UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended September 28, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ________________ to
________________
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Commission
file number:
000-31031
AIRSPAN
NETWORKS INC.
(Exact
name of registrant as specified in its charter)
Washington
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75-2743995
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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777
Yamato Road, Suite 310
Boca
Raton, FL
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33431
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(Address
of principal executive offices)
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(Zip
Code)
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561-893-8670
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
A
ccelerated
filer
x
Non-a
ccelerated
filer
o
Smaller reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
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Outstanding
at October 31, 2008
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Common
Stock, $.0003 par value per share
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59,472,165
shares
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TABLE
OF CONTENTS
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Page
Number
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PART
I. FINANCIAL INFORMATION
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Item
1.
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Financial
Statements
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Condensed
Consolidated Balance Sheets
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3
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Condensed
Consolidated Statements of Operations
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4
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Condensed
Consolidated Statements of Cash Flows
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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26
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Item
4.
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Controls
and Procedures
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27
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PART
II. OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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28
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Item
1A.
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Risk
Factors
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29
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Item
6.
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Exhibits
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30
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Signatures
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30
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
AIRSPAN
NETWORKS INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except for share data)
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September 28,
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December 31,
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2008
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2007
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(unaudited)
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(audited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
|
21,936
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|
$
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30,815
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Restricted
cash
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|
200
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393
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Short-term
investments
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9,013
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5,504
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Accounts
receivable, less allowance for doubtful accounts of
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$2,559
at September 28, 2008 and $2,878 at December 31, 2007
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18,251
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33,853
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Inventory
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13,101
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16,720
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Prepaid
expenses and other current assets
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5,655
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5,338
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Total
current assets
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68,156
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92,623
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Property,
plant and equipment, net
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5,121
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5,895
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Goodwill
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10,231
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10,231
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Intangible
assets, net
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1,171
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1,870
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Other
non-current assets
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3,475
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3,402
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Total
assets
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$
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88,154
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$
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114,021
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$
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9,214
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$
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11,938
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Deferred
revenue
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3,407
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5,125
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Customer
advances
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291
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892
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Other
accrued expenses
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11,471
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13,063
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Short-term
debt
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12,500
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7,500
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Total
current liabilities
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36,883
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38,518
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Long-term
debt and accrued interest on long-term debt
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1,978
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1,978
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Total
liabilities
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38,861
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40,496
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Commitments
and contingencies
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Stockholders'
equity
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Preferred
stock, $0.0001 par value; 250,000 shares authorized at
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September
28, 2008 and December 31, 2007; 200,690 shares
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issued
at September 28, 2008 and December 31, 2007
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-
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-
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Common
stock, $0.0003 par value; 100,000,000 shares authorized
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at
September 28, 2008 and December 31, 2007; 59,400,042 and 58,542,517
shares
issued at September 28, 2008 and December 31, 2007,
respectively
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18
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17
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Note
receivable – stockholder
|
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(87
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)
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(87
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)
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Additional
paid-in capital
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352,111
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349,718
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Accumulated
deficit
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(302,749
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)
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(276,123
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)
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Total
stockholders' equity
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49,293
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73,525
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Total
liabilities and stockholders' equity
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$
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88,154
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$
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114,021
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
AIRSPAN
NETWORKS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands except for share and per share data)
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Quarter Ended
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Year-to-Date
|
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September 28,
2008
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September 30,
2007
|
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September 28,
2008
|
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September 30,
2007
|
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(unaudited)
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(unaudited)
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Revenue
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$
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17,789
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$
|
22,470
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$
|
56,339
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|
$
|
71,203
|
|
Cost
of revenue
|
|
|
(12,294
|
)
|
|
(14,680
|
)
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|
(38,864
|
)
|
|
(53,312
|
)
|
Gross
profit
|
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|
5,495
|
|
|
7,790
|
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|
17,475
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|
17,891
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Operating
expenses:
|
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|
|
|
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Research
and development
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5,511
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6,185
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19,185
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17,572
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Sales
and marketing
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3,653
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3,521
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12,194
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10,391
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Bad
debts
|
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|
492
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|
632
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|
965
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|
1,587
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General
and administrative
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|
3,537
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3,311
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|
11,072
|
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|
11,475
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|
Amortization
of intangibles
|
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|
230
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|
|
234
|
|
|
698
|
|
|
702
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|
Restructuring
|
|
|
50
|
|
|
-
|
|
|
690
|
|
|
(485
|
)
|
Total
operating expenses
|
|
|
13,473
|
|
|
13,883
|
|
|
44,804
|
|
|
41,242
|
|
Loss
from operations
|
|
|
(7,978
|
)
|
|
(6,093
|
)
|
|
(27,329
|
)
|
|
(23,351
|
)
|
Interest
income, net
|
|
|
54
|
|
|
31
|
|
|
287
|
|
|
518
|
|
Other
income (expense), net
|
|
|
(358
|
)
|
|
317
|
|
|
(45
|
)
|
|
321
|
|
Loss
before income taxes
|
|
|
(8,282
|
)
|
|
(5,745
|
)
|
|
(27,087
|
)
|
|
(22,512
|
)
|
Income
tax (provision)/benefit
|
|
|
528
|
|
|
(24
|
)
|
|
461
|
|
|
(61
|
)
|
Net
loss before deemed dividend
|
|
|
(7,754
|
)
|
|
(5,769
|
)
|
|
(26,626
|
)
|
|
(22,573
|
)
|
Deemed
dividend associated with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of preferred stock
|
|
|
-
|
|
|
(4,138
|
)
|
|
-
|
|
|
(4,138
|
)
|
Net
loss attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$
|
(7,754
|
)
|
$
|
(9,907
|
)
|
$
|
(26,626
|
)
|
$
|
(26,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.13
|
)
|
$
|
(0.24
|
)
|
$
|
(0.45
|
)
|
$
|
(0.65
|
)
|
Weighted
average shares outstanding- basic and diluted
|
|
|
59,030,071
|
|
|
41,905,579
|
|
|
58,770,836
|
|
|
41,084,881
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
AIRSPAN
NETWORKS INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Year to date
|
|
Year to date
|
|
|
|
September 28,
2008
|
|
September 30,
2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(26,626
|
)
|
$
|
(22,573
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,985
|
|
|
2,835
|
|
Accrued
interest on long-term debt
|
|
|
-
|
|
|
31
|
|
Non-cash
stock compensation
|
|
|
2,003
|
|
|
1,846
|
|
Loss
on sale of property, plant and equipment
|
|
|
2
|
|
|
10
|
|
Bad
debts
|
|
|
965
|
|
|
1,587
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
in receivables
|
|
|
14,637
|
|
|
3,118
|
|
Decrease
in inventories
|
|
|
3,619
|
|
|
6,135
|
|
Increase
in other current assets
|
|
|
(317
|
)
|
|
572
|
|
Decrease
in accounts payables
|
|
|
(2,724
|
)
|
|
(253
|
)
|
Decrease
in deferred revenue
|
|
|
(1,717
|
)
|
|
(1,543
|
)
|
Decrease
in customer advances
|
|
|
(601
|
)
|
|
(432
|
)
|
Decrease
in other accrued expenses
|
|
|
(1,567
|
)
|
|
(4,901
|
)
|
Decrease
in other operating assets
|
|
|
120
|
|
|
933
|
|
Net
cash used in operating activities
|
|
|
(9,221
|
)
|
|
(12,635
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(1,515
|
)
|
|
(1,921
|
)
|
Purchase
of short-term investments
|
|
|
(10,659
|
)
|
|
(12,274
|
)
|
Proceeds
from sale of short-term investments
|
|
|
7,150
|
|
|
11,994
|
|
Net
cash used in investing activities
|
|
|
(5,024
|
)
|
|
(2,201
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Borrowings
under line of credit
|
|
|
5,000
|
|
|
7,500
|
|
Proceeds
from public offering, net of issuance costs
|
|
|
-
|
|
|
28,022
|
|
Proceeds
from the exercise of stock options
|
|
|
62
|
|
|
1,122
|
|
Proceeds
from the sale of common stock
|
|
|
304
|
|
|
602
|
|
Net
cash provided by financing activities
|
|
|
5,366
|
|
|
37,246
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(8,879
|
)
|
|
22,410
|
|
Cash
and cash equivalents, beginning of period
|
|
|
30,815
|
|
|
15,890
|
|
Cash
and cash equivalents, end of period
|
|
$
|
21,936
|
|
$
|
38,300
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Airspan
Networks Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 – BUSINESS AND BASIS OF PRESENTATION
Airspan
Networks Inc. (“Airspan” or “the Company”) is a global supplier of broadband
wireless equipment supporting the Worldwide Interoperability for Microwave
Access (“WiMAX”) protocol standard, which provides a wide area telecommunication
access network to connect end-users to telecom backbone networks. The WiMAX
standard is established by the WiMAX Forum
®
,
a
self-regulatory, industry standards-setting organization. While our main product
focus is WiMAX, we utilize other supplemental technologies, including
Wireless
Fidelity
(“WiFi”)
and Voice-over-Internet Protocol (“VoIP”), which allow communications network
operators and service providers to deliver high-speed data and voice services
cost-effectively using wireless communications rather than wired
infrastructure.
Historically,
the primary market for our wireless systems has been fixed point to multi-point
applications. Our development of new technology has expanded the market to
include portable and mobile applications. Today, we produce radio base station
equipment to transmit radio signals from a central location to the end-user
who
is equipped with a subscriber receiving unit. Our WiMAX products now enable
major network migrations to Internet Protocol, which makes higher transmission
speeds possible due to more efficient transmission techniques. After the
expected certification of mobile WiMAX standards, we expect our mobile
applications will be made available directly to end-user devices such as laptops
and personal digital assistants to deliver wireless connectivity - at home,
in
the office and on the move. Leveraging our experience with WiMAX technology
and
our experience gained from 15 years of developing and deploying broadband
wireless systems, we are focused on developing products for these mobile WiMAX
applications in addition to our fixed wireless products.
