock rather than the alleged “fair value” of that stock. The complaint seeks an order declaring the options issued in the program to be invalid and void, rescinding those options, preliminarily and permanently enjoining the exercise of those options, imposing a constructive trust on any such options that were granted to defendants, and awarding monetary damages in an unspecified amount as well as plaintiffs’ attorneys’ fees and expenses.

     On January 2, 2002, defendants filed a motion to stay or dismiss the complaint in Coates II and on April 1, 2002, defendants served their opening brief in support of that motion.

     The Company and the other defendants believe the claims asserted by Mr. Coates in both of these actions are without merit, and they intend to vigorously defend themselves against those claims.

     IPO Allocation Litigation. On or around August 23, 2001, Ramiro Soto-Gonzalez, who alleges that he is a former shareholder of the Company’s common stock, commenced a purported class action lawsuit in the U.S. District Court for the Southern District of New York against the Company, Richard Moley, Gideon Ben-Efraim and Michael T. Everett (“Individual Defendants”), and Dain Rauscher, Inc., FleetBoston Robertson Stephens, Inc., and Merrill Lynch, Pierce, Fenner and Smith, Inc. (“Underwriter Defendants”). The action is styled Soto-Gonzalez v. Netro Corporation, Inc., et al., No. 01 Civ. 7993 (S.D.N.Y.). On or around December 6, 2001, Zion Badichi, who alleges that he is a former shareholder of the Company’s common stock, commenced a purported class action lawsuit in the U.S. District Court for the Southern District of New York against the Company, the Individual Defendants (except Mr. Moley) and the Underwriter Defendants. The action is styled Badichi v. Netro Corporation, Inc., et al., No. 01 Civ. 8348 (S.D.N.Y.).

     The Soto-Gonzalez and Badichi actions are two of more than 1,000 lawsuits currently pending in the U.S. District Court for the Southern District of New York against more than 300 different issuers, certain officers and directors of these issuers and more than 45 different underwriters arising out of initial public offerings occurring between December 1997 and December 2000 (collectively “IPO Allocation Litigation”). By Order dated August 9, 2001, Chief Judge Michael B. Mukasey assigned the IPO Allocation Litigation, including the Soto-Gonzalez and Badichi actions, to the Honorable Shira A. Scheindlin for all pre-trial purposes. On September 7, 2001, Judge Scheindlin adjourned the time for all defendants in the IPO Allocation Litigation, including the Company and the Individual Defendants, to answer, move or otherwise respond to current and future complaints indefinitely pending further instruction from the court. On

12

Table of Contents

or about March 2002, the Soto-Gonzalez and Badichi actions were consolidated into a single action styled In re Netro Corp. Initial Public Offering Securities Litigation, No. 01 Civ. 7035, 21 MC 92 (SAS) (“Netro Litigation”). Other lawsuits alleging similar claims arising out of the Company’s August 1999 initial public offering against the Underwriter Defendants — but not against the Company or the Individual Defendants — were also consolidated into the Netro Litigation. Those actions are styled Gutner v. Merrill Lynch, Pierce, Fenner & Smith Incorporated et al., No. 01 Civ. 7035 (S.D.N.Y.) and Bryant v. Merrill Lynch, Pierce, Fenner & Smith Incorporated et al., No. 01 Civ. 9184 (S.D.N.Y.).

     On April 19, 2002, plaintiffs filed a consolidated amended class action complaint in the Netro Litigation (“Complaint”). The Complaint alleges claims against the Company arising under Section 11 of the Securities Act of 1933 (“’33 Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 promulgated thereunder, and against the Individual Defendants under Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act, and Section 15 of the ‘33 Act. The claims allege various misconduct arising from the Company’s August 1999 initial public offering and March 2000 follow-on offering of its common stock, including, among other things, that the disclosures made in connection with the offerings were incomplete or misleading in various respects. The allegations include, among other things, that the Company and the Individual Defendants failed to disclose that the Underwriter Defendants: (1) charged the Company excessive commissions and inflated transaction fees in violation of the securities laws and regulations; and (2) allowed certain investors to take part in the Company’s initial public offering in exchange for promises that these investors would purchase additional shares in the after-market for the purpose of inflating and maintaining the market price of the Company’s common stock. The Complaint seeks to certify a class of shareholders who purchased the Company’s common stock between August 18, 1999 and December 6, 2000, and to recover monetary damages from defendants in an unspecified amount, as well as plaintiff’s attorneys’ fees and expenses in bringing the action. The defendants have moved to dismiss the consolidated complaint and the motions are in the process of being briefed.

