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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 29, 2002
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________to__________.
Commission file number 000-31031
AIRSPAN NETWORKS INC.
(Exact name of registrant as specified in its charter)
Washington 75-2743995
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Yamato Road, Suite 105
Boca Raton, FL 33431
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
561-893-8670
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.0003 PER SHARE
Indicate by a 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 [_]
Number of shares outstanding of the registrant's common stock as of November 7,
2002: 35,530,482
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
AIRSPAN NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, September 29,
2001 2002
------------- -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 70,260 $ 56,788
Restricted cash 1,290 1,494
Accounts receivable, less allowance for doubtful accounts of $2,601
in 2001 and $2,408 at September 29, 2002 23,475 17,684
Unbilled accounts receivable 706 694
Inventory 11,907 13,297
Prepaid expenses and other current assets 4,233 3,526
------------- -------------
Total Current Assets 111,871 93,483
Property, plant and equipment, net 6,284 4,579
Goodwill 759 759
Intangible assets, net 25 25
Accounts receivable greater than one year 648 -
Other non-current assets 107 -
------------- -------------
Total Assets $ 119,694 $ 98,846
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,956 $ 6,625
Accrued taxes 326 299
Deferred revenue 790 1,707
Other accrued expenses 4,779 4,795
Current portion of long-term debt 1,340 1,250
------------- -------------
Total Current Liabilities 13,191 14,676
------------- -------------
Non Current Liabilities
Long-term debt 1,250 1,250
------------- -------------
Total Non Current Liabilities 1,250 1,250
------------- -------------
Stockholders' Equity
Common stock, $0.0003 par value; 50,000,000 shares authorized in 2001
and 2002: 35,120,199 issued in 2001 and 35,463,403 issued in 2002 10 11
Note receivable - stockholder (180) (130)
Additional paid in capital 214,491 214,704
Accumulated other comprehensive income 458 1,313
Accumulated deficit (109,526) (132,978)
------------- -------------
Total Stockholders' Equity 105,253 82,920
------------- -------------
Total Liabilities and Stockholders Equity $ 119,694 $ 98,846
============= =============
2
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except for share and per share data)
Quarter Ended Year-to-date
September September September September
30, 2001 29, 2002 30, 2001 29, 2002
----------- ---------- ---------- ----------
(unaudited) (unaudited)
Revenue $ 8,597 $ 9,036 $ 27,266 $ 15,068
Cost of revenue (5,028) (6,538) (16,675) (11,715)
Inventory provision (1,417) - (1,417) (2,001)
----------- ---------- ---------- ----------
Gross profit 2,152 2,498 9,174 1,352
----------- ---------- ---------- ----------
Operating expenses:
Research and development 3,672 3,343 11,619 10,066
Sales and marketing 3,530 2,272 12,422 7,513
Bad debt provision 1,040 - 649 1,518
General and administrative 2,668 2,236 8,394 6,621
Amortization of goodwill 31 - 93 -
Amortization of intangibles 75 - 225 -
Restructuring charge 1,235 278 1,235 445
----------- ---------- ---------- ----------
Total operating expenses 12,251 8,129 34,637 26,163
----------- ---------- ---------- ----------
Loss from operations (10,099) (5,631) (25,463) (24,811)
Interest expense (54) (38) (324) (122)
Interest and other income 714 711 2,729 1,483
----------- ---------- ---------- ----------
Loss before income taxes (9,439) (4,958) (23,058) (23,450)
----------- ---------- ---------- ----------
Income tax credit / (charge) - - 2,773 (2)
----------- ---------- ---------- ----------
Loss before extraordinary item (9,439) (4,958) (20,285) (23,452)
Extraordinary item
Gain on extinguishment of debt - - 9,244 -
Income tax charge on gain - (2,773) -
----------- ---------- ---------- ----------
Gain net of taxes - - 6,471 -
----------- ---------- ---------- ----------
Net loss $ (9,439) $ (4,958) $ (13,814) $ (23,452)
=========== ========== ========== ==========
Earnings per share - basic and diluted
Loss before extraordinary item $ (0.27) $ (0.14) $ (0.58) $ (0.67)
Extraordinary item, net of taxes - - $ 0.18 -
Net loss per share $ (0.27) $ (0.14) $ (0.40) $ (0.67)
Weighted average shares outstanding
-basic and diluted 34,902,639 35,369,872 34,724,723 35,212,453
3
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year-to-date
September September
30, 29,
2001 2002
----------- ----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (13,814) $(23,452)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,193 2,460
Gain on settlement of long term debt (9,252) -
Loss on disposal of fixed assets - 113
Other comprehensive income (131) 855
Accretion of interest on notes payable 109 -
Change in operating assets and liabilities:
(Increase)/decrease in receivables (5,861) 6,439
Increase in inventories (5,424) (1,390)
(Increase)/decrease in other current assets (391) 826
(Decrease)/increase in accounts payable (397) 669
(Decrease)/increase in deferred revenue (536) 917
Increase/(decrease) in accrued expenses 1,454 (11)
Decrease in notes receivable - 50
---------- ----------
Net cash used in operating activities (31,050) (12,524)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,953) (868)
---------- ----------
Net cash used in investing activities (2,953) (868)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 247 192
Payment of short-term debt (849) -
Payment of long-term debt, including capital lease obligations (9,627) (90)
Exercise of stock options 121 22
Restricted cash movement 3,948 (204)
---------- ----------
Net cash used by financing activities (6,160) (80)
---------- ----------
Decrease in cash and cash equivalents (40,163) (13,472)
Cash and cash equivalents, beginning of period 115,340 70,260
---------- ----------
Cash and cash equivalents, end of period $ 75,177 $ 56,788
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 324 $ 122
========== ==========
4
BUSINESS
Airspan Networks Inc. (the "Company") is a global supplier of broadband Fixed
Wireless Access ("FWA") equipment that enables communications service providers
(often referred to as "local exchange carriers," or simply telephone companies),
internet service providers and other corporate users of fixed-wireless local
access networks to cost effectively deliver integrated high-speed data and voice
services using radio frequencies rather than traditional wireline methods. We
call this transmission method "Wireless DSL". The market for our systems is a
subset of the fixed wireless systems market. Our AS4000 systems are based on a
digital wireless technique known as Direct Sequence - Code Division Multiple
Access, or DS-CDMA, which provides wide area coverage, security and resistance
to fading. Our systems can be deployed rapidly and cost effectively, providing
an attractive alternative or complement to traditional copper wire, cable, or
fiber-optic communications access networks. Our products also include software
tools that optimize geographic coverage of our systems and provide ongoing
network management. To facilitate the deployment and operation of our systems,
we also offer network installation, training and support services. During 1996,
we began shipping our products -- these were among the first fixed
point-to-multipoint wireless systems to be commercially deployed. More than 100
network operators in approximately 50 countries have deployed our systems.