Our
primary target customers are communications service providers and other network
operators that deploy WiMAX networks in licensed and unlicensed (license-exempt)
spectrums worldwide. These customers include incumbent local exchange carriers
(often referred to as “local exchange carriers”, “ILECs”, or simply telephone
companies), Internet service providers (often referred to as “ISPs”), Wireless
Internet Service providers (often referred to as “WISPs”), Mobile Virtual
Network Operators (often referred to as “MVNOs”), Competitive Local Exchange
Carriers (“CLECs”), and other telecommunications users, such as utilities and
other enterprises. As mobile WiMAX products are deployed, we are also targeting
mobile and cellular carriers, which represent a significant expansion of our
traditional addressable market. Our broadband wireless systems have been
installed by more than 500 network operators in more than 100
countries.
Each
of
our wireless systems uses digital radio technologies, which provide wide-area
or
local-area coverage, robust security and resistance to fading. Our systems
synchronize available bandwidth with the specific services being provided,
thereby facilitating the most efficient use of radio equipment resources and
spectrum. Our systems are designed as modular solutions enabling the expansion
of existing deployments as technologies and customer needs evolve. We provide
a
wide range of subscriber devices that deliver voice and data connection, or
a
combination of both, eliminating the need for multiple access devices in
customer premises.
Our
network management systems provide diagnostic and management tools that allow
our customers to monitor and optimize their installations. To facilitate the
deployment and operation of our systems, we also offer network installation
(generally through subcontractors), training, radio planning and support
services.
In
2007,
we introduced a portable miniature device (the MiMAX subscriber terminal) that
can be plugged into a standard laptop, enabling WiMAX for data services,
including VoIP. Our MiMAX USB received WiMAX certification by the WiMAX
Forum
®
in the
second quarter of 2008.
Earlier
in 2008, we announced the MacroMAXe mobile-WiMAX base station, developed in
partnership with Fujitsu. MacroMAXe is an all-in-one base station offering
the
range and features typically included in larger base station equipment. In
addition, the MacroMAXe uses new Gallium-Nitride power amplifier technology
from
Fujitsu which allows for extremely low power consumption.
Our
corporate headquarters are located in Boca Raton, Florida. Our main operations,
manufacturing and product development centers are located in Uxbridge, United
Kingdom and Airport City, Israel. Our telephone number in Boca Raton is (561)
893-8670. Further contact details and the location of all our worldwide offices
may be found at
www.airspan.com
.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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. The interim operating results are not necessarily indicative
of operating results expected in subsequent periods or for the year as a
whole.
The
condensed consolidated balance sheet at December 31, 2007 has been derived
from
the audited financial statements at that date included in our Form 10-K for
the
year ended December 31, 2007 but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto included
in
our Annual Report on Form 10-K for the year ended December 31, 2007.
Certain
prior year amounts have been reclassified to conform to the current year
classification.
All
notes
to the condensed consolidated financial statements are shown in thousands,
except for share and per share data.
NOTE
2 - INVENTORY
Inventory
consists of the following:
|
|
September 28,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
Purchased
parts and materials
|
|
$
|
6,230
|
|
$
|
6,941
|
|
Work
in process
|
|
|
1,259
|
|
|
1,283
|
|
Finished
goods and consumables
|
|
|
14,882
|
|
|
20,585
|
|
Inventory
provision
|
|
|
(9,270
|
)
|
|
(12,089
|
)
|
|
|
$
|
13,101
|
|
$
|
16,720
|
|
Inventories
are stated at the lower of cost or market value. Cost includes all costs
incurred in bringing each product to its present location and condition, as
follows:
·
|
Purchased
parts and materials, finished goods — average cost
|
·
|
Work
in process— cost of direct materials and labor.
|
NOTE
3 - ACCRUED RESTRUCTURING CHARGES
In
the
fourth quarter of 2002, the decision was made to completely outsource all of
our
manufacturing. As a result, a $1.0 million restructuring charge was recorded
for
the closure of our Riverside, Uxbridge facility in 2003. All of this cost
related to the excess facility. A further $0.4 million was recognized as
restructuring in the income statement in the fourth quarter of 2003 as we
reassessed the ability to sublease the Riverside facility. In the second quarter
of 2007, the lessor completed renovations and incurred actual costs of
approximately $0.8 million, which the Company was required to pay; therefore,
we
reduced the liability to $1.0 million, including the estimated legal and other
fees we expected to incur. All cash outflows in connection with this
restructuring were paid in February 2008.
In
the
third quarter of 2006, the Company commenced a company-wide restructuring
program to reduce operating expenses. The operating expense reduction was
accomplished primarily through reductions in worldwide headcount. In 2006,
the
Company recorded restructuring charges of $2.2 million. The Company made
approximately $0.4 million of cash outlays in 2007 related to amounts accrued
in
2006. All remaining cash outlays related to this program were completed in
the
second quarter of 2007.
In
the
second quarter of 2008, the Company announced its intention to reduce worldwide
operating expenses by approximately 15%. The operating expense reduction was
accomplished primarily through reductions in worldwide headcount. In the second
quarter of 2008, the Company recorded restructuring charges of $0.6 million.
An
additional $0.1 million was recorded as a restructuring charge in the third
quarter of 2008. All payments in connection with these charges were made in
the
second and third quarters of 2008.
The
restructuring charges and their utilization are summarized as follows:
|
|
Total expected
to be
incurred
|
|
Incurred
during the
quarter ended
September 28,
2008
|
|
Cumulative
incurred at
September 28,
2008
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
732
|
|
$
|
50
|
|
$
|
690
|
|
Contract
termination costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
associated costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
732
|
|
$
|
50
|
|
$
|
690
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
Restructuring
|
|
|
|
End
|
|
|
|
of Period
|
|
Charge
|
|
Utilized
|
|
of Period
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 28, 2008 (unaudited)
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
-
|
|
$
|
690
|
|
$
|
(690
|
)
|
$
|
-
|
|
Contract
termination costs
|
|
|
796
|
|
|
-
|
|
|
(796
|
)
|
|
-
|
|
Other
associated costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
796
|
|
$
|
690
|
|
$
|
1,486
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007 (audited)
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
375
|
|
$
|
-
|
|
$
|
(375
|
)
|
$
|
-
|
|
Contract
termination costs
|
|
|
1,437
|
|
|
(639
|
)
|
|
(2
|
)
|
|
796
|
|
Other
associated costs
|
|
|
50
|
|
|
(50
|
)
|
|
-
|
|
|
-
|
|
|
|
$
|
1,862
|
|
$
|
(689
|
)
|
$
|
(377
|
)
|
$
|
796
|
|
NOTE
4 – COMMITMENTS AND CONTINGENCIES
Commitments
As
of
September 28, 2008, our material commitments consisted of obligations on
operating leases, repayment of principal and interest owed on the loans made
to
us by the Finnish Funding Agency for Technology and Innovation (the “Tekes
Loans”) and purchase commitments to our manufacturing subcontractors. These
purchase commitments totaled $22.7 million at September 28, 2008. We have no
material capital commitments.
Warranty
The
Company provides limited warranties, usually for periods ranging from twelve
to
twenty-four months, to all purchasers of its new equipment. Warranty expense
is
accrued at the date revenue is recognized on the sale of equipment and is
recognized as a cost of revenue. The expense is estimated based on analysis
of
historic costs and other relevant factors. Management believes that the amounts
provided are sufficient for all future warranty costs on equipment sold through
September 28, 2008 but if actual product failure rates, material usage or
service delivery costs differ from estimates, revisions to the estimated
warranty liability would be required.
Information
regarding the changes in our product warranty liabilities was as follows for
the
nine months ended September 28, 2008.
|
|
Balance at
beginning
of period
|
|
Accrual
for
warranties
issued
during the
period
|
|
Changes
in accruals
related to
pre-
existing
warranties
(including
changes in
estimates)
|
|
Settlements
made (in
cash or in
kind)
during the
period
|
|
Balance at
end of
period
|
|
Nine
months ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
warranty liability
|
|
$
|
1,010
|
|
$
|
314
|
|
$
|
(37
|
)
|
$
|
(275
|
)
|
$
|
1,012
|
|
Other
guarantees
As
of
September 28, 2008, the Company had pledged cash to banks as collateral for
guarantees aggregating $1.2 million, of which $0.1 million is recorded as
restricted cash in current assets related to customers and $1.1 million is
recorded as other non-current assets related to property leases. The Company
has
also issued guarantees of its own obligations to customers under the line of
credit provided by Silicon Valley Bank (“SVB”) for a total of $3.0 million,
which does not require any related pledge of cash collateral. The Company has
not recognized any liability for these guarantees. These guarantees will all
expire before the end of 2011 with the majority expiring in 2009.
In
addition to the guarantees mentioned above, the Company has issued a guarantee
to Tekes, the main public funding organization for research and development
in
Finland, for the repayment of loans taken out by its fully consolidated
subsidiary, Airspan Networks (Finland) OY (“Radionet”). These loans totaled $2.0
million at September 28, 2008, which includes $0.2 million of accrued interest,
and are recorded in long-term debt. This guarantee expires only when Radionet
has fulfilled all its obligations to Tekes.
Legal
claims
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
Airspan, and certain current or former officers and directors (referred to
herein as the “Individual Defendants”) together with certain underwriters of our
July 2000 initial public offering. A Consolidated Amended Complaint, which
is
now the operative complaint, was filed on July 19, 2002. The complaint alleges
violations of Sections 11 and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of 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, the 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.
The action seeks damages in an unspecified amount.
This
action is being coordinated with approximately three hundred nearly identical
actions filed against other companies. On October 9, 2002, the Court dismissed
the Individual Defendants from the case without prejudice. This dismissal
disposed of the Section 15 and 20(a) control person claims without
prejudice. On February 19, 2003, the Court dismissed the Section 10(b)
claim against us, but allowed the Section 11 claim to proceed. On December
5,
2006, the Second Circuit vacated a decision by the district court granting
class
certification in six of the coordinated cases, which are intended to serve
as
test, or “focus,” cases. The plaintiffs selected these six cases,
which do not include Airspan. The district court’s decisions in the six
focus cases are intended to provide strong guidance for the parties in the
remaining cases. On April 6, 2007, the Second Circuit denied a petition
for rehearing filed by the plaintiffs, but noted that the plaintiffs could
ask
the district court to certify more narrow classes than those that were
rejected.