     The IPO Allocation Litigation in general, and the Netro Litigation in particular, are in the earliest stages. The Company and the Individual Defendants believe the claims asserted against them in the Netro Litigation are without merit, and they intend vigorously to defend themselves against those claims.

     Other Matters. 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 additional 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.

9. SUBSEQUENT EVENT:

     On July 19, 2002, the Company extended an offer to purchase 23,000,000 shares of its common stock, approximately 38 percent of its outstanding shares, or such lesser number of shares as are properly tendered, upon terms and subject to the conditions set forth in the Offer to Purchase, dated July 19, 2002, and the related letter of transmittal. The price paid by the Company will not be greater than $4.00 nor less than $3.50 per share, net to the seller in cash, without interest. The Company is conducting the tender offer through a procedure commonly referred to as a “Dutch auction.” This procedure allows each stockholder to select the price within the $4.00 to $3.50 per share price range at which such stockholder is willing to sell shares to the Company. If the stockholder wishes, such stockholder may alternatively tender shares at the price determined in the tender offer, which will be the price paid by the Company for all properly tendered and purchased shares. The purchase price paid by the Company for each share will be the lowest price at which, based on the number of shares tendered and the prices specified by the tendering stockholders, the Company can purchase 23,000,000 shares, or such lesser number of shares as are properly tendered. All shares purchased under the tender offer will receive the same purchase price. A tender of shares will include a tender of the associated preferred stock purchase rights issued under the Amended and Restated Rights Agreement, dated as of January 14, 2002, as amended, between Netro and American Stock Transfer & Trust Company, as Rights Agent. No separate consideration will be paid for those rights. Assuming that the maximum 23,000,000 shares are tendered in the offer at a price between $4.00 and $3.50 per share, the aggregate purchase price will be between $92.0 million and $80.5 million. The Company expects to fund its purchase of shares tendered in the offer from available cash on hand and short term investments. The tender offer will expire on Friday, August 16, 2002, at 5:00 p.m., New York City time, unless extended. The Company expects that it fees and expenses for the tender offer will be approximately $2.3 million.

13

Table of Contents

     On July 18, 2002, the Company also announced that it had authorized management to make open market repurchases of its shares following the expiration of at least 10 business days from the expiration date of the tender offer. The maximum amount to be used in such repurchases is $100 million, less the amount actually used to repurchase shares in the tender offer. These additional repurchases are subject to applicable regulations from the U.S. Securities and Exchange Commission and other entities.

14

Table of Contents

ITEM 2. 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 condensed consolidated financial statements and the related notes contained elsewhere in this Form 10-Q.

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Form 10-Q contain forward-looking statements which include, but are not limited to, statements concerning projected revenues, gross profit (loss), and expenses, the need for additional capital and market acceptance of our products. The forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 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, fixed wireless equipment. Telecommunications service providers use our equipment to provide voice and high speed data connections to end users, or between locations in the metropolitan telecommunications network, as an alternative to using wired or other connectivity. Our products are designed to provide access connectivity to residences and small and mid-sized businesses, as well as to provide infrastructure transmission connections between mobile phone service hubs and the core mobile telecommunications network. We began commercially shipping our first point-to-multipoint product, AirStar, in 1998 and have a significant installed base for this product. AirStar is mainly targeted at service providers offering voice and high speed data services to small and mid-sized enterprises and mobile telephone service providers for infrastructure applications. AirStar operates at the higher end of the licensed frequency spectrum (10-39 GHz) with support for an additional frequency in the lower range (3.5 GHz).