On October 4, 2002 we acquired the Wireless Internet Protocol Local Loop
("WipLL") product line from Marconi. The WipLL product is a low-cost
high-performance FWA product designed to deliver high-speed data, Voice over IP
("VoIP") and multimedia services to residential, small business and enterprise
customers. Operating in both licensed and unlicensed frequencies, WipLL uses a
digital wireless technique known as Frequency Hopping - Code Division Multiple
Access, or FH-CDMA.
We were originally organized in 1994 as a unit within DSC Communications
Corporation, a telecommunications equipment manufacturer. DSC began developing
fixed wireless access systems in 1992. In January 1998 we created a new
corporation that purchased the Airspan unit from DSC for $25 million, $15
million of which was due in the form of debt payable over three years beginning
February 1, 2001 and the balance through the issuance of 10 million shares of
preferred stock. When Alcatel acquired DSC in 1998, we redeemed the preferred
stock held by DSC for a cash payment of $10 million. In the first half of 2001,
we extinguished the debt owed to DSC by a payment of $9.3 million, which gave
rise to an extraordinary gain of $9.25 million. During February 1999 we moved to
our own premises in Uxbridge, U.K. Our primary operations, manufacturing and
product development centers for the AS4000 product are in Uxbridge, U.K., whilst
the manufacturing and development activities of our newly acquired WipLL product
are performed in Lod, Israel. Our corporate headquarters are located in Boca
Raton, Florida. Our telephone number there is 561-893-8670. Further contact
details and the location of all Airspan's worldwide offices may be found at
www.airspan.com.(The contents of the Airspan website does not form part of this
Form 10-Q).
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature, as well as
the accounting changes required by SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. The interim operating results are not
necessarily indicative of operating results expected in subsequent periods or
for the year as a whole. Certain reclassifications have been made for consistent
presentation.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the company's Annual Report on Form 10-K for the
year ended December 31, 2001.
All notes to the financial statements are shown in thousands, except for share
data.
5
ACCOUNTING CHANGES
In June 2001, the Financial Accounting Standards Board issued FAS 142, Goodwill
and Other Intangible Assets ("FAS 142") and FAS 141, Business Combinations ("FAS
141"). Under FAS 142, intangible assets with indefinite lives and goodwill can
no longer be amortized. Instead they are to be reviewed at least annually for
impairment and, if judged to be impaired, are to be written down. The Company
adopted FAS 142 effective January 1, 2002. In accordance with this adoption,
management has reviewed the goodwill for impairment and found that no impairment
exists. At September 29, 2002, the Company has approximately $0.8 million of
goodwill. Under FAS 141 the assembled workforce is no longer to be a recognized
intangible asset apart from goodwill. In accordance with FAS 141 our previously
recorded assembled workforce has been reclassified to goodwill on January 1,
2002. The effects of FAS 141 are not material for the nine months ended
September 29, 2002.
INVENTORY
Inventory consists of the following:
December 31, September 29,
2001 2002
------------- --------------
(unaudited)
Purchased parts and materials $ 5,488 $ 6,411
Work in progress - 97
Finished goods and consumables 6,419 6,789
------------- --------------
$11,907 $13,297
============= ==============
ACCRUED RESTRUCTURING CHARGES
In the third quarter of 2001, the Company implemented a restructuring program to
reduce operating expenses and recorded a charge of $1.2 million in relation to
this program. Included in this charge were costs related to excess facilities
and severance. The Company initially expected to sublease its excess facility
space in Sunrise, Florida by the end of the first quarter of 2002, but due to
the continued economic slow down in the Florida sublease market, a further $167
thousand was recognized as restructuring in the income statement in the first
quarter of 2002. On July 1, 2002 the lease was successfully assigned to a third
party and all facility related restructuring charges were utilized by the end of
the third quarter of 2002. In conjunction with the assignment of the lease we
moved our headquarters to a smaller office at Boca Raton, Florida. The total
number of employees being terminated as part of the restructuring program was 30
and all severance payments were made by the end of the third quarter 2002.
In the third quarter of 2002, a new restructuring program was initiated to
further reduce our operating expenses. A charge of $0.3 million was recorded in
the quarter. Included in this charge were costs related to the write off of
tradeshow equipment and severance costs. The total number of employees being
terminated as part of this restructuring program is 19. At September 29, 2002,
17 of these employees were still working in the Company. All 17 will be
terminated by the end of 2002.
6
The restructuring charge and its utilization is summarized as follows:
Balance at Restructuring Utilized Balance at
Beginning Charge End of
of Period Period
------------ ------------- ------------- ------------
Three months ended September 29, 2002 (unaudited)
Facility related $331 - $(331) -
Severance and other 88 $ 278 (156) $210
------------ ------------- ------------- ------------
$419 $ 278 $(487) $210
============ ============= ============= ============
Nine months ended September 29, 2002 (unaudited)
Facility related $307 $ 167 $(474) -
Severance and other 234 278 (302) $210
------------ ------------- ------------- ------------
$541 $ 445 $(776) $210
============ ============= ============= ============
Year ended December 31, 2001
Facility related - $ 551 $(244) $307
Severance and other - 684 (450) 234
------------ ------------- ------------- ------------
- $1,235 $(694) $541
============ ============= ============= ============
Included in the third-quarter 2001 facility restructuring charge was $0.2
million for the write down of certain fixed assets, mainly furniture and
fixtures. These assets were disposed of as part of the lease assignment of our
Sunrise, Florida head office. Included in the third-quarter 2002 restructuring
charge was $47 thousand for the write down of certain fixed assets used at
tradeshows. All charges, other than the fixed asset write-downs, will result in
direct cash outlays.
GOODWILL AND INTANGIBLES
On January 1, 2002, FAS 142, Goodwill and Other Intangible Assets, was
implemented and as a result, the Company ceased to amortize approximately $0.8
million of goodwill. The Company was required to perform an initial impairment
review of its goodwill in 2002 and will do an annual impairment review
thereafter. This impairment test was performed during the quarter ended March
31, 2002. The carrying value of goodwill has been compared to its implied fair
value by using the expected present value of future cash flows. No impairment of
goodwill was recorded during the nine months ended September 29, 2002.
December 31, 2001 September 29, 2002
Gross Accumulated Gross Accumulated
Carrying Amortization Carrying Amortization
Amount Amount
---------- ------------ ----------- ---------------
(unaudited) (unaudited)
Goodwill $1,248 $ (489) (1)(2) $2,448 $(1,664)
Intangibles
Assembled workforce 1,200 (1,175) (2) - -
Customer contracts 2,083 (2,083) 2,083 (2,083)
Patent technology 119 (119) 119 (119)
Developed technology 1,900 (1,900) 1,900 (1,900)
---------- ------------ ---------- --------------
$5,302 $(5,277) $4,102 $(4,102)
---------- ------------ ---------- --------------
(1) In accordance with FAS 142, Goodwill and Other Intangible Assets, we have
stopped amortizing goodwill and now test goodwill for impairment in value
at least on an annual basis and also when an impairment event is suspected
to have occurred.
(2) In accordance with FAS 141, Business Combinations, as of January 1, 2002
assembled workforce is no longer to be a recognized asset apart from
goodwill. To that affect our previously recorded assembled workforce has
been reclassified to goodwill on January 1, 2002.
During 2001 there were no unamortized intangible assets.
7
As goodwill is the only remaining intangible asset with a carrying value at
September 29, 2002, there is no estimated amortization expense over the next
five years.
No impairment of goodwill was recorded during the nine months ended September
29, 2002.
Goodwill
--------
(unaudited)
Balance as of January 1, 2002 $ 784
Impairment loss -
---------------
Balance as of September 29, 2002 $ 784
===============
The following table sets forth the adjusted loss before extraordinary items, net
income and earnings per share as required under FAS 142
Quarter Ended Year-to-Date
September September September September
30, 29, 30, 29,
2001 2002 2001 2002
------------- ------------- ------------ ------------
(unaudited) (unaudited)
Adjusted:
Loss before extraordinary item $(9,333) $(4,958) $(19,967) $(23,452)
============ ============ =========== ===========
Net loss $(9,333) $(4,958) $(13,496) $(23,452)
============ ============ =========== ===========
Adjusted basic and diluted earnings per share:
Loss before extraordinary item $ (0.27) $ (0.14) $ (0.58) $ (0.67)
============ ============ =========== ===========
Net loss $ (0.27) $ (0.14) $ (0.39) $ (0.67)
============ ============ =========== ===========
The following table sets forth the reconciliation of reported net income to the
adjusted net income and earnings per share
Quarter Ended Year-to-Date
September September September September
30, 29, 30, 29,
2001 2002 2001 2002
------------- ------------- ------------ ------------
(unaudited) (unaudited)
Reported net loss $(9,439) $(4,958) $(13,814) $(23,452)
Add back:
Goodwill amortization 31 - 93 -
Assembled workforce amortization 75 - -
225
------------ ------------ ----------- -----------
Adjusted net loss $(9,333) $(4,958) $(13,496) $(23,452)
============ ============ =========== ===========
Basic and diluted earnings per share:
Reported net loss $ (0.27) $ (0.14) $ (0.40) $ (0.67)
Goodwill and amortization - - - -
Assembled workforce amortization - - $ 0.01 -
------------ ------------ ----------- -----------
Adjusted net loss $ (0.27) $ (0.14) $ (0.39) $ (0.67)
============ ============ =========== ===========
8
SEGMENTAL INFORMATION
As a developer and supplier of fixed wireless communication access systems and
solutions, the Company has one reportable segment. The revenue of this single
segment is comprised primarily of revenue from products and, to a lesser extent,
services. Predominantly all of the Company's revenue is generated from its
United Kingdom operations. Substantially all of the Company's assets, other than
most of the cash and certain intangibles, which are held in the United States,
are located within the United Kingdom.
Revenue by geographical market:
Quarter Ended Year-to-date
September September September September
30, 29, 30, 29,
2001 2002 2001 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited)
USA & Canada $1,517 $ 478 $ 3,120 $ 2,368
Asia 4,286 430 13,531 1,694
Europe 227 527 4,578 1,428
Africa and the Middle East 2,237 7,291 3,559 9,058
Latin America and Caribbean 330 310 2,478 520
---------- ---------- ---------- ----------
$8,597 $9,036 $27,266 $15,068
========== ========== ========== ==========
COMPREHENSIVE LOSS
Total comprehensive loss was $8.2 million for the three months ended September
30, 2001 and $5.0 million for the three months ended September 29, 2002. For the
nine months ended September 30, 2001 and September 29, 2002, the total
comprehensive loss was $13.9 million and $22.6 million respectively.
Components of Comprehensive Loss
Quarter Ended Year-to-date
September September September September
30, 29, 30, 29,
2001 2002 2001 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Net loss $(9,439) $(4,958) $(13,814) $(23,452)
Other Comprehensive Income:
Movement in the fair value of cash flow hedges
- unrealized gain/(loss) on foreign currency cash
flow hedges 1,208 316 (131) 1,295
- reclassification of gains realized in net income - (371) - (440)
---------- ---------- ---------- ----------
Comprehensive loss $(8,231) $(5,013) $(13,945) $(22,597)
========== ========== ========== ==========
9
EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares of
common stock outstanding less the number of shares subject to repurchase. Shares
associated with stock options and warrants are not included in the calculation
of diluted net loss per share as they are antidilutive.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated.
Quarter Ended Year-to-date
September September September September
30, 29, 30, 29,
2001 2002 2001 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Numerator:
Loss before extraordinary item and taxes $ (9,439) $ (4,958) $ (23,058) $ (23,450)
Income tax credit - - 2,773 (2)
---------- ---------- ---------- ----------
Loss before extraordinary item (9,439) (4,958) (20,285) (23,452)
Extraordinary item, net of taxes - - 6,471 -
---------- ---------- ---------- ----------
Net income / (loss) per share $ (9,439) $ (4,958) $ (13,814) $ (23,452)
========== ========== ========== ==========
Denominator:
Weighted average common shares outstanding 34,979,028 35,369,872 34,832,362 35,219,012
Less weighted average shares of restricted stock (76,389) - (107,639) (6,559)
---------- ---------- ---------- ----------
Denominator for basic and diluted calculations 34,902,639 35,369,872 34,724,723 35,212,453
========== ========== ========== ==========
Earnings per share - basic and diluted
Loss before extraordinary item and taxes $ (0.27) $ (0.14) $ (0.66) $ (0.67)
Income tax credit - - 0.08 -
---------- ---------- ---------- ----------
Loss before extraordinary item (0.27) (0.14) (0.58) (0.67)
Extraordinary item, net of taxes - - 0.18 -
---------- ---------- ---------- ----------
Net loss per share $ (0.27) $ (0.14) $ (0.40) $ (0.67)
========== ========== ========== ==========
In July 2001 the Board of Directors approved a plan to allow eligible
employees to exchange outstanding options granted between and including October
1, 1999 and December 13, 2001 under the Airspan Networks Inc. 1998 stock option
and restricted stock plan and the 2001 supplemental stock option plan for new
options. The offer of exchange was made to eligible employees on December 13,
2001 and remained open for acceptance until January 18, 2002. Under the offer,
new options were issued on July 19, 2002 to employees who tendered their old
ones for exchange. On the expiration of the offer, 665,796 options tendered were
cancelled at a weighted average price of $6.64. On July 19, 2002, 524,875 new
options were granted at $1.039 to those eligible employees who had accepted the
offer of exchange and validly tendered their options for exchange.
In 2000, the Company adopted the 2000 Employee Stock Purchase Plan ("ESPP"),
which is intended to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code of 1986. As of December 31, 2001, 342,906
shares of common stock were reserved for issuance under the ESPP. On August 1,
2002, the Company issued 274,411 shares at $0.697 per share to employees
participating in the ESPP. As of September 29, 2002, there were 568,495 shares
of common stock reserved for issuance under the ESPP.
10
SUBSEQUENT EVENT
As of September 30, 2002, Airspan Communications Limited (the
"Purchaser"), a wholly owned subsidiary of the Company, entered into a stock
purchase agreement (the "Purchase Agreement") with Marconi Corporation plc
(the "Seller") to purchase all of the outstanding shares of capital stock of
Marconi Communications (Israel) Ltd. ("Marconi WipLL"). The closing of the
Purchase Agreement was subject to a number of conditions, all of which were
fulfilled on or by October 4, 2002. The name of Marconi WipLL is being changed
to Airspan Networks (Israel) Limited ("Airspan Israel").
Airspan Israel develops and manufactures a product commonly known as the
Wireless Internet Protocol Local Loop ("WipLL"). The products and services to
be marketed by the Airspan group enable operators in licensed and unlicensed
wireless bands to offer high speed, low cost, wireless broadband connections
for data, voice over IP and multimedia services.
Subject to the terms and conditions of the stock purchase agreement, the
Purchaser has acquired all of the issued and outstanding capital stock of
Marconi WipLL in exchange for $3 million of cash. Airspan has provided the
Seller and one of its affiliates with a guarantee of the Purchaser's
obligations under the stock purchase agreement and under an equipment sales
and servicing agreement with a customer, namely SpeedNet Inc. of Japan.
Further details of the stock purchase agreement can be found on Form 8-K filed
with the Securities and Exchange Commission on October 18, 2002. The Company
will also file an additional Form 8-K with the Securities and Exchange
Commission on or before December 18, 2002 disclosing the combined financial
position of the Company's business with that of Airspan Israel.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, AS WELL AS THE
FINANCIAL STATEMENTS AND NOTES THERETO. THIS QUARTERLY REPORT ON FORM 10-Q
INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECURITIES
EXCHANGE ACT OF 1934 THAT INVOLVE RISK AND UNCERTAINTY. BECAUSE SUCH STATEMENTS
INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVE",
"EXPECT", "INTEND", "ANTICIPATE", VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS BUT THEIR ABSENCE DOES NOT MEAN
THAT THE STATEMENT IS NOT FORWARD LOOKING. THESE FORWARD-LOOKING STATEMENTS ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF. AIRSPAN
ASSUMES NO OBLIGATION TO PUBLICIZE THE RESULTS OF ANY POTENTIAL REVISION OF
THESE FORWARD-LOOKING STATEMENTS.
Comparison of the quarter ended September 29, 2002 to the quarter ended
September 30, 2001
Revenue
Revenue totaled $9.0 million for the quarter ended September 29, 2002
representing a 5% increase from the $8.6 million reported for the comparable
2001 quarter. Whilst we have a year over year increase in revenues, the
continued pressure on the telecoms sector has caused some of our customers to
decrease their rate of capital spending. The severity of this decrease has
varied between customers and markets. With our broad international customer
base, in the third quarter of 2002, we were able to offset declines in the US
and Asia markets with growth in Africa and the Middle East. For the quarter
ended September 29, 2002, 81% of our revenues were derived from Africa and the
Middle East, 6% from Europe, 5% from U.S. based customers, 5% from Asia and 3%
from Latin America and Caribbean. During the quarter, shipments were made to 34
customers, including 7 new customers.
Cost of Revenue
Cost of revenue increased 30% from $5.0 million in the quarter ended September
30, 2001 to $6.5 million in the quarter ended September 29, 2002. The cost of
revenue increased primarily as a result of a change in product mix. In the
quarter ended September 29, 2002 we shipped fewer network infrastructure
products and significantly higher subscriber terminals than those shipped in the
quarter ended September 30, 2001. During the quarter ended September 30, 2001 we
made an inventory provision of $1.4 million. We did not make any such provision
in the quarter ended September 29, 2002. Excluding inventory provisions, gross
profit, as a percentage of revenue, declined to 28% in the third quarter of 2002
from 42% in the second quarter of 2001.
Research and Development Expenses
Research and development expenses decreased 9% from $3.7 million in the quarter
ended September 30, 2001 to $3.3 million in the quarter ended September 29,
2002. The decrease was due primarily to the headcount and expense reduction
program initiated in the third quarter of 2001.
12
Sales and Marketing Expenses
Sales and marketing expenses decreased 36% from $3.5 million in the quarter
ended September 30, 2001 to $2.3 million in the quarter ended September 29,
2002. The decrease reflects the effect of the 2001 third quarter headcount and
expense reduction program, reduced trade show activities and reduced agents
commissions.
Bad Debt Provision
In the third quarter of 2002 we did not make a bad debt provision. In the
comparable period of 2001 we provided for $1.0 million of doubtful debts.
General and Administrative Expenses
General and administrative expenses decreased 16% from $2.7 million in quarter
ended September 30, 2001 to $2.2 million in the quarter ended September 29,
2002. The decrease was primarily attributed to the headcount and expense
reduction program initiated in the third quarter of 2001 and the reduction in
property rental costs due to the sublease of our Sunrise head office at the
beginning of the third quarter of 2002.
Amortization of Goodwill and Intangibles
There was no expense for the amortization of goodwill or intangibles during 2002
compared to $0.1 million in the quarter ended September 30, 2001. On January 1,
2002 FASB Statement 141 "Business Combinations" and FASB Statement 142,
"Goodwill and Other Intangible Assets" came into force. After applying these
Statements to our business, the assembled workforce has been reclassified as
goodwill and goodwill is no longer amortized. Instead goodwill now undergoes, at
least annually, an impairment test. The impairment test performed in the first
quarter of 2002 supports the carrying value of our goodwill.
Restructuring Charge
During the third quarter of 2001 we initiated a restructuring program to reduce
our operating expense. In that quarter we recorded a restructuring provision of
$1.2 million to cover employee termination costs and facility closures. By the
end of the third quarter of 2002 all of the employees identified in the 2001
provision were terminated and the facilities had been sublet. During the third
quarter of 2002 a new restructuring program was started to further reduce our
operating expenditure. In the quarter ended September 29, 2002 we recorded $0.3
million for this new restructuring program provision, related primarily to
severance costs.
Interest expense
Interest expense in the third quarter of both 2002 and 2001 was below $0.1
million.
Interest and Other Income
Interest and other income was unchanged at $0.7 million for the quarter ended
September 29, 2002 compared to the quarter ended September 30, 2001. Interest
income declined from $0.7 million in the quarter ended September 30, 2001 to
$0.2 million in the quarter ended September 29, 2002, due to lower interest
rates on smaller cash balances, but the decline was offset by increases in other
income from net foreign exchange gains of $0.5 million in the third quarter 2002
compared to exchange losses of $0.1 million in the third quarter of 2001.
Income Taxes
We did not have a material income tax charge in the quarter ended September 29,
2002 or September 30, 2001.
13
Net Income/(Loss)
Net loss of $5.0 million in the quarter ended September 29, 2002 compared to a
net loss of $9.4 million for the quarter ended September 30, 2001. Excluding
inventory provisions, bad debt provisions and restructuring charges, we
generated gross profits of $3.6 million and $2.5 million and net losses of
approximately $5.7 million and $4.7 million for the quarters ended September 30,
2001 and September 29, 2002, respectively. The $1.1 million decrease in gross
profit was more than offset by our reductions in research and development, sales
and marketing, general and administrative expenses of $0.3 million, $1.3 million
and $0.4 million, respectively.
Other Comprehensive Gain/(Loss)
Other comprehensive loss for the quarter ended September 29, 2002 was $55
thousand compared to a gain of $1.2 million for the quarter ended September 30,
2001. Other comprehensive gains and losses related to the change in fair value
of our forward foreign exchange contracts on retranslation. These forward
exchange contracts are used to hedge our UK pound sterling expenses through to
June 2003.
Comparison of the nine months ended September 29, 2002 to the nine months ended
September 30, 2001
Revenue
Revenue totaled $15.1 million for the nine months ended September 29, 2002,
representing a 45% decrease from the $27.3 million reported for the comparable
nine months of 2001. The relative decrease in revenue in 2002 occurred in the
first six months of 2002. In contrast, the revenue generated in the third
quarter of 2002 was comparable to the third quarter of 2001. The downturn in the
telecommunications operator market has caused our customers to decrease their
rate of capital spending. The severity of this decrease has varied between
geographical markets, and with our broad international customer base we were
able to offset some of the declines in the rest of the world with growth in
Africa. During the first nine months of 2002, shipments were made to 63
customers, including 17 new customers, with 60% of our revenues derived from
Africa and the Middle East, 16% from U.S. based customers, 11% from Asia, 10%
from Europe and 3% from Latin America and Caribbean customers.
Cost of Revenue
Cost of revenue decreased 30% from $16.7 million in the nine months ended
September 30, 2001 to $11.7 million in the nine months ended September 29, 2002
principally as a result of the decrease in revenue. During the first nine months
of 2002 we made inventory provisions of $2.0 million compared to $1.4 million in
the first nine months of 2001. Excluding the inventory provisions, gross profit,
as a percentage of revenue, declined to 22% in the first nine months of 2002
from 39% in the first nine months of 2001. The lower gross profit arose from a
combination of the increase in the proportion of period costs as revenue
declined and from the change in product mix as subscriber equipment shipments
made up a higher proportion of the revenue for 2002. After the inventory
provision of $2.0 million, gross profit was $1.4 million for the nine months
ended September 29, 2002.
Research and Development Expenses
Research and development expenses decreased 13% from $11.6 million in the nine
months ended September 30, 2001 to $10.1 million in the nine months ended
September 29, 2002. The decrease was due primarily to the headcount and expense
reduction program initiated in the third quarter of 2001.
14
Sales and Marketing Expenses
Sales and marketing expenses decreased 40% from $12.4 million in the nine months
ended September 30, 2001 to $7.5 million in the quarter ended September 29,
2002. The decrease reflects the effect of the 2001 third quarter headcount and
expense reduction program, reduced trade show activities and the impact of lower
sales on commissions paid to our sales force and agents.
Bad Debt Provision
In the first nine months of 2002 we recorded $1.5 million of bad debt expense to
reflect our concerns about the financial position of certain customers,
particularly in Asia. In the comparable period of 2001 we provided $0.6 million.
General and Administrative Expenses
General and administrative expenses decreased 21% from $8.4 million in the nine
months ended September 30, 2001 to $6.6 million in the nine months ended
September 29, 2002. The decrease was primarily attributed to the headcount and
expense reduction program initiated in the third quarter of 2001.
Amortization of Goodwill and Intangibles
There was no expense for the amortization of goodwill or intangibles during 2002
compared to $0.3 million in the nine months ended September 30, 2001. On January
1, 2002 FASB Statement 141 "Business Combinations" and FASB Statement 142,
"Goodwill and Other Intangible Assets" came into force. After applying these
Statements to our business, the assembled workforce has been reclassified as
goodwill and goodwill is no longer amortized. Instead goodwill now undergoes, at
least annually, an impairment test. The impairment test in the first quarter of
2002 supports the carrying value of our goodwill and there have been no events
since then that have changed this.