On
August
14, 2007, the plaintiffs filed amended complaints in the six focus cases.
The amended complaints include a number of changes, such as changes to the
definition of the purported class of investors. On September 27, 2007, the
plaintiffs moved to certify classes in the six focus cases. The six focus
case issuers and the underwriters named as defendants in the focus cases filed
motions to dismiss the amended complaints against them. On March 26, 2008,
the District Court dismissed the Section 11 claims of those members of the
putative classes in the focus cases who sold their securities for a price in
excess of the initial offering price and those who purchased outside the
previously certified class period. With respect to all other claims, the
motions to dismiss were denied. On October 10, 2008, at the request of
plaintiffs, plaintiffs’ motion for class certification was withdrawn, without
prejudice. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the matter. We cannot predict whether we
will be able to renegotiate a settlement that complies with the Second Circuit’s
mandate, nor can we predict the amount of any such settlement and whether that
amount would be greater than Airspan’s insurance coverage. If Airspan is
found liable, we are unable to estimate or predict the potential damages that
might be awarded, whether such damages would be greater than Airspan’s insurance
coverage and whether such damages would have a material impact on our results
of
operations or financial condition in any future period.
On
October 9, 2007, a purported
Airspan
shareholder
filed a complaint for violation of Section 16(b) of the Securities Exchange
Act of 1934, which prohibits short-swing trading, against the Company's initial
public offering underwriters. The complaint, Vanessa
Simmonds v.
Credit
Suisse Group, et al., Case No. C07-01638, filed in the District Court for
the Western District of Washington, seeks the recovery of short-swing
profits. The Company is named as a nominal defendant. No recovery is
sought from the Company.
From
time
to time, the Company receives and reviews offers from third parties with respect
to licensing their patents and other intellectual property in connection with
the manufacture of our WiMAX and other products. There can be no assurance
that
disputes will not arise with such third parties if no agreement can be reached
regarding the licensing of such patents or intellectual property.
We
have
received letters/communications from
Wi-LAN
Inc. (“Wi-LAN”)
offering
licenses of various Wi-LAN patents and contending that products complying with
802.11 and 802.16 standards are covered by certain patents allegedly owned
by
Wi-LAN. The Company, in consultation with its patent counsel, has been reviewing
Wi-LAN's allegations and has had extensive correspondence with Wi-LAN regarding
those allegations. We continue to believe that we do not require a license
from
Wi-LAN, however, Wi-LAN continues to threaten the Company with litigation unless
it negotiates a license with Wi-LAN with respect to the patents in question.
There can be no assurance as to the ultimate outcome of this
matter.
Except
as
set forth above, 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.
NOTE
5 - STOCK COMPENSATION
At
September 28, 2008, we had three stock option plans as well as the 2004 Omnibus
Equity Compensation Plan and the 2000 Employee Stock Purchase Plan (the “ESPP”).
Awards under the 2004 Omnibus Equity Compensation Plan may be made to
participants in the form of Incentive Stock Options, Nonqualified Stock Options,
Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Awards,
Performance Shares, Other Stock-Based Awards and others forms of equity based
compensation as may be provided and are permissible under this Plan and the
law.
Employee stock options granted under all of the plans generally vest over a
four-year period and expire on the tenth anniversary of their issuance. All
options granted under the stock option plans had an exercise price equal to
the
market value of the underlying common stock on the date of grant. Restricted
stock is common stock that is subject to a risk of forfeiture or other
restrictions that will lapse upon satisfaction of specified performance
conditions and/or the passage of time. Awards of restricted stock that vest
only
by the passage of time will generally fully vest after four years from the
date
of grant. At September 28, 2008, the Company had reserved a total of 11,930,242
shares of its common stock for issuance under the above plans.
Under
our
ESPP, eligible employees may purchase shares of common stock through payroll
deductions. 661,494 shares were issued during the nine months ended September
28, 2008.
The
following table summarizes share-based compensation expense under SFAS No.
123
(revised 2004), “Share-Based Payment” (“SFAS 123(R)”) for the three and nine
months ended September 28, 2008 and September 30, 2007, which was allocated
as
follows (in thousands):
|
|
Three
Months
Ended
September
28, 2008
|
|
Three
Months
Ended
September
30, 2007
|
|
Nine Months
Ended
September
28, 2008
|
|
Nine Months
Ended
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
196
|
|
$
|
277
|
|
$
|
681
|
|
$
|
601
|
|
Sales
and marketing
|
|
|
134
|
|
|
152
|
|
|
413
|
|
|
548
|
|
General
and administrative
|
|
|
278
|
|
|
179
|
|
|
834
|
|
|
694
|
|
Stock-based
compensation expense included in operating expense
|
|
|
608
|
|
|
608
|
|
|
1,928
|
|
|
1,843
|
|
Cost
of sales
|
|
|
21
|
|
|
16
|
|
|
75
|
|
|
33
|
|
Total
stock-based compensation
|
|
$
|
629
|
|
$
|
624
|
|
$
|
2,003
|
|
$
|
1,876
|
|
SFAS
123(R) requires companies to estimate the fair value of share-based awards
on
the date of grant using an option-pricing model. The value of the portion of
the
award that is ultimately expected to vest is recognized as an expense in our
consolidated statement of operations over the requisite service periods.
Compensation expense for all share-based awards is recognized using the
straight-line single-option method. Because share-based compensation expense
is
based on awards that are ultimately expected to vest, share-based compensation
expense has been reduced to account for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
To
calculate option-based compensation under SFAS 123(R), we used the Black-Scholes
option-pricing model. Our determination of fair value of option-based awards
on
the date of grant using the Black-Scholes model is affected by our stock price
as well as assumptions regarding a number of subjective variables. These
variables include, but are not limited to our expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors.
Fair
Value and Assumptions Used to Calculate Fair Value under SFAS
123(R)
There
were no restricted stock shares granted during the first nine months of 2008.
The weighted average fair value of each restricted stock share granted under
our
equity compensation plans for the first nine months of fiscal 2007 was $4.69.
The fair value of each restricted stock award is estimated on the date of grant
using the intrinsic value method.
The
weighted average fair value of each option granted during the first nine months
of 2008 and the first nine months of 2007 was $0.55 and $2.64, respectively.
The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model, using the following weighted average
assumptions:
|
|
Nine Months Ended
|
|
|
|
September 28,
2008
|
|
September 30,
2007
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
82
|
%
|
|
80
|
%
|
Risk-free
interest rate
|
|
|
3.12
|
%
|
|
4.59
|
%
|
Expected
life (years)
|
|
|
5
|
|
|
5
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Assumptions
for Option-Based Awards under SFAS 123(R)
The
expected volatility is determined based on historical price changes of our
common stock over a period of time which approximates the expected option
term.
The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the term of our stock options.
The
expected term of options is estimated based on our historical data regarding
exercise behavior.
The
dividend yield assumption is based on our history and expectation of no dividend
payouts.
As
share-based compensation expense recognized in the consolidated statement of
operations is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. Forfeitures were estimated based on our historical
experience.
NOTE
6 - NET LOSS PER SHARE
Net
loss
attributable to common stockholders per share is computed using the weighted
average number of shares of common stock outstanding. Shares associated with
stock options and common stock to be issued on the conversion of Series B
Preferred Stock are not included in the calculation of diluted net loss
attributable to common stockholders per share as they are
anti-dilutive.
The
following table sets forth the computation of basic and diluted net loss per
share for the periods indicated.
|
|
Quarter End
|
|
Year-to-Date
|
|
|
|
September
28,
2008
|
|
September
30,
2007
|
|
September
28, 2008
|
|
September
30, 2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,754
|
)
|
$
|
(9,907
|
)
|
$
|
(26,626
|
)
|
$
|
(26,711
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic and diluted
|
|
|
59,030,071
|
|
|
41,905,579
|
|
|
58,770,836
|
|
|
41,084,881
|
|
Net
loss per share- basic and diluted
|
|
$
|
(0.13
|
)
|
$
|
(0.24
|
)
|
$
|
(0.45
|
)
|
$
|
(0.65
|
)
|
There
were 8,357,734 stock options outstanding at September 28, 2008 and 5,463,565
stock options outstanding at September 30, 2007 that have been excluded from
the
computation of diluted net loss per share as their effect was anti-dilutive.
If
the Company had reported net income, the calculation of these per share amounts
would have included the dilutive effect of these common stock equivalents using
the treasury stock method for stock options. There were 200,690 shares of
convertible preferred stock at September 28, 2008 and September 30, 2007,
respectively, that were also excluded from the computation of diluted net loss
per share as their effect was anti-dilutive. The 200,690 shares of convertible
preferred stock would be convertible into 21,630,856 common shares as of
September 28, 2008 and September 30, 2007, respectively. There were 87,637
and
109,940 non-vested shares of restricted stock at September 28, 2008 and
September 30, 2007, respectively, that were excluded from the computation of
diluted net loss per share as their effect was anti-dilutive.
NOTE
7 - GEOGRAPHIC INFORMATION
As
a
developer and supplier of broadband wireless equipment, 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. In 2008, the majority
of the Company’s revenue was generated from products manufactured in the United
Kingdom, Mexico and Israel, with additional revenue generated from sales of
original equipment manufacturers’ products.