     In February 2002, we acquired from AT&T Wireless Services, Inc. its fixed wireless development team, a license to intellectual property, inventory, equipment and proprietary software assets. The technology was originally developed under the code name “Angel.” The Angel product was commercially deployed in the United States by AT&T Wireless and is a proven and mature platform that is mainly targeted at service providers offering voice and high speed data services to residential and small business customers, segments we do not address with the AirStar platform. Angel operates at the lower end of the licensed frequency spectrum (1.9-3.5 GHz). We plan to sell the Angel system internationally. During the second quarter of 2002, we completed the international Angel system with a V5.2 international switch interface, confirmed its interoperability with several major voice switches and have shipped it to customers both for trial and revenue. We plan to complete the Angel 3.5 GHz radio in the third quarter of 2002, which will effectively complete the initial international adjustment of the Angel product.

     Both the AirStar and Angel platforms have been designed to minimize the costs of deployment and operation and to permit operators to offer a broad range of voice, Internet Protocol, and data services. When modifications to the Angel platform are complete, we will offer complete solutions that operate at point-to-multipoint frequencies licensed in every major geography in the world, which we believe is a significant competitive advantage.

     We currently develop, manufacture and sell the AirStar product for access offerings to small and mid-sized businesses and mobile infrastructure, and are developing the Angel platform for access offerings to residences and small businesses. Each of our product lines is comprised of three principal components:

•

Customer Premise Equipment, which includes a radio element which sends and receives signals to and from the hub equipment, and a digital signal processing unit, which connects and provides interfaces to the end-user’s telecommunications and/or data network;

15

Table of Contents

	•		Hubs, which include several radio elements, each of which sends and receives signals from multiple customer premise equipment units, and an aggregation unit, which aggregates data from the outdoor units and interfaces to the telecommunications service provider’s core network; and
	•		Network Management Software, which controls and monitors the operation of hubs and customer premise equipment.

     We sell our products indirectly through systems integrators and local resellers in addition to through a direct sales force. Our sales to systems integrators comprised approximately 42 percent of revenues for the second quarter of 2002, 35 percent of revenues for the first quarter of 2002, and 51 percent of revenues for the second quarter of 2001. Our sales to systems integrators comprised approximately 39 percent for the six months ended June 30, 2002 and 51 percent of revenues for the six months ended June 30, 2001. Due to past realignments of our relationships with certain of our systems integrator partners and our current low visibility regarding potential future revenues, we are uncertain what portion of revenues system integrators will represent in future periods. However, in the event of continued significant declines in indirect sales, we will be required to continue to improve and expand our internal sales, customer advocacy and administration functions. Furthermore, as a result of these realignments we could experience order delays and order cancellations and, therefore, revenues during the remaining quarters of 2002 could be adversely affected. We experienced such cancellations and loss of orders during 2001. Overall, our visibility regarding potential future revenues is unclear.

     International revenues represented approximately 93 percent and 89 percent of total revenues for the three months ended June 30, 2002 and 2001, respectively, and 94 percent and 60 percent of total revenues for the six months ended June 30, 2002 and 2001, respectively. In prior periods, substantially all of our domestic revenues were related to products sold through systems integrators and local resellers who resold the products to end customers located outside of the U.S. However, for the three months ended June 30, 2002, substantially all of the Company’s U.S. revenues were related to products sold to end customers located inside of the U.S. With international revenues comprising such a large proportion of our total revenues, our revenues can be significantly impacted by changes in the economy of a geography or particular country. For example, revenues from Argentina constituted approximately 30 percent of our revenues for the year ended December 31, 2001. However, as a result of recent economic dislocations in Argentina, we did not recognize any revenue from customers located in Argentina for the three or six months ended June 30, 2002.

     We outsource substantially all of our volume product manufacturing and assembly to contract manufacturers. We maintain small facilities for prototype production in support of our research and development efforts in both our San Jose, California and Redmond, Washington locations. We expect to continue to outsource substantially all of our product manufacturing for both AirStar and Angel product lines to contract manufacturers.

CRITICAL ACCOUNTING POLICIES

     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: delivery has occurred, an arrangement exists with the customer and we have the right to invoice the customer, collection of the receivable is reasonably assured and we have fulfilled all of our material contractual obligations to the customer. Provisions are made at the time of revenue recognition for estimated warranty costs. If we believe that the collectability of a receivable is not assured, we defer revenue recognition from such shipment until such time as the amounts due have been collected. Some of the factors that we use 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,
	•		our 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

16

Table of Contents

•

other intangible factors.