Restructuring Charge
During the third quarter of 2001 we initiated a restructuring program to reduce
our operating expense. In that quarter we recorded a restructuring provision of
$1.2 million to cover employee termination costs and facility closures. Due to
the delay and higher cost of assigning the lease of the office in Sunrise,
Florida a further $0.2 million of restructuring costs were recorded in the first
quarter of 2002. By the end of the third quarter of 2002, all of the employees
identified in the 2001 provision we terminated and the facilities had been
sublet. During the third quarter of 2002 a new restructuring program was started
to further reduce our operating expenditure. In the quarter ended September 29,
2002 we recorded $0.3 million for this restructuring program provision,
primarily related to severance costs.
Interest expense
Interest expense decreased from $0.3 million for the first nine months of 2001
to $0.1 million for the first nine months of 2002 due to the repayment of debt.
Interest and Other Income
Interest and other income decreased by 46% from $2.7 million for the nine months
ended September 30, 2001 to $1.5 million in the nine months ended September 29,
2002. The reduction was due to lower interest rates on lower cash deposits,
partly offset by foreign exchange gains and losses. A foreign exchange loss of
$0.3 million in the nine months ended September 30, 2001 compared to a gain of
$0.7 million in the nine months ended September 29, 2002.
Income Taxes
We did not have a material income tax charge in the nine months ended September
29, 2002. We recorded an income tax credit of $2.8 million in the nine months
ended September 30, 2001, derived from the tax losses generated in the U.K., to
offset the income tax expense recorded on our extraordinary gain.
15
Extraordinary Gain
The Company negotiated a settlement of its $18.5 million promissory note with
DSC Telcom L.P. in the first nine months of 2001. Under the settlement
agreement, the Company agreed to pay $9.3 million in 2001, in exchange for
complete forgiveness of the debt owed by the Company that was originally
repayable over 36 equal installments over three years starting February 1, 2001.
In addition, the Company and DSC Telcom L.P. mutually released each other from
certain claims made by the parties relating to the formation of Airspan in
January 1998. The extraordinary gain of $9.2 million that arose from this
transaction was partially offset by tax on the gain of $2.7 million, resulting
in an extraordinary gain, net of taxes, of $6.5 million. There was no
corresponding extraordinary item in 2002.
Net Loss
Our net loss of $23.5 million in the nine months ended September 29, 2002
compared to a loss of $13.8 million for the nine months ended September 30,
2001. Loss before extraordinary items and taxes increased from $23.1 million for
the nine months ended September 30, 2001 to $23.5 million for the nine months
ended September 29, 2002, or 2%. The $0.4 million increase in the loss before
extraordinary items and taxes is primarily attributable to a lower gross profit
of $7.8 million, an increase in bad debt provisions of $0.9 million and lower
net interest and other income of $1.0 million, which were partly compensated for
by decreases in research and development of $1.6 million, sales and marketing of
$4.9 million, general and administrative expenses of $1.8 million, amortization
of intangibles of $0.3 million and restructuring charge of $0.8 million.
Other Comprehensive Gain/(Loss)
Other comprehensive gain for the nine months ended September 29, 2002 was $0.9
million compared to a loss of $0.1 million for the nine months ended September
30, 2001. Other comprehensive gains and losses related to the change in fair
value of our forward foreign exchange contracts on retranslation. These forward
exchange contracts are used to hedge our UK pound sterling expenses through to
June 2003.
Liquidity and Capital Resources
Between inception and July 2000, we financed our operations primarily through
private sales of convertible preferred stock, which totaled $117.3 million (net
of transaction expenses). On July 25, 2000, we completed an initial public
offering of common stock for approximately $86.0 million in cash (net of
underwriting discounts, commission and other expenses).
As of September 29, 2002, we had cash and cash equivalents totaling $56.8
million, as well as $1.5 million of restricted cash that is held as collateral
for performance guarantees on customer contracts and with landlords as a
security for rent obligations. We do not have a line of credit or similar
borrowing facility, nor do we have any material capital commitments.
At September 29, 2002, we had outstanding debt due within one year of $1.25
million and long term debt of $1.25 million, both owed to Comdisco Inc.
Until we are able to generate cash from operations, if ever, we intend to use
our existing cash resources to finance our operations. We believe we have
sufficient cash for at least the next twelve months.
For the nine months ended September 29, 2002, we used $12.5 million cash in
operating activities compared with $31.0 million for the nine months ended
September 30, 2001. The cash used in operations was primarily as a result of the
operating loss and changes in working capital. The net cash used in investing
activities in the nine months to September 29, 2002 and September 30, 2001, of
$0.9 million and $3.0 million respectively, all related to capital equipment.
Our financing cash outflows for the nine months ended September 29, 2002 were
$0.1 million compared with $6.2 million for the nine months ended September 30,
2001. The outflows in 2002 arose largely from movements in restricted cash and,
in 2001, from the repayment of long and short-term debt.
We have no material commitments other than obligations on long-term debt,
operating leases and also the forward exchange contracts mentioned below.
16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Interest Rate Risk
The Company's earnings are affected by changes in interest rates. As of December
31, 2001 and September 29, 2002 we had cash and cash equivalents and restricted
cash of $71.6 million and $58.3 million, respectively. Substantially all of
these amounts consisted of highly liquid investments with remaining maturities
at the date of purchase of less than 90 days. These investments are exposed to
interest rate risk and will decrease in value if market interest rates increase.
A hypothetical increase or decrease in market interest rates of 2 percent from
September 29, 2002 rates would cause the fair market value of these short-term
investments to change by an insignificant amount. Due to the short duration of
these investments, a short-term increase in interest rates would not have a
material effect on our financial condition or results of operations. Declines in
interest rates over time would, however, reduce our interest income.
Foreign Currency Exchange Rate Risk
For the nine months ended September 29, 2002, 0.6% of our sales were denominated
in euro, 1.0% in Australian dollars and the remaining 98.4% were denominated in
US dollars. For the nine months ended September 30, 2001, 2.5% of our sales were
denominated in euro and the remaining 97.5% were denominated in US dollars. Our
total euro denominated sales for the nine months ended September 29, 2002 were
0.4 million euro, which were recorded at an average exchange rate of $1US =
1.0896 euro. If the average exchange rate used had been higher or lower by 10%
it would have decreased or increased the euro-denominated sales value by $0.04
million. Our total Australian dollars denominated sales for the nine months
ended September 29, 2002 were 0.9 million AUD, which were recorded at an average
exchange rate of $1US = 1.8684 AUD. If the average exchange rate used had been
higher or lower by 10% it would have decreased or increased the AUD-denominated
sales value by $0.09 million. We expect the proportions of sales in euros and
Australian dollars to fluctuate over time. The Company's sensitivity analysis
for changes in foreign currency exchange rates does not factor in changes in
sales volumes.
Since May 2000, we have entered in currency hedging contracts that lock in
minimum exchange rates for payments due to us under some of our sales contracts
where those payments are to be made in currencies other than US dollars. Prior
to 2000 we had not entered into any foreign currency forward or option contracts
to hedge those payments. We do not enter into any currency hedging activities
for speculative purposes. The costs of these contracts are included under
interest and other income in our financial statements. There were no euro hedges
outstanding at September 29, 2002. We will continue to monitor our foreign
currency exposures and may modify our hedging strategy as we deem prudent.
Our operating results are affected by moves in foreign currency exchange rates,
particularly the rate between US dollars and Great Britain pounds sterling. That
is because most of our operating expenses are incurred in pounds sterling.
During the nine months ended September 29, 2002, we paid expenses in local
currency of approximately 12.7 million pounds sterling, at an average rate of
$1US = 0.6809 pounds sterling. If the expenses in pounds sterling had not been
hedged and the average exchange rates had been higher or lower by 10%, the
pounds sterling denominated operating expenses would have decreased or increased
by $1.86 million. We expect the proportions of operating expenses paid in pounds
sterling to fluctuate over time.
To hedge our pound sterling foreign currency risk, we had outstanding forward
exchange contracts at December 31, 2001, to purchase 18 million pounds sterling
at an average exchange rate of $1US = 0.6992 pounds sterling in sixteen variable
amounts up to December 2002. On May 3, 2002, we purchased 7.5 million pounds
sterling at an average exchange rate of $1US = 0.6927 pounds sterling in six
amounts from January to June 2003. At September 29, 2002 there were nine
payments outstanding at an average exchange rate of $1US = 0.6965 pounds
sterling.
Equity Price Risk
We do not own any equity investments, other than in our subsidiaries. As a
result, we do not currently have any direct equity price risk.
Commodity Price
We do not enter into contracts for the purchase or sale of commodities. As a
result, we do not currently have any direct commodity price risk.
17
Item 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this quarterly report, an
evaluation was performed under the supervision and with the participation of
Airspan's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Airspan's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective. There have been no significant changes in Airspan's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
18
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDING
On and after July 23, 2001, three Class Action Complaints were filed in the
United States District Court for the Southern District of New York naming as
defendants the Company, Eric D. Stonestrom (our President and Chief Executive
Officer), Joseph J. Caffarelli (our former Senior Vice President and Chief
Financial Officer), Matthew Desch (our Chairman) and Jonathan Paget (our
Executive Vice President and Chief Operating Officer) (collectively, the
"Individual Defendants") together with certain underwriters of our July 2000
initial public offering. The complaints have been consolidated into a single
action and a consolidated amended complaint was filed April 19, 2002, captioned
In re: Airspan Networks, Inc. Initial Public Offering Securities Litigation,
Case No. 01 Civ. 6747.
The complaint alleges violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934 for issuing a Registration Statement and
Prospectus that contained materially false and misleading information and failed
to disclose material information. In particular, Plaintiffs allege that the
underwriter-defendants agreed to allocate stock in our initial public offering
to certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Registration
Statement and Prospectus for our initial public offering were false and
misleading in violation of the securities laws because they did not disclose
these arrangements. The actions seek damages in an unspecified amount. The
action is being coordinated with over three hundred other nearly identical
actions. On July 15, 2002, the Company and the Individual Defendants moved to
dismiss all claims against them. The Court has not ruled on this motion. On
October 9, 2002, the Court dismissed the Individual Defendants from the case
without prejudice based upon Stipulations of Dismissal filed by the plaintiffs
and the Individual Defendants. We intend to vigorously defend the Company
against this lawsuit.
We are not currently subject to any other material legal proceedings.
We may from time to time become a party to various other legal proceedings
arising in the ordinary course of our business.
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 -- Certification of Chief Executive Officer
99.2 -- Certification of Chief Financial Officer
None
(b) Reports on Form 8-K:
We filed a report on Form 8-K on October 18, 2002, reporting our acquisition of
Marconi Communications (Israel) Ltd.
19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Nov 12, 2002
AIRSPAN NETWORKS INC.
By: /s/ PETER ARONSTAM
----------------------
Peter Aronstam
Senior Vice President and Chief Financial Officer
20