An
analysis of revenue by location of the customer is given below:
|
|
Quarter
End
|
|
Year-to-Date
|
|
|
|
September
28, 2008
|
|
September
30, 2007
|
|
September
28, 2008
|
|
September
30, 2007
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
USA
and Canada
|
|
$
|
3,996
|
|
$
|
1,954
|
|
$
|
9,343
|
|
$
|
6,890
|
|
Asia
|
|
|
2,564
|
|
|
1,892
|
|
|
6,184
|
|
|
16,035
|
|
Europe
|
|
|
4,775
|
|
|
7,439
|
|
|
13,283
|
|
|
23,046
|
|
Africa
and the Middle East
|
|
|
1,908
|
|
|
3,050
|
|
|
11,567
|
|
|
4,177
|
|
Latin
America and Caribbean
|
|
|
4,546
|
|
|
8,135
|
|
|
15,962
|
|
|
21,055
|
|
|
|
$
|
17,789
|
|
$
|
22,470
|
|
$
|
56,339
|
|
$
|
71,203
|
|
NOTE
8 – AMENDMENT TO LOAN AND SECURITY AGREEMENT
On
August
21, 2008, we and our wholly-owned subsidiary, Airspan Communications Limited,
entered into a Second Amendment to our August 1, 2006 Loan and Security
Agreement, as amended August 7, 2007 (the “Loan and Security Agreement”) with
SVB, with respect to a revolving credit line. For the term of the credit line,
which expires on December 31, 2009, we may, subject to certain adjustments,
borrow up to the lesser of (i) (a) 80% of eligible accounts receivable plus
(as
long as the Company’s worldwide cash and investments exceeds $20 million and the
Company’s cash and investments maintained at SVB and its affiliates exceeds $15
million) (b) the lesser of (1) 60% of eligible inventory and (2) $8 million
(the
“Borrowing Base”) and (ii) $20 million. As of September 28, 2008, the Company
had $2.2 million of unused available credit. We are currently using the credit
line and we expect to continue to use it for the remainder of 2008. Although
we
believe the credit facility will increase our financial resources and financial
flexibility, our use of the credit facility does present certain risks. Our
ability to borrow under the credit facility is a function of, among other
things, our base of eligible accounts receivable and inventory and the rate
at
which advances are made against eligible receivables and inventory (the “Advance
Rate”). If the amount or quality of our accounts receivable or inventory
deteriorates or the Advance Rate or eligibility criteria are adjusted adversely
by SVB, our ability to borrow under the credit facility will be directly,
negatively affected. If there is an adverse adjustment in the Borrowing Base
at
a time when we are unable to, within three business days, repay SVB the amount
by which the Borrowing Base has been decreased, we will likely be in default
under the Loan and Security Agreement. In addition, the credit facility requires
us to satisfy certain financial covenants, including the maintenance of tangible
net worth. As of September 28, 2008, the tangible net worth requirement was
$30.0 million and the Company’s actual tangible net worth was $37.9 million. The
Company was in compliance with all of the financial covenants at September
28,
2008. There is no assurance the Company will be able to meet this covenant
in
future quarters as required by the Loan and Security Agreement. In the event
the
Company is unable to meet this test in the future, we would plan to seek an
amendment or waiver of this covenant. There can be no assurance that any such
waiver or amendment would be granted. As a result, we may be required to repay
any or all of our existing borrowings and we cannot provide any assurance that
we will be able to borrow under the Loan and Security Agreement at a time when
we most need money to fund working capital or other needs and prohibit us from
paying dividends on our capital stock. The credit facility also contains various
provisions that restrict our use of cash and operating flexibility. These
provisions could have important consequences for us, including (i) causing
us to
use a portion of our cash flow from operations for debt repayment and/or service
rather than other perceived needs, (ii) precluding us from incurring additional
debt financing for future working capital or capital expenditures and (iii)
impacting our ability to take advantage of significant, perceived business
opportunities, such as acquisition opportunities or to react to market
conditions. Our failure to meet financial and other covenants could give rise
to
a default under the Loan and Security Agreement. In the event of an uncured
default, the Loan and Security Agreement provides that all amounts owed to
SVB
are immediately due and payable and that SVB has the right to enforce its
security interest in our assets. The Loan and Security Agreement is secured
by
collateral, including all of our rights and interests in substantially all
of
our personal property, including accounts receivable, inventory, equipment,
general intangibles, intellectual property, books and records, contract rights
and proceeds of the above items. At September 28, 2008, $12.5 million of
indebtedness was outstanding under the Loan and Security Agreement. Advances
under the Loan and Security Agreement bear interest at SVB's prime rate plus
a
percentage ranging from 0.0% to 1.75%, depending on certain financial and
collateral tests. The monthly interest is calculated based on the higher amount
of outstanding borrowings or $10.0 million. We have issued $3.0 million of
letters of credit under the facility, which were still outstanding at September
28, 2008.
NOTE
9 - RECENT ACCOUNTING PRONOUNCEMENTS
Adopted
Accounting Standards
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements”, or SFAS 157, which defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in
an
orderly transaction between market participants at the measurement date.
SFAS 157 establishes a three-level fair value hierarchy that prioritizes
the inputs used to measure fair value. This hierarchy requires entities to
maximize the use of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value are as
follows:
Level
1 –
quoted prices in active markets for identical assets or liabilities
Level
2 –
inputs other than Level 1 quoted prices that are directly or indirectly
observable
Level
3 –
significant unobservable inputs that are supported by little or no market
activity
The
Company’s adoption of SFAS 157 did not have a material impact on its
consolidated financial statements. The Company has segregated all financial
assets and liabilities at fair value on a recurring basis into the most
appropriate level within the fair value hierarchy based on the inputs used
to
determine the fair value at the measurement date in the table below. Financial
Accounting Standards Board (“FASB”) Staff Position FSP FAS 157-2—Effective Date
of FASB Statement No. 157 (“FSP FAS 157-2”) delayed the effective date of SFAS
157 for all nonfinancial assets and liabilities until January 1, 2009,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis.
We
are
evaluating the impact that
FSP
FAS
157-2
will
have on our consolidated financial statements.
In
October 2008, the FASB issued Staff Position No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active
(FSP
157-3). FSP 157-3 clarifies the application of SFAS 157 to financial assets
for
which an active market does not exist. Specifically, FSP 157-3 addresses the
following SFAS 157 application issues: (1) how a reporting entity’s own
assumptions should be considered in measuring fair value when observable inputs
do not exist; (2) how observable inputs in inactive markets should be considered
when measuring fair value; and (3) how the use of market quotes should be
considered when assessing the relevance of inputs available to measure fair
value. FSP 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance
with
SFAS 157 and was effective upon issuance. We do not expect that FSP 157-3 will
have a material impact on our consolidated financial statements.
As
of
September 28, 2008, financial assets and liabilities subject to fair value
measurements were as follows (in thousands):
|
|
As of September
28, 2008
|
|
|
|
Level 1
(a)
|
|
Level 2
(b)
|
|
Level 3
|
|
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
10,498
|
|
$
|
649
|
|
$
|
-
|
|
$
|
11,147
|
|
Available
for sale investments
|
|
$
|
-
|
|
$
|
9,007
|
|
$
|
-
|
|
$
|
9,007
|
|
(a) These
consist of money market funds that are priced at the market price.
(b) These
consist of commercial paper with short maturities and infrequent secondary
market trades and are priced via mathematical calculations; in the event that
a
transaction is observed on the same security, the accretion schedule is
revised.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value
Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 allows entities the option to measure
eligible financial instruments at fair value as of specified dates. Such
election, which may be applied on an instrument-by-instrument basis, is
typically irrevocable once elected. Upon adoption, we did not elect the fair
value option for any items within the scope of SFAS 159 and, therefore, the
adoption of SFAS 159 did not have an impact on our consolidated financial
statements.
In
June
2007, the FASB ratified Emerging Issues Task Force (“EITF”) 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires
nonrefundable advance payments for research and development goods or services
to
be deferred and capitalized. The adoption of EITF 07-3 did not have a material
effect on our consolidated financial statements.
In
October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP
157-3 clarifies the application of SFAS 157 in a market that is not active
and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 was effective for us on September 28, 2008 for all financial
assets and liabilities recognized or disclosed at fair value in our Condensed
Consolidated Financial Statements on a recurring basis (at least annually).
The
adoption of FSP 157-3 did not have a material impact on our consolidated
financial statements.
Future
Adoption of Accounting Standards
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R requires the acquiring entity in a
business combination to recognize the full fair value of assets acquired and
liabilities assumed in the transaction whether full or partial acquisition,
establishes the acquisition-date fair value as the measurement objective for
all
assets acquired and liabilities assumed, requires expensing of most transaction
and restructuring costs, and requires the acquirer to disclose all information
needed to evaluate and understand the nature and financial effect of the
business combination. SFAS 141R applies to all transactions or other events
in
which an entity obtains control of one or more businesses, including
combinations achieved without transfer of consideration, for example, by
contract alone or through the lapse of minority veto rights. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on
or
after the beginning of the first fiscal year beginning after December 15, 2008.
Management expects that the adoption of SFAS 141R could have a material effect
on our consolidated financial statements if there are any acquisitions after
January 1, 2009.
In
December 2007, EITF 07-01, “Accounting for Collaborative Arrangements
Related to the Development and Commercialization of Intellectual Property”
(“
EITF
07-01”)
was issued.
EITF
07-01
prescribes the accounting for collaborations. It requires certain transactions
between collaborators to be recorded in the income statement on either a gross
or net basis within expenses when certain characteristics exist in the
collaboration relationship.
Based
on
the nature of the arrangement, payments to or from collaborators would be
evaluated and the terms of the arrangement, the nature of the entity's business
and whether those payments are within the scope of other accounting literature
would be presented. Companies are also required to disclose the nature and
purpose of collaborative arrangements along with the accounting policies and
the
classification and amounts of significant financial-statement amounts related
to
the arrangements. EITF 07-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, and is to be applied retrospectively to all periods
presented for all collaborative arrangements existing as of the effective date.
We are in the process of reviewing whether the adoption of
EITF
07-01 will have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an
Amendment
of ARB No. 51”
(“SFAS
160”)
.
SFAS
160 will change the accounting and reporting for minority interests, which
will
be recharacterized as noncontrolling interests and classified as a separate
component of equity rather than as a liability. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008.
Management
expects that the adoption of SFAS 160 will not have a material effect on our
consolidated financial statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS
161”). SFAS 161 amends and expands the disclosure requirements of
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) to provide a better understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items
are
accounted for, and their effect on an entity’s financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years
beginning after November 15, 2008. We do not expect that the adoption of SFAS
161 will have a material impact on our consolidated financial
statements.
In
April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine
the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008.
We
do not
expect that
FSP
142-3
will
have
a material impact on our consolidated financial statements.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and provides entities with a framework for
selecting the principles used in preparation of financial statements that are
presented in conformity with generally accepted accounting principles (“GAAP”).