     As of June 30, 2002, we had an outstanding deferred revenue balance of $1.8 million, of which $1.1 million was related to sales 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. In the event that we recognize revenues for which the related receivable is not ultimately collected, and such receivable is in excess of the applicable allowances, our financial statements would be adversely affected.

     Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our customers’ financial condition and establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other available information. At June 30, 2002, approximately 66 percent of the Company’s trade accounts receivable balance was represented by three customers. Accounts receivable, net of allowance for doubtful accounts of $1.5 million, was $5.9 million at June 30, 2002 and $3.7 million at December 31, 2001. Although the Company does not require collateral on certain accounts receivable on sales to large, well-established companies, it does require standby letter of credit or prepayments on certain sales to foreign and smaller companies. As of June 30, 2002, the Company had overdue accounts receivable of $2.9 million, of which $2.1 million was due from companies in Argentina. Of the amounts due from Argentina, $1.1 million was included in deferred revenue at June 30, 2002 and $1.0 million relates to revenue which was recognized during 2001. Argentina has suffered significant political and economic dislocations in periods subsequent to those in which revenue related to receivables of approximately $1.0 million was recognized. 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. We believe that we have sufficient allowances for doubtful accounts to address the risk associated with our outstanding accounts receivable.

     Equity Investments. From time to time, we make equity investments in third parties. Equity investments in companies in which we do not exercise a significant influence (generally those in which we own less than 20 percent of the voting stock outstanding) are accounted for using the cost method. Equity investments in which we exercise a significant but not controlling influence are accounted for using the equity method. Equity investments in which we exercise a controlling influence (generally those in which we own more than 50 percent of the voting stock outstanding) are consolidated into our financial statements. Currently, we have one investment accounted for under the cost method. All other equity investments are consolidated into our financial statements. We evaluate all investments on an ongoing basis by comparing the carrying value to the fair value of such investments. We recognize 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. We periodically evaluate whether events and circumstances have occurred which indicate that the carrying value of our 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 we determine 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 our acquisition of Project Angel and $10.6 million of fixed assets and tenant improvements.

     Provision for Excess and Obsolete Inventory. Inventory, which includes material and labor costs, is stated at the lower of cost (first-in, first-out) or market. We maintain a reserve for estimated obsolescence or unmarketable inventory based upon assumptions about future demand for our products, changes or revisions of our products, and the conditions of the markets in which our products are sold. This provision to reduce inventory to net realizable value is reflected as a reduction to inventory in the accompanying consolidated balance sheets. Significant management judgments and estimates must be made and used in connection with establishing these reserves. If actual market conditions are less favorable than our assumptions, additional reserves may be required.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived” Assets. This statement is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. These new rules on asset impairment supersede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and portions of APB Opinion 30, “Reporting the Results of Operations”. This statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying value. This statement also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. The adoption of this statement had no impact on the Company’s results of operations, financial position or cash flows.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion 30 will now be used to classify those gains and losses. SFAS 145 also amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS No. 145 affecting Statement 4 are effective for fiscal years beginning after May 15, 2002; the provisions of SFAS No. 145 affecting Statement 13 are effective for transactions occurring after May 15, 2002; all other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. The Company does not believe that the adoption of this statement will have a material impact on its results of operations, financial position or cash flows.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 eliminates the definition and requirement for recognition of exit costs in Emerging Issues Task Force Issue No. 94-3 pursuant to which a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe that the adoption of this statement will have a material impact on its results of operations, financial position or cash flows.

17

Table of Contents

RESULTS OF OPERATIONS

     In the current quarter, we experienced a 13 percent increase in revenue over the first quarter of 2002, due mainly to sales to new customers and system integration partners in the Middle East, Africa, Asia and North America, slightly offset by a small decrease in revenues in Europe. Substantially all of these sales were from our AirStar product. We made our first revenue shipment of Angel product in the second quarter of 2002, but the amount was immaterial. Operating expenses prior to non-cash charges increased approximately 20% over the first quarter of 2002, due mostly to the full quarter impact of Angel operations and one time expenses related to the integration of the information technology systems at our recently acquired Redmond, Washington facility.

     The following table sets forth the Company’s condensed consolidated statements of operations expressed as a percentage of total revenue: