AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 2003.
REGISTRATION NO. 333-107620
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM F-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SR TELECOM INC.
(Exact name of registrant as specified in its charter)
CANADA 3661 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
SR TELECOM INC. CT CORPORATION SYSTEM
8150 TRANS-CANADA HIGHWAY 111 EIGHTH AVENUE
MONTREAL, QUEBEC, CANADA H4S 1M5 NEW YORK, NY 10011
(514) 335-1210 (212) 894-8500
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of registrant's principal number,
executive offices) including area code, of agent for service)
WITH COPIES TO:
RONALD A. FLEMING, JR., ESQ. FRANCIS S. CURRIE, ESQ.
PILLSBURY WINTHROP LLP DAVIS POLK & WARDWELL
ONE BATTERY PARK PLAZA 1600 EL CAMINO REAL
NEW YORK, NEW YORK 10004 MENLO PARK, CA 94025
(212) 858-1000 (650) 752-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
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Common shares, no par value.... 41,600,000 N/A $116,190,632.25(1)(2) $9,399.82(2)(3)
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(1) Computed based upon the estimated maximum number of the Registrant's common
shares issuable to stockholders of Netro Corporation in the merger described
herein. The Agreement and Plan of Merger by and among the Registrant, Netro
Corporation and Norway Acquisition Corporation dated as of March 27, 2003,
as amended, provides for an aggregate of 41,500,000 SR Telecom common shares
to be issued in connection with the merger pursuant to a formula which
allows for the number of common shares issued to each Netro stockholder to
be rounded to the nearest whole number. Until the merger is consummated it
is impossible to know the actual number of shares which will be issued, but
the Registrant believes that the number presented is a fair estimate of the
number of its common shares to be issued.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) and 457(c) of the Securities Act of 1933 based upon the
average of the high and low sale prices of shares of Netro common stock on
the Nasdaq National Market on July 29, 2003 of $2.97 per share and a total
number of shares of 39,121,425.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. SR
Telecom may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 7, 2003
(SR TELECOM LOGO) (NETRO LOGO)
Dear Netro Corporation Stockholders:
You are cordially invited to attend a special meeting of the stockholders
of Netro Corporation on August 27, 2003 at 9:30 a.m., local time, at the Westin
Hotel, Bayshore Room, located at 5101 Great America Parkway, Santa Clara,
California 95054. At the special meeting, you will be asked to consider and vote
upon a proposal to merge Netro with SR Telecom Inc.
MERGER PROPOSAL
After careful consideration, the board of directors of Netro Corporation
has approved the acquisition of Netro by SR Telecom Inc. If the acquisition is
approved by you, Netro's stockholders, each outstanding share of Netro common
stock will be entitled to receive a cash dividend from Netro and will be
converted into the right to receive shares of SR Telecom common stock. The
aggregate amount of the cash dividend will be US$100 million and the aggregate
number of shares of SR Telecom common stock will be 41.5 million (approximately
41% of SR Telecom's outstanding common stock after the merger, not including the
exercise of issued and outstanding stock options and warrants to purchase shares
of SR Telecom common stock), subject to rounding in each case, and in the case
of shares of SR Telecom common stock, subject to SR Telecom's proposed reverse
stock split.
The per share value of the dividend will be determined by dividing US$100
million by the number of shares of Netro common stock outstanding at the
effective time and the per share value of the SR Telecom common stock will be
determined by dividing 41.5 million shares by the number of shares of Netro
common stock outstanding at the effective time. Because no fractional shares
will be issued in connection with the merger, any fraction equal to or higher
than one-half will be rounded up to the next succeeding whole number and any
fraction less than one-half will be rounded down. As of July 31, 2003, based on
SR Telecom's closing price of US$0.70 per share, and assuming that all of the
1,288,793 options that are expected to be vested as of the closing date of the
merger (anticipated to be in the first week of September 2003), with an exercise
price of US$3.10 or less are exercised, Netro would have an aggregate of
40,410,218 shares of common stock outstanding at the effective time of the
merger and each share of Netro common stock would entitle its holder to receive
aggregate consideration of US$3.19702, consisting of a cash dividend in the
amount of US$2.47462 and 1.02697 shares of SR Telecom common stock (without
giving effect to SR Telecom's proposed reverse stock split) with a fair market
value of approximately US$0.72240. The actual amount of the cash dividend and
the actual number of shares of SR Telecom common stock that each Netro
stockholder will receive will be determined immediately prior to the completion
of the merger in accordance with the formulas set forth in the merger agreement,
as described on page 86. SR Telecom common stock is traded on the Toronto Stock
Exchange under the symbol "SRX," and on July 31, 2003, the closing price of its
common stock was CDN$0.99 per share (US$0.70 per share based on the exchange
rate on that date). The shares of SR Telecom common stock will be traded on the
Nasdaq National Market, under the symbol "SRXA".
NETRO'S BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF NETRO STOCKHOLDERS AND RECOMMENDS THAT NETRO STOCKHOLDERS VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
The accompanying proxy statement/prospectus provides detailed information
concerning SR Telecom, Netro, the merger, the cash dividend and the transactions
contemplated by the merger agreement. Please give all of the information
contained in the proxy statement/prospectus your careful attention. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 24. ALSO, BECAUSE RECEIPT OF THE CASH DIVIDEND
AND THE MERGER CONSIDERATION MAY, DEPENDING ON YOUR PARTICULAR SITUATION, RESULT
IN TAXABLE GAIN TO YOU, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE
SECTION ENTITLED "THE MERGER -- MATERIAL TAX CONSIDERATIONS" BEGINNING ON PAGE
79.
Please use this opportunity to take part in the affairs of Netro by voting.
Whether or not you plan to attend the special meeting, please complete, sign,
date and return the accompanying proxy in the enclosed self-addressed stamped
envelope. Returning the proxy does NOT deprive you of your right to attend the
special meeting and to vote your shares in person. YOUR VOTE IS VERY IMPORTANT.
Thank you for your consideration of these matters.
/s/ Gideon Ben-Efraim
Chairman of the Board and Chief
Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE OR PROVINCIAL
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated August 7, 2003, and was first mailed to
stockholders on or about August 7, 2003.
NETRO CORPORATION
3860 N. First Street, San Jose, CA 95134
(408) 216-1500
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 27, 2003 AT 9:30 A.M.
To the Stockholders of Netro Corporation:
A special meeting of Netro Corporation will be held at the Westin Hotel,
Bayshore Room, located at 5101 Great America Parkway, Santa Clara, California
95054, on August 27, 2003 at 9:30 a.m., local time, for the following purposes:
1. Approval of Netro's proposal to approve and adopt the merger agreement
by and among Netro, SR Telecom Inc. and Norway Acquisition Corporation dated as
of March 27, 2003, as amended to date, pursuant to which Netro would merge with
Norway Acquisition Corporation and would survive the merger as a wholly-owned
subsidiary of SR Telecom.
2. To transact any other business that properly comes before the special
meeting or any adjournments, postponements, continuations or rescheduling
thereof.
The accompanying proxy statement/prospectus provides detailed information
concerning SR Telecom, Netro, the merger, the cash dividend and the transactions
contemplated by the merger agreement. Please read the entire document carefully.
In particular, you should carefully consider the discussion entitled "Risk
Factors" beginning on page 24. Also, because receipt of the cash dividend and
the merger consideration may, depending on your situation, result in taxable
gain to you, you should carefully consider the discussion in the section
entitled "The Merger -- Material Tax Considerations" beginning on page 79.
Stockholders who held shares of Netro at the close of business on July 31,
2003 are entitled to notice of, and to vote at, this meeting.
By Order of the Board of Directors of
NETRO CORPORATION
/s/ Francis S. Currie
--------------------------------------
Francis S. Currie
Secretary
San Jose, California
August 7, 2003
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, HOWEVER, PLEASE ENSURE YOUR
REPRESENTATION AT THE MEETING BY COMPLETING, SIGNING AND DATING THE ENCLOSED
PROXY AS PROMPTLY AS POSSIBLE AND RETURNING IT IN THE ENCLOSED ENVELOPE. IF A
QUORUM IS NOT REACHED, NETRO MAY HAVE THE ADDED EXPENSE OF REISSUING THESE PROXY
MATERIALS. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY
AND VOTE IN PERSON. YOUR PROXY IS REVOCABLE IN ACCORDANCE WITH THE PROCEDURES
SET FORTH IN THE PROXY STATEMENT.
THANK YOU FOR ACTING PROMPTLY.
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS FOR NETRO STOCKHOLDERS................ 1
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 4
SR Telecom (see page 103)................................. 4
Netro (see page 156)...................................... 4
Reasons for the Merger (see page 53)...................... 5
Estimated Per Share Value to be Received by Netro
Stockholders (see pages 42-45)......................... 5
Opinions of Netro's Advisors (see page 62)................ 9
Conditions to Completion of the Merger (see page 95)...... 9
Conditions to Payment of the Cash Dividend (see page
87).................................................... 10
The Netro Special Stockholder Meeting (see page 40)....... 10
Termination of the Merger Agreement; Termination Fees (see
pages 96-99)........................................... 10
Restrictions on Soliciting Alternative Transactions (see
page 92)............................................... 10
Reverse Stock Split (see page 76)......................... 10
Effect of the Merger on Outstanding Netro Stock Options
(see page 86).......................................... 11
Effect of the Merger on the Rights of Participants in the
Netro Employee Stock Purchase Plan (see page 94)....... 11
Directors of SR Telecom Following the Merger (see page
88).................................................... 11
Expected Completion Date for the Merger (see page 74)..... 11
Material U.S. Federal Income Tax Consequences of the Cash
Dividend and the Merger (see page 79).................. 12
Material Canadian Federal Income Tax Consequences of the
Merger (see page 84)................................... 13
Interest of Netro's Directors and Officers in the Merger
(see page 72).......................................... 13
No Appraisal Rights (see page 78)......................... 13
Change of Control (see page 86)........................... 13
Where You Can Find More Information (see page 214)........ 13
SELECTED CONSOLIDATED FINANCIAL DATA........................ 15
SR Telecom Selected Consolidated Financial Data........... 15
Netro Selected Consolidated Financial Data................ 17
Summary Unaudited Pro Forma Condensed Consolidated
Financial Information.................................. 19
Comparative Per Share Market Price and Exchange Rate
Data................................................... 20
RISK FACTORS................................................ 24
Risks Related to the Merger............................... 24
Risks Related to the Businesses of SR Telecom and the
Combined Company....................................... 28
FORWARD-LOOKING STATEMENTS.................................. 39
NETRO SPECIAL STOCKHOLDER MEETING........................... 40
General................................................... 40
Date, Time and Place...................................... 40
Matters to be Considered at the Special Meeting........... 40
Record Date............................................... 40
Voting of Proxies......................................... 40
Quorum; Abstentions and Broker Non-Votes.................. 41
Solicitation of Proxies and Expenses...................... 41
The Merger Proposal....................................... 41
i
PAGE
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THE MERGER.................................................. 46
The Merger................................................ 46
Background of the Merger.................................. 46
SR Telecom's Reasons for the Merger....................... 53
Netro's Reasons for the Merger............................ 56
Recommendation of Netro's Board of Directors.............. 62
Opinions of Netro's Advisors.............................. 62
Interests of Netro's Directors and Officers in the
Merger................................................. 72
Netro's Directors and Officers After Completion of the
Merger................................................. 74
Completion and Effectiveness of the Merger................ 74
Structure of the Merger and Conversion of Netro Common
Stock.................................................. 74
Exchange of Netro Stock Certificates...................... 75
Accounting Treatment...................................... 76
Regulatory Approvals...................................... 76
Reverse Stock Split....................................... 76
Listing on the Nasdaq National Market and the Toronto
Stock Exchange of the Shares of SR Telecom Common Stock
to be Issued in the Merger............................. 77
Certain U.S. and Canadian Securities Laws
Considerations......................................... 77
No Appraisal Rights....................................... 78
Delisting and Deregistration of Netro Common Stock After
the Merger............................................. 78
Certain Pending Litigation................................ 78
Material Tax Considerations............................... 79
Change of Control......................................... 86
Effect of the Merger on Outstanding Netro Stock Options... 86
THE MERGER AGREEMENT........................................ 87
Structure of the Merger................................... 87
Effective Time of the Merger.............................. 87
The Cash Dividend......................................... 87
The Merger Consideration.................................. 87
Stock Options............................................. 88
The Exchange Agent........................................ 88
Procedures for Exchanging Stock Certificates.............. 88
Certificate of Incorporation and By-Laws.................. 88
Officers and Directors of Netro Following the Merger...... 88
Directors of SR Telecom Following the Merger.............. 88
Representations and Warranties............................ 89
Definition of Material Adverse Effect..................... 90
Principal Covenants....................................... 90
Conditions to the Merger.................................. 95
Expenses.................................................. 96
Termination............................................... 96
Payment of Applicable Termination Fee..................... 98
Right of First Negotiation and First Refusal.............. 99
Covenant Not to Sell Netro's Assets....................... 99
ii
PAGE
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Amendment................................................. 100
THE VOTING AGREEMENTS....................................... 101
SR TELECOM BUSINESS......................................... 103
Overview.................................................. 103
SR Telecom's Business..................................... 103
History................................................... 105
Organizational Structure.................................. 106
Product Lines............................................. 107
New Products.............................................. 109
Manufacturing............................................. 110
Services.................................................. 110
Sales and Marketing....................................... 111
Customers................................................. 111
Competition............................................... 112
Research and Development.................................. 114
Business and Growth Strategy.............................. 115
CTR....................................................... 116
Intellectual Property..................................... 118
Human Resources........................................... 118
Facilities................................................ 119
Environment............................................... 119
Available Information..................................... 119
Litigation................................................ 119
Industry Data............................................. 120
SR Telecom Securities Held in the United States........... 120
Historical Stock Price Data............................... 121
SR TELECOM'S MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 122
Overview.................................................. 122
Critical Accounting Policies.............................. 122
Results of Operations..................................... 124
Three-Months ended March 31, 2003 versus three-months
ended March 31, 2002................................... 125
For the years ended December 31, 2002 versus December 31,
2001 and 2000.......................................... 132
Accounting Pronouncements................................. 140
Quantitative and Qualitative Disclosures About Market
Risk................................................... 140
SR TELECOM MANAGEMENT....................................... 142
Termination of Employment and Employment Contracts........ 145
Audit Committee........................................... 145
Executive Compensation.................................... 146
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........ 152
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SR TELECOM.................................. 154
Significant Changes in Ownership.......................... 155
Control Persons........................................... 155
Canadian Beneficial Ownership Reporting Requirements...... 155
iii
PAGE
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NETRO BUSINESS.............................................. 156
Overview.................................................. 156
The Netro Solution........................................ 156
Products and Technology................................... 158
Sales and Marketing....................................... 159
Customers................................................. 160
Operations and Manufacturing.............................. 160
Research and Development.................................. 161
Customer Advocacy......................................... 161
Competition............................................... 161
Government Regulation..................................... 162
Intellectual Property..................................... 163
Employees................................................. 163
Available Information..................................... 164
Properties................................................ 164
Subsidiaries.............................................. 164
Litigation................................................ 164
Historical Stock Price Data............................... 167
NETRO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 169
Overview.................................................. 169
Critical Accounting Policies.............................. 170
Three Months Ended March 31, 2003 Compared to Three Months
Ended March 31, 2002................................... 172
Year Ended December 31, 2002 Compared to Years Ended
December 31, 2001 and 2000............................. 178
Liquidity and Capital Resources........................... 183
Accounting Pronouncements................................. 184
Changes in and Disagreements with Accountants and
Financial Disclosure................................... 185
Quantitative and Qualitative Disclosures About Market
Risk................................................... 186
NETRO MANAGEMENT............................................ 187
Executive Compensation.................................... 189
Compensation Committee Interlocks and Insider
Participation.......................................... 191
Compensation Committee Report on Executive Compensation... 191
Stock Performance Graph................................... 194
Cumulative Total Return................................... 194
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF NETRO....................................... 195
DESCRIPTION OF SR TELECOM SHARE CAPITAL..................... 196
Common Stock.............................................. 196
Preferred Shares.......................................... 196
Previous Purchases and Sales of Securities................ 197
Private Placement......................................... 197
Securities Held by SR Telecom............................. 198
Options and Convertible Securities........................ 198
DESCRIPTION OF SR TELECOM INDEBTEDNESS...................... 198
8.15% Debentures.......................................... 198
iv
PAGE
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CTR Project Debt.......................................... 198
Bank Debt................................................. 198
COMPARISON OF STOCKHOLDER RIGHTS AND CORPORATE GOVERNANCE
MATTERS................................................... 199
General Provisions........................................ 199
Requirements for Extraordinary Corporate Transactions..... 210
LEGAL MATTERS............................................... 213
EXPERTS..................................................... 213
WHERE YOU CAN FIND MORE INFORMATION......................... 214
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX A -- MERGER AGREEMENT................................. A-1
ANNEX B-1 -- AMENDMENT NO. 1 TO MERGER AGREEMENT............ B-1-1
ANNEX B-2 -- AMENDMENT NO. 2 TO MERGER AGREEMENT............ B-2-1
ANNEX B-3 -- AMENDMENT NO. 3 TO MERGER AGREEMENT............ B-3-1
ANNEX C-1 -- OPINION OF GOLDMAN, SACHS & CO. ............... C-1-1
ANNEX C-2 -- PRELIMINARY OPINION OF AMERICAN APPRAISAL
ASSOCIATES, INC. .............................. C-2-1
ANNEX D -- FORM OF VOTING AGREEMENT......................... D-1
ANNEX E -- VOTING AGREEMENT OF GIDEON BEN-EFRAIM............ E-1
v
Until 25 days after the commencement of the offering all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus.
You may request a copy of SR Telecom's public filings with the Canadian
securities regulators at no cost by writing or telephoning:
SR TELECOM INC.
8150 Trans-Canada Highway
Montreal, Quebec H4S 1M5
Canada
Tel: (514) 335-1210
Attn: Investor Relations
email: investor@srtelecom.com
You may request a copy of Netro's public filings with the SEC at no cost by
writing or telephoning:
NETRO CORPORATION
3860 North First Street
San Jose, California 95134
Tel: (408) 216-1500
Attn: Investor Relations
email: investor-relations@netro-corp.com
To ensure timely delivery of the documents prior to the special meeting,
any requests should be received by August 18, 2003.
vi
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, SHARES OF SR TELECOM COMMON STOCK OR THE
SOLICITATION OF A PROXY IN ANY JURISDICTION OR FROM ANY PERSON TO WHOM OR FROM
WHOM IT IS UNLAWFUL TO MAKE THE OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN THAT JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MEANS, UNDER ANY
CIRCUMSTANCES, THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS OR IN SR TELECOM'S OR NETRO'S AFFAIRS SINCE THE
DATE OF THIS PROXY STATEMENT/ PROSPECTUS. THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS CONCERNING NETRO AND ITS SUBSIDIARIES WAS PROVIDED BY
NETRO. THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS CONCERNING
SR TELECOM AND ITS SUBSIDIARIES WAS PROVIDED BY SR TELECOM.
QUESTIONS AND ANSWERS FOR NETRO STOCKHOLDERS
The following questions and answers are intended to address some commonly
asked questions regarding the merger. These questions and answers may not
address all questions that may be important to you. Please refer to the more
detailed information contained elsewhere in this proxy statement/prospectus and
the annexes to this proxy statement/prospectus.
Q: WHAT AM I VOTING ON?
A: You are being asked to consider and approve a proposal relating to the
merger of Netro with SR Telecom Inc.
Q: WHAT IS THE TOTAL VALUE THAT NETRO STOCKHOLDERS WILL RECEIVE FOR THEIR
SHARES IF THE MERGER IS APPROVED? (SEE PAGE 87)
A: If the merger is approved and the other conditions of the merger are
satisfied or waived, Netro stockholders as a group will be entitled to
receive 41.5 million shares of SR Telecom common stock in exchange for the
outstanding shares of Netro common stock and the associated preferred stock
purchase rights, and a cash dividend from Netro just prior to the merger of
US$100 million. SR Telecom has proposed to conduct a reverse stock split of
its shares of common stock before the merger is consummated, and the number
of shares of SR Telecom common stock to be received by Netro stockholders in
the merger will be reduced proportionately by that reverse stock split. The
exact ratio to be used in the reverse stock split is not yet known, but will
be between 1:5 and 1:15.
Based on the closing price of SR Telecom common stock on the Toronto Stock
Exchange on July 31, 2003, the aggregate value of shares of SR Telecom
common stock to be issued to Netro stockholders is US$29.1 million. The
value of the SR Telecom common stock will increase or decrease depending on
fluctuations in the Canadian-to-U.S. dollar exchange rate and movements in
SR Telecom's stock price. On the basis of the calculation provided above,
the total value that Netro stockholders would receive as a result of the
cash dividend and the merger is US$129.1 million. Based on the closing price
of SR Telecom common stock on the Toronto Stock Exchange on March 26, 2003,
the day preceding the announcement of the merger, the total value that Netro
stockholders would receive as a result of the cash dividend and the merger
is US$121.1 million.
For estimates of the per share value of the dividend and the shares of SR
Telecom common stock to be received in the merger, see page 42.
Q: WHAT DO I NEED TO DO NOW? (SEE PAGE 39)
A: You should carefully read this document, including its annexes, and consider
how the merger will affect you. You should then indicate on your proxy card
how you want to vote and sign and mail it in the enclosed return envelope
marked for this purpose as soon as possible so that your shares will be
represented at the special meeting. If you sign and send in your proxy and
do not indicate how you want to vote, your proxy will be counted as a vote
"FOR" the approval and adoption of the merger agreement
1
and the merger. If you abstain or if you fail to sign and return a proxy, it
will have the effect of a "no" vote on the merger.
PLEASE READ THE INSTRUCTIONS ACCOMPANYING THE PROXY CARD CAREFULLY.
Q: IF MY SHARES ARE HELD IN STREET NAME BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME? (SEE PAGES 40)
A: Brokers cannot vote your shares on the merger without instructions from you
on how to vote. Therefore, it is important that you follow the directions
provided by your broker about how to instruct your broker to vote your
shares. If you fail to provide your broker with instructions, that will have
the same effect as your voting against the merger proposal.
Q: HOW CAN I CHANGE MY VOTE OR REVOKE MY PROXY? (SEE PAGE 40)
A: Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering a written notice of
revocation or a duly executed proxy bearing a later date to the Secretary of
Netro, 3860 N. First Street, San Jose, CA 95134, or by attending the special
meeting and voting in person.
Q: WHO IS ENTITLED TO VOTE? (SEE PAGE 40)
A: Netro stockholders as of the close of business on the record date for the
special meeting, July 31, 2003, are entitled to vote. As of the record date
for the special meeting, 39,121,425 shares of Netro's common stock were
issued and outstanding. Each Netro stockholder is entitled to one vote for
each share of Netro common stock held on the record date for the special
meeting.
Q: WHO WILL COUNT THE VOTE?
A: Votes cast by proxy or in person at the special meeting will be tabulated by
Innisfree M&A Incorporated, which is also serving as the inspector of
elections.
Q: WHAT IS A "QUORUM"? (SEE PAGE 41)
A: A "quorum" is the presence in person or by proxy of the holders of a
majority of the shares of Netro common stock outstanding on the record date
for the special meeting. There must be a quorum for the special meeting to
be held and action to be validly taken. If you submit a properly executed
proxy card, even if you abstain from voting or if you withhold your vote
with respect to the proposal, you will be considered present for purposes of
a quorum.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER? (SEE PAGE 40)
A: Assuming a quorum is present, approval and adoption of the merger agreement
and the merger requires the affirmative vote of holders of a majority of the
outstanding shares of Netro common stock outstanding on the record date for
the special meeting. BECAUSE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
OUTSTANDING SHARES OF NETRO COMMON STOCK ENTITLED TO VOTE AT THE SPECIAL
MEETING, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE EFFECT OF A VOTE
AGAINST THE MERGER PROPOSAL. Netro's stockholders are entitled to cast one
vote per share of Netro stock owned as of the record date for the special
meeting. Executive officers and directors of Netro holding 3,398,532 shares
of Netro common stock, or approximately 8.69% of the outstanding shares of
Netro common stock as of July 31, 2003 have agreed to vote those shares in
favor of approval and adoption of the merger agreement and the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES WITH MY PROXY CARD? (SEE PAGE 41)
A: No. Please DO NOT send your stock certificates with your proxy card. Rather,
promptly after the effective time of the merger, the exchange agent will
mail you a letter of transmittal and instructions for
2
you to use in surrendering your share certificates. If your shares are held
in "street name," follow your broker's instructions.
Q: WHOM SHOULD I CALL WITH QUESTIONS? (SEE PAGE 41)
A: If you have additional questions about the merger or about the solicitation
of your proxy, you should contact Innisfree M&A Incorporated, at
1-888-750-5834.
3
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
To better understand the merger, SR Telecom and Netro urge you to read
carefully this entire proxy statement/prospectus and the documents we refer to
in this proxy statement/prospectus, including the annexes. For more information,
please see "Where You Can Find More Information" on page 214. SR Telecom and
Netro have included page references in this summary directing you to a more
complete description of each item.
ALL REFERENCES TO "CDN$" IN THIS PROXY STATEMENT/PROSPECTUS ARE TO CANADIAN
DOLLARS, AND ALL REFERENCES TO "$" OR "US$" ARE TO U.S. DOLLARS. FOR INFORMATION
ABOUT HISTORICAL RATES OF EXCHANGE BETWEEN THE CANADIAN DOLLAR AND THE U.S.
DOLLAR, SEE "COMPARATIVE PER SHARE MARKET PRICE AND EXCHANGE RATE DATA" ON PAGE
20.
SR TELECOM (SEE PAGE 103)
SR Telecom provides fixed wireless access solutions for voice, data and
Internet access applications. SR Telecom designs, markets and sells fixed
wireless products to telecommunications service providers, who in turn use the
products to provide their subscribers with a full range of telecommunications
services. SR Telecom also provides full turnkey services to its customers. Most
of SR Telecom's sales are outside the United States and Canada, with its fixed
wireless systems currently being used by telecommunications service providers in
over 110 countries worldwide. These customers include large incumbent local
exchange carriers, in the countries they serve, as well as competitive local
exchange carriers and private operators of telecommunications systems. In
addition, through a majority-owned subsidiary, SR Telecom provides local
telephone service and Internet access to residential, commercial and
institutional customers and operates a network of payphones in a large,
predominantly rural area of Chile. At March 31, 2003, SR Telecom had CDN$70
million in working capital, of which CDN$26.9 million was cash and short-term
investments. As such, there are adequate funds to meet its current obligations.
SR Telecom has CDN$75 million of debentures which must be refinanced or retired
in 2005 as well as US$38 million of long-term project financing being repaid in
installments through 2008. Although SR Telecom had continuously profitable years
from 1989 to 1999, it has more recently experienced losses in each of the years
ended December 31, 2000, December 31, 2001 and December 31, 2002 and in the
first quarter of 2003. Losses recorded in the aggregate for the years ended
December 31, 2000, December 31, 2001 and December 31, 2002, and the first
quarter of 2003 are CDN$96,412,000. As a result, SR Telecom currently has an
accumulated deficit of CDN$52,340,000. In addition, SR Telecom is significantly
leveraged with (1) CDN$75,000,000 of debentures, maturing in 2005, (2)
$38,000,000 of project financing debt, repayable in installments through 2008
and (3) CDN$5,000,000 of bank indebtedness.
SR Telecom was incorporated under the Canada Business Corporations Act in
1981, and has been a public reporting company in Canada since 1986, when it
consummated an initial public offering in Canada. SR Telecom's common stock
currently trades on the Toronto Stock Exchange under the symbol "SRX". SR
Telecom's registered head office and principal place of business is located at
8150 Trans-Canada Highway, Montreal, Quebec, Canada, H4S 1M5 and its telephone
number is (514) 335-1210. SR Telecom's website is www.srtelecom.com. The
information on SR Telecom's website is not part of this proxy
statement/prospectus.
NETRO (SEE PAGE 156)
Netro designs, markets and sells broadband, point-to-multipoint, fixed
wireless equipment. Telecommunications service providers use Netro's equipment
as an alternative to using wired connectivity or point-to-point fixed wireless
equipment. The three principal applications for Netro's products are:
- Providing voice and high speed data access connections to residences,
principally through its Angel product line, although to date Netro has
not had material sales of Angel;
- Providing voice and high speed data access connections for businesses,
principally through its AirStar product line; and
4
- Connecting mobile phone base stations to the core telecommunications
network through its AirStar product line.
As of March 31, 2003, Netro had cash and cash equivalents of US$32.0
million, short-term marketable securities of US$64.5 million and long term
marketable securities of US$44.0 million. As such, there are adequate funds to
meet its current obligations. Netro has experienced losses in every fiscal year
since inception. As of March 31, 2003, Netro's accumulated deficit was $288.3
million. In addition, Netro has in the past, and continues to consume
significant cash in operations. During the quarter ended March 31, 2003, Netro
consumed cash of $11 million in operations. Netro consumed $61.9 million, $28.3
million and $33.0 million of cash in operations for the fiscal years ended
December 31, 2002, December 31, 2001 and December 31, 2000, respectively.
Netro was incorporated in California on November 14, 1994 and was
reincorporated in Delaware on June 19, 2001. Netro's principal corporate offices
are located at 3860 North First Street, San Jose, California 95134. Netro's
common stock currently trades on Nasdaq under the symbol "NTRO". Netro's website
is www.netro-corp.com. The information on Netro's website is not part of this
proxy statement/prospectus.
REASONS FOR THE MERGER (SEE PAGE 53)
SR Telecom's board of directors believes that the proposed merger presents
significant opportunities for long-term growth by increasing revenue through its
international network and for cutting expenses by working with Netro. By
expanding the number and type of products it offers, SR Telecom's board of
directors expects SR Telecom to increase its revenue over time as it introduces
Netro's products and technologies to SR Telecom's installed customer base and
also markets its own products and services to Netro's customer base. A further
benefit of this transaction is that SR Telecom will improve its net liquidity.
SR Telecom expects that immediately following the merger, the combined company
will have approximately CDN$20 million in cash from Netro available to fund
other activities, provided that the combined company does not incur any
additional contingent liabilities from Netro beyond those for which provision
has been made.
Netro is proposing to merge with SR Telecom for several reasons, including
that the proposed transactions described in this proxy statement/prospectus will
allow Netro's stockholders to receive immediate liquidity through the US$100
million cash dividend to be declared by Netro, which amount is greater than the
market value of Netro's outstanding stock on the date of the merger agreement,
while at the same time receiving a meaningful opportunity to participate in the
growth and success of the combined company through ownership of shares of SR
Telecom common stock that they will receive in the merger. Based on the number
of shares of SR Telecom common stock outstanding on July 31, 2003 (giving effect
to SR Telecom's recent private placement), Netro stockholders would own
approximately 41% of the combined company (not taking account of additional
shares of SR Telecom common stock that may be issued upon the exercise of
outstanding stock options and warrants), if the merger had closed on that date.
For more information about SR Telecom's recent private placement, refer to the
section entitled "Description of SR Telecom Share Capital -- Private Placement"
on page 197.
Netro's board believed the SR Telecom offer, together with the cash
dividend to be declared by Netro, would be more attractive to Netro stockholders
than the amounts that would be received by Netro stockholders in the other
offers received or as a result of the dissolution of Netro. To review the
background and reasons for the merger in greater detail, see the sections
entitled "The Merger -- Background of the Merger," "-- SR Telecom's Reasons for
the Merger" beginning on page 53 and "-- Netro's Reasons for the Merger"
beginning on page 56.
ESTIMATED PER SHARE VALUE TO BE RECEIVED BY NETRO STOCKHOLDERS (SEE PAGES 42-45)
The aggregate amount of the dividend and the shares of SR Telecom common
stock will be allocated proportionally to each share of Netro common stock
outstanding at the effective time of the merger. Each outstanding share of Netro
common stock and the associated stock purchase right will be automatically
5
converted into the right to receive SR Telecom common stock. In order to
determine the per share value of the dividend and the SR Telecom common stock
you would receive, you must do the following calculations:
- For the per share dividend amount, divide US$100 million by the number of
shares of Netro common stock outstanding at the effective time.
- For the number of shares of SR Telecom common stock, divide 41.5 million
by the number of shares of Netro common stock outstanding at the
effective time. No fractional shares will be issued in connection with
the merger. Any fraction equal to or higher than one-half will be rounded
up to the next succeeding whole number and any fraction less than
one-half will be rounded down.
For example, assume there are 40,410,218 shares of Netro common stock
outstanding at the effective time of the merger. This assumption is based on the
shares of Netro common stock outstanding on July 31, and the exercise of
in-the-money stock options prior to the closing date (anticipated to be in the
first week of September 2003) based on the value of SR Telecom's common stock on
July 31, 2003 of US$0.70. Based on that number of outstanding shares, each share
of Netro common stock would receive a cash dividend in the amount of US$2.47462
and would be converted into the right to receive 1.02697 shares of SR Telecom
common stock, for a total per share value of US$3.19702 based on SR Telecom's
stock price and the corresponding exchange rate on that date. If you held 500
shares of Netro common stock, you would be entitled to receive US$1,237.31 and
513.48 shares of SR Telecom common stock. This would be rounded down to 513
shares of SR Telecom common stock.
This is merely an example. If the number of Netro shares outstanding is
greater or less than the number used in this example, the amount of the cash
dividend and the number of shares of SR Telecom common stock received would be
adjusted accordingly. In addition, these calculations do not take into account
SR Telecom's proposed reverse stock split. The actual number of shares received
by Netro stockholders will be reduced proportionately in accordance with the
ratio established by the SR Telecom board of directors, which will be between
1:5 and 1:15. For a range of the various estimates of the number of Netro shares
that could be outstanding on the closing date based on a reasonable range of
recent stock prices for shares of SR Telecom common stock, see page 44.
As of July 31, 2003, there were 39,121,425 shares of Netro common stock
outstanding. Pursuant to the terms of Netro's 1999 Employee Stock Purchase Plan
and the merger agreement, 70,348 shares of Netro common stock were issued to
Netro employees on June 30, 2003 and the plan was terminated. The 70,348 shares
issued on the June 30, 2003 purchase date are reflected in the 39,121,425 shares
of Netro common stock outstanding on July 31, 2003. No further shares of Netro's
common stock will be issued under the Employee Stock Purchase Plan. Between July
31, 2003 and the effective time, however, Netro may issue additional shares of
common stock upon the exercise of outstanding stock options.
Netro expects that holders of Netro stock options will exercise their stock
options if the value of the cash dividend and the shares of SR Telecom common
stock exceeds the exercise price of such options. At a minimum, options with
exercise prices below the cash amount of the dividend will most likely be
exercised. Options to purchase 434,836 shares have an exercise price below
US$2.40 and will likely be exercised, as the cash dividend amount is expected to
exceed that amount.
Because many of the outstanding Netro stock options have exercise prices
between US$2.90 and US$3.20 per share, small fluctuations in the value of the SR
Telecom common stock or the U.S. dollar to Canadian dollar exchange rate could
cause there to be significant fluctuations in the number of shares of Netro
common stock issued upon the exercise of stock options. Some option holders may
choose not to exercise if the difference between their exercise price and the
value of the cash dividend and the shares of SR Telecom common stock is small or
if they perceive risk in the shares of SR Telecom common stock retaining or
6
increasing in value. Based on options outstanding as of July 31, 2003, the
following table outlines the vested and exercisable stock options that would be
outstanding as of August 27, 2003 at various prices:
NUMBER OF
VESTED
OPTIONS AS OF
EXERCISE PRICES AUGUST 27, 2003
--------------- -----------------
(IN U.S. DOLLARS)
Below $2.40................................................. 434,836
$2.41 -- $2.50.............................................. 0
$2.51 -- $2.60.............................................. 0
$2.61 -- $2.70.............................................. 0
$2.71 -- $2.80.............................................. 145
$2.81 -- $2.90.............................................. 13,749
$2.91 -- $3.00.............................................. 470,709
$3.01 -- $3.10.............................................. 368,554
$3.11 -- $3.20.............................................. 1,073,212
$3.21 -- $3.30.............................................. 0
$3.31 -- $3.40.............................................. 0
$3.41 -- $3.50.............................................. 316,459
$3.51 -- $4.00.............................................. 309,892
$4.01 -- $4.50.............................................. 96,588
Above $4.50................................................. 1,998,541
---------
Total:................................................. 5,083,458
=========
To illustrate the range of Netro shares that could be outstanding at the
effective time of the merger and the corresponding estimated aggregate per share
value of the cash dividend and the SR Telecom shares to be received by Netro
stockholders, we have included the following table. The range of Netro shares
outstanding is based on:
- Netro shares expected to be outstanding at the effective time regardless
of the value of the cash dividend and the SR Telecom shares; plus
- additional Netro shares that would be expected to be outstanding due to
the exercise of stock options that would be in-the-money at the trading
values of SR Telecom's stock (after conversion to U.S. dollars) specified
in the table.
7
The table set forth below presents the range of Netro shares that could be
outstanding at the effective time of the merger based on changes in the number
of stock options exercised by Netro employees prior to such time and the effect
that such changes are likely to have on the per share cash dividend and merger
consideration likely to be received by Netro's stockholders. As the table
demonstrates, greater numbers of Netro employees would be expected to exercise
their stock options as the trading value of SR Telecom's common stock increases.
This is the case because as the trading price of SR Telecom's common stock
increases, stock options with higher and higher exercise prices will become "in
the money" and thus be more likely to be exercised. For each of the examples of
the number of shares that could be outstanding at the effective time as provided
in the table, we have specified the dollar value of the cash dividend to be
received, the dollar value of the SR Telecom common stock to be received and the
total value per share of Netro common stock to be received based on various
examples of potential trading values of SR Telecom's common stock.
EXAMPLES OF NUMBER OF NETRO SHARES OUTSTANDING AT THE EFFECTIVE TIME
SHARES OUTSTANDING AT SHARES OUTSTANDING AT
JULY 31, 2003, JULY 31, 2003,
PLUS SHARES ISSUABLE UPON PLUS SHARES ISSUABLE UPON
THE EXERCISE OF VESTED THE EXERCISE OF VESTED
SHARES OUTSTANDING AT OPTIONS WITH EXERCISE PRICES OPTIONS WITH EXERCISE PRICES
JULY 31, 2003 LESS THAN $3.00 PER SHARE LESS THAN $3.10 PER SHARE
39,121,425 40,041,664 40,410,218
------------------------------ ------------------------------ ------------------------------
VALUE OF VALUE OF VALUE OF
SRT SRT SRT
CASH STOCK TOTAL CASH STOCK TOTAL CASH STOCK TOTAL
DIVIDEND RECEIVED VALUE DIVIDEND RECEIVED VALUE DIVIDEND RECEIVED VALUE
EXAMPLES OF TRADING VALUES PER PER PER PER PER PER PER PER PER
OF ONE SR TELECOM COMMON NETRO NETRO NETRO NETRO NETRO NETRO NETRO NETRO NETRO
SHARE IN US DOLLARS SHARE SHARE SHARE SHARE SHARE SHARE SHARE SHARE SHARE
-------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$0.35.................. $2.56 $0.37 $2.93 $2.50 $0.36 $2.86 $2.47 $0.36 $2.83
$0.45.................. $2.56 $0.48 $3.03 $2.50 $0.47 $2.96 $2.47 $0.46 $2.94
$0.55.................. $2.56 $0.58 $3.14 $2.50 $0.57 $3.07 $2.47 $0.56 $3.04
$0.65.................. $2.56 $0.69 $3.25 $2.50 $0.67 $3.17 $2.47 $0.67 $3.14
$0.75.................. $2.56 $0.80 $3.35 $2.50 $0.78 $3.27 $2.47 $0.77 $3.24
$0.85.................. $2.56 $0.90 $3.46 $2.50 $0.88 $3.38 $2.47 $0.87 $3.35
$0.95.................. $2.56 $1.01 $3.56 $2.50 $0.98 $3.48 $2.47 $0.98 $3.45
$1.05.................. $2.56 $1.11 $3.67 $2.50 $1.09 $3.59 $2.47 $1.08 $3.55
$1.15.................. $2.56 $1.22 $3.78 $2.50 $1.19 $3.69 $2.47 $1.18 $3.66
$1.25.................. $2.56 $1.33 $3.88 $2.50 $1.30 $3.79 $2.47 $1.28 $3.76
$1.35.................. $2.56 $1.43 $3.99 $2.50 $1.40 $3.90 $2.47 $1.39 $3.86
SHARES OUTSTANDING AT SHARES OUTSTANDING AT SHARES OUTSTANDING AT
JULY 31, 2003, JULY 31, 2003, JULY 31, 2003,
PLUS SHARES ISSUABLE UPON PLUS SHARES ISSUABLE UPON PLUS SHARES ISSUABLE UPON
THE EXERCISE OF VESTED THE EXERCISE OF VESTED THE EXERCISE OF VESTED
OPTIONS WITH EXERCISE PRICES OPTIONS WITH EXERCISE PRICES OPTIONS WITH EXERCISE PRICES
LESS THAN $3.20 PER SHARE LESS THAN $3.50 PER SHARE LESS THAN $4.00 PER SHARE:
41,483,430 41,799,889 42,109,781
------------------------------ ------------------------------ ------------------------------
VALUE OF VALUE OF VALUE OF
SRT SRT SRT
CASH STOCK TOTAL CASH STOCK TOTAL CASH STOCK TOTAL
DIVIDEND RECEIVED VALUE DIVIDEND RECEIVED VALUE DIVIDEND RECEIVED VALUE
EXAMPLES OF TRADING VALUES PER PER PER PER PER PER PER PER PER
OF ONE SR TELECOM COMMON NETRO NETRO NETRO NETRO NETRO NETRO NETRO NETRO NETRO
SHARE IN US DOLLARS SHARE SHARE SHARE SHARE SHARE SHARE SHARE SHARE SHARE
-------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$0.35.................. $2.41 $0.35 $2.76 $2.39 $0.35 $2.74 $2.37 $0.34 $2.72
$0.45.................. $2.41 $0.45 $2.86 $2.39 $0.45 $2.84 $2.37 $0.44 $2.82
$0.55.................. $2.41 $0.55 $2.96 $2.39 $0.55 $2.94 $2.37 $0.54 $2.92
$0.65.................. $2.41 $0.65 $3.06 $2.39 $0.65 $3.04 $2.37 $0.64 $3.02
$0.75.................. $2.41 $0.75 $3.16 $2.39 $0.74 $3.14 $2.37 $0.74 $3.11
$0.85.................. $2.41 $0.85 $3.26 $2.39 $0.84 $3.24 $2.37 $0.84 $3.21
$0.95.................. $2.41 $0.95 $3.36 $2.39 $0.94 $3.34 $2.37 $0.94 $3.31
$1.05.................. $2.41 $1.05 $3.46 $2.39 $1.04 $3.43 $2.37 $1.03 $3.41
$1.15.................. $2.41 $1.15 $3.56 $2.39 $1.14 $3.53 $2.37 $1.13 $3.51
$1.25.................. $2.41 $1.25 $3.66 $2.39 $1.24 $3.63 $2.37 $1.23 $3.61
$1.35.................. $2.41 $1.35 $3.76 $2.39 $1.34 $3.73 $2.37 $1.33 $3.71
The number of Netro shares outstanding at the effective time of the merger
will depend on the value of SR Telecom shares and the Canadian-to-U.S. dollar
exchange rate. The per share value to be received by Netro stockholders in the
transaction increases as the per share value of the SR Telecom common stock
increases. However, as the per share transaction value increases, the number of
Netro stock options that are in-the-money and likely to be exercised also
increases. As the number of Netro shares outstanding increases, this in turn
decreases the amount of cash and number of SR Telecom shares that each Netro
stockholder will receive on a per share basis.
Given the uncertainty of the value of the SR Telecom common stock, you
should consider the range of potential values when deciding whether to vote for
the merger proposal. These examples merely illustrate possible ranges of the
value of the SR Telecom common stock. Actual values could be higher or lower.
The merger agreement and amendments no. 1, 2 and 3 thereto are attached to
this proxy statement/ prospectus as Annexes A, B-1, B-2 and B-3. All references
in this proxy statement/prospectus to the merger agreement refer to the merger
agreement as so amended. Netro and SR Telecom encourage you to read the merger
agreement, as amended, carefully. A summary of the merger agreement, the cash
dividend, the merger and the estimated per share value of the cash dividend and
the shares of SR Telecom common stock is provided in this proxy
statement/prospectus in the sections entitled "The Merger Agreement" beginning
on page 87, "Netro Special Stockholder Meeting -- The Merger Proposal" beginning
on page 41 and "The Merger" beginning on page 46.
8
OPINIONS OF NETRO'S ADVISORS (SEE PAGE 62)
Goldman, Sachs & Co. delivered its opinion to Netro's board of directors
that, as of March 27, 2003 and based upon and subject to the factors and
assumptions set forth therein, the consideration to be received by holders of
Netro's common stock pursuant to the merger and the cash dividend in the
aggregate amount of US$100 million to be declared on Netro's common stock as
contemplated under the merger agreement, in the aggregate, are fair from a
financial point of view to such holders.
The full text of the written opinion of Goldman Sachs, dated March 27,
2003, which sets forth assumptions made, procedures followed, matters considered
and limitations on the review undertaken in connection with the opinion, is
attached as Annex C-1. Netro's stockholders should read the opinion in its
entirety. Goldman Sachs provided its opinion for the information and assistance
of Netro's board of directors in connection with its consideration of the
transaction. The Goldman Sachs opinion is not a recommendation as to how any
holder of Netro's common stock should vote with respect to the transaction.
Because Netro can only declare the US$100 million cash dividend if it can
legally be declared in accordance with Delaware's "capital surplus rule" and
applicable federal and state solvency and fraudulent transfer and conveyance
laws, American Appraisal Associates Inc. was engaged by Netro to assist Netro's
board of directors in determining whether the dividend could legally be declared
and paid in accordance with such laws. On March 26, 2003, American Appraisal
Associates delivered to Netro's board of directors its preliminary opinion that
based on the information known to it and on the factors and assumptions
described in the opinion, Netro and the combined company would pass the capital
surplus and solvency tests, as applicable, described in the opinion, provided
that certain conditions were satisfied.
The full text of the preliminary written opinion of American Appraisal
Associates, dated March 26, 2003, which sets forth assumptions made, procedures
followed, matters considered and limitations on the review undertaken in
connection with the opinion, is attached as Annex C-2. Netro's stockholders
should read the opinion in its entirety. American Appraisal Associates provided
its opinion for the information and assistance of Netro's board of directors in
connection with its consideration of the cash dividend. The American Appraisal
Associates opinion is not a recommendation as to how any holder of Netro's
common stock should vote with respect to the transaction.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 95)
In addition to obtaining the approval and adoption of the merger agreement
and the merger by Netro's stockholders, the completion of the merger depends
upon the satisfaction of a number of other material conditions, including:
- the declaration and payment of the cash dividend must be permissible
under applicable law;
- the absence of any pending stop orders, injunctions or other legal or
regulatory restraints, and of any pending or threatened suits, actions or
proceedings by any governmental entity, prohibiting the transactions
contemplated by the merger agreement;
- the approval of the shares of SR Telecom common stock to be issued in the
merger for quotation on the Nasdaq National Market and the reservation
for listing of such shares of SR Telecom common stock on the Toronto
Stock Exchange, subject to certain conditions; and
- the absence of any material breach of the material representations,
warranties or covenants of the parties to the merger agreement, including
the absence of any material adverse effect as defined in the merger
agreement.
If the law permits, any condition to the merger may be waived by the party
for whose benefit it is included in the agreement. Before Netro's board of
directors waives one of the material conditions specified above, for which
Netro's waiver would be required, it will solicit Netro stockholder approval of
such waiver. The law does not permit SR Telecom or Netro to waive conditions
relating to stockholder approval, injunctions or court orders.
In addition, SR Telecom has agreed to use its commercially reasonable
efforts to obtain shareholder approval for its proposed reverse stock split.
While this shareholder vote is not a formal condition to the consummation of the
merger, if its shareholders do not approve this reverse stock split, SR Telecom
will likely
9
be unable to satisfy the condition that its shares of common stock be approved
for listing on Nasdaq. In that event, the merger may not be consummated.
The obligation of SR Telecom and Netro to consummate the merger under the
merger agreement is not contingent on SR Telecom's obtaining additional
financing from any outside source. Netro believes that the cash and cash
equivalents and short-term investments of Netro will be adequate to finance the
cash dividend.
CONDITIONS TO PAYMENT OF THE CASH DIVIDEND (SEE PAGE 87)
The cash dividend is to be declared, segregated and set aside immediately
prior to the effective time of the merger with respect to each share of Netro
common stock outstanding on the record date for such cash dividend (which will
be the closing date, as defined in the merger agreement) and distributed to the
holders of such shares promptly following the effective time of the merger. The
declaration and payment of the cash dividend is contingent on approval of the
merger by Netro's stockholders and satisfaction or waiver of the other
conditions to the merger. Declaration of the cash dividend is a condition of the
merger. Netro will not pay the cash dividend if the merger is not consummated.
THE NETRO SPECIAL STOCKHOLDER MEETING (SEE PAGE 40)
At the special meeting, and any adjournment, postponement or continuation
thereof, Netro stockholders will be asked to consider and vote upon proposals
relating to (1) the merger agreement and the merger and (2) any other business
that properly comes before the special meeting or any adjournments,
postponements or continuations thereof.
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES (SEE PAGES 96-99)
SR Telecom and Netro can agree to terminate the merger agreement at any
time before completing the merger. Also, either of SR Telecom or Netro may,
without the other's consent, but subject to limitations, terminate the merger
agreement for the reasons described under the heading "The Merger Agreement --
Termination" on page 96.
In certain cases, termination of the merger agreement will require Netro to
pay SR Telecom a termination fee of up to US$6 million plus expenses. In
addition, in certain cases following termination, if the Netro board of
directors approves a liquidation or dissolution of Netro, SR Telecom will have a
right of first refusal and right of first negotiation with respect to purchasing
certain of Netro's technology for a limited period of time. See "The Merger
Agreement -- Payment of Applicable Termination Fee" on page 98.
RESTRICTIONS ON SOLICITING ALTERNATIVE TRANSACTIONS (SEE PAGE 92)
Netro has agreed that it will not initiate or engage in any discussion
regarding a prospective business combination of Netro with any party other than
SR Telecom except in limited circumstances. These limited exceptions to this
prohibition are intended to enable Netro's board to fulfill its fiduciary duties
to Netro's stockholders.
REVERSE STOCK SPLIT (SEE PAGE 76)
SR Telecom intends to declare a reverse stock split, known as a
consolidation under Canadian corporate law, at a ratio to be determined by SR
Telecom's board of directors from within the range of 1:5 to 1:15. A
consolidation under Canadian law is functionally equivalent to a reverse stock
split under Delaware law. SR Telecom will solicit proxies from its current
shareholders pursuant to Canadian law to approve the reverse stock split. The SR
Telecom shareholder meeting to vote on the reverse stock split is expected to
occur in late August 2003. If its shareholders approve the reverse stock split,
SR Telecom expects to implement the reverse stock split after the Netro special
stockholder meeting but prior to the effective time of the merger. If the
reverse stock split is consummated, the 41.5 million shares of SR Telecom common
stock to be issued to current Netro stockholders in connection with the merger
will be automatically reduced in accordance with the ratio selected by SR
Telecom's board of directors. If its shareholders do not approve this reverse
stock
10
split, SR Telecom will likely be unable to satisfy the condition to the merger
that its shares of common stock be approved for quotation on the Nasdaq National
Market. In that event, the merger may not be consummated.
If, for example, SR Telecom's board of directors were to select a ratio of
1:10, the number of shares of SR Telecom common stock outstanding prior to the
merger will be reduced from approximately 60.9 million to approximately 6.09
million and Netro stockholders would receive an aggregate of 4.15 million
shares. Under this 1:10 ratio, and based on the number of shares of Netro common
stock outstanding on July 31, 2003 and the number expected to be issued prior to
the closing date (anticipated to be in the first week of September 2003), each
share of Netro common stock would receive a cash dividend in the amount of
US$2.47462 and would be converted into the right to receive 0.102697 shares of
SR Telecom common stock. The exact number of shares of SR Telecom common stock
to be received per share of Netro common stock could be higher or lower
depending both upon the number of shares of Netro common stock outstanding and
the ratio at which the reverse stock split is conducted. The amount of the cash
dividend to be received per share of Netro common stock could be higher or lower
depending upon the number of shares of Netro common stock outstanding but would
be unaffected by the ratio at which the reverse stock split is conducted.
EFFECT OF THE MERGER ON OUTSTANDING NETRO STOCK OPTIONS (SEE PAGE 86)
At the effective time of the merger, all outstanding options to purchase
shares of Netro common stock under any stock option or compensation plan or
arrangement of Netro, whether or not exercisable or vested, will be terminated.
No consent of any holder of any stock option or any employee will be required
under any Netro stock option or compensation plan or other arrangement of Netro
for such termination.
As of July 31, 2003, there were outstanding options to purchase 7,336,228
shares of Netro common stock at exercise prices ranging from US$0.20 to
US$49.875. Of that number, options to purchase approximately 5,083,485 shares
will be vested and exercisable as of August 27, 2003. If those options are
exercised prior to the effective time of the merger, the shares acquired upon
exercise will be entitled to receive the cash dividend and the shares of SR
Telecom common stock to be issued in the merger.
EFFECT OF THE MERGER ON THE RIGHTS OF PARTICIPANTS IN THE NETRO EMPLOYEE STOCK
PURCHASE PLAN (SEE PAGE 94)
In accordance with the terms of Netro's 1999 Employee Stock Purchase Plan,
Netro shortened the offering periods and purchase periods in progress by setting
a new purchase date of June 30, 2003. Each participant's option under the plan
was exercised automatically on the new purchase date, unless prior to such date
the participant withdrew from the offering period. Any purchase periods and
offering periods under the plan then in progress ended on the new exercise date,
and the plan was terminated. 70,348 shares of Netro common stock were issued
under the Employee Stock Purchase Plan on the new purchase date, June 30, 2003.
No further shares will be issued under the Employee Stock Purchase Plan.
DIRECTORS OF SR TELECOM FOLLOWING THE MERGER (SEE PAGE 88)
Following the effective time of the merger, SR Telecom's board of directors
has agreed to appoint an individual, designated by Netro's board of directors
and reasonably acceptable to SR Telecom's board of directors, to serve on SR
Telecom's board of directors with a term expiring at the next annual meeting of
SR Telecom's stockholders following the effective time of the merger. SR
Telecom's board of directors has also agreed to include such person in the slate
of nominees recommended by SR Telecom's board of director's at such annual
meeting. Netro has named Gideon Ben-Efraim as its nominee.
EXPECTED COMPLETION DATE FOR THE MERGER (SEE PAGE 74)
For purposes of this proxy statement/prospectus, we have assumed that the
closing will occur in the first week of September 2003. Because the merger is
subject to satisfaction of a number of conditions, we cannot predict the exact
timing. Subject to certain exceptions, either Netro or SR Telecom can terminate
the merger agreement if the merger has not been consummated on or before
September 30, 2003. For more details, see
11
the section entitled "The Merger Agreement -- Conditions to the Merger,"
"-- Termination," and "-- Payment of Applicable Termination Fee" beginning on
pages 95, 96 and 98.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE CASH DIVIDEND AND THE
MERGER (SEE PAGE 79)
SR Telecom and Netro have received opinions from their counsel, Pillsbury
Winthrop LLP and Davis Polk & Wardwell, respectively, concerning the material
U.S. federal income tax consequences of the cash dividend and the merger. These
opinions describe these consequences under three different factual scenarios.
Because the correct factual scenario cannot be determined until the closing of
the merger or thereafter, neither SR Telecom's nor Netro's counsel is able to
render an opinion concerning the proper characterization of the cash dividend
and the merger for U.S. federal income tax purposes.
SR Telecom and Netro believe, based on their current expectations regarding
the relevant facts, that the most likely characterization of the cash dividend
and merger will be that they will be considered separate taxable events for U.S.
federal income tax purposes and the merger will be properly treated as a
"reorganization" for U.S. federal income tax purposes. Assuming this belief is
correct, if, as expected based on Netro's anticipated earnings during 2003,
Netro does not have positive current or accumulated earnings and profits as
determined under U.S. federal income tax principles, the cash dividend will be
treated as a tax-free return of capital to the extent of your adjusted tax basis
in your shares of Netro common stock and, to the extent in excess of basis, as
capital gain. Any amount treated as a tax-free return of capital will reduce
your adjusted tax basis in your shares of Netro common stock. If, contrary to
our expectations, Netro does have positive current or accumulated earnings and
profits, the cash dividend will be taxable to you as ordinary income to the
extent of these earnings and profits, and thereafter would be treated a tax-free
return of capital as described above.
Scenario 1. Recognition of gain but not loss. If, as expected, the cash
dividend and the merger are treated as separate taxable events for U.S. federal
income tax purposes, and the value of SR Telecom (excluding certain liquid
assets) is less than the value of Netro (determined based on market values on
the closing date after taking into account the cash dividend), you will
recognize gain, but not loss, on the exchange of your shares of Netro common
stock for shares of SR Telecom common stock in the merger. The amount of any
gain recognized will equal the difference, if any, between the fair market value
of the shares of SR Telecom common stock received determined at the time of the
exchange and your adjusted basis in your shares of Netro common stock
immediately before the exchange (after taking into account the reduction
attributable to the cash dividend as described above). Your tax basis in the
shares of SR Telecom common stock received in exchange for shares of Netro
common stock will be equal to your adjusted basis in your shares of Netro common
stock immediately before the exchange (after taking into account the reduction
attributable to the cash dividend as described above) increased by any gain
recognized by you in the exchange. Your holding period for the shares of SR
Telecom common stock you receive will include your holding period in your shares
of Netro common stock exchanged.
There are two other possible factual scenarios that would result in
different U.S. federal income tax consequences of the cash dividend and the
merger.
Scenario 2. Recognition of neither gain nor loss. If, as expected, the
cash dividend and the merger constitute separate taxable events for U.S. federal
income tax purposes, but, contrary to our current belief, the value of SR
Telecom (excluding certain liquid assets) is at least equal to the value of
Netro (determined based on market values on the closing date after taking into
account the cash dividend), Netro stockholders would not recognize gain or loss
in the merger. The tax consequences of the cash dividend and the merger would
otherwise be the same as described above.
Scenario 3. Recognition of gain or loss. The third possible factual
scenario is that the cash dividend and the merger are characterized as a single
taxable event for U.S. federal income tax purposes. In this event, which SR
Telecom and Netro believe is unlikely, Netro stockholders would recognize gain
or loss in a fully taxable transaction. The amount of gain or loss recognized
would equal the difference between the cash you receive as a dividend plus the
fair market value of the shares of SR Telecom common stock received
12
determined at the time of the exchange and your adjusted basis in your shares of
Netro common stock exchanged.
Because the material U.S. federal income tax consequences of the cash
dividend and the merger depend on facts that will not be known until the closing
date of the merger or thereafter, the U.S. federal income tax consequences of
the cash dividend and the merger are subject to uncertainty, and you are urged
to consult your tax advisor. No IRS ruling will be obtained regarding those
consequences. There can be no assurance that the IRS will not take a contrary
position that could result in U.S. federal income tax consequences that differ
materially in some respects from those described above. For further information
regarding the U.S. federal income tax consequences of the cash dividend and the
merger, see "The Merger -- Material Tax Considerations -- U.S. Federal Income
Tax Considerations" beginning on page 79.
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 84)
The disposition of the shares of Netro common stock pursuant to the merger
in exchange for shares of SR Telecom common stock will not give rise to Canadian
tax for holders of Netro common stock who are not, who have not been and who are
not deemed to be resident in Canada at any time. Dividends, if any, paid or
credited to holders of shares of SR Telecom common stock who are not, who have
not been and who are not deemed to be resident in Canada are subject to a
Canadian withholding tax of 25%. Under the Canada -- United States Income Tax
Convention (1980), if applicable, the rate of such withholding tax is generally
reduced to 15%. To the extent that the shares of SR Telecom common stock are not
"taxable Canadian property", any capital gain realized on a disposition of such
shares, other than a disposition to SR Telecom, will not be subject to tax in
Canada. In general, shares of SR Telecom common stock are not expected to
constitute "taxable Canadian property." For further information regarding the
Canadian Federal income tax consequences of the merger, see "The
Merger -- Material Tax Considerations -- Canadian Federal Tax Considerations"
beginning on page 79.
INTEREST OF NETRO'S DIRECTORS AND OFFICERS IN THE MERGER (SEE PAGE 72)
When considering the recommendations of Netro's board of directors, you
should be aware that certain Netro directors and officers have interests in the
merger that are different from, or are in addition to, yours.
NO APPRAISAL RIGHTS (SEE PAGE 78)
Under Delaware law, Netro stockholders are not entitled to any appraisal or
dissenters' rights in connection with the merger.
CHANGE OF CONTROL (SEE PAGE 86)
The merger will result in a change of control of Netro. However, because
holders of Netro common stock will own less than 50% of SR Telecom's common
stock after the merger, the merger will not result in a change of control to SR
Telecom for purposes of any of its employment, severance or other agreements.
WHERE YOU CAN FIND MORE INFORMATION (SEE PAGE 214)
Netro files reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy reports, proxy
statements and other information filed by Netro with the SEC at the SEC's public
reference room at 450 Fifth Street, NW, Washington, D.C., 20549. Please call the
SEC at 1-800-SEC-0330 for further information concerning the public reference
room. Netro files its reports, proxy statements and other information
electronically with the SEC. You may access information on Netro on the SEC's
website at www.sec.gov.
13
SR Telecom is a Canadian company whose shares of common stock are listed on
the Toronto Stock Exchange. To date, SR Telecom has not been required to file
periodic reports, proxy statements or other information (other than this proxy
statement/prospectus and related information) with the SEC. SR Telecom files
reports, statements and other information with the Canadian provincial
securities administrators, which are available at various of the Canadian
provinces' securities commissions' public reference sources. SR Telecom filings
are also electronically available to the public from the Canadian System for
Electronic Document Analysis and Retrieval, the Canadian equivalent of the SEC
EDGAR system, at www.sedar.com.
14
SELECTED CONSOLIDATED FINANCIAL DATA
SR TELECOM SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "SR Telecom Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 122, the section entitled
"Risk Factors" beginning on page 24, and the consolidated financial statements
of SR Telecom and related notes thereto beginning on page F-I-1 of this proxy
statement/prospectus. The following selected consolidated financial information
as of March 31, 2003, and for the three months ended March 31, 2003 and 2002,
which was derived from SR Telecom's unaudited consolidated financial statements,
and as of and for the fiscal years ended December 31, 2002 and 2001, 2000, 1999
and 1998, which was derived from SR Telecom's audited consolidated financial
statements, was prepared in accordance with Canadian GAAP and is presented in
Canadian dollars. The principles of Canadian GAAP used in the preparation of SR
Telecom's financial statements for the three months ended March 31, 2003 and
2002 and years ended December 31, 2002 and 2001 conform in all material respects
with U.S. GAAP, except as disclosed in note 25 to the consolidated financial
statements for the three months ended March 31, 2003 and 2002 and years ended
December 31, 2002 and 2001 included in this proxy statement/prospectus. The
unaudited financial statements as of March 31, 2003, and for the three months
ended March 31, 2003 and 2002, in the opinion of the management of SR Telecom,
include all adjustments of a normal recurring nature necessary for the fair
presentation for such periods. As permitted by SEC rules, SR Telecom's financial
statements for the years ended December 31, 2000, 1999 and 1998 have not been
reconciled to U.S. GAAP. For information about the historical rates of exchange
between the Canadian dollar and the U.S. dollar, see "Comparative Per Share
Market Price and Exchange Rate Data -- Exchange Rate Data" on page 20.
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------- -----------------------------------------------
2003 2002 2002 2001 2000 1999 1998
------ ------ ------- ------- ------- ------- -------
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................... 29,601 45,464 196,903 161,487 191,512 193,942 168,702
Restructuring, asset
impairment and other
charges................... -- -- (4,912) (61,655) (4,385) -- --
Operating (loss) earnings... (7,000) 746 (2,125) (69,855) 6,610 16,263 8,580
Net (loss) earnings from
continuing operations..... (6,681) (2,608) (20,885) (62,924) (5,922) 8,568 3,935
Net (loss) earnings......... (6,681) (2,608) (20,885) (16,065) (52,781) 7,307 3,229
Basic and diluted (loss)
earnings per share from
continuing operations..... (0.12) (0.05) (0.38) (1.25) (0.14) 0.24 0.11
Basic and diluted (loss)
earnings per share........ (0.12) (0.05) (0.38) (0.32) (1.25) 0.20 0.09
Net loss (U.S. GAAP)........ (7,680) (1,832) (11,125) (55,254)
Basic and diluted loss per
share (U.S. GAAP)......... (0.14) (0.03) (0.20) (1.10)
15
AS OF
MARCH 31, AS OF DECEMBER 31,
--------- -----------------------------------------------
2003 2002 2001 2000 1999 1998
--------- ------- ------- ------- ------- -------
(IN THOUSANDS OF CANADIAN DOLLARS)
CONSOLIDATED BALANCE SHEET DATA:
Total Assets....................... 290,921 320,805 336,370 406,386 346,849 303,790
Long-term Debt(1).................. 132,779 140,300 149,439 151,629 129,280 80,082
Capital Stock...................... 148,142 147,985 147,230 133,345 60,710 59,942
Shareholders' Equity............... 95,802 102,326 122,456 129,343 112,360 104,285
Shareholders' Equity (U.S. GAAP)... 72,695 80,218 94,562
OTHER DATA:
Number of Shares Issued:
Common shares.................... 55,472 55,228 54,553 45,915 35,579 35,280
Dividends per common share....... -- -- -- -- -- 0.05
---------------
(1) Long-term debt includes the current portion of long-term debt and capital
leases.
16
NETRO SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Netro Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 169, the section entitled
"Risk Factors" beginning on page 24, and the consolidated financial statements
of Netro and related notes thereto included elsewhere in this proxy
statement/prospectus. The selected consolidated statement of operations data for
each of the five years ended December 31, 2002, 2001, 2000, 1999 and 1998 and
the selected consolidated balance sheet data at December 31, 2002, 2001, 2000,
1999 and 1998 are derived from Netro's audited consolidated financial
statements, which are prepared in accordance with U.S. GAAP, and which are
presented in U.S. dollars.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2003 2002 2002(1) 2001(2) 2000 1999 1998
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................. $ 2,205 $ 5,008 $ 17,107 $ 23,659 $ 68,527 $ 18,185 $ 5,438
Cost of revenues......... 1,723 4,395 17,167 62,512 52,096 14,874 9,640
-------- -------- -------- -------- -------- -------- --------
Gross profit (loss)...... 482 613 (60) (38,853) 16,431 3,311 (4,202)
Operating expenses:
Research and
development......... 4,403 7,223 27,973 25,782 24,265 19,307 16,143
Sales and marketing.... 1,831 3,691 13,877 13,281 10,455 5,794 4,819
General and
administrative...... 4,391 4,459 21,210 16,996 9,812 6,259 3,968
Amortization of
deferred stock
compensation........ 84 180 612 857 1,064 1,104 --
Amortization of
acquired intangible
assets.............. 2,346 385 7,820 -- -- -- --
Acquired in-process
research and
development......... -- 17,600 17,600 -- -- -- --
Restructuring and asset
impairment charges
compensation........ -- 1,825 8,079 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses.......... 13,055 35,363 97,171 56,916 45,596 32,464 24,930
-------- -------- -------- -------- -------- -------- --------
Loss from operations..... (12,573) (34,750) (97,231) (95,769) (29,165) (29,153) (29,132)
Other income, net........ 803 2,355 6,624 16,541 18,987 353 304
-------- -------- -------- -------- -------- -------- --------
Net loss before provision
for income taxes....... $(11,770) $(32,395) $(90,607) $(79,228) $(10,178) $(28,800) $(28,828)
Provision for income
taxes.................. 6 36 103 76 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss................. $(11,776) $(32,431) $(90,710) $(79,304) $(10,178) $(28,800) $(28,828)
======== ======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share......... $ (0.31) $ (0.57) $ (1.76) $ (1.52) $ (0.21) $ (1.31) $ (4.07)
Weighted-average shares
used to compute basic
and diluted net loss
per share.............. 38,606 56,997 51,521 52,196 49,639 21,988 7,087
======== ======== ======== ======== ======== ======== ========
17
AS OF AS OF DECEMBER 31,
MARCH 31, --------------------------------------------------
2003 2002(1) 2001(2) 2000 1999 1998
--------- -------- -------- -------- ------- -------
(IN THOUSANDS OF U.S. DOLLARS)
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term marketable
securities.................... $ 96,573 $101,058 $206,444 $277,564 $45,337 $15,128
Working capital................. $ 87,803 $ 89,325 $191,123 $300,159 $44,417 $12,523
Total assets.................... $189,319 $203,253 $349,721 $421,753 $65,814 $26,788
Long-term debt and capital
leases, net of current
portion....................... -- -- $ 64 $ 1,280 $ 3,633 $ 4,547
Total stockholders' equity...... $167,067 $178,521 $320,876 $395,975 $45,556 $13,893
---------------
(1) For 2002, the results include the effect of the acquisition from AT&T
Wireless of their fixed wireless development team, a license to intellectual
property, inventory, equipment and proprietary software assets and the
effect of the 2002 restructuring and asset impairment charges. Please see
"Netro Management's Discussion of Financial Condition and Results of
Operations -- Overview" beginning on page 169 and "-- Year Ended December
31, 2002 Compared to Years Ended December 31, 2001 and 2000 -- Results of
Operations -- Restructuring and Asset Impairment" beginning on page 182 for
additional information.
(2) For 2001, the results include approximately US$42.4 million of charges to
cost of revenues related to obsolete inventory and other material-related
commitments.
SELECTED UNAUDITED QUARTERLY DATA
(unaudited, in dollars, in thousands of U.S. dollars, except per share amounts)
BASIC & DILUTED
GROSS PROFIT NET LOSS PER
REVENUE (LOSS) NET LOSS SHARE
------- ------------ -------- ---------------
2001
First Quarter(1).............................. $9,131 $(21,572) $(32,972) $(0.64)
Second Quarter(2)............................. $2,051 $(19,131) $(29,838) $(0.57)
Third Quarter................................. $6,043 $ 969 $ (7,039) $(0.13)
Fourth Quarter................................ $6,434 $ 881 $ (9,455) $(0.18)
2002
First Quarter(3).............................. $5,008 $ 613 $(32,431) $(0.57)
Second Quarter................................ $5,681 $ 1,027 $(18,489) $(0.30)
Third Quarter(4).............................. $3,516 $ (4,584) $(25,606) $(0.51)
Fourth Quarter(5)............................. $2,902 $ 2,884 $(14,184) $(0.37)
2003
First Quarter................................. $2,205 $ 482 $(11,776) $(0.21)
---------------
(1) Results for the first quarter of 2001 include US$23.2 million of charges to
cost of revenues related to obsolete inventory and other material-related
commitments.
(2) Results for the second quarter of 2001 include US$18.5 million of charges to
cost of revenues related to obsolete inventory and other material-related
commitments.
(3) Results for the first quarter of 2002 include US$17.6 million in charges
related to the write-off of acquired in-process research and development
expenses and US$1.8 million of restructuring and asset impairment charges.
(4) Results for the third quarter of 2002 include US$5.2 million of charges to
cost of revenues related to obsolete inventory and other material-related
commitments and US$2 million of restructuring charges.
(5) Results for the fourth quarter of 2002 include US$4.3 million of
restructuring and asset impairment charges.
18
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following summary unaudited pro forma condensed consolidated financial
information gives effect to the payment of the US$100 million cash dividend by
Netro and the merger of Norway Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of SR Telecom, with and into Netro whereby Netro
will become a wholly-owned subsidiary of SR Telecom. The merger will be
accounted for as a purchase. The summary pro forma financial information is
prepared in accordance with Canadian GAAP, with certain items reconciled to U.S.
GAAP, and presented in both Canadian dollars and U.S. dollars and is derived
from and should be read in conjunction with the unaudited pro forma condensed
consolidated financial information and notes thereto which are included in this
proxy statement/prospectus beginning on page F-III-1. For information about the
historical rates of exchange between the Canadian dollar and the U.S. dollar,
see "Comparative Per Share Market Price, Dividend and Exchange Rate
Data -- Exchange Rate Data" on page 20.
The unaudited pro forma condensed consolidated statement of operations
information for the year ended December 31, 2002 reflects the merger as if it
had occurred on January 1, 2002. The pro forma statement of operations
information for the year ended December 31, 2002 is based on the audited
consolidated statement of operations of SR Telecom for the year ended December
31, 2002 and on the audited consolidated statement of operations of Netro for
the year ended December 31, 2002, in each case included elsewhere in this proxy
statement/prospectus.
The unaudited pro forma statement of operations information for the three
months ended March 31, 2003 reflects the merger as if it had occurred on January
1, 2003. The unaudited pro forma condensed consolidated balance sheet presents
the combined financial position of SR Telecom and Netro as of March 31, 2003,
assuming that the acquisition had occurred on March 31, 2003. The pro forma
balance sheet information and the pro forma statement of operations information
as of and for the three months ended March 31, 2003 is based on the unaudited
consolidated balance sheet and the unaudited consolidated statement of
operations of SR Telecom as of and for the three months ended March 31, 2003
included elsewhere in this proxy statement/prospectus and on the unaudited
condensed consolidated balance sheet and the unaudited condensed consolidated
statement of operations of Netro as of and for the three months ended March 31,
2003.
The summary unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the consolidated
financial position or results of operations of future periods or the results
that actually would have been realized had SR Telecom and Netro been a combined
company during the periods presented. The pro forma financial information
reflects pro forma adjustments that are based on estimates and assumptions that
SR Telecom believes are reasonable. These estimates and assumptions are
preliminary and have been made solely for purposes of developing this pro forma
financial information. For an explanation of the basis of presentation of the
pro forma financial information, the pro forma adjustments, the pro forma
condensed consolidated financial information and the differences between
Canadian and U.S. GAAP, see the notes to the pro forma financial information,
included elsewhere in this proxy statement/ prospectus. The summary pro forma
financial information should be read in conjunction with the respective
consolidated financial statements and related notes thereto and the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of both SR Telecom and Netro as well as the section
entitled "Risk Factors" included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed financial information is presented in
Canadian dollars. In addition, solely for your convenience, this information has
also been converted into U.S. dollars using a rate of CDN$1.4695 to US$1.00, the
noon buying rate in New York City as of March 31, 2003.
19
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 2002 MARCH 31, 2003
-------------------------------------- --------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues........................ CDN$ 222,042 US$ 151,100 CDN$ 32,841 US$ 22,348
Loss from operations............ (104,351) (71,011) (21,374) (14,545)
Net loss........................ (115,732) (78,755) (20,435) (13,906)
Net loss (U.S. GAAP)............ (131,778) (89,676) (21,318) (14,507)
Basic and diluted loss per
share......................... (1.20) (0.82) (0.21) (0.14)
Basic and diluted loss per share
(U.S. GAAP)................... (1.37) (0.93) (0.22) (0.15)
Weighted average number of
shares outstanding............ 96,229 96,229 96,728 96,728
AS OF MARCH 31, 2003
------------------------
(AMOUNTS IN THOUSANDS)
PRO FORMA BALANCE SHEET DATA:
Total assets................................................ CDN$393,950 US$268,084
Long-term debt(1)........................................... 133,220 90,657
CAPITAL STOCK
Shareholders' equity........................................ 123,815 84,256
Shareholders' equity (U.S. GAAP)............................ 101,244 68,897
OTHER PRO FORMA DATA:
Weighted average number of shares outstanding:
Common shares............................................. 96,728 96,728
---------------
(1) Long-term debt includes current portion of long-term debt and capital
leases.
COMPARATIVE PER SHARE MARKET PRICE AND EXCHANGE RATE DATA
COMPARATIVE MARKET PRICE INFORMATION
The following table presents, for the dates indicated, the closing market
price for the shares of SR Telecom common stock, which trades on the Toronto
Stock Exchange under the symbol "SRX", and the closing market prices for shares
of Netro common stock, which trades on the Nasdaq National Market under the
symbol "NTRO". These prices are presented for two dates:
- March 26, 2003, the last full trading day before the announcement of the
merger; and
- July 31, 2003, the latest practicable date before the printing of this
proxy statement/prospectus.
The hypothetical sales prices for shares of SR Telecom common stock is
expressed in U.S. dollars based upon the U.S. dollar/Canadian dollar exchange
rates on March 26, 2003 and July 31, 2003, respectively. On March 26, 2003, the
last reported closing price for shares of SR Telecom common stock on the Toronto
Stock Exchange was CDN$0.75, and US$1.00 was equivalent to CDN$1.4711 at the
Federal Reserve Bank of New York Noon Buying Rate. On July 31, 2003, the last
reported closing price for shares of SR Telecom common stock on the Toronto
Stock Exchange was CDN$0.99, and CDN$1.00 was equivalent to US$1.4074 at the
Federal Reserve Bank of New York Noon Buying Rate. July 31, 2003 was the latest
practicable date before the date of this proxy statement/prospectus.
20
SR Telecom and Netro urge you to obtain current market quotations and
currency exchange rate information prior to making any decisions with respect to
the merger.
SHARES OF SR TELECOM NETRO NETRO
COMMON STOCK(1) COMMON STOCK EQUIVALENT(2)
-------------------- ------------ -------------
March 26, 2003.................................. US$0.51 US$2.43 US$0.52
July 31, 2003................................... US$0.70 US$2.99 US$0.72
---------------
(1) Without giving effect to the reverse stock split.
(2) While the total number of shares of SR Telecom common stock to be issued in
connection with the merger, without giving effect to the reverse stock
split, is limited to 41.5 million, with a possible minor adjustment due to
rounding, there is no fixed exchange ratio per share. The information
presented in this column has been prepared on the assumption that there will
be 40,410,218 shares of Netro common stock outstanding at the effective time
of the merger, so that each holder of Netro common stock would be entitled
to receive 1.02697 shares of SR Telecom common stock for each share of Netro
common stock. Using these assumptions, if SR Telecom declares a reverse
stock split at a ratio of 1:10, holders of Netro common stock would receive
0.102697 shares of SR Telecom common stock for each share of Netro common
stock that they hold. The numbers in this column have therefore been
calculated by multiplying this hypothetical exchange ratio by the closing
price of SR Telecom common stock on the specified dates. This is only an
example; the actual equivalent share value will be based upon the number of
shares of Netro common stock outstanding immediately prior to the effective
time of the merger. If the number of shares of Netro common stock
outstanding at the effective time of the merger is greater or less than
40,410,218, the Netro equivalent would be adjusted accordingly. The amount
shown in the table does not include the value of the cash dividend. Based on
the same assumptions, a holder of shares of Netro common stock at the
effective time of the merger would also be entitled to receive US$2.47462 in
cash for each share of Netro common stock held on that date.
No assurance can be given as to the market prices of shares of Netro common
stock or shares of SR Telecom common stock at any time before the consummation
of the merger or as to the market price of shares of SR Telecom common stock at
any time after the merger. Because the total number of shares of SR Telecom
common stock to be issued in the merger, without giving effect to the reverse
stock split, is limited to an aggregate of 41.5 million, with a possible minor
adjustment due to rounding, the exchange ratio will not be adjusted to
compensate Netro stockholders for decreases in the market price of SR Telecom
common stock which could occur before the merger becomes effective.
COMPARATIVE PER SHARE DATA
The following table sets forth selected information regarding earnings
(loss) from continuing operations, dividends and book value per share, without
giving effect to the reverse stock split, for shares of SR Telecom common stock
on a pro forma and historical basis and regarding income (loss) from continuing
operations, dividends and book value per share for shares of Netro common stock
on a pro forma and historical basis. You should read this information in
conjunction with SR Telecom's consolidated financial statements, Netro's
21
consolidated financial statements and the unaudited pro forma condensed
consolidated financial information included elsewhere in this proxy
statement/prospectus.
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
2003 2002
---------------- --------------
CDN$ US$(1) CDN$ US$(1)
------ ------- ----- ------
SR TELECOM (HISTORICAL)
Amounts pursuant to Canadian GAAP
Book value per share of common stock...................... 1.73 1.17 1.85 1.26
Cash dividends per share of common stock.................. -- -- -- --
Earnings (loss) per share of common stock from continuing
operations............................................. (0.12) (0.08) (0.38) (0.26)
Amounts pursuant to U.S. GAAP
Book value per share of common stock...................... 1.31 0.89 1.45 0.99
Cash dividends per share of common stock.................. -- -- -- --
Earnings (loss) per share of common stock from continuing
operations............................................. (0.14) (0.10) (0.20) (0.16)
SR TELECOM (PRO FORMA)
Amounts pursuant to Canadian GAAP
Book value per share of common stock...................... 1.28 .87 N/A N/A
Cash dividends per share of common stock.................. -- -- -- --
Earnings (loss) per share of common stock from continuing
operations............................................. (0.21) (0.14) (1.20) (0.82)
Amounts pursuant to U.S. GAAP
Book value per share of common stock...................... 1.04 0.71 N/A N/A
Cash dividends per share of common stock.................. -- -- -- --
Earnings (loss) per share of common stock from continuing
operations............................................. (0.22) (0.15) (1.37) (0.93)
NETRO (HISTORICAL)
Amounts pursuant to U.S. GAAP
Book value per share of common stock...................... 4.31 4.63
Cash dividends per share of common stock.................. -- --
Income (loss) per share of common stock from continuing
operations............................................. (0.31) (1.76)
NETRO (PRO FORMA EQUIVALENT PER SHARE)(2)
Amounts pursuant to U.S. GAAP
Book value per share of common stock...................... 0.73 N/A
Cash dividends per share of common stock.................. -- --
Income (loss) per share of common stock from continuing
operations............................................. (0.15) (0.96)
---------------
(1) Amounts relating to SR Telecom shown in U.S. dollars have been translated
from Canadian dollars to U.S. dollars using an exchange rate of CDN$1.4695
to US$1.00, the noon buying rate in New York City as of March 31, 2003. The
U.S. dollar equivalent information presented for SR Telecom is provided
solely for the convenience of the readers of the proxy statement/prospectus
and should not be construed as implying that the local currency amounts
represent, or could have been, or could be, converted into U.S. dollars at
such rates or at any rate.
22
(2) While the total number of shares of SR Telecom common stock to be issued in
connection with the merger is limited to 41.5 million, with a possible minor
adjustment due to rounding, there is no fixed exchange ratio per share. The
information presented under this caption has been prepared on the assumption
that there will be 40,410,218 shares of Netro common stock outstanding at
the effective time of the merger, so that each holder of Netro common stock
would be entitled to receive 1.02697 shares of SR Telecom common stock for
each share of Netro common stock. The information presented under this
caption does not take into account SR Telecom's proposed reverse stock
split. Using these assumptions, if SR Telecom declares a reverse stock split
at a ratio of 1:10, holders of Netro common stock would receive 0.102697
shares of SR Telecom common stock for each share of Netro common stock that
they hold, and all other information would be revised on the same basis. The
numbers in this column have therefore been calculated by multiplying this
hypothetical exchange ratio by the U.S. dollar value of the SR Telecom (pro
forma) data. This is only an example; the actual equivalent share value will
be based upon the number of shares of Netro common stock outstanding
immediately prior to the effective time of the merger. If the number of
shares of Netro common stock outstanding at the effective time of the merger
is greater or less than 40,410,218, the Netro (pro forma equivalent per
share) would be adjusted accordingly.
EXCHANGE RATE DATA
The following tables show, for the periods and dates indicated, certain
information regarding the U.S. dollar/Canadian dollar exchange rate. The
information is based on the noon buying rate in the City of New York for cable
transfers in Canadian dollars as certified for United States customs purposes by
the Federal Reserve Bank of New York. On July 31, 2003, the exchange rate was
CDN$1.4074 per US$1.00.
YEAR ENDED DECEMBER 31, AVERAGE RATE (1)
----------------------- ----------------
(PER US$1.00)
1998........................................................ 1.4894
1999........................................................ 1.4827
2000........................................................ 1.4871
2001........................................................ 1.5519
2002........................................................ 1.5702
THREE MONTHS ENDED AVERAGE RATE (1)
------------------ ----------------
(PER US$1.00)
March 31, 2002.............................................. 1.4954
March 31, 2003.............................................. 1.5098
HIGH LOW
------ ------
(PER US$1.00)
PREVIOUS SIX MONTHS
January 2003................................................ 1.5750 1.5220
February 2003............................................... 1.5315 1.4880
March 2003.................................................. 1.4905 1.4659
April 2003.................................................. 1.4843 1.4336
May 2003.................................................... 1.4221 1.3446
June 2003................................................... 1.3768 1.3348
July 2003................................................... 1.4114 1.3368
August 2003 (through August 5, 2003)........................ 1.4065 1.3960
---------------
(1) The average rate is calculated as the average of the noon buying rate on the
last day of each month during the period.
23
RISK FACTORS
The merger involves a high degree of risk for Netro stockholders. Netro
stockholders will be choosing to invest in shares of SR Telecom common stock by
voting in favor of adoption of the merger agreement. An investment in shares of
SR Telecom common stock involves a high degree of risk. In addition to the other
information contained in this proxy statement/prospectus, Netro stockholders
should carefully consider the following risk factors relating to the proposed
merger, the combined company, SR Telecom and Netro in deciding whether to vote
in favor of the merger.
RISKS RELATED TO THE MERGER
NETRO STOCKHOLDERS AS A GROUP WILL RECEIVE A LIMITED NUMBER OF SHARES OF SR
TELECOM COMMON STOCK AND AN AGGREGATE CASH DIVIDEND OF US$100 MILLION, EVEN IF
THE NUMBER OF SHARES OF SR TELECOM OR NETRO COMMON STOCK OUTSTANDING INCREASES.
AS A RESULT, THE VALUE YOU RECEIVE MAY DECREASE BETWEEN NOW AND CLOSING.
The cash dividend to be paid by Netro is fixed at an aggregate of US$100
million and the number of shares of SR Telecom common stock to be issued in the
merger is limited to an aggregate of 41.5 million shares, with a possible minor
adjustment due to rounding. Upon consummation of the reverse stock split, the
aggregate number of shares of SR Telecom common stock to be issued to Netro
stockholders will be reduced in accordance with the ratio selected by SR
Telecom's board of directors from within the range of 1:5 and 1:15. Regardless
of the ratio used in the reverse stock split, Netro stockholders will receive
the same proportionate interest in SR Telecom. These amounts will be allocated
to Netro stockholders on a pro rata basis at the effective time of the merger.
Therefore, the exact exchange ratio cannot be determined until immediately prior
to the effective time.
While the ratio used in the reverse stock split will not affect the
proportionate interest in SR Telecom that holders of shares of Netro common
stock will receive in the merger, changes in the number of shares of Netro
common stock outstanding will affect the amount of the cash dividend and the
number of shares of SR Telecom common stock that any individual Netro
stockholder will receive. Between the date of this proxy statement/prospectus
and the effective time of the merger, the number of Netro shares outstanding is
likely to increase due to the exercise of stock options. As the number of Netro
shares outstanding increases, the amount of the cash dividend and the number of
shares of SR Telecom common stock available to Netro stockholders on a per share
basis decreases proportionately. Additionally, to the extent SR Telecom issues
new shares of common stock or other equity securities (including, for example,
the possible sale of such securities in a private placement before or after the
effective time of the merger) the percentage of SR Telecom's equity owned by
former Netro stockholders will decrease.
BECAUSE THE NUMBER OF SHARES OF SR TELECOM COMMON STOCK TO BE PAID TO NETRO
STOCKHOLDERS IS LIMITED, FLUCTUATIONS IN THE MARKET PRICE OF SR TELECOM COMMON
STOCK COULD DECREASE THE VALUE OF THE SHARES OF SR TELECOM COMMON STOCK TO BE
RECEIVED IN THE MERGER.
Other than due to the reverse stock split discussed above, the aggregate
number of shares of SR Telecom common stock that Netro stockholders will be
entitled to receive upon completion of the merger will not change, even if the
market price of SR Telecom common stock or Netro common stock changes. There
will be no adjustment to the exchange ratio or right to terminate the merger
agreement based solely on fluctuations in the price of shares of SR Telecom
common stock or Netro common stock. The market price of shares of SR Telecom
common stock upon and after completion of the proposed merger could be lower
than the market price on the date you submit your proxy, which would decrease
the value of the shares of SR Telecom common stock you receive in the merger.
You should obtain recent market quotations of SR Telecom common stock before you
submit your proxy.
For a discussion of the estimated per share merger consideration, see the
section entitled "The Netro Special Stockholder Meeting -- The Merger Proposal".
24
YOU MAY FIND IT DIFFICULT TO ENFORCE YOUR RIGHTS BECAUSE SR TELECOM IS A
FOREIGN COMPANY.
Judgments of U.S. courts including judgments against SR Telecom or its
board of directors or officers that are predicated on the civil liability
provisions of the federal securities laws of the United States are not directly
enforceable in Canada. Even if a shareholder prevails on a claim in a United
States court, it may find it difficult or impossible to enforce its rights in
Canada and might have to relitigate the merits of the matter before the
competent court in Canada in order to enforce its rights. Furthermore, a
shareholder may find it difficult or impossible to effect service of process on
the members of SR Telecom's board, its officers and others connected to it.
THE COSTS TO COMPLETE THE MERGER AND INTEGRATION ARE SUBSTANTIAL. THESE COSTS
AND THE MANNER OF ACCOUNTING FOR THE MERGER MAY AFFECT THE COMBINED COMPANY'S
REPORTED RESULTS OF OPERATIONS.
It is anticipated that SR Telecom and Netro will incur approximately CDN$30
million of costs in connection with the merger. This includes costs associated
with combining the businesses of the two companies, such as integration and
restructuring costs, costs associated with the consolidation of operations and
the fees of financial advisors, attorneys, accountants and other advisors. SR
Telecom and Netro will also incur a number of expenses prior to the closing of
the merger, which will increase operating costs. Some of these costs are
expected to be charged to expenses in the period incurred, increasing the
combined company's loss for that period. The remaining costs included in this
calculation, consisting primarily of severance payments, lease termination
payments, and fees and expenses paid to financial advisors, attorneys,
accountants and other advisors, will be a component of the purchase price and
will be allocated to the net identifiable assets acquired and any deficiency
will be recorded as a reduction of the tangible assets and intangible assets,
and the remainder, if any, will be attributed to negative goodwill. Negative
goodwill is recorded as an extraordinary gain in the statement of operations.
While the integration costs will be funded from the cash and marketable
securities held by the combined company, which should be sufficient to cover the
integration costs, management of SR Telecom may not be able to effectively
control the costs associated with the integration of the two companies. These
costs may also be higher than anticipated. If integration costs are not managed
effectively or if they are higher than anticipated, then operating costs may be
higher than anticipated, which could lead to continued net losses from the
combined company, and the market price of SR Telecom common stock could decline.
IF SR TELECOM DOES NOT SUCCESSFULLY INTEGRATE NETRO OR THE MERGER DOES NOT MEET
THE EXPECTATIONS OF INVESTORS OR FINANCIAL OR INDUSTRY ANALYSTS, THE MARKET
PRICE OF SR TELECOM COMMON STOCK MAY DECLINE.
The market price of SR Telecom common stock may decline as a result of the
merger for many reasons, including:
- the integration of SR Telecom and Netro may not be completed in a timely
and efficient manner;
- the perceived benefits of the merger may not be achieved as rapidly as,
or to the extent anticipated by, financial or industry analysts;
- SR Telecom's assumptions about Netro's business model and operations,
considered on a stand-alone basis, may prove too optimistic; or
- significant holders of shares of SR Telecom common stock following the
merger may decide to dispose of their shares of SR Telecom common stock
because the results of the merger may not be consistent with their
expectations.
IF SR TELECOM IS NOT ABLE TO SUCCESSFULLY MARKET AND SELL NETRO'S NEW ANGEL
PRODUCT SOME OF THE ANTICIPATED BENEFITS OF ITS ACQUISITION OF NETRO MAY NEVER
BE ACHIEVED.
In February 2002, Netro acquired technologies and other assets from AT&T
Wireless associated with the Angel product. Netro has modified the Angel
platform to conform to international standards. Netro completed these
modifications in the second half of 2002, but has not achieved any material
Angel product sales to date.
25
Although Netro and SR Telecom believe that the Angel product continues to hold
significant promise, SR Telecom cannot assure you that the Angel product will
achieve market acceptance or generate revenues. When Netro acquired the Angel
platform from AT&T Wireless, it acquired a license to several patents and
numerous patent applications associated with the Angel platform. AT&T Wireless
has only agreed not to license these patents to its competitors for a period of
five years, and Netro and SR Telecom cannot assure you that AT&T Wireless will
enforce the combined company's rights against potential infringers. The failure
of AT&T Wireless to enforce the combined company's rights could adversely affect
the combined company's ability to sell the Angel product.
SR Telecom's ability to sell Netro's Angel product is substantially
dependent on whether high speed wireless telecommunications equipment gains
market acceptance as a means to provide telecommunications voice and data
services. If service providers adopt technologies other than Angel's high speed
wireless technology, SR Telecom may not be able to sustain or grow Netro's
business. In addition, widespread acceptance of Angel may be hindered by
inherent technological limitations, such as coverage limitations or bandwidth
limitations. If SR Telecom is unable to sell Angel products, it may be forced to
take further action to reduce costs in order to minimize the expected negative
impact to its earnings. SR Telecom cannot predict what the extent of these
reductions might be, and it would have to assess the options available to it at
the time.
INTEGRATION OF SR TELECOM'S AND NETRO'S BUSINESSES MAY BE DIFFICULT TO ACHIEVE,
WHICH MAY ADVERSELY AFFECT OPERATIONS.
The merger involves risks related to the integration and management of
technology, operations and personnel of two companies. SR Telecom and Netro have
different technologies, products and business operations that have operated
independently. The integration of the businesses of SR Telecom and Netro will be
a complex, time-consuming and expensive process that may disrupt the businesses
and adversely affect the operating results of the combined company. Following
the merger, SR Telecom and Netro must operate as a combined organization using
common information and communications systems, operating procedures, financial
controls and human resources practices.
SR Telecom and Netro may encounter substantial difficulties, costs and
delays in integrating their operations, including:
- potential conflicts between business cultures;
- potential inability to retain Netro's customers;
- adverse changes in business focus perceived by third-party
constituencies;
- potential conflicts in distribution, marketing or other important
relationships;
- an inability to implement uniform standards, controls, procedures and
policies;
- a failure to effectively integrate research and development efforts; and
- the loss of key employees or the diversion of management's attention from
other ongoing business concerns.
If SR Telecom fails to integrate the businesses successfully, the results
of the combined company could decrease because the combined company may not
achieve the operating efficiencies that SR Telecom hopes to obtain from the
merger.
THE GEOGRAPHIC DISTANCE BETWEEN SR TELECOM'S AND NETRO'S OFFICES, AS WELL AS SR
TELECOM'S LIMITED OPERATING HISTORY IN THE UNITED STATES, MAY INCREASE THE
DIFFICULTY IN INTEGRATING THE TWO COMPANIES, WHICH MAY ADVERSELY AFFECT
OPERATIONS.
Netro is headquartered in northern California and develops its Angel
product in Redmond, Washington, while SR Telecom is headquartered in Montreal,
Quebec, Canada. The geographic distance between the companies and their
respective offices and operations, and SR Telecom's limited operating history in
the United States may increase the risk that the integration will not be
completed successfully or in a timely and
26
cost-effective manner. The management of SR Telecom may not be successful in
overcoming these risks or any other problems encountered in connection with the
integration of the companies, and there can be no assurance that the combined
company will realize any of the anticipated benefits of the merger.
THE NETRO BOARD OF DIRECTORS WILL NOT PAY THE US$100 MILLION CASH DIVIDEND AND
THE MERGER WILL NOT BECOME EFFECTIVE IF THE BOARD DETERMINES THAT PAYMENT OF
SUCH DIVIDEND IS NOT PERMISSIBLE UNDER APPLICABLE LAW.
In order for the merger to become effective, the Netro board of directors
must declare, pay and set aside the US$100 million cash dividend. The Netro
board will not declare or pay the cash dividend if, at the time of its
determination, it concludes that the cash dividend cannot be made in compliance
with applicable law, including the capital surplus rule and solvency laws
described in the section entitled "The Merger -- Netro's Reasons for the
Merger -- Factors Considered in Connection with the Cash Dividend". While the
board has made a determination that, based on information known to it as of
March 25, 2003, assuming no change in this information prior to the effective
time of the merger and assuming that the transactions contemplated by the merger
agreement are carried out as proposed, the cash dividend could be lawfully
declared just prior to the effective time of the merger, there is no assurance
that the board will be able to make the same determination immediately prior to
the effective time of the merger. If the board determines immediately prior to
the effective time that payment of the cash dividend would be illegal or
otherwise cannot be made in compliance with applicable law, the cash dividend
will not be declared or paid, the merger will not take place and Netro will be
obligated to pay SR Telecom US$2 million plus SR Telecom's expenses.
IF THE CASH DIVIDEND IS PAID, IT MAY BE CHALLENGED AS AN ILLEGAL DIVIDEND
AND/OR A FRAUDULENT TRANSFER OR CONVEYANCE. IF A COURT WERE TO DETERMINE THAT
THE CASH DIVIDEND CONSTITUTES AN ILLEGAL DIVIDEND OR FRAUDULENT TRANSFER OR
CONVEYANCE, THE STOCKHOLDERS OR THEIR TRANSFEREES MAY BE REQUIRED TO RETURN THE
CASH DIVIDEND.
Under the United States Bankruptcy Code and comparable provisions of state
fraudulent transfer or conveyance laws, a transfer is a fraudulent transfer if
the transferor receives less than reasonably equivalent value and the transferor
was insolvent at the time of the transfer, was rendered insolvent by the
transfer or was left with unreasonably small capital to engage in its business.
A transfer may also be a fraudulent transfer if it is made with intent to
hinder, delay or defraud creditors. If the cash dividend or the merger is
determined to be a fraudulent transfer, a court may require the stockholders or
any immediate or mediate transferee of any stockholders to return the amount of
the cash dividend.
Because Netro will not receive reasonably equivalent value when it pays the
cash dividend to the stockholders, a court may conclude that the cash dividend
is a fraudulent transfer if it determines that Netro is insolvent at the time of
the cash dividend, is rendered insolvent by the cash dividend or is left with
unreasonably small capital to engage in its business following the payment of
the cash dividend. Netro and SR Telecom believe that Netro is solvent and
adequately capitalized. Prior to declaring the cash dividend, Netro's board of
directors will obtain a final opinion of American Appraisal Associates, Inc. to
the effect that Netro will be solvent and adequately capitalized immediately
after giving effect to the payment of the cash dividend. This opinion, including
the conditions, assumptions and limitations of the opinions of American
Appraisal Associates, Inc. are described in detail below under the caption
"Opinions of Netro's Advisors -- Opinion of American Appraisal Associates, Inc."
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE CASH DIVIDEND AND THE MERGER
ARE SUBJECT TO UNCERTAINTY.
Because the facts relevant for determining the proper treatment of the cash
dividend and the merger for U.S. federal income tax purposes will not be known
until the closing of the merger or thereafter, the material U.S. federal income
tax consequences of the cash dividend and the merger are subject to uncertainty.
In particular, there are three possible factual scenarios, and although SR
Telecom and Netro believe one scenario is the most likely to occur, neither SR
Telecom's nor Netro's counsel is able to render an opinion as to the proper
characterization of the cash dividend and the merger.
27
It is the opinion of Pillsbury Winthrop LLP, counsel to SR Telecom, and
Davis Polk & Wardwell, counsel to Netro, that under the three possible factual
scenarios, a Netro stockholder would be required to recognize (i) gain, if any,
but not loss, (ii) neither gain nor loss or (iii) gain or loss for U.S. federal
income tax purposes. Although SR Telecom and Netro believe that the most likely
scenario to occur is the one in which a stockholder would be required to
recognize gain, if any, but not loss for U.S. federal income tax purposes, no
assurances can be given in this regard. For more details, see the section
entitled "Material Tax Considerations -- U.S. Federal Income Tax Considerations"
beginning on page 79.
Holders of shares of Netro common stock should consult their tax advisors
regarding U.S. federal income tax consequences of the cash dividend and the
merger.
RISKS RELATED TO THE BUSINESSES OF SR TELECOM AND THE COMBINED COMPANY
LENDERS TO SR TELECOM'S CHILEAN SUBSIDIARY MAY ELECT NOT TO RENEW COVENANT
WAIVERS THAT EXPIRE IN FEBRUARY 2004.
SR Telecom's wholly-owned subsidiary in Chile, Comunicacion y Telefonia
Rural, or CTR, is party to credit facilities under which US$38 million of debt
is outstanding at July 31, 2003. The loan documents provide the lenders with
full recourse to the assets of SR Telecom if certain financial and operational
covenants are not satisfied. The lenders have waived compliance with these
covenants through February 13, 2004, in exchange for a fee. CTR does not expect
to satisfy these covenants for the foreseeable future. If the lenders do not
waive these defaults when the existing waivers expire in February 2004, CTR will
be in default and all amounts due under the credit facilities could be declared
due and immediately payable. In addition, such a default would trigger a
cross-default under SR Telecom's public debentures and bank debt, permitting the
debentures and bank debt to be accelerated. Such acceleration would have
material and adverse consequences for the combined company's business, financial
position and results of operations, may cause SR Telecom to seek protection from
its creditors under applicable bankruptcy or insolvency legislation.
SR TELECOM IS SUBSTANTIALLY LEVERAGED, WHICH COULD POSE AN INSOLVENCY RISK AND
IMPAIR THE COMBINED COMPANY'S ABILITY TO GAIN ACCESS TO NECESSARY ADDITIONAL
FUNDING.
In addition to the CTR debt, SR Telecom had CDN$80 million (US$54.4
million) of public and bank debt outstanding as of March 31, 2003. SR Telecom's
trust indenture governing its public debentures limits the amount of
indebtedness that may be incurred, but does not prohibit the incurrence of debt.
SR Telecom is limited under its trust indenture to the borrowing facilities it
currently has outstanding, and as of March 31, 2003, could not incur any
additional indebtedness under the most restrictive provisions in the indenture.
Furthermore, the indenture limits, but does not prohibit, the incurrence of
certain other indebtedness by SR Telecom and its subsidiaries or its operating
companies. The balance of the debentures is due in a bullet payment at maturity
in April 2005. If SR Telecom is unable to refinance this debt when it becomes
due, there will be material and adverse consequences for SR Telecom's financial
position and results of operations, and may cause SR Telecom to seek protection
from its creditors under applicable bankruptcy or insolvency legislation.
SR Telecom's and the combined company's operations are by their nature
capital intensive. The combined company will therefore require continuing access
to financing to fund additional development and acquisition opportunities, the
retirement of maturing debt, working capital needs, capital expenditures and
other cash requirements. If the combined company is unable to obtain such
additional financing or refinance its existing debt, it may be unable to repay
its existing debt or meet its capital needs. If the combined company were unable
to repay its existing debt or meet its capital needs using its cash and cashflow
from operations, it could be forced to sell other assets needed for its
business. A substantial portion of cash flow from operations would need to be
dedicated to repayment of debt, thereby reducing the availability of cash flow
to fund the combined company's working capital, capital expenditures, research
and development efforts, potential acquisition opportunities and other general
corporate purposes. This could reduce the combined company's flexibility in
planning for or reacting to changes in its business, or leave it unable to make
strategic acquisitions, introduce new products or exploit new business
opportunities.
28
THE COMBINED COMPANY WILL HAVE A LONG SALES CYCLE, WHICH COULD CAUSE ITS
RESULTS OF OPERATIONS AND STOCK PRICE TO FLUCTUATE.
The combined company's sales cycles are expected to be long and
unpredictable. As a result, its revenues may fluctuate from quarter to quarter
and it may be unable to adjust its expenses accordingly. This would cause its
operating results and stock price to fluctuate. OEMs and service providers
typically perform numerous tests and extensively evaluate products before
incorporating them into networks. Some additional factors that are likely to
affect the length of the combined company's sales cycle include:
- availability of radio frequency;
- currency and capital markets crises;
- availability of financing to the customer;
- budget allocation by the customer;
- political and regulatory issues;
- scope of a given project;
- complexity of a given network;
- deployment and planning of network infrastructure; and
- acquisition of roof rights.
In addition, SR Telecom and Netro expect that the delays which would be
inherent in the combined company's sales cycle would raise additional risks of
service providers deciding to cancel or change their product plans. The combined
company's business would be adversely affected if a significant customer reduces
or delays orders during its sales cycle or chooses not to deploy networks
incorporating the combined company's products.
THE COMBINED COMPANY WILL BE SUBJECT TO THE RISKS OF DOING BUSINESS IN
DEVELOPING COUNTRIES.
The combined company plans to continue marketing and selling its
telecommunications products and services to customers around the world, with a
focus on developing countries. Accordingly, the combined company will be subject
to all the risks of doing business with customers in such countries, including
dealing with:
- trade protection measures and import or export licensing requirements;
- difficulties in enforcing contracts;
- difficulties in protecting intellectual property;
- unexpected changes in regulatory requirements;
- legal uncertainty regarding liability, tax, tariffs and other trade
barriers;
- foreign exchange controls and other currency risks;
- inflation;
- challenges to credit and collections;
- expropriation; and
- government instability, war, riots, insurrections and other political
events.
Although the combined company intends to obtain political risk insurance
covering a some of the events listed above, insurance proceeds under such
policies would likely not cover all losses and such insurance may not be
available on commercially reasonable terms, or at all.
29
THE COMBINED COMPANY MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER LEADING
PROVIDERS OF EQUIPMENT AND SYSTEMS IN THE WIRELESS COMMUNICATIONS INDUSTRY,
MANY OF WHOM HAVE GREATER FINANCIAL RESOURCES THAN THE COMBINED COMPANY, AS A
RESULT OF WHICH ITS REVENUES AND RESULTS OF OPERATIONS MAY BE IMPAIRED.
The combined company faces competition in the following markets:
Enterprise Access. In the enterprise access market, the combined company's
point-to-multipoint fixed wireless solutions compete with wire-based solutions,
such as fiber optic cable and leased T1 and E1 lines and wireless solutions,
such as point-to-point radios. The combined company will compete against large
OEMs, such as Alcatel, NEC, Ericsson, Marconi, Intracom and Siemens as well as
with smaller wireless-only companies, such as Alvarion and AirSpan.
Residential and Small Business Access. In the residential and small
business access market, point-to-multipoint fixed wireless solutions compete
with wire-based solutions, such as DSL and cable modems, and against established
wireless local loop vendors, such as Innowave, which has recently been acquired
by Alvarion, and AirSpan, as well as with numerous startup companies that are
developing products for the industry.
Mobile Infrastructure. In the market for mobile infrastructure
technologies connecting cellular base stations to the core telecommunications
network, point-to-multipoint fixed wireless solutions compete with wire-based
solutions such as leased T1 and E1 lines and wireless solutions such as
point-to-point radios. The combined company will compete principally with large
OEMs, such as Alcatel, Ericsson and Marconi.
Competition is likely to persist and intensify in the future. Many of the
combined company's competitors will be substantially larger and have
significantly greater financial, sales, marketing, technical, manufacturing and
other resources and more extensive distribution channels than the combined
company. These competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion, sale and financing of their products
than the combined company will be able to. The combined company's competitors
may also attempt to influence the adoption of standards that are not compatible
with the combined company's current architecture. This may require it to incur
additional development and integration costs and may delay its sales efforts.
Some of the combined company's competitors may make strategic acquisitions
or establish cooperative relationships to increase their ability to gain
customer market share rapidly. These competitors may enter the combined
company's existing or future markets with solutions that may be less expensive,
provide higher performance or additional features or be introduced earlier than
the solutions of the combined company. If any technology that is competing with
a technology of the combined company is more reliable, faster, less expensive or
has other advantages over the combined company's technology, then the demand for
the combined company's products and services would decrease, which would
seriously harm its business.
To be competitive, the combined company must invest significant resources
in research and development, sales and marketing and customer support. The
combined company may not have sufficient resources to make these investments or
be able to make the technological advances necessary to be competitive. As a
result, the combined company may not be able to compete effectively against its
competitors.
IF THE COMBINED COMPANY DOES NOT MEET PRODUCT INTRODUCTION DEADLINES, OR ITS
PRODUCTS DO NOT CONTAIN KEY ENHANCEMENTS, IT MAY NOT BE COMPETITIVE AND
REVENUES AND RESULTS OF OPERATIONS MAY BE IMPAIRED.
The combined company's inability to develop new products or product
features on a timely basis, or the failure of new products or product features
to achieve market acceptance, could adversely affect its revenues and revenue
growth. In the past, SR Telecom and Netro each experienced design and
manufacturing difficulties that delayed their development, introduction or
marketing of new products and enhancements, which caused them to incur
unexpected expenses. In addition, some of Netro's and SR Telecom's customers
have conditioned their future product purchases on the addition of new product
features. Furthermore, in order to compete in additional markets, the combined
company will have to develop different versions of its existing products that
operate at different frequencies and comply with diverse, new or varying
governmental regulations in each market, which could also delay the introduction
of new products.
30
SR TELECOM AND NETRO HAVE A HISTORY OF NET LOSSES AND THE COMBINED COMPANY MAY
NOT ACHIEVE OR MAINTAIN PROFITABILITY, WHICH WOULD IMPAIR ITS SHARE PRICE AND
LIQUIDITY.
SR Telecom has incurred a loss from operations in its last two fiscal
years. As of March 31, 2003, SR Telecom's accumulated deficit was approximately
CDN$75.4 million pursuant to U.S. GAAP. Netro has never recorded net income from
operations and as of March 31, 2002, Netro had an accumulated deficit of
US$288.4 million. The combined company is expected to continue to have losses in
2003. While SR Telecom cannot predict whether it will have losses in 2004,
failure to achieve breakeven in 2004 could have a material adverse effect on the
combined company's business and prospects.
The combined company's ability to achieve and maintain profitability will
depend on, among other things, the ability to secure new business, the ability
to timely develop new products and features, the market acceptance of its
products and the ability to reduce product and other costs sufficiently.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO THE
COMBINED COMPANY'S BUSINESS.
As part of its business strategy, the combined company may acquire assets
and businesses principally relating or complementary to SR Telecom's and Netro's
current operations. Any other acquisitions or mergers by the combined company
will be accompanied by the risks commonly encountered in acquisitions of
companies. These risks include, among other things:
- exposure to unknown liabilities of acquired companies;
- higher than anticipated acquisition costs and expenses;
- effects of costs and expenses of acquiring and integrating new businesses
on the operating results and financial condition of the combined company;
- the difficulty and expense of integrating the operations and personnel of
the target companies, especially where the target company is in a
geographically distant location;
- disruption of the combined company's ongoing business;
- diversion of management's time and attention;
- failure to maximize the combined company's financial and strategic
position by the unsuccessful incorporation of acquired technology;
- the inability to implement uniform standards, controls, procedures and
policies;
- loss of key employees and customers as a result of changes in management;
- the incurrence of amortization expenses; and
- possible dilution to the shareholders of the combined company.
The combined company may not be successful in overcoming these risks or any
other problems encountered in connection with any acquisitions.
Further, your ownership of the combined company will be diluted if equity
securities are issued in connection with any acquisition. If acquisitions are
made for cash consideration, the combined company may be required to use a
substantial portion of its available cash, cash equivalents and short-term
investments. Acquisition financing may not be available on acceptable terms, if
at all and the combined company's ability to make acquisitions will be limited
by SR Telecom's current debt obligations.
THE COMBINED COMPANY'S PRODUCTS COULD BECOME OBSOLETE AS A RESULT OF RAPID
TECHNOLOGICAL CHANGE, LIMITING ITS ABILITY TO GENERATE CONTINUING REVENUES AND
EARNINGS.
The telecommunications industry is subject to rapid and substantial
technological change. The combined company may not be able to keep pace with
technological developments or developments by other companies that could render
the combined company's products or technologies non-competitive. Other companies
have
31
developed, and will continue to develop, technologies that could be the basis
for competitive products. Some of these technologies and products could be more
effective and less costly than the combined company's products or technologies,
thereby eroding the combined company's market share.
THE COMBINED COMPANY MAY ENCOUNTER CONTINUED COMPETITIVE PRESSURES TO LOWER
SELLING PRICES. IF THE COMBINED COMPANY CANNOT SUCCESSFULLY REDUCE ITS PRODUCT
COSTS, ITS RESULTS OF OPERATIONS AND EARNINGS WILL SUFFER.
The market for fixed wireless access telecommunications equipment is
rapidly evolving and highly competitive. Increased competition may result in
price reductions, shorter product life cycles, longer sales cycles and loss of
market share, any of which could adversely affect the combined company's
business. If the combined company cannot reduce the cost of its products enough
to keep pace with the required price reductions, then its product sales or its
gross margins, and consequently its results of operations, will suffer. Netro
has experienced significant delays in implementing cost reductions in the past
and the combined company may continue to experience delays in the future.
The combined company's ability to implement cost reductions will also be
dependent on factors outside of its control. For example, its cost for contract
manufacturing may be largely impacted by the level and volume of its orders
which will be driven by its customers' demand. Also, its contract manufacturers
must correctly implement cost reductions that the combined company designs into
the products. The combined company's cost projections are based upon assumptions
regarding the ability of its contract manufacturers to achieve volume-related
cost reductions. Some of its design cost reductions will depend on the emergence
of low-cost components which are likely to be developed by third parties. The
combined company will not control these third parties. To the extent these third
parties are unable or unwilling to cooperate with it in reducing product cost,
or their efforts in this regard are not timely, the combined company's product
costs will exceed SR Telecom's and Netro's internal projections.
In addition, the price for wireless telecommunications equipment is driven
by the prevailing price for other connection technologies, such as the cost of
obtaining digital subscriber line service or leasing a T1 connection from the
traditional telecommunications service provider in a given locale. The price of
these connections has declined significantly in many countries in the recent
past, and could decline significantly in the future. If this trend continues,
service providers might be more likely to use these kinds of connections than to
introduce new technology such as the combined company's products, which would
adversely affect its revenues and earnings.
BECAUSE THE COMBINED COMPANY MUST SELL ITS PRODUCTS IN MANY COUNTRIES THAT HAVE
DIFFERENT REGULATORY SCHEMES, IF IT CANNOT DEVELOP PRODUCTS THAT WORK WITH
DIFFERENT STANDARDS, ITS OPPORTUNITIES FOR GROWTH WILL BE LIMITED.
The combined company must sell its products in many different countries in
order to grow. Many countries require communications equipment used in their
country to comply with unique regulations, including safety regulations, radio
frequency allocation schemes and standards. If the combined company is unable to
develop products that work with different standards, it will be unable to sell
its products. If compliance proves to be more expensive or time consuming than
it anticipates, its business would be adversely affected. Some countries have
not completed their radio frequency allocation process and therefore the
standards with which the combined company will be forced to comply are unknown.
Furthermore, standards and regulatory requirements are subject to change. If the
combined company fails to anticipate or comply with these new standards, its
revenues and results of operations will be adversely affected.
BECAUSE SOME OF THE COMBINED COMPANY'S KEY COMPONENTS ARE FROM SOLE SOURCE
SUPPLIERS OR REQUIRE LONG LEAD TIMES, ITS BUSINESS WILL BE SUBJECT TO
UNEXPECTED INTERRUPTIONS, WHICH COULD CAUSE ITS OPERATING RESULTS TO SUFFER.
Some of the key components to be used in the combined company's products
are complex to manufacture and have long lead times. They are supplied by sole
source vendors for which alternative sources are not
32
currently available. In the event of a reduction or interruption of supply, or a
degradation in quality, as many as six months could be required before the
combined company would begin receiving adequate supplies from alternative
suppliers, if any. As a result, product shipments could be delayed and its
revenues and results of operations would suffer. If the combined company
receives a smaller allocation of component parts than is necessary to
manufacture products in quantities sufficient to meet customer demand, customers
could choose to purchase competing products and the combined company could lose
market share.
SR Telecom has decided to move the manufacturing of its SWING product from
a facility owned by a sole source subcontractor in France to its Montreal
headquarters. If a labor action at this facility continues, SR Telecom may be
unable to gain access to equipment it needs to send to its Montreal facility,
which could delay the start of manufacturing the SWING product there. This could
materially delay the delivery of products to existing customers, which could
materially negatively impact SR Telecom's future revenues, results of operations
and earnings.
PRODUCTS OF THE COMBINED COMPANY MAY CONTAIN DEFECTS THAT COULD HARM ITS
REPUTATION, BE COSTLY TO CORRECT, EXPOSE IT TO LITIGATION AND HARM ITS
OPERATING RESULTS AND PROFITS.
SR Telecom and Netro and their customers have from time to time discovered
defects in SR Telecom's and Netro's products and additional defects may be found
in the future. If defects are discovered, the combined company may not be able
to correct them in a timely manner or at all. Defects and failures in its
products could result in a loss of, or a delay in, market acceptance of the
combined company's products. In addition, defects in its products could cause
adverse publicity, damage its reputation and impair its ability to acquire new
customers. In addition, the combined company may need to make significant
expenditures to eliminate defects from its products.
Moreover, because its products are used in critical telecommunications
networks, the combined company may be subject to significant liability claims if
its products do not work properly. The provisions in its agreements with
customers that are intended to limit its exposure to liability claims may not
preclude all potential claims. In addition, the combined company's insurance
policies may not adequately limit its exposure with respect to such claims. SR
Telecom and Netro warranted to their current customers that their respective
products will operate in accordance with product specifications. If these or the
combined company's future products fail to conform to such specifications, the
combined company's customers could require it to remedy the failure or could
assert claims for damages. Liability claims could require the combined company
to spend significant time and money in litigation or to pay significant damages.
Any such claims, whether or not successful, would be costly and time-consuming
to defend and could seriously damage the reputation and business of the combined
company.
THE COMBINED COMPANY'S OPERATING RESULTS AND LIQUIDITY MAY BE ADVERSELY
AFFECTED IF SR TELECOM DOES NOT SUCCESSFULLY RESOLVE PENDING COMMERCIAL
DISPUTES.
As described under "SR Telecom Business -- Litigation", SR Telecom is party
to arbitration proceedings arising from unrelated disputes involving telecom
projects in Ghana and Haiti. The Ghana proceedings include damage claims against
SR Telecom for breach of contract in the amount of US$1.3 million plus special
damages, interest and costs, as well as potential SR Telecom liability to
reimburse payment on a US$406,000 performance bond. In connection with the Haiti
project dispute, SR Telecom has filed a statement of claim for US$4.86 million
against MCI International in MCI's bankruptcy. If SR Telecom loses the Ghana
arbitration and is forced to pay the full amount of damages claimed against it,
or SR Telecom fails to recover a substantial amount from MCI International, the
companies' results of operations and liquidity may be adversely affected.
SR TELECOM AND THE COMBINED COMPANY FACE RISKS ASSOCIATED WITH NETRO
STOCKHOLDER LITIGATION.
Netro and certain members of its board of directors are currently being
sued in two different lawsuits by plaintiffs who claim that they owned shares of
Netro's common stock at the time of each of the events in question in each suit.
One of the lawsuits involves allegations relating to inadequate disclosure of
underwriting
33
commissions and practices in violation of securities laws and regulations in
relation to its initial public offering. Although Netro has accepted a proposal
to settle this lawsuit, that proposal has not yet received the required court
approval.
A second lawsuit alleges that Netro's current and certain former directors
breached their fiduciary duties to Netro by, among other things, allegedly
failing to properly value and obtain the highest price reasonably available for
Netro, favoring SR Telecom over competing potential acquirers and engaging in
self-dealing in connection with the merger. The second lawsuit also alleges that
Netro's directors, among other things, breached their fiduciary duties to Netro
allegedly by causing Netro to repurchase stock in the August 2002 issuer
self-tender in an effort to entrench themselves in response to offers by
Crosswind and Wyndcrest to acquire Netro, failing to disclose offers it had
received from Crosswind adequately and in a timely manner, rejecting prior
proposals by Wyndcrest to acquire Netro, and refusing to invite or grant
permission currently to Wyndcrest to make a proposal to acquire Netro despite
Wyndcrest's stated interest in making such a proposal. Plaintiffs further allege
that at a deposition taken in July 2003 with respect to the lawsuit, a
representative of Wyndcrest testified that Wyndcrest remains interested in
acquiring Netro and that after it has obtained further unspecified information
from Netro, it would like the opportunity to make another proposal to acquire
Netro, that is superior to SR Telecom's proposal. No one has made a written
proposal or has requested from Netro its permission to make such a proposal,
since Netro and SR Telecom entered into the Merger Agreement on March 27, 2003.
The time for Netro and the individual defendants to respond to the consolidated
complaint has not yet expired. Among other things, the complaint in the second
lawsuit seeks preliminary and injunctive relief to prevent the merger from
closing. The parties have reached an agreement in principle to settle this
lawsuit. The terms of the settlement include, among other things, that Netro
make certain supplements and amendments to the disclosures in this proxy
statement/prospectus (which suggested changes have been made) that Netro
covenant that it will not sell all or substantially all of the assets of the
Airstar or Angel product lines for a period of nine months after the closing
date of the merger (and to the extent that such sale occurs nine months after
the closing date of the merger, Netro shall pay US$4.5 million to the members of
the class of Netro stockholders defined in the lawsuit), that SR Telecom waive
its right to a termination fee under Section 11.04(b)(iii) of the merger
agreement if the merger agreement is terminated under the circumstances
described therein and Netro consummates a qualifying transaction, as such term
is defined in the merger agreement, more than fourteen months following the
termination, and that Netro agree not to oppose an award of fees to class
counsel approved by the court if such award does not exceed US$590,000 inclusive
of expenses and costs. The parties are preparing definitive settlement documents
for submission to the court for its required approval. Both of the foregoing
lawsuits if not settled could be costly and could require a significant
commitment of time and resources by management of the combined company. Netro
and SR Telecom cannot predict with certainty the outcome of these lawsuits.
THE COMBINED COMPANY WILL BE RESPONSIBLE FOR NETRO'S OBLIGATIONS, SOME OF WHICH
MAY BE SETTLED AT AMOUNTS WHICH ARE MATERIALLY DIFFERENT THAN THE AMOUNTS
ACCRUED FOR IN NETRO'S CONSOLIDATED FINANCIAL STATEMENTS.
NETRO HAS RECORDED SIGNIFICANT ACCRUED LIABILITIES.
These liabilities include its obligations in connection with its litigation
and arbitration proceedings, and may involve other obligations which have not
yet become known, such as potential product liability claims. Netro has made
estimates of these liabilities to the extent it is aware of them, but there can
be no assurance that the actual settlement of these liabilities will not differ
materially from amounts accrued. If these liabilities are more extensive than
anticipated, they could result in additional expense for the combined company
and divert the attention of management of the combined company to respond to
these unexpected obligations.
THE COMBINED COMPANY MAY HAVE TO ACQUIRE SIGNIFICANT INVENTORY TO SUPPORT
FUTURE SALES AND FOR LONG-TERM PRODUCT SUPPORT.
SR Telecom has acquired and may continue to acquire significant inventory
in order to support contractual obligations in relation to discontinued product
lines and discontinued components in existing products. If sales of
34
such products or components do not materialize, SR Telecom could end up with
inventory levels that are significantly in excess of its needs, which could
diminish its working capital or cause significant losses.
THE COMBINED COMPANY WILL BE EXPOSED TO CURRENCY RISK. SIGNIFICANT FLUCTUATIONS
IN EXCHANGE RATES COULD REDUCE REVENUES, EARNINGS, INVESTMENTS AND LIQUIDITY.
The combined company's reporting currency will be the Canadian dollar,
while the majority of the sales contracts are in other currencies. Fluctuations
between currencies will affect the reported values of revenues and eventual
collections. While the combined company will actively engage in hedging
activities to protect itself from fluctuations, there can be no assurance that
the practices will be adequate to eliminate potential negative effects.
The value of SR Telecom's investment in its foreign subsidiaries is
partially a function of the currency exchange rate between the Canadian dollar
and the applicable local currency. The devaluation of a foreign subsidiary's
local currency would result in a reduction in SR Telecom's carrying value of its
investment in such foreign subsidiary. As a result, SR Telecom may experience
economic losses with respect to its investments in foreign subsidiaries and
fluctuations in its results of operations solely as a result of currency
exchange rate fluctuations. Many of the currencies of developing countries have
experienced steady, and at times significant, devaluations relative to the
Canadian dollar, and significant exchange rate fluctuations have occurred in the
past and may again occur in the future, any of which could impair the
recoverability of long-term assets of the combined company.
In many circumstances, revenues generated by foreign subsidiaries will
generally be paid to the foreign subsidiaries in the local currency. By
contrast, some significant liabilities of the foreign subsidiaries, such as
liabilities for the financing of telecommunications equipment, may be payable in
U.S. dollars or in currencies other than the local currency. As a result, any
devaluation in the local currency relative to the currencies in which such
liabilities are payable could increase the Canadian dollar amounts payable and
negatively impact liquidity and earnings. Moreover, the combined company will
record revenues and expenses of its foreign subsidiaries in their home
currencies and translate these amounts into Canadian dollars. As a result,
fluctuations in foreign currency exchange rates in markets where the combined
company derives significant revenues or has significant operations may adversely
affect its revenues, expenses and results of operations, as well as the value of
its assets and liabilities.
THE COMBINED COMPANY'S ABILITY TO OPERATE COULD BE HINDERED BY THE PROPRIETARY
RIGHTS OF OTHERS AND SR TELECOM'S AND THE COMBINED COMPANY'S INABILITY TO
ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS.
A number of telecommunication companies have developed technologies, filed
patent applications or received patents on various technologies that may be
related to the combined company's business. Some of these technologies,
applications or patents may conflict with the combined company's technologies or
intellectual property rights. Such conflicts could limit the scope of the
patents, if any, that the combined company may be able to obtain or result in
the denial of its patent applications altogether.
If patents that cover the combined company's activities are issued to other
persons or companies, SR Telecom could be charged with infringement. In the
event that other parties' patents cover any portion of the combined company's
activities, SR Telecom may be forced to develop alternatives or negotiate a
license for such technology. SR Telecom may not be successful in either
developing alternative technologies or acquiring licenses upon reasonable terms,
if at all. Any such license could require the expenditure of substantial time
and other resources and could harm the combined company's business and decrease
its earnings. If SR Telecom does not obtain such licenses, it could encounter
delays in the introduction of its products or could find that the development,
manufacture or sale of products requiring such licenses is prohibited.
Despite efforts to protect proprietary rights, existing copyright,
trademark, patent and trade secret laws only afford limited protection. Third
parties may attempt to copy or reverse engineer aspects of the combined
company's products or proprietary information. Accordingly, the combined company
may not be able to adequately protect its intellectual property.
35
SR TELECOM AND THE COMBINED COMPANY MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF
LITIGATION OR OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL
PROPERTY RIGHTS.
SR Telecom and the combined company's future success and competitive
position depend in part on SR Telecom's ability to obtain and maintain certain
proprietary intellectual property rights used in the combined company's
principal products. Any such success may be achieved in part by prosecuting
claims against others who SR Telecom believes are infringing the rights of the
combined company and by defending claims of intellectual property infringement
brought by its competitors and others. The combined company's involvement in
intellectual property litigation could result in significant expense, adversely
affecting sales of the challenged product or intellectual property and diverting
the efforts of the combined company's technical and management personnel,
whether or not such litigation is resolved in its favor. In addition, in their
sales agreements, SR Telecom and Netro have agreed to indemnify their respective
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties, which obligations will
continue to be binding on the combined company and could expose the combined
company to additional costs. Some of the combined company's competitors may be
able to sustain the costs of complex patent litigation more effectively because
they have substantially greater resources. Uncertainties resulting from the
initiation and continuation of any litigation could affect the combined
company's ability to continue its operations. In the event of an adverse outcome
in any such litigation, SR Telecom may, among other things, be required to:
- pay substantial damages;
- cease the development, manufacture, use or sale of product candidates or
products that infringe upon the intellectual property of others;
- expend significant resources to design around a patent or to develop or
acquire non-infringing intellectual property;
- discontinue processes incorporating infringing technology; or
- obtain licenses to the infringing intellectual property, which may not be
available on terms acceptable to the combined company, if at all.
Should third parties file patent applications, or be issued patents
claiming technology also claimed by SR Telecom or Netro in pending applications,
the combined company may be required to participate in interference proceedings
with the Canadian Intellectual Property Office, U.S. Patent and Trademark
Office, or other proceedings outside Canada or the United States, including
oppositions, to determine priority of invention or patentability, which could
result in substantial cost to SR Telecom and the combined company even if the
eventual outcome were unfavorable.
BECAUSE CERTAIN SHAREHOLDERS OF THE COMBINED COMPANY WILL BENEFICIALLY OWN A
LARGE PERCENTAGE OF SR TELECOM'S VOTING STOCK, OTHER STOCKHOLDERS' VOTING POWER
MAY BE LIMITED.
If the merger is consummated, it is anticipated that LeBlanc & Royle
Enterprises Inc., Carso Global, Howson Tattersall, and SR Telecom's executive
officers, directors and affiliates will beneficially own or control
approximately 35.5% of the shares of SR Telecom common stock. As a result, if
such persons act together, they may influence all matters submitted to SR
Telecom's shareholders for approval, including the election and removal of
directors and the approval of any merger, consolidation or sale of all or
substantially all of SR Telecom's assets. In addition, Paul A. Dickie, the
chairman of SR Telecom's board of directors, and John C. Charles and Nancy E.
McGee, two of its other directors, are stockholders and serve as Managing
Directors of LeBlanc & Royle. These stockholders may make decisions that are
adverse to your interests. Upon completion of the merger, it is anticipated that
current directors and officers of Netro as a group will beneficially own
approximately 3.91% of the then outstanding shares of SR Telecom common stock,
assuming that each Netro share outstanding immediately prior to the effective
time is converted into 1.02697 shares of SR Telecom common stock, and assuming
the exercise of all vested stock options held by Netro's directors and officers
with an exercise price of $3.10 or less prior to the effective time of the
merger.
36
SR TELECOM'S STOCK PRICE HAS BEEN VOLATILE, AND IS LIKELY TO CONTINUE TO BE
VOLATILE AND COULD DECLINE SUBSTANTIALLY.
The price of SR Telecom common stock has been, and is likely to continue to
be, highly volatile, including after the merger. For example, in the last 24
months, shares of SR Telecom common stock traded on the Toronto Stock Exchange
have closed at a high of CDN$2.63 and at a low of CDN$0.55 Trading of SR Telecom
common stock on the Nasdaq National Market is expected to track the price of SR
Telecom common stock on the Toronto Stock Exchange, and thus it may be at least
as volatile, and possibly more volatile than in the past, because SR Telecom's
trading will be split between two different markets, thus dividing its
liquidity. In addition, changes in the U.S. dollar to Canadian dollar exchange
rate will affect the market price of SR Telecom's common stock on the Nasdaq
National Market. This could result in negative changes to the price of SR
Telecom common stock in U.S. dollars even if the underlying fundamentals of SR
Telecom are unchanged. A decline in the relative value of the Canadian dollar to
U.S. dollar would also have a negative impact on the value of any cash dividends
paid in Canadian dollars by SR Telecom on its shares of common stock. Some of
the factors that could cause SR Telecom's stock price to fluctuate significantly
in the future include:
- a failure to successfully combine the companies or otherwise achieve the
desired benefits of the merger and cost reductions for the combined
company;
- a failure to secure new business;
- the possibility that SR Telecom will not be able to obtain additional
waivers after February 2004 for defaults on CTR's project financing loans
or be unable to refinance its public debentures;
- risk that the combined company would be unable to meet its debt repayment
obligations;
- the delay of expected customer orders;
- future announcements concerning the combined company and its competitors;
- the introduction of new products or changes in product pricing policies
by the combined company or its competitors;
- an acquisition or loss of significant customers, distributors and
suppliers;
- changes in earnings estimates by analysts;
- changes in third-party reimbursement practices;
- sales of significant amounts of shares of SR Telecom common stock by SR
Telecom's shareholders after the merger either by former stockholders of
Netro selling because SR Telecom does not fit their investment profile,
or by existing SR Telecom shareholders selling for any reason. LeBlanc &
Royle, Carso Global Group and Howson Tattersall Investment Counsel
Limited will own approximately 30% of the aggregate number of shares of
SR Telecom common stock that will be outstanding after the merger, and
there will be no restrictions on the sale of their shares of SR Telecom
common stock other than those imposed by the U.S. or Canadian securities
laws; and
- fluctuations in the economy generally and general market conditions.
In addition, stock markets in general, and the market for shares of
telecommunications companies in particular, have experienced extreme price and
volume fluctuations in recent years that may be unrelated to the operating
performance of the affected companies. These broad market fluctuations may cause
the market price of SR Telecom common stock to decline. The market price of SR
Telecom common stock could decline below the current price and may fluctuate
significantly in the future. These fluctuations may or may not be related to the
combined company's performance or prospects.
Due in part to factors such as the timing of product release dates,
purchase orders and product availability, significant volume shipments of
products could occur at the end of the combined company's fiscal quarters.
Failure to ship products by the end of a quarter may adversely affect the
combined company's
37
operating results. In the future, its customers may delay delivery schedules or
cancel their orders without notice. Due to these and other factors, quarterly
revenue, expenses and results of operations could vary significantly, and
period-to-period comparisons should not be relied upon as indications of future
performance.
In the past, shareholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a shareholder files a securities class action suit, SR Telecom
could incur substantial legal fees and its management's attention and resources
could be diverted from operating the business of the combined company in order
to respond to the litigation.
THE LISTING OF SHARES OF SR TELECOM COMMON STOCK ON NASDAQ MAY NOT BE
MAINTAINED
As a condition to the merger, SR Telecom will apply to list the shares of
SR Telecom common stock to be issued in connection with the merger and the
related transactions on the Nasdaq National Market. Even if the shares of SR
Telecom common stock are initially approved for listing on the Nasdaq National
Market, there is no assurance that the shares of SR Telecom common stock will
continue to satisfy the listing requirements of the Nasdaq National Market. If
the shares of SR Telecom common stock are delisted from the Nasdaq National
Market, there will be no established trading market in the United States for
shares of SR Telecom common stock.
If the shares of SR Telecom common stock were to be delisted from the
Nasdaq National Market, shares of SR Telecom common stock would be considered a
"penny stock" and would trade on the OTC Bulletin Board or in the "Pink Sheets"
maintained by the National Quotation Bureau. The OTC Bulletin Board handles
over-the-counter stocks that do not meet the minimum stockholders' equity and
other requirements of the national securities exchanges. Securities on the OTC
Bulletin Board are governed by the SEC and must report certain regulatory
filings to maintain OTC status. The Pink Sheets trading system handles high-risk
ventures and is not regulated by the SEC. Such alternatives are generally
considered to be less efficient markets and not as broad as the Nasdaq National
Market.
If SR Telecom fails to maintain a Nasdaq listing for the shares of SR
Telecom common stock, and no other exclusion from the definition of a "penny
stock" under Rule 3a51-1 of the Securities Exchange Act of 1934, as amended, or
Exchange Act, is available, then any broker engaging in a transaction in the
shares of SR Telecom common stock would be required to provide any customer with
a risk disclosure document, disclosure of market quotations, if any, disclosure
of the compensation of the broker-dealer and its salesperson in the transaction
and monthly account statements showing the market values of shares of SR Telecom
common stock held in the customer's account. The bid and offer quotation and
compensation information must be provided prior to effecting the transaction and
must be contained on the customer's confirmation. If brokers become subject to
the penny stock rules when engaging in transactions in the shares of SR Telecom
common stock, they would become less willing to engage in transactions, thereby
making it more difficult for the holders of shares of SR Telecom common stock to
dispose of their shares.
U.S. HOLDERS OF SHARES OF SR TELECOM COMMON STOCK MAY NOT BE ABLE TO
PARTICIPATE IN OFFERINGS OF NEW SHARES.
If the combined company issues rights to holders of its shares of common
stock, U.S. holders may not be able to participate in any such offer of new
shares to existing shareholders because of restrictions on the offer and sale of
securities in the United States under U.S. securities laws and regulations. The
combined company may decide not to include U.S. holders in such an offering, so
as to avoid the cost and considerable effort involved in complying with the
registration requirements in the United States. The combined company might
instead decide to sell any rights which would otherwise be allocated to U.S.
holders and distribute the cash to the U.S. holders instead. In this case, U.S.
holders could be excluded from the opportunity to purchase additional shares of
SR Telecom's common shares at favorable rates.
38
AS A "FOREIGN PRIVATE ISSUER," SR TELECOM WILL BE EXEMPT FROM A NUMBER OF RULES
UNDER THE SECURITIES EXCHANGE ACT AND, ACCORDINGLY IS PERMITTED TO FILE LESS
INFORMATION WITH THE SEC THAN A COMPANY INCORPORATED IN THE UNITED STATES
As a "foreign private issuer," SR Telecom will be exempt from rules under
the U.S. Securities Exchange Act of 1934 that impose certain disclosure and
procedural requirements for proxy solicitations under Section 14 of the Exchange
Act. In addition, SR Telecom's officers, directors and principal shareholders
will be exempt from the reporting and "short-swing" profit recovery provisions
of Section 16 of the Exchange Act and the rules thereunder with respect to their
purchases and sales of shares of SR Telecom common stock. Moreover, SR Telecom
will not be required to file periodic reports and financial statements with the
SEC as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act, nor will it be required to comply with
Regulation FD, which restricts the selective disclosure of material information.
Accordingly, there may be less information concerning SR Telecom publicly
available than there is for U.S. companies. Also, as discussed below, the
combined company will be a Canadian company, which may permit it to use the
multi-jurisdictional disclosure system, which will permit it to furnish its
annual report on Form 40-F, which requires even less disclosure than the annual
report on Form 20-F required of other foreign private issuers.
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes "forward-looking statements" with
respect to the merger and the financial condition, results of operations, plans,
objectives, future performance and business of Netro, SR Telecom and the
combined company, and other topics, which are usually identified by the use of
words such as "will," "may," "anticipates," "believes," "estimates," "expects,"
"projects," "plans," "predicts," "continues," "intends," "should," "would,"
"likely" or similar expressions.
These forward-looking statements reflect current views and expectations
about the relevant company's plans, strategies and prospects, which are based on
the information currently available and on current assumptions.
Neither Netro nor SR Telecom can give any guarantee that these plans,
intentions or expectations will be achieved. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, and actual results
may differ materially from those discussed in the forward-looking statements as
a result of various factors, including those factors described in the "Risk
Factors" section of this proxy statement/prospectus, among others. In addition,
events may occur in the future that neither Netro nor SR Telecom is able to
accurately predict or control and that may cause actual results to differ
materially from the expectations described in the forward-looking statements.
Readers should not place undue reliance on the forward-looking statements
included in this proxy statement/prospectus. These forward-looking statements
speak only as of the date on which the statements were made. In evaluating
forward-looking statements, you also should consider the other risks described
from time to time in Netro's and SR Telecom's reports and documents filed with
the SEC and Canadian provincial securities administrators.
NEITHER SR TELECOM NOR NETRO ASSUMES ANY OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS.
Following the merger, SR Telecom expects to continue to be a "foreign
private issuer" eligible to file reports under the Securities Exchange Act of
1934, or the Exchange Act, and may become eligible to use the
multi-jurisdictional disclosure system 12 months after the consummation of the
merger if the value of its outstanding public equity held by non-affiliates
exceeds US$75 million. The multi-jurisdictional disclosure system facilitates
cross-border offerings of securities and continuous reporting by specified
Canadian issuers. The system permits eligible companies in the United States and
Canada to offer securities in the other country using the disclosure documents
meeting the regulatory requirements of their home country. As a corporation
governed by the Canada Business Corporations Act and subject to reporting
requirements of the various securities regulatory authorities in Canada, SR
Telecom is required to prepare and file financial information in Canada under
accounting principles generally accepted in Canada, or Canadian GAAP.
39
Following the merger, SR Telecom expects to file with the SEC and various
Canadian provincial securities administrators annual reports, including
consolidated financial statements denominated in Canadian dollars and prepared
in accordance with Canadian GAAP, which will include a reconciliation to
accounting principles generally accepted in the United States, or U.S. GAAP.
NETRO SPECIAL STOCKHOLDER MEETING
GENERAL
Netro's board of directors is furnishing this proxy statement/prospectus to
holders of Netro common stock in connection with the solicitation of proxies by
Netro's board of directors for use at the special meeting to be held on August
27, 2003 at 9:30 a.m., local time, for the following purposes:
1. Approval of Netro's proposal to approve and adopt the merger agreement
by and among Netro, SR Telecom Inc. and Norway Acquisition Corporation dated as
of March 27, 2003, as amended to date, pursuant to which Netro would merge with
Norway Acquisition Corporation and would survive the merger as a wholly-owned
subsidiary of SR Telecom Inc.
2. To transact any other business that properly comes before the special
meeting or any adjournments, postponements, continuations or reschedulings
thereof.
This proxy statement/prospectus is being mailed to Netro stockholders on or
about August 7, 2003. This proxy statement/prospectus is also being furnished to
Netro stockholders as a prospectus in connection with the issuance by SR Telecom
of shares of SR Telecom common stock as contemplated by the merger agreement.
DATE, TIME AND PLACE
The special meeting will be held at the Westin Hotel, Bayshore Room,
located at 5101 Great America Parkway, Santa Clara, California 95054 on August
27, 2003 at 9:30 a.m., local time.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, and any adjournment, postponement or continuation
thereof, Netro stockholders will be asked to consider and vote upon the proposal
described in this proxy statement/prospectus and any other business that
properly comes before the special meeting or any adjournments, postponements or
continuations thereof.
RECORD DATE
Netro's board of directors has fixed the close of business on July 31,
2003, as the record date for determination of Netro stockholders entitled to
notice of and to vote at the special meeting.
VOTING OF PROXIES
Netro requests that its stockholders complete, date and sign the proxy card
and promptly return it by mail in the accompanying envelope marked for this
purpose in accordance with the instructions accompanying the proxy card. If your
shares are held by a broker in "street name," your broker may vote the shares in
respect of the merger only if you provide instructions on how to vote. Your
broker will provide directions on how to instruct the broker to vote your
shares. All properly signed and dated proxies that Netro receives prior to the
vote at the special meeting, and that are not properly revoked, will be voted in
accordance with the instructions indicated on the proxies or, if no direction is
indicated, "FOR" each of the merger proposal.
Stockholders may revoke their proxies at any time prior to their use:
- by delivering to the Secretary of Netro, 3860 N. First Street, San Jose,
CA 95134, a signed notice of revocation or a duly executed proxy bearing
a later date; or
40
- by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the special meeting
is the presence in person or by proxy of the holders of a majority of the shares
of Netro common stock outstanding on the record date for the special meeting.
Abstentions and broker non-votes each will be included in determining the number
of shares voting at the special meeting for the purpose of determining the
presence of a quorum. There must be a quorum for the special meeting to be held
and action to be validly taken. If you submit a properly executed proxy card,
even if you abstain from voting or if you withhold your vote with respect to the
proposal, you will be considered present for purposes of a quorum. BECAUSE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER REQUIRES THE
AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF NETRO COMMON STOCK
ENTITLED TO VOTE AT THE SPECIAL MEETING, ABSTENTIONS AND BROKER NON-VOTES WILL
HAVE THE SAME EFFECT AS VOTES AGAINST THE MERGER PROPOSAL. IN ADDITION, THE
FAILURE OF A NETRO STOCKHOLDER TO RETURN A PROXY OR TO VOTE IN PERSON IN FAVOR
OF THE MERGER WILL HAVE THE EFFECT OF A VOTE AGAINST THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT AND THE MERGER. Brokers holding shares for beneficial
owners cannot vote on the proposal to adopt the merger agreement and the merger
without the owners' specific instructions. Accordingly, Netro stockholders are
encouraged to return the enclosed proxy card marked to indicate their votes as
described in the instructions accompanying the proxy card.
SOLICITATION OF PROXIES AND EXPENSES
Netro and SR Telecom have retained the services of Innisfree M&A
Incorporated to act as their solicitation agent in connection with the special
meeting. Innisfree will distribute proxy solicitation materials to brokers,
banks and other nominees and assist in the solicitation of proxies from holders
of Netro common stock for a fee of US$8,500 plus US$5.50 for each telephone call
that Innisfree is requested to make or receive. Innisfree will also be
reimbursed for its reasonable out-of-pocket expenses. Netro and SR Telecom will
bear all of the specified expenses when incurred.
The solicitation of proxies will be conducted by mail, telephone, facsimile
and electronic transmission. Netro and SR Telecom may conduct further
solicitation personally, telephonically, electronically or by facsimile through
certain of their officers, directors and employees, none of whom will receive
additional compensation for assisting with the solicitation. Three Netro
employees, including Gideon Ben-Efraim, Chairman and Chief Executive Officer,
Sanjay Khare, Chief Financial Officer, and Jennifer Mar, Legal Assistant and
Stock Administrator, will be involved in the solicitation of proxies in
connection with the proposed acquisition. Four SR Telecom employees, including
Pierre St-Arnaud, President and CEO, David L. Adams, Senior Vice President,
Finance and CFO, Paul Goyette, Director of Communications, and Victoria Trim,
Treasurer, will be involved in the solicitation of proxies in connection with
the proposed acquisition.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO NETRO STOCKHOLDERS. ACCORDINGLY, NETRO STOCKHOLDERS ARE ENCOURAGED TO READ
AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE MARKED FOR THIS PURPOSE, AS
DESCRIBED IN THE INSTRUCTIONS ACCOMPANYING THE PROXY CARD.
Netro stockholders should not send any stock certificates with their proxy
card. Instructions for the return of stock certificates will be sent by the
exchange agent after the effectiveness of the merger if the merger is approved.
THE MERGER PROPOSAL
Netro stockholders are being asked to approve and adopt the merger
agreement and the merger, pursuant to which a wholly-owned subsidiary of SR
Telecom will merge with and into Netro and Netro will become a wholly-owned
subsidiary of SR Telecom.
41
Aggregate Value to be Received by Netro Stockholders. If the merger is
approved and the other conditions to the merger are satisfied or waived, Netro
stockholders will be entitled to receive:
- a cash dividend from Netro, the aggregate amount of which will be US$100
million; and
- an aggregate of 41.5 million shares of SR Telecom common stock, to be
later adjusted to take account of the proposed reverse stock split, in
exchange for the outstanding shares of Netro common stock and the
associated preferred stock purchase rights.
Based on the closing price of SR Telecom common stock on the Toronto Stock
Exchange on July 31, 2003, the aggregate value of shares of SR Telecom common
stock to be issued to Netro stockholders is US$29.1 million. The value of the SR
Telecom common stock will increase or decrease depending on fluctuations in the
Canadian-to-U.S. dollar exchange rate and movements in SR Telecom's stock price.
On the basis of the calculation provided above, the total value that Netro
stockholders will receive as a result of the cash dividend and the merger is
US$129.1 million. Based on the closing price of SR Telecom common stock on the
Toronto Stock Exchange on March 26, 2003, the day preceding the announcement of
the merger, the total value that Netro stockholders would receive as a result of
the cash dividend and the merger is US$121.1 million.
The cash dividend is to be declared, segregated and set aside immediately
prior to the effective time of the merger with respect to each share of Netro
common stock outstanding on the record date for such cash dividend (which will
be the closing date, as defined in the merger agreement) and distributed to the
holders of such shares promptly following the effective time of the merger. The
declaration and payment of the cash dividend is contingent on approval of the
merger by Netro's stockholders and satisfaction or waiver of the other
conditions to the merger. Netro will not pay the cash dividend if the merger is
not consummated.
Estimated Per Share Value to be Received by Netro Stockholders. The
aggregate amount of the dividend and the shares of SR Telecom common stock will
be allocated proportionally to each share of Netro common stock outstanding at
the effective time of the merger. Each outstanding share of Netro common stock
and the associated stock purchase right will be automatically converted into the
right to receive SR Telecom common stock. In order to determine the per share
value of the dividend and the SR Telecom common stock, you must do the following
calculations:
- For the per share dividend amount, divide US$100 million by the number of
shares of Netro common stock outstanding at the effective time.
- For the number of shares of SR Telecom common stock, divide 41.5 million
by the number of shares of Netro common stock outstanding at the
effective time. No fractional shares will be issued in connection with
the merger. Any fraction equal to or higher than one-half will be rounded
up to the next succeeding whole number and any fraction less than
one-half will be rounded down.
For example, assume there are 40,410,218 shares of Netro common stock
outstanding at the effective time of the merger. This assumption is based on the
shares of Netro common stock outstanding on July 31, 2003, and the exercise of
in-the-money stock options prior to the closing date (anticipated to be in the
first week of September 2003) based on the value of SR Telecom's common stock on
July 31, 2003. Based on that number of outstanding shares, each share of Netro
common stock would receive a cash dividend in the amount of US$2.47462 and would
be converted into the right to receive 1.02697 shares of SR Telecom common stock
for a total per share value of US$3.19702 based on SR Telecom's stock price and
the corresponding exchange rate on that date. If you held 500 shares of Netro
common stock, you would be entitled to receive US$1,237.31 and 513.48 shares of
SR Telecom common stock. This would be rounded to 513 shares of SR Telecom
common stock.
This is merely an example. For a range of the various estimates of the
number of Netro shares outstanding on the closing date based on a reasonable
range of recent stock prices for shares of SR Telecom common stock, see page 44.
If the number of Netro shares outstanding is greater or less than the number
used in this example, the amount of the cash dividend and the number of shares
of SR Telecom common stock received would be adjusted accordingly. In addition,
these calculations do not take into account SR Telecom's
42
proposed reverse stock split. The actual number of shares received by Netro
stockholders will be reduced proportionately in accordance with the ratio
established by the SR Telecom board of directors, which will be between 1:5 and
1:15.
As of July 31, 2003, there were 39,121,425 shares of Netro common stock
outstanding. Pursuant to the terms of Netro's 1999 Employee Stock Purchase Plan
and the merger agreement, 70,348 shares of Netro common stock were issued on
June 30, 2003 and the plan was terminated. The 70,348 shares issued on the June
30, 2003 purchase date are reflected in the 39,121,425 shares of Netro common
stock outstanding on July 31, 2003. No further shares of Netro's common stock
will be issued under the Employee Stock Purchase Plan. Additionally, between
July 31, 2003 and the effective time, Netro may issue additional shares of
common stock upon the exercise of outstanding stock options.
Netro expects that holders of Netro stock options will exercise their stock
options if the value of the cash dividend and the shares of SR Telecom common
stock exceeds the exercise price of such options. At a minimum, options with
exercise prices below the cash amount of the dividend will most likely be
exercised. Options to purchase 434,836 shares have an exercise price below
US$2.40 and will likely be exercised, as the cash dividend amount is expected to
exceed that amount.
Because many of the outstanding Netro stock options have exercise prices
between US$2.90 and US$3.20 per share, small fluctuations in the value of the SR
Telecom common stock or the U.S. dollar to Canadian dollar exchange rate could
cause there to be significant fluctuations in the number of shares of Netro
common stock issued upon the exercise of stock options. Some option holders may
choose not to exercise if the difference between their exercise price and the
value of the cash dividend and the shares of SR Telecom common stock is small or
if they perceive risk in the shares of SR Telecom common stock retaining or
increasing in value. Based on options outstanding as of July 31, 2003, the
following table outlines the vested and exercisable stock options that would be
outstanding as of August 27, 2003 at various prices:
NUMBER OF
VESTED
OPTIONS AS OF
EXERCISE PRICES AUGUST 27, 2003
--------------- -----------------
(IN U.S. DOLLARS)
Below $2.40................................................. 434,836
$2.41 -- $2.50.............................................. 0
$2.51 -- $2.60.............................................. 0
$2.61 -- $2.70.............................................. 0
$2.71 -- $2.80.............................................. 145
$2.81 -- $2.90.............................................. 13,749
$2.91 -- $3.00.............................................. 470,709
$3.01 -- $3.10.............................................. 368,554
$3.11 -- $3.20.............................................. 1,073,212
$3.21 -- $3.30.............................................. 0
$3.31 -- $3.40.............................................. 0
$3.41 -- $3.50.............................................. 316,459
$3.51 -- $4.00.............................................. 309,892
$4.01 -- $4.50.............................................. 96,588
Above $4.50................................................. 1,998,541
---------
Total:................................................. 5,083,485
=========
43
To illustrate the range of per share values Netro stockholders can expect
to receive, we have included the following table. The table shows on a per share
basis the hypothetical amount Netro stockholders will receive as follows:
- the U.S. dollar amount of the cash dividend;
- the number of shares of SR Telecom common stock to be received in the
merger;
- the U.S. dollar value of the shares of SR Telecom common stock to be
received in the merger; and
- the aggregate U.S. dollar value of the cash dividend and the shares of SR
Telecom common stock.
The numbers shown in this table are hypothetical based upon a range of
illustrative trading values for SR Telecom common stock. The table was prepared
based on prices for shares of SR Telecom common stock ranging from US$0.35 to
US$1.15, displayed in increments of US$0.10. This range was chosen because the
low and high end of the range are within US$0.10 of the lowest and highest
closing price of SR Telecom's common stock (after conversion to U.S. dollars) on
the Toronto Stock Exchange from December 27, 2002, which was 90 days prior to
the announcement of the merger, through July 31, 2003. During this period, the
lowest price was US$0.37 on April 1, 2003, and the highest price was US$1.10 on
June 13, 2003.
For each assumed value of one share of SR Telecom common stock reflected in
the table, the corresponding number of outstanding shares of Netro common stock
as of the effective time reflects the approximate number of shares Netro expects
to be outstanding on the closing date, based on the following items:
- the number of shares outstanding as of July 31, 2003; and
- the number of shares subject to vested options as of August 27, 2003, and
expected to be exercised, based on the exercise prices of such options
and the aggregate per share value of the dividend and the shares of SR
Telecom common stock.
The value of the SR Telecom common stock will increase or decrease
depending on the trading price of the SR Telecom common stock on the Toronto
Stock Exchange and fluctuations in the Canadian-to-U.S. dollar exchange rate.
These fluctuations in the value of the SR Telecom common stock could cause there
to be significant fluctuations in the number of outstanding shares of Netro
common stock at the effective time. However, because the table below assumes
trading values of SR Telecom common stock after taking into account the
conversion of values from Canadian-to-U.S. dollars, the numbers in the table
would not be affected by changes in the Canadian-to-U.S. dollar exchange rate.
EXAMPLES OF
OUTSTANDING
EXAMPLES OF TRADING VALUES NUMBER OF NETRO SHARES
OF ONE SR TELECOM AT THE EFFECTIVE TIME
COMMON SHARE IN BASED ON TRADING VALUE CASH NUMBER OF MARKET VALUE AGGREGATE
U.S. DOLLARS OF SR SHARES DIVIDEND SR TELECOM SHARES OF SR SHARES VALUE
-------------------------- ---------------------- -------- ----------------- --------------- ---------
$0.35 39,121,425 $2.56 1.0608 $0.37 $2.93
$0.45 39,570,955 $2.53 1.0487 $0.47 $3.00
$0.55 40,041,664 $2.50 1.0364 $0.57 $3.07
$0.65 40,410,218 $2.47 1.0270 $0.67 $3.14
$0.75 41,483,430 $2.41 1.0004 $0.75 $3.16
$0.85 41,483,430 $2.41 1.0004 $0.85 $3.26
$0.95 41,485,430 $2.41 1.0004 $0.95 $3.36
$1.05 41,483,430 $2.41 1.0004 $1.05 $3.46
$1.15 41,799,889 $2.39 0.9928 $1.14 $3.53
The number of Netro shares outstanding will depend on the value of SR
Telecom shares and the Canadian-to-U.S. dollar exchange rate. The per share
value to be received by Netro stockholders in the transaction increases as the
per share value of the SR Telecom common stock increases. However, as the per
44
share transaction value increases, the number of Netro stock options that are
in-the-money and likely to be exercised also increases. As the number of Netro
shares outstanding increases, this in turn decreases the amount of cash and
number of SR Telecom shares that each Netro stockholder will receive on a per
share basis.
Given the uncertainty of the value of the SR Telecom common stock, you
should consider the range of potential values when deciding whether to vote for
the merger proposal. These examples merely illustrate possible ranges of the
value of the SR Telecom common stock. Actual values could be higher or lower.
REQUIRED VOTE
As of the close of business on July 31, 2003, the record date for the
special meeting, 39,121,425 shares of Netro common stock were issued and
outstanding. The holders of a majority of the shares of Netro common stock
outstanding must vote to approve and adopt the merger agreement and the merger
in order for the merger agreement and the merger to be approved. The holders of
a majority of the shares of Netro common stock entitled to vote must be present
or represented by proxy at the special meeting in order to establish a quorum.
Each Netro stockholder is entitled to one vote for each share of Netro common
stock held.
As of the record date for the special meeting, the directors and executive
officers of Netro and their affiliates beneficially owned 5,911,988 shares of
Netro common stock, which represented approximately 14.20% of the outstanding
Netro common stock assuming the exercise of all options held by them exercisable
within 60 days of such date. Executive officers and directors of Netro holding
3,398,532 shares of Netro common stock, or approximately 8.69% of the
outstanding shares of Netro common stock as of July 31, 2003 have agreed to vote
those shares in favor of approval and adoption of the merger agreement and the
merger. All of the shares of Netro common stock held by directors and certain
officers of Netro are subject to voting agreements, pursuant to which these
directors and executive officers agreed, among other things, to vote, or cause
to be voted, all of the shares of Netro common stock owned by them, as set forth
in each voting and proxy agreement, as well as all shares of Netro common stock
acquired by them, in favor of the approval and adoption of the merger agreement
and the merger, and against any other extraordinary transaction, such as another
merger.
RECOMMENDATION OF NETRO'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, NETRO'S BOARD OF DIRECTORS UNANIMOUSLY (WITH MR.
BEN-EFRAIM ABSTAINING) DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF
THE NETRO STOCKHOLDERS, APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT NETRO
STOCKHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
THE MERGER.
45
THE MERGER
THE MERGER
This section of this proxy statement/prospectus describes material aspects
of the proposed merger, including the merger agreement. While SR Telecom and
Netro believe that this description covers the material terms of the merger and
the related transactions, this summary may not contain all of the information
that is important to you. You should read the entire merger agreement and the
other documents referred to herein carefully and in their entirety for a more
complete understanding of the merger.
SR Telecom, Norway Acquisition Corporation and Netro entered into an
agreement and plan of merger on March 27, 2003, a copy of which is attached as
Annex A to this proxy statement/prospectus and is incorporated herein by
reference. The agreement and plan of merger was amended by amendment no. 1
thereto on May 5, 2003, by amendment no. 2 thereto on July 17, 2003 and by
amendment no. 3 thereto on August 6, 2003, copies of which are attached as Annex
B-1, Annex B-2 and Annex B-3 to this proxy statement/prospectus and are
incorporated herein by reference.
BACKGROUND OF THE MERGER
During the review of the Netro thirty-month operating plan, which took
place in June and July of 2002, Netro's board of directors became concerned with
the continuing losses of Netro and the continuing forecasted losses. As an
outgrowth of this concern, Netro's board of directors instructed management to
evaluate a variety of alternatives for improving the prospective financial
return to Netro stockholders. Among the alternatives that were to be considered
were:
- restructuring Netro and maintaining both the AirStar and Angel product
lines;
- spinning off, selling or shutting down one of the two product lines and
focusing Netro around the other product line only;
- liquidating Netro; and
- selling Netro in its entirety.
In furtherance of this analysis, management retained an individual to aid
it in preparing, and validating management assumptions underlying various
financial projections and began conversations with Goldman, Sachs & Co., who had
advised Netro in the past from time to time. Netro's board of directors also
reviewed Netro's cash resources and possible uses of cash. After reviewing
available alternatives, the board concluded that regardless of the ultimate
strategy pursued by Netro, Netro had sufficient cash resources not only to
pursue its strategy, but also to return a significant amount of capital to its
stockholders. As a result, the board decided to return capital to its
stockholders by conducting a tender offer for its shares of common stock in a
process known as a "Dutch auction." In the tender offer made to all Netro
stockholders on July 19, 2002, Netro offered to repurchase approximately 38% of
its outstanding common stock at prices between US$3.50 and US$4.00 per share.
Netro's board of directors expressly stated in the tender offer materials that
it was not making any recommendation to its stockholders as to whether to accept
Netro's tender offer, and the tender offer materials also provided that no
directors or executive officers would participate. Netro engaged Goldman Sachs
to act as dealer manager for the tender offer. The auction resulted in Netro's
repurchase of approximately 38% of its then outstanding common stock in August
2002 at US$3.50 per share.
On July 10, 2002, after Netro had commenced planning for its Dutch auction
self-tender offer, Netro received an offer from Crosswind Partners to purchase
all of the outstanding common shares of Netro for US$3.75 per share. Netro's
management requested Crosswind to provide further information on Crosswind's
identity, as well as assurances of financing commitments. In response,
Crosswind's attorneys submitted a second letter, dated July 14, 2002, in which
Crosswind offered to buy 100% of the assets of Netro through a newly formed
corporation for a purchase price of US$225 million, or US$3.68 per share (as
adjusted as of the closing on a dollar for dollar basis for any variance in
Netro's net working capital from US$312 million, and as further reduced
dollar-for-dollar for any accounts receivable not collected within 180 days of
the closing), plus 15% of fully-diluted equity of the newly formed corporation.
As of June 30, 2002, Netro's current assets plus
46
long-term marketable securities, less its current liabilities, was approximately
US$262.4 million. Based on Netro's understanding of the net working capital
adjustment in the Crosswind offer and Netro's June 30, 2002 balance sheet, Netro
believed that the cash portion of the US$225 million Crosswind offer would be
reduced by approximately US$49.6 million, or approximately US$0.81 per share to
approximately US$2.87 per share. The July 14th offer was made subject to a
number of conditions, including a material adverse change condition and a due
diligence review, and the July 14th offer did not provide the requested
information on Crosswind's identity or any assurances of Crosswind's ability to
finance its offer. Crosswind did note an informal affiliation with Wyndcrest
Holdings. At that time, however, no information regarding the identity of
Wyndcrest or its financial standing was provided.
The two Crosswind offers were considered by Netro's board of Directors on
July 16, 2002, at the same board meeting at which the board considered Netro's
Dutch auction self-tender offer. After extensively discussing its alternatives,
the board determined to reject the two Crosswind offers due to its view that
Netro's market sector held long term promise despite the current cyclical
downturn, its belief that Netro's Airstar and Angel products were favorably
positioned to meet customer demands, its view that the price offered by
Crosswind did not reflect Netro's long-term value and the lack of information
concerning Crosswind's identity and its ability to finance its offer. The board
determined to proceed with the Dutch auction self-tender offer as an effective
means of returning Netro's excess cash to those stockholders who had less belief
than the board in the Angel and Airstar technology and products, while
permitting those stockholders who believed in Netro's future to retain their
Netro stock and, following completion of the self-tender offer, to hold a larger
percentage of Netro's outstanding stock. The board noted that, because it was
not recommending that stockholders tender or refrain from tendering their
shares, the board was taking a consistent position in rejecting both of the
Crosswind offers, and approving the Dutch auction self-tender offer. The board
also noted that the minimum price in the Dutch auction was in excess of the
amount offered by Crosswind after taking into account the US$0.81 deduction that
would result from the working capital adjustment. The board did not retain
financial advisors specifically with respect to the Crosswind offers because of
the board's determination to proceed with Dutch auction self-tender, the price
and uncertainties regarding the Crosswind offers discussed above, and because
the board had not determined to sell Netro.
The Crosswind July 10th and July 14th offers were both disclosed in Netro's
tender offer materials with respect to its Dutch auction self-tender.
On July 25, 2002 and August 2, 2002, Netro received two additional offers
from Wyndcrest Holdings, LLC offering to purchase all of the outstanding shares
of Netro for US$245.4 million (US$4.01 per share) and US$247 million
(approximately US$4.04 per share), respectively. Both offers were presented as
updates to the July 14, 2002 Crosswinds offer. As a result, Netro believed the
offers continued to be subject to the working capital adjustments of the July
14, 2002 offer, which Netro estimated would have resulted in a reduction in
purchase price of approximately US$0.81 per share. These Wyndcrest offers
therefore appeared to be below the minimum price that Netro would be paying to
purchase Netro shares in the Dutch auction tender offer. Both offers were
conditioned on due diligence and did not contain any financing assurances or
information concerning Wyndcrest's identity. At meetings held on July 29, 2002
and August 9, 2002, after discussion, the board rejected both Wyndcrest offers.
The Netro board continued to remain neutral as to whether Netro stockholders
should accept Netro's tender offer. The board did not retain a financial advisor
specifically with respect to the Wyndcrest offers for the same reasons stated
above with respect to the Crosswind offers. Both Wyndcrest offers were disclosed
in amendments to Netro's tender offer materials with respect to its Dutch
auction self-tender. For more information on allegations regarding Wyndcrest's
offers contained in litigation brought against Netro, see the section entitled
"The Merger -- Certain Pending Litigation" on page 78.
Netro's sales for the quarter ending September 30, 2002 continued to be
disappointing. In October 2002, Netro's board of directors met again and
reviewed the financial implications of several scenarios related to the above
alternatives, as prepared by management with the aid of a third-party
consultant. After review and discussion, Netro's board of directors determined
that, while certain of the alternatives were more attractive than others on
their face, further analysis was required. As a result, the Netro board directed
management to restructure Netro to reduce operating expenses as much as possible
without jeopardizing any of the long-term
47
strategic alternatives of the company. The Netro board determined that it would
be advisable to conduct a formal and comprehensive review of strategic
alternatives for Netro and that it would also be advisable to retain a financial
advisor to assist Netro in this regard.
In response to this direction, management reduced its headcount by over 100
employees, closed two international sales offices and engaged Goldman Sachs to
conduct a formal review of strategic alternatives. On November 7, 2002, Netro
publicly announced its reorganization and its intention to pursue strategic
alternatives. Further, on November 20, 2002, Netro publicly announced that it
had retained Goldman Sachs as its financial advisor. After review, analysis,
preparation and consultation with management and legal counsel, Goldman Sachs
began to solicit, on behalf of Netro, indications of interest from various
targeted parties. During the course of its engagement, Goldman Sachs, on behalf
of Netro, was in contact with a total of 38 prospective buyers, consisting
principally of (1) communications equipment companies and technology companies
known by Goldman Sachs or Netro to be interested in the wireless sector and with
the financial ability to consummate a transaction, and (2) companies and
financial buyers who had previously expressed an interest in acquiring Netro or
one of its product lines, or who subsequently expressed interest in a
transaction with Netro as a result of Netro's November 7 announcement that is
was considering its strategic alternatives.
In response to the November 7 announcement, as well as the efforts of
Goldman Sachs, Netro received multiple expressions of interest regarding a
potential transaction, including one publicly announced offer by Wyndcrest in
November 2002 to acquire the company for approximately US$158 million, less
deductions for cash utilized, employee severance and contingent liabilities. A
second such contact was from SR Telecom to Netro by means of a phone call from
Pierre St-Arnaud, President and Chief Executive Officer of SR Telecom, to Gideon
Ben-Efraim, President and Chief Executive Officer of Netro, in which Mr.
St-Arnaud expressed an interest in initiating discussions regarding a potential
business combination between SR Telecom and Netro.
Over the course of the weeks following the initiation of the strategic
alternatives process, Netro and Goldman Sachs arranged for formal meetings with
eight potential acquirors, including SR Telecom and Wyndcrest, who attended face
to face exploratory meetings with Netro's management. At these meetings, each
party presented an overview of their respective companies and the basic
rationale for a transaction. Netro entered into confidentiality agreements with
six parties, including SR Telecom and Wyndcrest, who expressed interest in
pursuing a potential transaction. In the case of SR Telecom, the parties
executed a confidentiality agreement on December 10, 2002 and on December 11,
2002 Mr. St-Arnaud, David L. Adams, SR Telecom's Chief Financial Officer and
Senior Vice President, Finance, and Allan Klein, SR Telecom's Vice President,
Technology, together with representatives of TD Securities Inc., SR Telecom's
financial advisor, met with Gideon Ben-Efraim and Sanjay Khare, Netro's Chief
Executive Officer and Chief Financial Officer, respectively, at the offices of
Goldman Sachs in Menlo Park, California. Netro management was accompanied by
representatives of Goldman Sachs.
In order to facilitate the process of due diligence and bid solicitation,
Netro conducted technical due diligence sessions with interested parties,
including SR Telecom and Wyndcrest, through formal presentations by its
engineering management at Netro's Redmond, Washington and San Jose, California
facilities. As a part of this process, on January 13, 2003, Benoit Pinsonnault,
SR Telecom's senior vice president for customer satisfaction and operations,
Mike Morris, SR Telecom's senior vice president for strategic development and
Mr. Klein visited Netro's Redmond, Washington research and development facility
where they received a technical presentation on the Angel product line and also
received a facility tour. Present for Netro were Mr. Khare, John Saw, Netro's
Senior Vice President, Angel Engineering, Chaz Immendorf, Netro's Vice
President, Angel Software Design, Arun Naidu, Netro's Vice President, Angel
Radio and Hardware Design and Kerri Lewis, Netro's Director, Angel Operations.
On January 14, 2003, Messrs. Morris and Klein continued their technical due
diligence at Netro's corporate office in San Jose, California, where they
reviewed technical details of Netro's AirStar product line. Present for Netro
were Mr. Khare, Shlomo Yariv, Netro's Chief Operating Officer and James
Hannigan, Netro's Vice President, AirStar Engineering. Mr. Yariv's employment
was terminated pursuant to a reduction in force effective May 16, 2003. On
January 17, 2002, Messrs. Ben-Efraim and St-Arnaud met in San Francisco,
California, where they discussed the possible acquisition of Netro by SR Telecom
and potential transaction structures, although specific terms were not
discussed.
48
By late January, six parties who had signed confidentiality agreements,
including SR Telecom and Wyndcrest, progressed from receiving overview
presentations to detailed technology due diligence presentations from Netro's
engineering management staff as described above.
On January 28, 2003, Netro's board of directors held a meeting at which
management reviewed refined scenarios and alternatives for the company. In
addition, Goldman Sachs provided the board of directors with an update of the
process including profiles of the parties who continued to be active in the
process. These profiles for publicly listed companies included publicly
available information such as the parties' location, ticker symbol, headcount,
equity market value and multiple of 2003 estimated revenues, enterprise value
and multiple of 2003 estimated earnings, publicly held shares outstanding and
trading volume. Goldman Sachs did not provide financial analyses with respect to
potential transactions at this meeting. Based on the guidance of Netro's board,
Netro management and Goldman Sachs initiated the next step in the process in
which Goldman Sachs, on behalf of Netro, distributed a formal request for bids
to acquire Netro. As part of this process, Goldman Sachs sent out forms of the
merger agreement drafted by Davis Polk & Wardwell. At this time, Netro made
available a data room at its facilities in San Jose, California that included
material legal, financial and other documentation that would permit interested
parties to make their bids for the company more definitive.
Five of the parties who had progressed to this stage of the process elected
to continue into this advanced due diligence stage, including SR Telecom and
Wyndcrest. SR Telecom participated in the advanced due diligence phase of the
process by sending a team of management personnel and advisors to Netro's San
Jose, California and Redmond, Washington facilities during the week of February
3, 2003. In addition to members of the SR Telecom management team, also in
attendance were representatives of Deloitte & Touche LLP, SR Telecom's
independent auditors and representatives of Fasken Martineau DuMoulin LLP, SR
Telecom's Canadian counsel. In addition to members of the Netro management team,
representatives of Goldman Sachs were present at the due diligence review. These
firms, along with Pillsbury Winthrop LLP, SR Telecom's U.S. legal counsel,
continued their due diligence throughout the remainder of the process as
materials became available from Netro.
On February 21, 2003, three entities, including SR Telecom and Wyndcrest,
delivered formal letters of intent to Netro outlining proposed terms for a
potential business combination. The board of directors of Netro convened on the
same day and management, in conjunction with representatives of Goldman Sachs,
reviewed the various offers. At that time, management also reviewed alternative
transactions (including acquisitions of Netro and liquidation of Netro),
alternative transaction structures (including Netro's acquisition of one of the
potential acquirors) and refinements to management's previous analysis of
liquidation expenses and proceeds. Based on the direction of the board of
directors, management and Goldman Sachs engaged in the process of soliciting
increased offers and more attractive terms and conditions from the various
bidders.
On February 22, 2003, Messrs. St-Arnaud and Ben-Efraim met in San Francisco
to discuss the status of the merger negotiations. As a result of those
discussions, it was concluded that the negotiations and discussions between the
parties could be furthered if Messrs. Adams and Khare were to confer. Messrs.
Adams and Khare met in Montreal on February 24, 2003 to review the aggregate
consideration as well as other, more minor, transaction points.
Simultaneous to these meetings, members of Netro management and
representatives of Goldman Sachs were soliciting amendments and modifications to
the other offers that had been received as well as conducting further due
diligence with the representatives of all of the various bidders. As a result of
these efforts, Netro received revised offers from each of the prior three
entities, including SR Telecom and Wyndcrest. In addition, Netro received an
additional independent offer from a party who had been bidding in cooperation
with Wyndcrest, but elected to also pursue an independent combination with the
company.
Included among these various offers were transactions that reflected all
cash consideration as well as those that offered both cash and equity
consideration. The Netro board of directors reconvened on March 3, 2003 to
review the revised and updated offers and concluded that the revised offer by SR
Telecom was more attractive than the other offers presented. The factors
considered by Netro's board of directors in determining to approve the SR
Telecom offer and determining that the SR Telecom offer was more attractive than
the
49
other three offers and the liquidation alternative are fully set forth in "The
Merger -- Netro's Reasons for the Merger -- Factors Considered and Reasons for
the Merger".
In addition to these considerations, the board also concluded that the SR
Telecom transaction was more likely to be completed on the proposed terms and in
a timely manner than the other three offers. In particular the Wyndcrest offer
was made in conjunction with an industry participant, who subsequently made an
independent offer, and the joint offer contemplated material cash and other
contributions from the industry participant. The board had significant concerns
regarding the amount of due diligence to be carried out by the industry
participant and the unclear level of coordination between Wyndcrest and the
industry participant, which made the Wyndcrest offer less certain, and less
attractive. In particular, the industry participant had not conducted technical,
product or employee related due diligence in the same level of detail as that
performed by other bidders. Furthermore, the industry participant had not
conducted any financial due diligence. However, each succeeding bid from
Wyndcrest and/or the industry participant implied a greater role for the
industry participant in the proposed transaction than the original Wyndcrest
proposal. As a result, Netro became concerned that the industry participant was
making commitments without understanding the full implications of those
commitments and that, once the industry participant fully understood the extent
of its obligations, its financial and other support for the transaction might
wane or disappear altogether. Furthermore, because the industry participant was,
at turns, making independent proposals for Netro as well as bidding with
Wyndcrest, it was not clear to what extent the two parties were committed to
working together or against one another. In addition, the consideration being
offered by Wyndcrest had declined significantly since the time of its public
offer for Netro and showed signs of potential further decline. Wyndcrest's first
bid after conducting due diligence was approximately 33% lower than its publicly
announced bid in November 2002. After negotiation, Wyndcrest did increase its
offer, however, it remained approximately 22% lower than its original, publicly
announced bid. Because the bid was contingent on certain working capital and
cash-related conditions to closing, the board of directors of Netro believed
that if Netro had pursued this transaction, there was a material risk that the
consideration would have been reduced further to account for these cash and
working capital adjustments. For more information on allegations regarding
Wyndcrest's offers contained in litigation brought against Netro, see the
section entitled "The Merger -- Certain Pending Litigation" on page 78. As a
result of their deliberations, the Netro board of directors authorized
management to enter into an exclusive negotiating period with SR Telecom for a
period ending on March 14, 2003. The board of directors of Netro also provided
management with guidance on its due diligence on SR Telecom, highlighting key
areas of inquiry.
During the first two weeks of March, the companies negotiated their merger
agreement and Netro conducted business, financial, accounting and legal due
diligence on SR Telecom. On March 10, Mr. Ben-Efraim and Mr. St-Arnaud met in
Montreal, at which time they discussed the role Mr. Ben-Efraim might play in the
continuing organization. On March 11, 2003 Mr. Ben-Efraim was joined in Montreal
by Mr. Khare and representatives of Goldman Sachs and Davis Polk & Wardwell in
order for Netro to conduct detailed due diligence on SR Telecom. Presentations
by various members of SR Telecom management to Netro management and its advisors
continued on March 11 and 12, 2003. Davies Ward Phillips & Vineberg LLP,
Canadian counsel to Netro, and Davis Polk & Wardwell also conducted legal due
diligence on SR Telecom at a data room located at SR Telecom's headquarters on
March 11 and 12, 2003. These firms had initiated legal due diligence at the
beginning of March and continued their due diligence throughout the remainder of
the process as materials became available from SR Telecom.
PricewaterhouseCoopers LLP also conducted accounting due diligence at SR
Telecom's headquarters on March 10, 11 and 12, 2003.
On March 10, 2003, SR Telecom's legal counsel circulated a draft merger
agreement to Netro and its advisors. On March 14, 2003, members of management of
both Netro and SR Telecom met in the Palo Alto, California offices of Pillsbury
Winthrop, along with each company's legal and financial advisors, to negotiate
the merger agreement.
On March 15, 2003, Netro's board of directors again met to consider the
merger. In addition to Netro management, representatives of Goldman Sachs and
Davis Polk & Wardwell reported to Netro's board on the status of the agreement
and key issues in the merger agreement, including restrictions on Netro's
conduct of business between signing and closing, employee severance, stock
options, events of termination and termina-
50
tion fees, conditions to closing, the ability of Netro's board to change its
recommendation and Netro's non-solicitation covenant and fiduciary out, and
other open items that were still pending, including engaging an advisor to
assist the board in its duties and obligations relating to the cash dividend,
customer issues, Netro's cash balances at closing and completion of accounting
and management due diligence. Messrs. St-Arnaud and Adams also made a
presentation to Netro's board of directors at this meeting in order to provide
them with an overview of SR Telecom and the prospects for the combined company.
Mr. St-Arnaud also disclosed that SR Telecom had agreed, upon effectiveness of
the merger, to hire Mr. Ben-Efraim through the assumption of, and under the same
terms provided in, Mr. Ben-Efraim's present contracts with Netro. He indicated
that SR Telecom was willing to have the Netro board designate one of their
members to be elected to the SR Telecom board and indicated that Mr. Ben-Efraim
would be acceptable to SR Telecom as Netro's designated director. A
representative of TD Securities, financial advisor to SR Telecom, also joined
the meeting by teleconference and discussed the capital markets for SR Telecom's
securities, described recent trading patterns of SR Telecom's stock and public
debentures and the anticipated impact of the proposed acquisition on the trading
of SR Telecom's equity securities in the capital markets. After SR Telecom
officers and advisors had left the meeting, Netro's board was also informed of a
revised offer which had been received from Wyndcrest after Netro had already
entered into its agreement regarding an exclusive negotiating period pursuant to
the Netro board's instructions on March 3, 2003. The board agreed that, in view
of the progress made in discussions with SR Telecom to date, and in view of the
board's continuing concerns which were not addressed by the new offer concerning
Wyndcrest and Wyndcrest's ability to consummate a transaction on the terms
proposed and in a timely manner, the board determined to continue its
negotiations with SR Telecom on an exclusive basis through March 24, 2002. Davis
Polk & Wardwell then advised the board of the requirements imposed by Delaware
law and by federal and state solvency laws in connection with the declaration
and payment of a cash dividend, as proposed by the terms of the draft merger
agreement with SR Telecom. Management and the board discussed their duties and
their due diligence in connection with these legal requirements and concluded
that, in addition to their own review and conclusions, it would be prudent to
engage an independent third party to review Netro's ability to comply with such
legal requirements in connection with the proposed cash dividend. As a result,
Netro's board of directors directed management to continue negotiations with SR
Telecom, including their due diligence investigations, authorized management to
engage American Appraisal Associates to aid the board in its duties and
obligations in connection with declaring and paying a cash dividend and also
authorized management to extend the exclusive negotiation period with SR
Telecom.
Mr. Khare and a representative of American Appraisal Associates traveled to
Montreal for meetings with Mr. Adams on March 17 and March 18 to continue
financial due diligence and negotiations of the potential transaction, as well
as to aid American Appraisal Associates in its review of SR Telecom's business,
financial position, results of operations and projections for the combined
company. A representative of American Appraisal Associates also reviewed Netro's
business, financial position and results of operations and conversed with Mr.
Khare by telephone and e-mail at various times over the next 10 days. From March
17 through March 27, 2003 representatives from SR Telecom, Netro and their
respective financial and legal advisors exchanged comments on the draft
agreement and plan of merger and participated in a series of conference calls
during which they resolved many of the remaining open issues and exchanged and
reviewed further draft language for the merger agreement. All other open issues
and items in the merger agreement were discussed and resolved during this
period. These items included details of the dividend and merger mechanics, tax
consequences of the merger, representations and warranties, a right of first
negotiation on Netro's technology, conditions to closing, events of termination
and termination fees, restrictions on Netro's conduct of business between
signing to closing, directors and officers insurance and Netro's
non-solicitation covenant and fiduciary out.
On March 25, 2003, SR Telecom's board of directors met to review the status
of the transaction, during which the directors of SR Telecom participated in an
active discussion and review of the significant issues that had arisen in
connection with the proposed transaction. SR Telecom's financial and legal
advisors also participated in this meeting. The results of SR Telecom's due
diligence investigation of Netro were discussed. SR Telecom's board of directors
unanimously approved the transaction subject to confirmation of the views that
had been expressed by its financial advisors, the resolution of a number of
specified business issues and
51
the finalization of definitive merger documentation in a form satisfactory to
Messrs. Pierre St-Arnaud and David L. Adams.
Also on March 25, 2003, Netro held a board meeting to consider the merger
agreement and the merger at which Netro's financial advisor, Goldman Sachs, made
a presentation and described the opinion that Goldman Sachs would be prepared to
deliver upon review of the definitive merger agreement to be entered into in
connection with the transaction, assuming that the definitive merger agreement
did not differ materially from the draft merger agreement reviewed by Goldman
Sachs. At the meeting, at which all directors of Netro were present, Davis Polk
& Wardwell, counsel to Netro, described the proposed terms of the merger
agreement and the merger to Netro's board of directors. The significant issues
in the merger agreement discussed by the board included the conditions to
closing, events of termination and termination fees and restrictions on Netro's
conduct of business between signing and closing. Mr. Khare and
PricewaterhouseCoopers LLP also discussed with the Netro board of directors the
accounting due diligence conducted on SR Telecom. Mr. Khare summarized the areas
of focus of Netro's management and reported to the board of directors of Netro
that he was comfortable with SR Telecom's practices with respect to reserves and
estimates. PricewaterhouseCoopers indicated that because of the limited scope of
the due diligence performed, they were not able to reach any conclusions with
respect to SR Telecom's approach to revenue recognition. Deloitte & Touche then
joined the meeting via teleconference and answered questions from Mr. Khare,
PricewaterhouseCoopers and members of the Netro board of directors. Angelo
Bracaglia, the Deloitte & Touche LLP audit partner on the SR Telecom account,
and other representatives of Deloitte & Touche LLP then provided Netro's board
with a history of their relationship with SR Telecom, SR Telecom's policies,
practices, internal controls, management and other due diligence items.
Following the departure of the Deloitte & Touche representatives, Mr. Khare
noted that Deloitte & Touche had reviewed SR Telecom's financial statements and
concurred that they were in compliance with U.S. and Canadian GAAP. Mr. Khare
also noted that he had been informed that U.S. GAAP and Canadian GAAP both
utilized the same standard with respect to revenue recognition. Finally, he
noted that the merger agreement included representations by SR Telecom regarding
compliance with Canadian GAAP. American Appraisal Associates also presented
orally its preliminary opinion that, based on the information known to it and on
the factors and assumptions described in the preliminary written opinion
included as Annex C-2 to this proxy statement/prospectus, Netro and the combined
company would pass the solvency and capital surplus tests, as defined in the
preliminary opinion, provided that certain conditions were satisfied. At the
conclusion of this meeting, following an extensive discussion and numerous
questions from Netro's board, the members of Netro's board of directors present
at the meeting voted unanimously (with Mr. Ben-Efraim abstaining) to approve the
merger agreement and the merger, subject to Netro management's ability to
positively conclude negotiations on certain key terms and also subject to the
receipt of a final opinion as to fairness from a financial point of view from
Goldman Sachs and the receipt of a written preliminary opinion from American
Appraisal Associates as to the capital surplus and solvency analysis tests
discussed at the meeting.
Negotiation of the merger agreement continued over the next two days. The
key terms remaining open after the board meetings on March 25, 2003 involved
termination fees and restrictions on Netro's conduct of business between signing
and closing. On March 26, 2003, American Appraisal Associates delivered the
preliminary opinion described above and elsewhere in this proxy
statement/prospectus to Netro's board of directors. On March 27, 2003, Goldman
Sachs delivered its oral opinion, subsequently confirmed in writing, to Netro's
board of directors that, as of that date and based upon and subject to the
factors and assumptions set forth therein, the consideration to be received by
holders of Netro's common stock pursuant to the merger agreement and the
dividend in the aggregate amount of US$100 million to be declared on Netro's
common stock as contemplated under the merger agreement, in the aggregate, are
fair from a financial point of view to such holders. On the same day, prior to
the opening of trading for the Netro common stock on the Nasdaq National Market
and the SR Telecom common stock on the Toronto Stock Exchange (after receipt of
the oral opinion from Goldman Sachs), Netro, SR Telecom and Norway Acquisition
Corporation, SR Telecom's wholly-owned subsidiary, signed the merger agreement.
The voting agreements were also executed and delivered contemporaneously with
the execution and delivery of the merger agreement. Netro also amended its
stockholder rights agreement on that day to exempt SR Telecom from the
definition of "Acquiring Person" with respect to the proposed merger, the merger
agreement and the voting agreements. Netro and
52
SR Telecom then announced the merger agreement through a joint press release,
and on the morning of March 27, 2003, their management teams conducted a joint
conference call about the transaction that was open to the public.
On May 1, 2003, Netro and SR Telecom discussed simplifying the structure of
the merger consideration such that all of the issued and outstanding shares of
Netro common stock would be converted into the right to receive consideration in
the form of shares of SR Telecom common stock in lieu of American Depositary
Shares representing shares of SR Telecom common stock. On May 5, 2003, after
receiving the necessary board authorization, Netro and SR Telecom executed and
delivered amendment no. 1 to the merger agreement which reflects that structure.
On June 23, 2003, Netro and SR Telecom discussed SR Telecom's intention to
enter into an agreement with an agent for a private placement on a best efforts
basis of SR Telecom units, each unit consisting of one share of SR Telecom
common stock and one-half of one common stock purchase warrant (each whole
common stock purchase warrant entitles the holder to acquire one share of SR
Telecom common stock at a price of CDN$1.00 per share until July 18, 2008).
Members of Netro's board of directors reviewed the impact of the proposed
private placement on Netro's stockholders and on the combined company and
concluded that as a result of the transaction, SR Telecom's liquidity position
would be enhanced and the resulting dilution to Netro's stockholders would be
minimal. On July 17, 2003, after receiving the necessary board authorization,
Netro and SR Telecom executed and delivered amendment no. 2 to the merger
agreement, which authorized the private placement of 5,280,000 units at CDN$0.85
per unit for aggregate net proceeds of CDN$4,220,800.
On August 5, 2003, Netro and SR Telecom discussed the probable timeline for
the Netro special stockholder meeting, the closing of the merger, and the
desirability of extending the date from which either party could unilaterally
elect to terminate the merger agreement if the merger had not closed from August
31, 2003 to September 30, 2003. Netro and SR Telecom also discussed the need for
both companies to waive their respective closing conditions and termination
rights related to the pending merger related litigation. On August 6, 2003,
after receiving the necessary board authorization, Netro and SR Telecom executed
and delivered amendment no. 3 to the merger agreement, which addressed such
issues.
SR TELECOM'S REASONS FOR THE MERGER
SR TELECOM'S STRATEGIC INITIATIVES
SR Telecom has regularly evaluated different strategies to improve its
competitive position and enhance stockholder value, including opportunities for
combinations with or acquisitions of other companies or their assets, possible
partnerships or alliances and other significant transactions. A key goal in this
approach has been to improve SR Telecom's financial position by seeking
acquisition targets that could improve its cash position and balance sheet.
In 2001, SR Telecom began to implement a strategy designed to substantially
advance its standing in the global telecommunications marketplace. With this
goal in mind, SR Telecom has taken advantage of the restructuring in the global
telecommunications industry by seeking to broaden its product selection through
acquisition. SR Telecom's management believes that this strategy is central to
the future growth of SR Telecom. In September 2001, SR Telecom acquired the
assets of Lucent Technologies' wireless access solutions business unit, which
greatly enhanced SR Telecom's presence in Europe and other countries where SR
Telecom historically had little presence. In March 2002, SR Telecom acquired the
assets related to Nera Telecommunications Inc.'s Velocity 2000 product line in
order to position SR Telecom to expand into the U.S. market. In early 2003, SR
Telecom acquired from the receiver in bankruptcy of Comdev Broadband Inc. the
assets and intellectual property related to Comdev's CDMA2000 1xEV-DO product
line. These products enable SR Telecom to provide broadband data services to
residential and small and medium-sized enterprises located in underserved areas.
In the context of a consolidating market place, SR Telecom was of the view
that a number of additional opportunities existed to acquire telecommunications
technologies and products, especially in point-to-multipoint fixed wireless
products. SR Telecom's strategy was to be able to deliver end-to-end broadband
53
wireless solutions that would provide new applications and a range of new
services and solutions to SR Telecom's existing customer base, a range of new
services and solutions and to address market opportunities that extend beyond
its traditional business.
In its strategic review, SR Telecom had identified several classes of
solutions for which SR Telecom believed there was substantial demand among its
existing customer base, and had considered a number of existing vendors of these
applications as possible acquisition candidates. Due to the recent allocations
of 3.5 GHz licenses for voice in Europe, China and Brazil, new solutions were
being required to serve these markets, solutions which SR Telecom did not have.
In addition, SR Telecom's strategy is to increase its market into urban markets
with licensed frequencies in the low (1.9 to 3.5 GHz range) and the high (10 to
39 GHz range) frequencies where there is a demand for high speed data
communications and toll quality voice services.
SR Telecom identified a number of vendors of broadband wireless solutions
which would fit into SR Telecom's strategy and considered Netro to be the most
attractive candidate because of Netro's Angel product, which is the first
commercially developed carrier-class, non-line of sight system using OFDM, or
orthogonal frequency division multiplexing, a communication technique whereby a
single high-speed data stream is divided into many low bit-rate streams, which
are then transmitted simultaneously over multiple radio carriers, with one low
bit-rate stream per carrier. This ensures optimal coverage, capacity and cost
for toll-quality voice and scalable high-speed data applications. Coupled with
SR Telecom's current product line and distribution network, SR Telecom believed
that the acquisition of Netro would enable SR Telecom to deploy and provision
revenue-generating broadband technology solutions to service providers around
the world.
An important element of SR Telecom's strategy is the pursuit of
acquisitions of companies, product lines and assets that are complementary to
its business and that will contribute to the long-term growth of the company. SR
Telecom seeks, through selective acquisitions in the fixed wireless access
telecommunication segment to leverage its distribution network by widening its
product offering and increasing market opportunities. SR Telecom has typically
increased its product portfolio through the acquisition of complementary
wireless access solutions or "in-progress" research and development programs. SR
Telecom's board of directors has determined that the terms of the merger are
fair to, and in the best interests of, SR Telecom and its shareholders.
Accordingly, SR Telecom's board of directors has approved the merger agreement
and the consummation of the merger. In reaching its decision, SR Telecom's board
of directors identified several potential benefits to the merger, including the
following:
- Expanding SR Telecom's offering of fixed wireless access solutions. SR
Telecom believes there is substantial demand, both from its current
customer base, and among potential new customers, for solutions to
provide value-added service capabilities. Netro's solutions provide SR
Telecom with a broadband wireless access solution that complements SR
Telecom's product portfolio by adding the Angel product line, which
functions in the 1.9 to 3.5 GHz range, and Airstar, which functions in
the 3.5 to 28 GHZ range. The merger would permit SR Telecom to provide
products to customers that would make broadband data and high-speed
Internet access deployable in areas where wireline technologies are
currently not economically viable or efficient. These products will help
enable SR Telecom to meet the demands of its customers around the world,
promote customer loyalty and create opportunities for incremental revenue
growth from new and existing customers. SR Telecom also believes that
Netro's product offering will enable SR Telecom to be among a select
group of suppliers who offer products to each of the fixed wireless
access, wireless local loop and broadband fixed wireless access markets.
SR Telecom's view is that the merger would give SR Telecom the
opportunity to pursue new opportunities, which would otherwise not be
available to it.
- Realizing incremental revenue generation opportunities and cost
savings. SR Telecom believes that the proposed merger presents
significant opportunities to generate additional revenue through its
international network and for expense synergies. SR Telecom expects to
realize revenue opportunities over time as SR Telecom introduces Netro's
products and technologies to SR Telecom's installed customer base and
also markets its own products and turnkey services and solutions to
Netro's
54
customer base. The revenue from these incremental sales might not be made
by either company in the absence of the merger. SR Telecom believes that
its cost structure is lower than that of Netro, and accordingly that the
gross margins resulting from sales of Netro's products should be higher
than Netro's historical gross margins. SR Telecom also believes that
potential exists for expense reduction synergies as a result of the
proposed merger. In particular, SR Telecom expects to reduce staffing at
Netro where appropriate to eliminate duplicative functions or expense.
These reductions are expected to occur throughout most functional areas
within Netro's operations. SR Telecom also expects to significantly
reduce or eliminate expenses associated with Netro operating
independently as a public company, including legal, accounting, investor
relations and insurance expense. SR Telecom plans to consolidate
facilities where appropriate and to reduce Netro's rent expense. The
parties also expect to consolidate sales and marketing programs to focus
on SR Telecom's large customer base and eliminate duplicative efforts and
expense. As a result of these anticipated synergies, SR Telecom believes
that the business opportunities available to the two companies combined
will be greater than those available to the two companies operating
separately.
- Strengthening SR Telecom's balance sheet. SR Telecom believes the merger
with Netro will improve the consolidated financial position of the
combined company following the payment of Netro's US$100 million cash
dividend and the merger, due to cash that Netro will hold after the
payment of the cash dividend and the unencumbered nature of its assets.
SR Telecom expects that immediately following the merger, the combined
company will have approximately CDN$20 million in cash from Netro
available to fund other activities, provided that the combined company
does not incur any additional contingent liabilities from Netro beyond
those for which provision has been made.
SR Telecom's board of directors also identified and considered a variety of
potential negative factors in its deliberations concerning the merger,
including, but not limited to:
- the risk to SR Telecom's stockholders that the value to be received by
Netro's stockholders in the merger could increase significantly due to
the nature of the exchange ratio;
- the risk that the potential benefits sought in the merger might not be
fully realized; and
- the possibility that the merger might not be consummated.
Other factors considered by SR Telecom's board of directors in its
deliberations included:
- historical market prices, trading multiples, recent trading activity and
trading ranges of Netro's common stock and SR Telecom's common stock;
- SR Telecom's management's view of the financial condition, results of
operations, businesses and prospects of the combined company after giving
effect to the merger; and
- the terms and conditions of the merger agreement and the company voting
agreements and the percentage of Netro's common stock represented by the
stockholders who signed the voting agreements.
After due consideration, SR Telecom's board of directors believed that the
overall risks associated with the proposed merger were outweighed by the
potential benefits of the merger. SR Telecom's board of directors does not
intend the foregoing discussion of information and factors to be exhaustive but
believes the discussion to include the material factors that it considered. In
view of the complexity and wide variety of information and factors, both
positive and negative, that it considered, SR Telecom's board of directors did
not find it practical to quantify or otherwise assign relative or specific
weights to the factors considered. However, after taking into consideration all
of the factors set forth above, SR Telecom's board of directors concluded that
the merger agreement and merger were fair to, and in the best interests of, SR
Telecom and its stockholders and that SR Telecom should proceed with the merger.
55
NETRO'S REASONS FOR THE MERGER
REVIEW OF NETRO'S STRATEGIC ALTERNATIVES
Netro's decision to pursue a merger with SR Telecom arose after Netro's
extensive and continual evaluation of its business and prospects over the past
two years.
Prior to 2001, Netro's principal business involved the sale of its AirStar
point-to-multipoint wireless networking equipment to system integrators, such as
Lucent, who resold Netro's equipment together with their own equipment and
systems integration and installation services. The principal customers for these
products and services were emerging competitive local exchange carriers, which
were founded in response to the worldwide trend towards deregulation. In 2001,
due in large part to the limited access to the capital markets of
telecommunications service providers -- and in particular competitive local
exchange carriers -- and the corresponding decrease in spending by these service
providers, Netro's revenues declined sharply from the previous year. In response
to the change in its customer relationships and declining revenues, Netro
embarked on a three-pronged strategy to:
- develop a direct sales and customer service organization that would
eliminate reliance on third-party systems integrators, such as Lucent;
- focus selling and marketing efforts on incumbent local exchange carriers
and mobile service providers, primarily outside the United States and
Canada; and
- modify and expand its product portfolio to directly target incumbent
local exchange carriers and mobile service providers.
In the summer of 2001, Netro identified the category of wireless local loop
products that could be deployed internationally as being an additional product
line that would complement its existing AirStar product line and also be
attractive to incumbent local exchange carriers. After reviewing other available
alternatives and acquisitions, Netro decided to pursue an acquisition of the
Angel technology which had been developed by AT&T Wireless because it was the
most advanced, field proven technology for wireless local loop applications
available. Netro purchased the Angel assets in February 2002 and immediately
embarked on the process of modifying the Angel platform for international sales.
The modification was completed later in 2002 and Netro began marketing the Angel
product in international locations.
Notwithstanding the significant investments in additional product lines,
after several months of marketing and sales effort and due to the significant
weakening of the telecommunications markets, Netro concluded that substantial
cash would have to be expended to establish a worldwide sales, commissioning and
service force that was sufficiently large to be satisfactory to incumbent local
exchange carriers and mobile service providers. As a result, Netro concluded
that the best course of action was to investigate opportunities to sell Netro
and to evaluate any such opportunities against the dissolution of its business
and the return of Netro's capital to its stockholders. Goldman, Sachs & Co. was
engaged in October 2002 to assist Netro in identifying potential acquirers.
As part of the sale process, Goldman Sachs contacted 38 potential buyers.
Confidentiality agreements were signed with six potential buyers, some of whom
conducted due diligence on Netro. In response to the auction process conducted
by Goldman Sachs, Netro received non-binding offers from four potential buyers,
including SR Telecom. The offer presented by SR Telecom, after negotiation,
involved a US$100 million cash dividend issued by Netro followed by a
stock-for-stock merger with SR Telecom, with Netro stockholders receiving shares
of SR Telecom common stock representing approximately 43% (not taking into
account SR Telecom's subsequent private placement) of the combined company, all
as described in detail in other sections of this proxy statement/prospectus.
The board of directors of Netro agreed to the merger of Netro and SR
Telecom after Netro's management and advisors conducted extensive business,
financial and legal due diligence, the Board considered the results of such due
diligence and weighed the potential benefits and risks of a transaction with SR
Telecom versus the potential benefits and risks associated with the dissolution
of Netro.
56
FACTORS CONSIDERED AND REASONS FOR THE MERGER
In reaching a decision to recommend and approve the transaction with SR
Telecom, including the cash dividend, Netro's board of directors relied on its
knowledge of Netro's business and the telecommunications market, information
provided by Netro's officers and the advice of its advisors. All of the material
factors considered by Netro's board of directors in its deliberations concerning
the merger and all of the material reasons that Netro's board of directors had
for voting in favor of the merger with SR Telecom, are set forth below.