The current GAAP hierarchy has been criticized because it is directed to the
auditor rather than the entity, it is complex, and it ranks FASB Statements
of
Financial Accounting Concepts, which are subject to the same level of due
process as FASB Statements of Financial Accounting Standards, below industry
practices that are widely recognized as generally accepted but that are not
subject to due process. The FASB believes the GAAP hierarchy should be directed
to entities because it is the entity (not its auditors) that is responsible
for
selecting accounting principles for financial statements that are presented
in
conformity with GAAP. The adoption of SFAS 162 is not expected to have a
material impact on our consolidated financial statements.
NOTE
10 – SUBSEQUENT EVENTS
On
November 5, 2008, the Company filed a definitive proxy statement with the
Securities and Exchange Commission. The definitive proxy statement contains
proposals (i) to approve an amendment to the Company’s Second Amended and
Restated Articles of Incorporation, as amended, effecting a reverse stock split
of the Company’s common stock at a ratio to be determined by the Company’s Board
of Directors within a range of one-for-five shares to one-for-fifteen shares,
(ii) to approve an amendment and restatement of the ESPP to increase the number
of shares of common stock reserved for issuance thereunder and to allow for
nine
additional separate offering periods, the final offering period to commence
on
August 16, 2017 and terminate on August 15, 2018, and (iii) to approve a stock
option exchange program under which eligible employees (including executive
officers but excluding non-employee members of the Company’s Board of Directors)
will be offered the opportunity to exchange their eligible options to purchase
shares of common stock outstanding under the Company’s equity compensation plans
for a smaller number of new options at a lower exercise price. The Company
currently plans to hold a special meeting of shareholders to vote on these
proposals on December 16, 2008.
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, 2007, as well as the
financial statements and notes thereto. Except for historical matters contained
herein, statements made in this quarterly report on Form 10-Q are
forward-looking and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Without limiting the
generality of the foregoing, words such as “may”, “will”, “to”, “plan”,
“expect”, “believe”, “anticipate”, “intend”, “could”, “would”, “estimate”, or
“continue” or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. Investors and others are
cautioned that a variety of factors, including certain risks, may affect our
business and cause actual results to differ materially from those set forth
in
the forward-looking statements. These risk factors include, without limitation,
(i) risks to our ability to develop and sell WiMAX certified mobile
products in a timely fashion; (ii) a slowdown of expenditures by
communication service providers and failure of the WiMAX market to develop
as
anticipated; (iii) increased competition from alternative communication
systems; (iv) a higher than anticipated rate of decline in our legacy
business and/or a slower than anticipated rate of growth in the WiMAX business;
(v) encroachment of large telecommunications carriers and equipment
suppliers on the WiMAX market; (vi) the failure of our existing or
prospective customers to purchase products as projected; (vii) our
inability to successfully implement cost reduction or containment programs;
(viii) our inability to retain our key customers; (ix) possible
infringement of third party technologies which may result in lawsuits that
could
be costly to defend and prohibit us from selling our products; (x) risks to
our ability to compensate for declining sales of obsolescent products with
increased sales of new products; and (xi) disruptions to our operations in
Israel, including the absence of employees, due to required military service,
caused by political and military tensions in the Middle East. The Company is
also subject to the risks and uncertainties described in its filings with the
Securities and Exchange Commission, including those set forth in its Annual
Report on Form 10-K for the year ended December 31, 2007, its quarterly report
on Form 10-Q for the quarter ended March 30, 2008 and under Item 1A of Part
II
in this quarterly report on Form 10-Q for the quarter ended September 28,
2008.
Overview
We
are a
global supplier of broadband wireless equipment supporting the WiMAX protocol
standard, which provides a wide area telecommunication access network to connect
end users to telecom backbone networks. Our primary target customers are
communications service providers and other network operators that deploy WiMAX
networks in licensed and unlicensed (license exempt) spectrums
worldwide.
Historically,
our business addressed communications service providers that used fixed,
non-WiMAX wireless infrastructure to deliver services in those parts of their
service areas that are difficult or not cost effective to reach using copper
or
fiber. We now offer a comprehensive range of WiMAX solutions to support these
traditional fixed wireless applications as well as the broader market for the
mobile applications that WiMAX is expected to enable. We are leveraging many
years of experience in complex radio systems design to provide innovative and
cost effective products for all types of WiMAX users.
We
have
transitioned our company over the last three years to focus on WiMAX product
development and sales and marketing. As a result, a majority of our resources
are dedicated to WiMAX-based products and we are dependent on the acceptance
of
WiMAX solutions in the marketplace.
Since
1998 we have evolved from being the supplier of a single product line of
broadband wireless access (“BWA”) equipment that utilized our proprietary
technology to a supplier of a highly diversified suite of BWA equipment,
including certain equipment that has been developed to conform with WiMAX and
the WiFi standards. The diversification of our product portfolio has been the
product of both internal research and development and targeted acquisitions.
As
a
result of the migration of telecommunications to platforms that operate using
the Internet protocol, we expect that our BWA equipment which is designed to
handle communications over the Internet will become increasingly important
to
us. Due to the projected popularity of technologies such as WiMAX and WiFi,
we
also anticipate that our WiMAX and WiFi products will become increasingly
important to us. Our WiMAX and WiFi products are designed to be inter-operable
with any other equipment that is WiMAX or WiFi Certified,
respectively.
Accordingly,
these relatively new products face certain opportunities and risks that our
proprietary products did not encounter.
The
market for BWA equipment has been characterized by rapid technological
developments and evolving industry standards. Our future success will therefore
depend on our ability to adapt to these new standards and to successfully
introduce new technologies that meet customer preferences. We anticipate that
we
will need to continue to devote considerable resources to research and
development to maintain and/or improve upon our competitive position.
Since
July 1, 2003, we have acquired three suppliers of BWA equipment. Depending
on
the opportunities available, we may continue to expand our business through,
among other things, acquisitions of other businesses and technologies and joint
ventures. Accordingly, we anticipate our future results of operation and
financial condition may be directly or indirectly materially affected by our
acquisition and joint venture efforts. Acquisitions are inherently risky and
our
future growth may depend on our ability to successfully acquire, operate and
integrate new businesses into our company.
Critical
Accounting Policies and Estimates
Our
Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
We review the accounting policies used in reporting our financial results on
a
regular basis. The preparation of these financial statements requires us to
make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our process used to develop
estimates. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable for making judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates due to actual
outcomes being different from those on which we based our assumptions.
Our
significant accounting policies were described in Note 1 to our audited
Consolidated Financial Statements and our critical accounting policies were
included in the Management’s Discussion and Analysis of Financial Condition and
Results of Operations section in our Annual Report on Form 10-K for the year
ended December 31, 2007. With the exception of the items discussed in Note
9 in the accompanying Condensed Consolidated Financial Statements, there have
been no significant changes to these policies and no recent accounting
pronouncements or changes in accounting pronouncements during the nine months
ended September 28, 2008.
Comparison
of the Quarter Ended September 28, 2008 to the Quarter Ended September 30,
2007
Revenue
Revenue
totaled $17.8 million for the quarter ended September 28, 2008, representing
a
21% decrease from the $22.5 million reported for the quarter ended September
30,
2007. The decrease compared to the third quarter of 2007 was attributable to
a
25% reduction in WiMAX products and an 11% reduction in non-WiMAX revenues.
The
decrease in WiMAX revenue was due to a smaller number of customer shipments
above $2 million made in the current quarter compared to the same period of
2007. In addition, certain customers in Africa were not able to complete their
funding of letters of credit due to the ongoing credit crisis.
Non-WiMAX revenues decreased to $5.7 million in the quarter ending
September 28, 2008 from $6.4 million in the quarter ending September 30, 2007
as
a result of the ongoing decline of our legacy business.
Geographically,
in the third quarter of 2008, approximately 27% of our revenue was derived
from
customers in Europe, 26% from customers in Mexico, Latin America and the
Caribbean, 22% from customers in the United States and Canada, 14% from
customers in Asia and 11% from customers in Africa and the Middle
East.
During
the third quarter of 2008, more than 100 customers purchased WiMAX equipment
from us compared with 70 customers during the third quarter of
2007.
Cost
of
Revenue
Cost
of
revenue decreased 16% to $12.3 million in the quarter ended September 28, 2008
from $14.7 million in the quarter ended September 30, 2007 primarily due to
the
decrease in revenue in the third quarter of 2008. The gross profit for the
third
quarter of 2008 was $5.5 million (31% of revenue) compared to a gross profit
of
$7.8 million (35% of revenue) for the third quarter of 2007. The lower margin
percentage in the third quarter of 2008 reflects the higher percentage of period
related costs on lower revenue as well as a change in product mix.
Research
and Development Expenses
Research
and development expenses decreased 11% to $5.5 million in the quarter ended
September 28, 2008 from $6.2 million in the quarter ended September 30, 2007.
The decrease year over year is primarily due to reduced personnel and
subcontract development costs.
Sales
and
Marketing Expenses
Sales
and
marketing expenses increased 5% to $3.7 million in the quarter ended September
28, 2008 from $3.5 million in the quarter ended September 30, 2007. The increase
as compared to the third quarter of 2007 is primarily attributable to additional
headcount and trade shows.
Bad
Debt
Provision
In
the
third quarter of 2008, we recorded bad debt provisions of $0.5 million relating
to customer accounts for which management has determined that full recovery
is
unlikely. We recorded bad debt provisions of $0.6 million in the third quarter
of 2007.
General
and Administrative Expenses
General
and administrative expenses increased 9% to $3.5 million in the quarter ended
September 28, 2008 from $3.3 million in the quarter ended September 30, 2007.
The increase from the third quarter of 2007 was primarily attributable to higher
stock compensation expense and professional fees, offset by lower headcount
related costs in the third quarter of 2008.
Amortization
of Intangibles
We
recorded amortization of intangibles expense of $0.2 million in the third
quarter of 2008 and for the third quarter of 2007. The amortization expense
arises primarily as a result of our acquisition of intangible assets in
connection with the ArelNet and Radionet acquisitions in June and November
2005,
respectively.
Restructuring
In
the
third quarter of 2007, we did not record a restructuring charge. In the second
quarter of 2008, we recorded a restructuring charge of $0.6 million to reflect
the restructuring program we commenced in May 2008, the goal of which was to
reduce operating expenses by approximately 15% compared to the level of
operating expenses recorded in the first quarter of 2008. The cost reduction
was
accomplished primarily as a result of a reduction in worldwide headcount. As
of
the end of the third quarter of 2008, we had reduced headcount by approximately
13% compared to levels at the end of the first quarter of 2008. The majority
of
the headcount reduction was completed by the end of the third quarter. We
recorded a restructuring charge of approximately $0.1 million in the third
quarter of 2008. The restructuring resulted in a direct cash outlay primarily
in
the second and third quarters of 2008. We achieved cost savings of approximately
$2 million relative to the cost structure that existed in the first quarter
of
2008. Despite our efforts to prepare reliable projections, we recognize that
our
forecasts may prove to be imprecise due to unforeseen events, including
unanticipated expenses or difficulties associated with requiring retained staff
members to assume additional responsibilities and/or reorganizing our operations
to more cost efficiently produce a given level of product revenue. See also
“NOTE 3 - ACCRUED RESTRUCTURING CHARGES” to our condensed consolidated financial
statements contained in this quarterly report on Form 10-Q for additional
information regarding the restructuring.
Interest
Income, Net
At
September 28, 2008, the outstanding principal and accrued interest payable
on
the Tekes Loans was $2.0 million. We also had outstanding borrowings under
the
bank line of credit for $12.5 million after drawing down $5.0 million in the
third quarter of 2008. In the third quarter of 2008 and the third quarter of
2007, we incurred interest expense of $0.2 million on these loans. We had
interest income of $0.2 million in both the third quarter of 2008 and the third
quarter of 2007.
Other
Income (Expense), Net
Other
income (expense), net decreased to an expense of $0.4 million in the third
quarter of 2008 from income of $0.3 million in the third quarter of 2007,
primarily due to foreign exchange differences on cash balances.
Income
Tax Credits (Charge), Net
In
the
third quarter of 2008, we recorded a net tax credit of $0.5 million, primarily
relating to research and development tax credits in the United Kingdom, for
which we became eligible starting in August 2008. The net tax credit is based
on
the Company’s effective tax rate, which includes the effects of the tax credits.
Such tax credit reflects an estimate of eligible research and development costs
to be incurred through the fourth quarter of 2008.
The
Company recorded a tax charge of $24 thousand in the third quarter of 2007.
The
Company was not eligible for the research and development tax credits in the
UK
in 2007.
Deemed
Dividend Upon Issuance of Stock
In
the
third quarter of 2007, we recognized a non-cash charge of $4.1 million for
a
deemed dividend to our Series B preferred stockholders. We did not recognize
a
similar charge in the third quarter of 2008.
On
September 26, 2007, we issued 15,000,000 shares of common stock in a public
offering. As the sale price of these shares to the underwriters on a per share
basis was less than $2.90 per share, there was an anti-dilution adjustment
to
the number of shares of common stock issuable on conversion of the Series B
Preferred Stock. As a result of the anti-dilution adjustment, we recorded a
deemed dividend of $4.1 million, calculated by multiplying the number of
additional shares to be received on conversion (1.38 million shares) by $2.99,
the closing price of the Company’s common stock on The NASDAQ Global Market on
September 25, 2007, the date of the closing of the Private Placement.
Net
Loss
Attributable to Common Stockholders
For
the
reasons described above, we incurred a net loss of $7.8 million, or $(0.13)
per
share, in the quarter ended September 28, 2008, compared to a net loss of $9.9
million, or $(0.24) per share, for the quarter ended September 30, 2007.
Comparison
of the Nine Months Ended September 28, 2008 to the Nine Months Ended September
30, 2007
Revenue
Revenue
totaled $56.3 million for the nine months ended September 28, 2008, representing
a 21% decrease from the $71.2 million reported for the nine months ended
September 30, 2007. Non-WiMAX revenues decreased to $18.2 million in the
nine months ending September 28, 2008 from $26.4 million in the nine months
ending September 30, 2007. WiMAX revenues for the first nine months of 2008
were
$38.1 million compared to $44.8 million in the first nine months of 2007.
Included within the first nine months WiMAX revenue for 2007 of $44.8 million
was $11.5 million of revenues related to Yozan, which is no longer a significant
customer of the Company. Revenues from Yozan were only $29 thousand in the
first
nine months of 2008.
Cost
of
Revenue
Cost
of
revenue decreased 27% to $38.9 million in the nine months ended September 28,
2008 from $53.3 million in the nine months ended September 30, 2007 primarily
due to decreased sales. The cost of revenue for the first nine months of 2007
included a charge of $6.3 million for inventory provisions on non-WiMAX
products. The gross profit for the first nine months of 2008 was $17.5 million
(31% of revenue) compared to a gross profit of $17.9 million (25% of revenue)
for the first nine months of 2007. The increase in gross margin percentage
in
the first nine months of 2008 as compared to the first nine months of 2007
is
attributable to the impact of more revenue coming from products with higher
product margins as well as the charge for inventory provisions in the first
nine
months of 2007.
Research
and Development Expenses
Research
and development expenses increased 9% to $19.2 million in the nine months ended
September 28, 2008 from $17.6 million in the nine months ended September 30,
2007. The increase year over year is primarily due to increased personnel costs
as we were investing more heavily in the development of WiMAX products earlier
in 2008.
Sales
and
Marketing Expenses
Sales
and
marketing expenses increased 17% to $12.2 million in the nine months ended
September 28, 2008 from $10.4 million in the nine months ended September 30,
2007. The increase as compared to the first nine months of 2007 is primarily
attributable to additional headcount in 2008.
Bad
Debt
Provision
In
the
first nine months of 2008, we recorded bad debt provisions of $1.0 million
relating to customer accounts for which management has determined that full
recovery is unlikely. We recorded bad debt provisions of $1.6 million in the
first nine months of 2007.
General
and Administrative Expenses
General
and administrative expenses decreased 3% to $11.1 million in the first nine
months ended September 28, 2008 from $11.5 million in the nine months ended
September 30, 2007. The decrease from the first nine months of 2007 was
primarily attributable to lower headcount related costs in the first nine months
of 2008.
Amortization
of Intangibles
We
recorded amortization of intangibles expense of $0.7 million in the first nine
months of 2008 and for the first nine months of 2007. The amortization expense
arises primarily as a result of our acquisition of intangible assets in
connection with the ArelNet and Radionet acquisitions in June and November
2005,
respectively.
Restructuring
In
the
first nine months of 2007, we recorded a restructuring credit of $0.5 million.
In the first nine months of 2008, we recorded a restructuring charge of $0.7
million to reflect the restructuring program we commenced in May 2008, the
goal
of which was to reduce operating expenses by approximately 15% compared to
the
level of operating expenses recorded in the first quarter of 2008. The cost
reduction was accomplished primarily as a result of a reduction in worldwide
headcount. As of the end of the third quarter of 2008, we had reduced headcount
by approximately 13% compared to levels at the end of the first quarter of
2008.
The majority of the headcount reduction was completed by the end of the third
quarter of 2008. The restructuring resulted in a direct cash outlay primarily
in
the second and third quarters of 2008. We achieved annual cost savings of
approximately $2 million relative to the cost structure that existed in the
first quarter of 2008. Despite our efforts to prepare reliable projections,
we
recognize that our forecasts may prove to be imprecise due to unforeseen events,
including unanticipated expenses or difficulties associated with reducing our
workforce, requiring retained staff members to assume additional
responsibilities and/or reorganizing our operations to more cost efficiently
produce a given level of product revenue. See also “NOTE 3 - ACCRUED
RESTRUCTURING CHARGES” to our condensed consolidated financial statements
contained in this quarterly report on Form 10-Q for additional information
regarding the restructuring.
Interest
Income, Net
At
September 28, 2008, the outstanding principal and accrued interest payable
on
the Tekes Loans was $2.0 million. We also had outstanding borrowings under
the
bank line of credit for $12.5 million after drawing down $5.0 million in the
third quarter of 2008. In the first nine months of 2008, we incurred interest
expense of $0.4 million on these loans compared to interest expense of $0.2
million in the first nine months of 2007 due to higher amounts outstanding
under
the line of credit.
Interest
income decreased to $0.7 million in the first nine months of 2008 compared
to
$0.8 million in the first nine months of 2007.
Other
Income (Expense), Net
Other
income (expense), net decreased to $45 thousand of expense in the first nine
months of 2008 from $0.3 million in income in the first nine months of 2007,
primarily due to foreign exchange losses in the first nine months of 2008 on
assets in currencies other than the US dollar.
Income
Tax Credits (Charge), Net
In
the
first nine months of 2008, we recorded a net tax credit of $0.5 million,
primarily relating to research and development tax credits in the United
Kingdom, for which we became eligible starting in August 2008. The credit
recorded in the first nine months of 2008 is based on the Company’s effective
tax rate, which includes the effects of the tax credits. Such tax credit
reflects an estimate of eligible research and development costs to be incurred
through the fourth quarter of 2008. The Company recorded a tax charge of $0.1
million in the first nine months of 2007. The Company was not eligible for
the
research and development tax credits in the UK in 2007.
Deemed
Dividend Upon Issuance of Stock
In
the
third quarter of 2007, we recognized a non-cash charge of $4.1 million for
a
deemed dividend to our Series B preferred stockholders. We did not recognize
a
similar charge in the third quarter of 2008.
On
September 26, 2007, we issued 15,000,000 shares of common stock in a public
offering. As the sale price of these shares to the underwriters on a per share
basis was less than $2.90 per share, there was an anti-dilution adjustment
to
the number of shares of common stock issuable on conversion of the Series B
Preferred Stock. As a result of the anti-dilution adjustment, we recorded a
deemed dividend of $4.1 million, calculated by multiplying the number of
additional shares to be received on conversion (1.38 million shares) by $2.99,
the closing price of the Company’s common stock on The NASDAQ Global Market on
September 25, 2007, the date of the closing of the Private Placement.
Net
Loss
Attributable to Common Stockholders
For
the
reasons described above, we incurred a net loss of $26.6 million, or $(0.45)
per
share, in the nine months ended September 28, 2008, compared to a net loss
of
$26.7 million, or $(0.65) per share, for the nine months ended September 30,
2007.
Liquidity
and Capital Resources
As
of
September 28, 2008 we had cash, cash equivalents, short-term investments and
current restricted cash of $31.1 million, as compared to $36.7 million at
December 31, 2007. As of September 28, 2008, this consisted of cash and cash
equivalents totaling $21.9 million, short-term investments totaling $9.0 million
and $0.2 million of restricted cash in current assets. In addition, we had
restricted cash of $1.1 million in other non-current assets. We have no material
capital commitments.
Since
inception, we have financed our operations through private sales of convertible
preferred stock, public offerings of common stock and a secured bank line of
credit.
On
August
21, 2008, we and our wholly-owned subsidiary, Airspan Communications Limited,
entered into a Second Amendment to our August 1, 2006 Loan and Security
Agreement, as amended August 7, 2007 (the “Loan and Security Agreement”) with
SVB, with respect to a revolving credit line. For the term of the credit line,
which expires on December 31, 2009, we may, subject to certain adjustments,
borrow up to the lesser of (i) (a) 80% of eligible accounts receivable plus
(as
long as the Company’s worldwide cash and investments exceeds $20 million and the
Company’s cash and investments maintained at SVB and its affiliates exceeds $15
million) (b) the lesser of (1) 60% of eligible inventory and (2) $8 million
(the
“Borrowing Base”) and (ii) $20 million. As of September 28, 2008, the Company
had $2.2 million of unused available credit. We are currently using the credit
line and we expect to continue to use it for the remainder of 2008. Although
we
believe the credit facility will increase our financial resources and financial
flexibility, our use of the credit facility does present certain risks. Our
ability to borrow under the credit facility is a function of, among other
things, our base of eligible accounts receivable and inventory and the rate
at
which advances are made against eligible receivables and inventory (the “Advance
Rate”). If the amount or quality of our accounts receivable or inventory
deteriorates or the Advance Rate or eligibility criteria are adjusted adversely
by SVB, our ability to borrow under the credit facility will be directly,
negatively affected. If there is an adverse adjustment in the Borrowing Base
at
a time when we are unable to, within three business days, repay SVB the amount
by which the Borrowing Base has been decreased, we will likely be in default
under the Loan and Security Agreement. In addition, the credit facility requires
us to satisfy certain financial covenants, including the maintenance of tangible
net worth. As of September 28, 2008, the tangible net worth requirement was
$30.0 million and the Company’s actual tangible net worth was $37.9 million. The
Company was in compliance with all of the financial covenants at September
28,
2008. There is no assurance the Company will be able to meet this covenant
in
future quarters as required by the Loan and Security Agreement. In the event
the
Company is unable to meet this test in the future, we would plan to seek an
amendment or waiver of this covenant. There can be no assurance that any such
waiver or amendment would be granted. As a result, we may be required to repay
any or all of our existing borrowings and we cannot provide any assurance that
we will be able to borrow under the Loan and Security Agreement at a time when
we most need money to fund working capital or other needs and prohibit us from
paying dividends on our capital stock. The credit facility also contains various
provisions that restrict our use of cash and operating flexibility. These
provisions could have important consequences for us, including (i) causing
us to
use a portion of our cash flow from operations for debt repayment and/or service
rather than other perceived needs, (ii) precluding us from incurring additional
debt financing for future working capital or capital expenditures and (iii)
impacting our ability to take advantage of significant, perceived business
opportunities, such as acquisition opportunities or to react to market
conditions. Our failure to meet financial and other covenants could give rise
to
a default under the Loan and Security Agreement. In the event of an uncured
default, the Loan and Security Agreement provides that all amounts owed to
SVB
are immediately due and payable and that SVB has the right to enforce its
security interest in our assets. The Loan and Security Agreement is secured
by
collateral, including all of our rights and interests in substantially all
of
our personal property, including accounts receivable, inventory, equipment,
general intangibles, intellectual property, books and records, contract rights
and proceeds of the above items. At September 28, 2008, $12.5 million of
indebtedness was outstanding under the Loan and Security Agreement. Advances
under the Loan and Security Agreement bear interest at SVB's prime rate plus
a
percentage ranging from 0.0% to 1.75%, depending on certain financial and
collateral tests. The monthly interest is calculated based on the higher amount
of outstanding borrowings or $10.0 million. We have issued $3.0 million of
letters of credit under the facility, which were still outstanding at September
28, 2008.
For
the
nine months ended September 28, 2008, we used $9.2 million of cash for operating
activities, compared with an operating cash outflow of $12.6 million for the
nine months ended September 30, 2007. The operating cash outflow for the first
nine months of 2008 was primarily a result of the:
·
net
loss
of $26.6 million;
·
decrease
of $2.7 million in accounts payable;
·
decrease
of $1.7 million in deferred revenue; and
·
decrease
of $1.6 million in other accrued expenses.
The
cash
outflow was offset by:
·
decrease
of $14.6 million in receivables; and
·
decrease
of $3.6 million in inventory.
Days
sales outstanding were at 76 days at the end of the third quarter of 2008,
up
from 67 days at the end of the second quarter of 2008. The change from the
end
of the second quarter of 2008 to the end of the third quarter of 2008 primarily
reflects the lower revenue level in the most recent period. Inventory turns
were
4.2 for the third quarter of 2008, compared with 4.8 for the second quarter
of
2008. The change in inventory turns is primarily attributable to the lower
cost
of sales in the third quarter.
The
net
cash used in investing activities for the nine months ended September 28, 2008
was $5.0 million. The investing cash outflow for the first nine months of 2008
resulted from $3.5 million of net purchases of investment securities and $1.5
million of fixed asset purchases.
Our
net
cash provided by financing activities for the nine months ended September 28,
2008 was $5.4 million, including $5.0 million drawn down on the line of credit,
$0.3 million from sales of stock under the ESPP plan and $0.1 million from
the
exercise of stock options.
As
of
September 28, 2008, our material commitments consisted of obligations on
operating leases, repayment of principal and interest owed on the Tekes Loans
and purchase commitments to our manufacturing subcontractors. These purchase
commitments totaled $22.7 million at September 28, 2008 and $25.0 million at
September 30, 2007.
We
have
explored and may in the future explore and pursue other perceived opportunities
to acquire wireless access and related businesses. We may seek to acquire such
businesses through a variety of different legal structures and may utilize
cash,
common stock, preferred stock, other securities or some combination thereof
to
finance the acquisition. In connection with such activities, we are subject
to a
variety of risks, a number of which are described further in the Company’s Form
10-K for the fiscal year ended December 31, 2007, in its Form 10-Q for the
quarter ended March 30, 2008 and under Item 1A of Part II in this quarterly
report on Form 10-Q for the quarter ended September 28, 2008. There can be
no
assurance that any efforts we may make to acquire other businesses will be
successful.
We
have
raised equity in the past and may in the future seek to raise additional equity
or debt capital to assist us in financing an acquisition and/or our on-going
business operations or those of any business that we may in the future acquire.
Among other securities, we may seek to sell additional shares of common stock,
or shares of an existing or newly designated class of preferred stock or debt
securities. We have not, as of the date of this report, entered into any
definitive financing arrangements other than those described above. Particularly
in light of extraordinary market conditions, there can be no assurance that
we
will be able to secure equity or debt capital in amounts and on terms acceptable
to us. Although we will seek to secure financing on terms and conditions
favorable to the Company and its existing shareholders, we may seek to raise
capital by issuing securities, which, under certain circumstances, enjoy certain
preferences and/or priorities relative to the common stock or which may result
in material dilution of the interests of our existing
shareholders.
Until
we
are able to generate positive cash flow from operations, if ever, we intend
to
use our existing cash resources and the Loan and Security Agreement, if
available, together with, depending on market conditions and opportunities,
the
net proceeds of external financings to finance our operations. We currently
believe we will have sufficient cash resources to finance our operations for
at
least the next twelve months.
On
April 25, 2008, the Company received a letter from the NASDAQ Stock Market
(the “Notice”) notifying the Company that for the 30 consecutive trading days
preceding the date of the Notice, the bid price of the Company’s common stock
had closed below the $1.00 per share minimum required for continued listing
on
The NASDAQ Global Market pursuant to NASDAQ Marketplace Rule 4450(a)(5). The
Notice also stated that pursuant to NASDAQ Marketplace Rule 4450(e)(2), the
Company had been provided 180 calendar days, or until October 22, 2008, to
regain compliance.
On
October 20, 2008, the Company received notification that NASDAQ has suspended
for a three month period the enforcement of the rules requiring a minimum $1
closing bid price or a minimum market value of publicly held shares. NASDAQ
has
said that it will not take any action to delist any security for these concerns
during the suspension. NASDAQ has stated that, given the current extraordinary
market conditions, this suspension will remain in effect through Friday, January
16, 2009 and will be reinstated on Monday, January 19, 2009. As a result of
this
suspension, the Company now has until January 26, 2009 to regain compliance
with
the minimum bid price rule.
As
a
result of the suspension, if, at any time before January 26, 2009, the bid
price
of the Company’s common stock closes at $1.00 per share or more for a minimum of
10 consecutive business days, we expect that NASDAQ will provide written
notification that the Company has achieved compliance with the minimum bid
price
rule.
If
the
Company does not regain compliance with the minimum bid rule by January 26,
2009, NASDAQ will provide written notification that its securities will be
delisted. At that time, the Company may appeal NASDAQ’s determination to delist
its securities to a Listing Qualifications Panel. The Company may also apply
to
transfer its securities to The NASDAQ Capital Market if it satisfies the
requirements for initial inclusion set forth in Marketplace Rule 4310(c) on
such
date. If the Company’s application is approved, the Company will be afforded the
remainder of this market’s second 180 calendar day compliance period in order to
regain compliance while its common stock remains listed on The NASDAQ Capital
Market.
On
November 5, 2008, the Company filed a definitive proxy statement with the
Securities and Exchange Commission. The definitive proxy statement, among other
things, contains a proposal to approve an amendment to the Company’s Second
Amended and Restated Articles of Incorporation, as amended, effecting a reverse
stock split of the Company’s common stock at a ratio to be determined by the
Company’s Board of Directors within a range of one-for-five shares to
one-for-fifteen shares. The Company believes that such a reverse stock split
will help facilitate the continued listing of its common stock on The NASDAQ
Global Market and enhance the desirability and marketability of its common
stock
to the financial community and the investing public. The Company currently
plans
to hold a special meeting of shareholders to vote on the reverse stock split
proposal on December 16, 2008.
Item
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate Risk
The
Company’s earnings are affected by changes in interest rates. As of September
28, 2008 and December 31, 2007, we had cash, cash equivalents, short term
investments and restricted cash of $31.2 million and $36.7 million,
respectively. These amounts consisted of highly liquid investments, with more
than 55% having purchase to maturity terms of 90 days or less. The balance
has
maturity terms of between 92 to 361 days. These investments are exposed to
interest rate risk, but a hypothetical increase or decrease in market interest
rates by two percentage points from September 28, 2008 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. Due to the uncertainty of the specific actions
that
would be taken to mitigate this, and their possible effects, the sensitivity
analysis does not take into account any such action.
Foreign
Currency Exchange Rate Risk
For
the
nine months ended September 28, 2008, 93% of our sales were denominated in
US
dollars, 2% were denominated in pounds sterling, 2% were denominated in
Australian dollars, 2% were denominated in euro and 1% were denominated in
the
New Israeli Shekel. Comparatively, for the nine months ended September 30,
2007,
79% of our sales were denominated in US dollars, 17% were denominated in euro,
1% were denominated in pounds sterling and 3% were denominated in Australian
dollars. Our total pounds sterling denominated sales for the nine months ended
September 28, 2008 were $1.1 million, which were recorded at an average exchange
rate of $1US = GBP £0.50962. Our total Australian dollar denominated sales for
the nine months ended September 28, 2008 were $1.1 million, which were recorded
at an average exchange rate of $1US = AUS$1.08746. Our total euro denominated
sales for the nine months ended September 28, 2008 were $1.1 million, which
were
recorded at an average exchange rate of $1US = €0.65534. Our total New Israeli
Shekel denominated sales for the nine months ended September 28, 2008 were
$0.6
million, which were recorded at an average exchange rate of $1US = 3.5257
Shekels. If the average exchange rates used had been higher or lower during
the
nine month period ended September 28, 2008 by 10%, they would have decreased
or
increased the total pounds sterling, Australian dollar, euro and New Israeli
Shekel-denominated sales value by a total of $0.4 million. We expect the
proportions of sales in euro, Australian dollars and New Israeli Shekels to
fluctuate over time. The Company’s sensitivity analysis for changes in foreign
currency exchange rates does not take into account changes in sales volumes.
For
the
nine months ended September 28, 2008, we incurred the majority of our cost
of
revenue in US dollars.
The
Company’s operating results are affected by movements in foreign currency
exchange rates against the US dollar, particularly the UK pound sterling and
New
Israeli Shekel. This is because most of our operating expenses, which may
fluctuate over time, are incurred in pounds sterling and New Israeli Shekels.
During
the nine months ended September 28, 2008, we paid expenses in local currency
of
approximately 11.5 million pounds sterling, at an average exchange rate of
$1US
= GBP £0.50962.. During the nine months ended September 28, 2008, we paid
expenses in local currency of approximately 42.7 million New Israeli Shekels,
at
an average exchange rate of $1US = 3.5257 Shekels. If the average exchange
rates
for pounds sterling and New Israeli Shekels had been higher or lower for the
nine month period ended September 28, 2008 by 10%, the total pounds sterling
and
New Israeli Shekel-denominated operating expenses would have decreased or
increased by $2.0 million and $1.1 million, respectively.
We
expect
the proportions of operating expenses paid in pounds sterling and New Israeli
Shekels to fluctuate over time.
We
do not
enter into any currency hedging activities for speculative purposes.
Equity
Price Risk
We
do not
own any equity investments, other than the shares of 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.
Item
4.
CONTROLS
AND PROCEDURES
As
of the
end of the period covered by this quarterly report, an evaluation was performed
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as
amended). Based on that evaluation, and the similar evaluation undertaken at
the
end of 2007, the Chief Executive Officer and Chief Financial Officer concluded
that as of September 28, 2008, our disclosure controls and procedures were
effective.
There
have been no changes in the Company’s internal controls over financial reporting
that occurred during the Company’s third quarter of 2008 that have affected, or
are reasonably likely to affect, the Company’s internal control over financial
reporting.
As
of the
last business day of our second fiscal quarter (June 29, 2008), our public
float, as calculated in accordance with Rule 12b-2 under the Securities Exchange
Act of 1934, as amended ("Rule 12b-2"), was less than $50 million. As such,
in
addition to our being an accelerated filer (as defined in Rule 12b-2),
we also became a smaller reporting company (as defined in Rule 12b-2)
on such date. At the end of our fiscal year, we will cease to be an
accelerated filer and will only be a smaller reporting company.
PART
II.
OTHER
INFORMATION
Item
1.
LEGAL
PROCEEDINGS
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
Airspan, and certain current or former officers and directors (referred to
herein as the “Individual Defendants”) together with certain underwriters of our
July 2000 initial public offering. A Consolidated Amended Complaint, which
is
now the operative complaint, was filed on July 19, 2002. The complaint alleges
violations of Sections 11 and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of 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, the 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.
The action seeks damages in an unspecified amount.
This
action is being coordinated with approximately three hundred nearly identical
actions filed against other companies. On October 9, 2002, the Court dismissed
the Individual Defendants from the case without prejudice. This dismissal
disposed of the Section 15 and 20(a) control person claims without
prejudice. On February 19, 2003, the Court dismissed the Section 10(b)
claim against us, but allowed the Section 11 claim to proceed. On December
5,
2006, the Second Circuit vacated a decision by the district court granting
class
certification in six of the coordinated cases, which are intended to serve
as
test, or “focus,” cases. The plaintiffs selected these six cases,
which do not include Airspan. The district court’s decisions in the six
focus cases are intended to provide strong guidance for the parties in the
remaining cases. On April 6, 2007, the Second Circuit denied a petition
for rehearing filed by the plaintiffs, but noted that the plaintiffs could
ask
the district court to certify more narrow classes than those that were
rejected.
On
August
14, 2007, the plaintiffs filed amended complaints in the six focus cases.
The amended complaints include a number of changes, such as changes to the
definition of the purported class of investors. On September 27, 2007, the
plaintiffs moved to certify classes in the six focus cases. The six focus
case issuers and the underwriters named as defendants in the focus cases filed
motions to dismiss the amended complaints against them. On March 26, 2008,
the District Court dismissed the Section 11 claims of those members of the
putative classes in the focus cases who sold their securities for a price in
excess of the initial offering price and those who purchased outside the
previously certified class period. With respect to all other claims, the
motions to dismiss were denied. On October 10, 2008, at the request of
plaintiffs, plaintiffs’ motion for class certification was withdrawn, without
prejudice. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the matter. We cannot predict whether we
will be able to renegotiate a settlement that complies with the Second Circuit’s
mandate, nor can we predict the amount of any such settlement and whether that
amount would be greater than Airspan’s insurance coverage. If Airspan is
found liable, we are unable to estimate or predict the potential damages that
might be awarded, whether such damages would be greater than Airspan’s insurance
coverage and whether such damages would have a material impact on our results
of
operations or financial condition in any future period.
On
October 9, 2007, a purported Airspan shareholder filed a complaint for
violation of Section 16(b) of the Securities Exchange Act of 1934, which
prohibits short-swing trading, against the Company's initial public offering
underwriters. The complaint, Vanessa Simmonds v. Credit Suisse Group,
et al., Case No. C07-01638, filed in the District Court for the Western
District of Washington, seeks the recovery of short-swing profits. The
Company is named as a nominal defendant. No recovery is sought from the
Company.
From
time
to time, the Company receives and reviews offers from third parties with respect
to licensing their patents and other intellectual property in connection with
the manufacture of our WiMAX and other products. There can be no assurance
that
disputes will not arise with such third parties if no agreement can be reached
regarding the licensing of such patents or intellectual property.
We
have
received letters/communications from Wi-LAN offering licenses of various Wi-LAN
patents and contending that products complying with 802.11 and 802.16 standards
are covered by certain patents allegedly owned by Wi-LAN. The Company, in
consultation with its patent counsel, has been reviewing Wi-LAN's allegations
and has had extensive correspondence with Wi-LAN regarding those allegations.
Wi-LAN continues to threaten the Company with litigation unless it negotiates
a
license with Wi-LAN with respect to the patents in question. There can be no
assurance as to the ultimate outcome of this matter.
Except
as
set forth above, 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
1A. RISK FACTORS
Except
for the risk factor set forth below, there have been no material changes to
the
risk factors disclosed in Item 1A of Part 1 of the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 and Item 1A of Part II
of
the Company’s Quarterly Report on Form 10-Q for the quarter ended March 30,
2008.
Current
adverse economic conditions could negatively impact the Company’s
business.
The
Company’s operations are affected by local, national and worldwide economic
conditions. The consequences of a prolonged recession may include a lower level
of economic activity and uncertainty regarding capital and commodity markets.
A
lower level of economic activity may adversely affect the Company’s revenues and
future growth, as well as the future growth of the WiMAX market upon which
our
business is substantially dependent. The current instability in the financial
markets, as a result of recession or otherwise, may also affect the cost of
capital and the Company’s ability to raise capital.
Current
economic conditions may be exacerbated by insufficient financial sector
liquidity which may impact our customers’ ability to pay timely for our
products, increase customer bankruptcies and may lead to increased bad
debts.
Item
6. EXHIBITS
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002**
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002**
|
*
|
Filed
herewith
|
**
|
Furnished
herewith
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
AIRSPAN
NETWORKS INC.
|
|
|
|
Date: November
5, 2008
|
By:
|
/s/ DAVID
BRANT
|
|
|
Name:
David Brant
|
|
|
Title:
Chief Financial Officer
|
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