The Most Attractive Alternative. The SR Telecom offer was more attractive
than the other offers received and than the other alternatives available to
Netro, in terms of the form and amount of consideration to Netro stockholders,
the timing of consideration being available to Netro stockholders and the
structure and certainty of completion. The board considered the following in
coming to this conclusion:
- the US$100 million cash dividend together with the merger consideration
offered by SR Telecom was greater than or substantially equivalent to the
total consideration offered by any other bidders based on the average
price of SR Telecom common stock for the 90 calendar day period
immediately preceding the announcement of the proposed transaction;
- based on Netro's per share closing price of US$2.43 on March 26, 2003,
the last trading day before the public announcement of the transaction
with SR Telecom, the consideration to be paid to the Netro stockholders
(after giving effect to the exercise of in-the-money stock options)
represented an approximate premium of 25% over the trading price of the
shares;
- Goldman Sachs' presentation of its proposed fairness opinion, that as of
the date of such opinion and based upon and subject to the factors and
assumptions set forth therein, the consideration to be received by
holders of Netro's common stock pursuant to the merger agreement and the
cash dividend in the aggregate amount of US$100 million to be declared on
Netro's common stock as contemplated under the merger agreement, in the
aggregate, are fair from a financial point of view to such holders;
- American Appraisal Associates' preliminary opinion that, based on the
information known to it and on the factors and assumptions described in
the opinion, Netro and the combined company would pass the solvency and
capital surplus tests, as applicable, set forth in the opinion if the
US$100 million dividend is paid and the merger is completed as
contemplated by the merger agreement;
- the cash dividend followed by the merger will allow Netro's stockholders
to receive immediate liquidity in an amount per share in excess of
Netro's closing price on the date preceding the expected signing date for
the merger agreement, as well as a meaningful opportunity to participate
in the growth and success of the combined company through ownership of
approximately 43% (not taking into account SR Telecom's subsequent
private placement) of the combined company's stock (as of March 27,
2003);
- the cash dividend to be paid to Netro's stockholders is greater than the
amount the board estimated would be able to be distributed immediately if
Netro were to enter into a plan of dissolution and liquidation and was
greater than the price per share at which the Netro common stock was
trading at the time of the execution of the merger agreement;
- prior to the expected signing date of the merger agreement, the net
present value of the SR Telecom offer exceeded the expected net present
value (based on management estimates) of all proceeds to be received by
Netro stockholders in a dissolution, taking into account the amount,
timing and uncertainties associated with the return of Netro's capital to
Netro stockholders if Netro were dissolved;
- the sale of the entire company and continuity of its assets and
liabilities is preferable to the piecemeal sale of Netro assets in
liquidation because certain liabilities that would arise in a liquidation
can be avoided by a sale of the entire company; and
57
- the Netro board's stated belief that, with the assistance of Goldman
Sachs, Netro had conducted an extensive auction process in the course of
which Netro and Goldman Sachs were in contact with 38 potential bidders
on behalf of Netro and that the SR Telecom offer was the most attractive
alternative for Netro stockholders resulting from the process and the
merger agreement enabled the Netro board to consider and recommend other
offers (subject to the payment of a breakup fee) if a subsequent bid were
made for Netro which provided superior terms.
Strategic Advantages of the Merger. Based on estimates of future financial
results and the pro forma financial position of the combined company, both Netro
and SR Telecom believed that the merger would have a positive impact on the
business, operations and financial results of the two companies. Specifically,
the two companies believed in light of historical information concerning the
business, financial performance and condition, market opportunity and position,
technology and management of Netro and SR Telecom that the following factors
would have a positive effect on the businesses:
- Netro's AirStar and Angel products are complementary to SR Telecom's
products and will provide the combined company with opportunities for
cross selling;
- SR Telecom's history of sales to incumbent local exchange carriers around
the globe who are target customers for Netro's products could strengthen
the businesses of both companies after the merger;
- SR Telecom's worldwide sales, commissioning, installation and service
organization, which is of the kind that Netro was unable to independently
develop, will be attractive to Netro's target incumbent local exchange
carrier and mobile service provider customers;
- SR Telecom's continued success with maintaining long historical customer
relationships in a difficult economic environment, as shown by its solid
backlog, evidenced SR Telecom's management team's ability to position the
combined company for future success; and
- Netro's stockholders would be able to share in the future success of the
combined company through their 43% (not taking into account SR Telecom's
subsequent private placement) ownership of the combined company.
Impact on Netro Customers and Employees. The board believed that Netro's
customers would be better served by the combined company because SR Telecom's
worldwide sales, commissioning, installation and service organization, which
Netro was unable to develop independently, would be attractive to Netro's
current and potential customers. Furthermore, the breadth of products offered by
the combined company would enable customers to use a one-stop-shop purchasing
strategy for all of their wireless access needs.
The board also evaluated the impact of the proposed merger on Netro's
employees and determined that although most Netro employees would be terminated
in connection with the merger, more employees would retain their jobs in the
proposed transaction with SR Telecom than in the other alternatives available to
Netro and adequate severance would be provided to terminated employees to
alleviate the impact of the terminations.
Risks of the Proposed Transaction. A number of risks were also considered
by the board in conjunction with its advisors in the course of legal, accounting
and business due diligence and during the negotiation of the merger agreement.
The board considered each of the following material risks, which were known to
it:
- the debt obligations and other liabilities of the combined company and
the risk that the combined company may not be able to meet, defer or
refinance such obligations and liabilities in the future;
- the low trading prices and volatility of the two companies' shares of
common stock and the risk that because the number of shares of SR Telecom
common stock to be issued in the merger is fixed, Netro stockholders may
receive less merger consideration than the board anticipated;
- the risks faced by Netro stockholders associated with owning equity which
is primarily traded outside of the United States;
58
- the risk that the SR Telecom transaction is not completed, in which case
Netro may be required to pay a break-up fee equal to as much as US$6
million plus expenses, which might reduce the amount a subsequent bidder
would be willing to pay to acquire Netro;
- the risk that the merger with SR Telecom might not be completed,
including the possible exercise of termination rights by SR Telecom under
the merger agreement or Netro's failure to satisfy certain closing
conditions, even if the merger is approved by Netro's stockholders; and
- other risks described in this proxy statement/prospectus in the section
entitled "Risk Factors".
Comparison to Net Asset Value. Netro's board of directors also considered
the fact that the aggregate consideration offered by SR Telecom was less than
the net asset value of Netro as shown on Netro's balance sheet dated March 31,
2003. Netro's board concluded, however, that the consideration being offered was
nonetheless fair in light of the fact that (a) notwithstanding the extensive
process that Netro engaged in with the assistance of Goldman Sachs, no other
company was willing to make an offer for Netro that exceeded the offer of SR
Telecom, (b) the value of the liabilities on Netro's balance sheet do not
include significant costs associated with a restructuring or liquidation of
Netro, such as termination of Netro's real estate lease obligations or the
severance costs associated with terminating excess Netro employees, which are
properly excluded as liabilities from the Netro balance sheet, (c) the outcome
of litigation to which Netro is subject is inherently uncertain, and (d) Netro's
net asset value continues to decrease from quarter to quarter resulting from
expenditures of cash in operations. As a result of these factors, the value of
offers from potential acquirors who contemplated liquidating Netro, and Netro's
own estimates of the proceeds from a potential liquidation, were all less than
the net asset value of Netro as of March 31, 2003, even assuming the complete
liquidation process could have been commenced on March 31, 2003. Although the
companies proposing to acquire Netro as a continuing business such as SR
Telecom, would be able to avoid triggering certain liabilities that would be a
direct result of a decision to liquidate, they nonetheless would be affected by
the continuing expenditure of cash pending the consummation of a transaction,
the significant costs associated with restructuring and integration and the
inherent uncertainty of litigation to which Netro is subject.
Comparison to Liquidation. The board of directors also considered the
proposed transaction in comparison to a liquidation of Netro and distribution of
assets. According to management's estimates, if the liquidation process were
initiated on March 31, 2003, the reasonable range of liquidation values for
Netro would have been between US$94.7 million and US$146.9 million with the
expected value of approximately US$122.9 million. Based on legal advice, Netro
expected that the initial dividend to stockholders would be approximately
US$85.2 million (90% of the conservative estimate of liquidation value) with the
balance of proceeds, if any, becoming available over the 3 year period following
the initiation of the liquidation process. On a net present value basis, based
on management estimates and legal advice regarding the timing of the
distributions under a liquidation scenario, the reasonable range of net present
values of a liquidation was US$90.7 million to US$136.8 million with an expected
value of approximately US$114.2 million.
Conflict of Interest. The board of directors also considered whether it
had any conflicts of interest with the Netro stockholders in connection with the
proposed transaction with SR Telecom. After considering the potential conflicts
of interest, including those described elsewhere in this proxy
statement/prospectus in the section entitled "-- The Merger -- Interests of
Netro's Directors and Officers in the Merger", the board determined that because
Mr. Ben-Efraim would be receiving a continuation of his employment agreement in
connection with the proposed transaction, he may have a conflict of interest
with Netro stockholders with respect to the transaction with SR Telecom. The
board therefore required Mr. Ben-Efraim to abstain from the board's vote on
whether or not to approve the agreement and plan of merger.
Netro's board of directors concluded that, on balance, the known potential
benefits of the transaction with SR Telecom outweighed the known potential risks
and the proposed transaction with SR Telecom was more compelling than other
available alternatives and was in the best interests of Netro's stockholders.
59
FACTORS CONSIDERED IN CONNECTION WITH THE CASH DIVIDEND
In reaching its decision to approve the transactions contemplated by the
merger agreement, Netro's board of directors considered its legal duties and
obligations in connection with declaring the US$100 million cash dividend. As
part of its deliberative process, Netro's board of directors received
information and advice from Netro's management, Davis Polk & Wardwell, Goldman
Sachs and American Appraisal Associates. Netro's board of directors reviewed the
information provided by management and each of its advisors and engaged in
extensive discussions with management and its advisors about factors relating to
the declaration of the cash dividend and the merger.
In order to assist the board in its deliberations, Netro management
prepared projections of Netro's income statement and a reconciliation of Netro's
projected operating income to projected cash balances through the end of fiscal
year 2006, which were based on the assumption that Netro would be operating as a
division of SR Telecom after the effective time of the merger, as contemplated
by SR Telecom's management. The board considered this information in determining
that the cash dividend could be legally declared just prior to the effective
time of the merger in accordance with applicable laws, as described below. The
financial projections provided by management were also provided to and relied
upon by American Appraisal Associates for purposes of its opinion, which is
described elsewhere in this document under the caption "-- Opinions of Netro's
Advisors -- Opinion of American Appraisal Associates, Inc."
As a result of this deliberative process, Netro's board of directors
concluded that, based upon the information known to it as of March 25, 2003,
assuming no change in this information prior to the effective time of the merger
and assuming that the transactions contemplated by the merger agreement are
carried out as proposed, the cash dividend could be legally declared just prior
to the effective time of the merger. In coming to this conclusion, based on the
facts known to it as of March 25, 2003, the board satisfied itself that the
legal tests described below could be satisfied if the cash dividend is declared
and the merger is completed as contemplated by the merger agreement.
The Capital Surplus Rule. One of the legal tests that must be satisfied in
order to declare the cash dividend immediately prior to the effective time of
the merger is Delaware's "capital surplus rule." Under Delaware law, dividends
may legally be paid out of "surplus", or if there is no surplus, out of the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. We refer to this Delaware requirement as the capital
surplus rule. For purposes of this test, the following terms have the following
meanings:
- "surplus" means the amount by which the "net assets" of the corporation
exceed the corporation's "capital."
- "net assets" means the amount by which the fair value of the
corporation's total assets exceed its total liabilities including
contingent liabilities.
- "capital" is that portion of the consideration received by a corporation
for its issued shares of capital stock that the directors determine to be
"capital", which in no event can be less than the aggregate par value of
such shares.
As of March 31, 2003, Netro had net assets of US$167.1 million, which is
greater than the amount of net assets Netro expects to have immediately prior to
the declaration of the cash dividend. Netro's capital is exactly equal to the
aggregate par value of its outstanding common stock, which as of March 31, 2003,
was US$38,739.98. Accordingly, as of March 31, 2003, the declaration of the cash
dividend could have been made in compliance with the capital surplus rule. In
order for Netro's board of directors to legally declare the cash dividend
immediately prior to the merger in compliance with the capital surplus rule, the
value of Netro's net assets on the day the cash dividend is declared must exceed
the value of the cash dividend, or US$100 million, plus Netro's capital on that
day.
Solvency Analysis. Netro's board of directors also considered the legality
of the dividend under the United States Bankruptcy Code and applicable state
fraudulent transfer or conveyance laws, which we refer to collectively as
solvency laws. If the cash dividend is not declared in compliance with these
solvency laws, it
60
may be recoverable in certain circumstances, by Netro or its creditors from the
stockholders or immediate or mediate transferees of the stockholders. In
particular, if Netro is insolvent under applicable solvency laws at the time the
cash dividend is made or if the cash dividend causes Netro to be insolvent or
leaves Netro with unreasonably small capital to engage in its business or unable
to pay its liabilities as they mature, the cash dividend may be recoverable.
Although the formulations vary, Netro would generally be considered to be
insolvent if the sum of its liabilities, including contingent liabilities, is
greater than the fair value of its total assets.
Opinion of American Appraisal Associates. To assist in its determination
that the cash dividend can be legally paid in accordance with the capital
surplus rule and solvency laws described above, Netro's board of directors
retained American Appraisal Associates, Inc. to conduct an analysis and render
the solvency opinion described below under the caption "-- Opinions of Netro's
Advisors -- Opinion of American Appraisal Associates, Inc." American Appraisal
Associates, Inc. rendered an oral preliminary opinion to Netro's Board of
Directors on March 25, 2003, followed by a preliminary written opinion on March
26, 2003. Specifically, American Appraisal Associates opined that, subject to
the conditions, assumptions and limitations contained therein:
- the excess of the value of the aggregate assets of Netro over the total
liabilities of Netro, immediately prior to the payment of the cash
dividend, will exceed the value of the cash dividend plus the stated
capital of Netro; and
- after taking into account the payment of the cash dividend but not the
merger, the excess of the value of the aggregate assets of Netro over the
total liabilities of Netro will exceed the stated capital of Netro.
In addition, American Appraisal Associates specifically opined that,
subject to the conditions, assumptions and limitations contained in the opinion,
after giving effect to the cash dividend, the merger and the payment of related
fees and expenses:
- the fair value of the aggregate assets of Netro will exceed its total
liabilities;
- the present fair saleable value of the aggregate assets of Netro will be
greater than its total liabilities;
- based upon the facts known by American Appraisal Associates, Inc. as of
such date, Netro will be able to pay its liabilities as they mature; and
- Netro will not have unreasonably small capital for the business in which
it is engaged, as management of Netro has stated such business was then
conducted and as SR Telecom has stated such business is proposed to be
conducted immediately following the consummation of the transactions.
The oral and written preliminary opinions, in customary form, included no
quantifications of Netro's assets or its ability to pay its liabilities and
conduct its business. As Netro's board of directors had made its own independent
determination that the dividend could be legally declared just prior to the
effective time of the merger having reviewed Netro's historical financial
statements and considered and deemed reasonable, management's projections
underlying American Appraisal Associates opinion, the board of directors was
satisfied that the opinion of American Appraisal Associates need not contain
such quantifications. Moreover, based on a review of American Appraisal
Associates' credentials in rendering similar solvency opinions, the board
determined that because the firm is a nationally recognized, independent
corporate valuation consulting firm with extensive experience and expertise in
rendering similar opinions, it was reasonable to rely upon the opinions in the
form provided. In addition to the definitions provided above in the discussion
of the capital surplus rule, refer to the section entitled "-- Opinions of
Netro's Advisors -- Opinion of American Appraisal Associates, Inc." for
definitions of the terms used in the opinions of American Appraisal Associates
and for a description of the conditions, assumptions and limitations on those
opinions.
In short, the preliminary opinion concluded, subject to the conditions,
assumptions and limitations contained in the opinion, that after giving effect
to the cash dividend, the merger and the payment of related fees and expenses,
Netro would not be insolvent under any of the standard solvency tests described
in the preliminary opinion. American Appraisal Associates, Inc. has been
retained to render a final opinion with
61
respect to the matters covered by the preliminary opinion immediately prior to
the declaration and payment of the cash dividend. Netro's board of directors
will consider this final opinion in determining whether to declare and pay the
cash dividend immediately prior to the effective time of the merger.
As noted above, the cash dividend has not yet been declared by Netro's
board of directors. Although just prior to the signing of the merger agreement,
Netro's board of directors determined based on information known to it at that
time, assuming no change in this information prior to the effective time of the
merger and assuming that the transactions contemplated by the merger agreement
are carried out as proposed, that it would be legally permissible to declare and
pay the cash dividend prior to the effective time of the merger, the cash
dividend will not be declared by Netro's board of directors unless certain
conditions are satisfied. Specifically, the dividend will not be declared unless
and until:
- the merger has been approved by you, Netro's stockholders;
- all of the other conditions to the merger (other than the declaration and
payment of the dividend) have been satisfied or waived; and
- a determination is made by Netro's board of directors that the cash
dividend can be lawfully paid.
If Netro's board of directors is not able to determine that the cash
dividend may be declared and paid in accordance with applicable law, the cash
dividend will not be declared or paid, the merger will not be consummated, and
Netro will be obligated to pay SR Telecom US$2 million plus SR Telecom's
expenses.
This discussion of information and factors considered by Netro's board of
directors in connection with the merger and the cash dividend is not intended to
be exhaustive but is intended to summarize all material factors considered. In
view of the wide variety of factors considered, including the various valuation
methodologies prepared by Netro's financial advisors, Netro's board of directors
did not find it practicable to quantify or otherwise assign relative weights to
the specific factors considered. However, Netro's board of directors concluded
that the potential benefits of the merger outweighed the potential negative
factors and that, overall, the cash dividend followed by the proposed merger had
greater potential benefits for Netro's stockholders than other strategic
alternatives, including dissolution. After taking into account all of the
factors set forth above, the Netro board of directors (with Mr. Ben-Efraim
abstaining) unanimously agreed that the merger agreement and the transactions
contemplated thereby (including the cash dividend and the merger) were fair to,
and in the best interests of, Netro's stockholders and that Netro should enter
into the merger agreement.
RECOMMENDATION OF NETRO'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, NETRO'S BOARD OF DIRECTORS UNANIMOUSLY (WITH
MR. BEN-EFRAIM ABSTAINING) DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS
OF THE NETRO STOCKHOLDERS AND APPROVED THE MERGER AGREEMENT. NETRO'S BOARD OF
DIRECTORS RECOMMENDS THAT NETRO STOCKHOLDERS VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
OPINIONS OF NETRO'S ADVISORS
OPINION OF GOLDMAN, SACHS & CO.
Goldman Sachs rendered its opinion to Netro's board of directors that, as
of March 27, 2003 and based upon and subject to the factors and assumptions set
forth therein, the consideration to be received by holders of Netro's common
stock pursuant to the merger agreement and the dividend in the aggregate amount
of US$100 million to be declared on Netro's common stock as contemplated under
the merger agreement, in the aggregate, are fair from a financial point of view
to such holders.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED MARCH 27,
2003, WHICH SETS FORTH ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS
ATTACHED AS ANNEX C-1. NETRO'S STOCKHOLDERS SHOULD READ THE OPINION IN ITS
ENTIRETY. GOLDMAN SACHS PROVIDED ITS OPINION FOR THE INFORMATION AND ASSISTANCE
OF NETRO'S BOARD OF DIRECTORS
62
IN CONNECTION WITH ITS CONSIDERATION OF THE TRANSACTION. THE GOLDMAN SACHS
OPINION IS NOT A RECOMMENDATION AS TO HOW ANY HOLDER OF NETRO'S COMMON STOCK
SHOULD VOTE WITH RESPECT TO THE TRANSACTION.
In connection with rendering the opinion described above and performing its
related financial analyses, Goldman Sachs reviewed:
- the merger agreement;
- Annual Reports to stockholders and Annual Reports on Form 10-K of Netro
for the four years ended December 31, 2002 and Annual Reports to
shareholders of SR Telecom for the five years ended December 31, 2002;
- the registration statement on Form S-1, including the prospectus dated
August 18, 1999, relating to Netro's initial public offering of shares of
Netro common stock;
- interim reports to stockholders and Quarterly Reports on Form 10-Q of
Netro and quarterly reports to shareholders of SR Telecom;
- other documents filed by Netro with the SEC and Netro press releases;
- internal financial analyses and forecasts for Netro and SR Telecom
prepared by their respective managements, including certain cost savings
and operating synergies projected by the managements of Netro and SR
Telecom to result from the transaction and forecasts and analyses
prepared by management of Netro of the proceeds that would be distributed
to holders of shares of Netro's common stock in the event of a
liquidation of Netro.
Goldman Sachs also held discussions with members of the senior managements
of Netro and SR Telecom regarding their assessment of the strategic rationale
for, and the potential benefits of, the transaction and the past and current
business operations, financial condition and future prospects of their
respective companies. In addition, Goldman Sachs:
- reviewed the reported price and trading activity for the Netro common
stock and the SR Telecom common stock;
- compared certain financial and stock market information for Netro and SR
Telecom with similar information for certain other companies the
securities of which are publicly traded;
- reviewed the financial terms of certain recent business combinations in
the communications technology industry specifically and in other
industries generally; and
- performed such other studies and analyses as it considered appropriate
(the material studies and analyses performed by Goldman Sachs are
summarized below).
Goldman Sachs relied upon the accuracy and completeness of all of the
financial, accounting and other information discussed with or reviewed by it and
assumed such accuracy and completeness for purposes of rendering the opinion
described above. In that regard, Goldman Sachs assumed with Netro's consent that
the internal financial analyses and forecasts for Netro and SR Telecom described
above were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of Netro and SR Telecom. In addition, Goldman
Sachs did not make an independent evaluation or appraisal of the assets and
liabilities (including any derivative or off-balance-sheet assets and
liabilities) of Netro or SR Telecom or any of their respective subsidiaries and
Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman
Sachs also did not express any opinion as to the impact of the transactions
contemplated by the merger agreement on the solvency or viability of Netro or
the ability of Netro to pay its obligations when they become due. In addition,
the opinion of Goldman Sachs did not address the relative merits of the
transaction contemplated pursuant to the merger agreement as compared to any
alternative business transaction or strategic course that might be available to
Netro.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with rendering the opinion described above. Although
the material financial analyses performed by Goldman Sachs are summarized, the
following summary does not purport to be a complete description of the financial
analyses
63
performed by Goldman Sachs. The order of analyses described does not represent
relative importance or weight given to those analyses by Goldman Sachs. Some of
the summaries of the financial analyses include information presented in tabular
format. The tables must be read together with the full text of each summary and
are alone not a complete description of Goldman Sachs' financial analyses.
Except as otherwise noted, the following quantitative information, to the extent
that it is based on market data, is based on market data as it existed on or
before March 24, 2003 and is not necessarily indicative of current market
conditions.
Selected Companies Analysis. Goldman Sachs reviewed and compared certain
financial information for Netro and SR Telecom to corresponding financial
information, ratios and public market multiples for the following publicly
traded companies in the fixed wireless and broad systems industries:
FIXED WIRELESS INDUSTRY BROAD SYSTEMS INDUSTRY
----------------------- ----------------------
Airspan Networks Inc. ADC Telecommunications, Inc.
Alvarion Ltd. Alcatel
Remec, Inc. Cisco Systems, Inc.
Stratex Networks, Inc. LM Ericsson Telephone Company
Vyyo Inc. Hughes Electronics
Corporation
Lucent Technologies Inc.
Motorola, Inc.
Nokia Corporation
Nortel Networks Corporation
Siemens AG
UTStarcom, Inc.
Although none of the selected companies is directly comparable to Netro or
SR Telecom, the companies included were chosen because they are publicly traded
companies with operations that for purposes of analysis may be considered
similar to certain operations of Netro and SR Telecom.
Goldman Sachs also calculated and compared various financial multiples and
ratios based on financial data, information it obtained from SEC filings,
estimates provided by the Institutional Brokers Estimate System, or IBES, and
securities analysts' projections.
With respect to the selected companies, Goldman Sachs calculated:
- the revenue growth rate from calendar year 2002 revenue to estimated
calendar year 2003 revenue;
- levered market capitalization, which is the market value of common equity
plus the book value of debt less cash, as a multiple of estimated
calendar year 2003 revenue; and
- the ratio of the stock price to estimated calendar year 2004 earnings.
Estimated 2003 revenue was derived from securities analysts' reports.
Levered market capitalization was calculated using closing prices on March 24,
2003 and the most recent publicly available information for Netro, SR Telecom
and the selected companies. The ratio of stock price to estimated calendar year
2004 earnings was calculated using closing prices on March 24, 2003 and IBES
estimates of calendar year 2004 earnings per share.
The following table presents the results of this analysis:
SELECTED FIXED SELECTED BROAD
WIRELESS COMPANIES SYSTEMS COMPANIES NETRO SR TELECOM
------------------ --------------------- ----- ----------
RANGE MEDIAN RANGE MEDIAN
--------- ------ ------------ ------
Revenue Growth CY2002-CY2003 (2)%-18% 1% (18)%-54% (3)% NA* (6)%
Levered Market Capitalization as
a multiple of CY2003 Revenue 0.6x-0.9x 0.8x 0.5x-4.1x 0.9x NA 0.8x
Price/Earnings Ratio NM+ NM 11.5x-228.7x 19.8x NA NA
64
---------------
* NA means not available. No revenue estimates for calendar year 2003 were
available from published analysts' reports for Netro and no earnings estimates
for calendar year 2004 were available from published analysts' reports for
Netro or SR Telecom.
+ NM means not meaningful. The price/earnings ratio calculations for selected
fixed wireless companies either resulted in negative numbers or positive
numbers that were too large to be meaningful. The median price/earnings ratio
calculation for selected fixed wireless companies resulted in a negative
number.
Discounted Cash Flow Analysis. Goldman Sachs performed discounted cash
flow analyses on the combined company (SR Telecom and Netro) and on Netro on a
stand-alone basis. These analyses used Netro management estimates, including
Netro management estimates of the combined company's June 30, 2003 net debt
balance of US$54.9 million, or US$0.57 per share. The first analysis, which was
on the combined company, indicated a range of values for the sum of the combined
company common stock issued to holders of Netro common stock under the merger
agreement and the dividend of US$100 million. The second analysis on Netro
indicated a range of values for the Netro common stock on a stand-alone basis.
This second analysis provided one basis for comparison with the values that the
first analysis indicated for the combined company common stock and the US$100
million dividend.
This discounted cash flow analysis implied indicative ranges of values as
described below. Goldman Sachs calculated net present values of projected free
cash flows for the combined company for the years 2003 through 2005 using
discount rates ranging from 15% to 35%. For this purpose, free cash flows were
calculated as operating income plus depreciation, minus any increase in net
working capital minus capital expenditures. Goldman Sachs calculated per share
value ranges of the combined company's common stock using multiples in the year
2005 ranging from 6x earnings before interest, taxes, depreciation and
amortization, or EBITDA, to 14x EBITDA. These values were then discounted to a
present value as of June 30, 2003 using discount rates ranging from 15% to 35%.
Present value as of June 30, 2003 was then adjusted by subtracting US$0.57 per
share, Netro management's estimate of the net debt balance as of June 30, 2003.
This analysis indicated a range of present values of US$0.69 to US$3.51 per
share of the combined company's common stock. Based on this range of values,
Goldman Sachs calculated a range of values per share of Netro common stock of
the combined company common stock issued to holders of Netro common stock in the
merger and the dividend of US$100 million to be declared on the Netro common
stock as contemplated pursuant to the merger agreement implied by this analysis
of US$3.23 to US$6.16 per share. This calculation differs from the calculation
of the estimated per share value to be received by Netro stockholders of
US$3.19702 described under "-- The Merger Proposal -- Estimated Per Share Value
to be Received by Netro Stockholders". The calculation used in the Goldman Sachs
analysis involved calculating a range of potential values for the combined
company common stock, based on Netro management's forecasts, of US$0.69 to
US$3.51 per share. In contrast, the calculation of the estimated per share value
to be received by Netro stockholders described under "-- The Merger Proposal --
Estimated Per Share Value to be Received by Netro Stockholders" was based on the
actual closing price per share of the common stock of SR Telecom, on a
stand-alone basis, on July 31, 2003, of US$0.70.
Goldman Sachs performed a sensitivity analysis to the discounted cash flow
analysis by applying certain ranges of deviations to the annual revenue growth
estimates and operating margin estimates. The sensitivity analysis assumed a 25%
discount rate and a 10x multiple of estimated 2005 EBITDA. The annual revenue
growth deviations ranged from (20)% to 20% and the operating margin deviations
ranged from (10)% to 10%. This analysis indicated a range of present values of
US$0.00 to US$6.68 per share of the combined company's common stock. Based on
this range of present values, Goldman Sachs calculated a range of values per
share of Netro common stock of the combined company common stock issued to
holders of Netro common stock in the merger and the dividend of US$100 million
to be declared on the Netro common stock as contemplated pursuant to the merger
agreement implied by this analysis of US$2.51 to US$9.46 per share.
Goldman Sachs also performed a discounted cash flow analysis on Netro using
Netro management estimates as of March 19, 2003 (including Netro management
estimates of Netro's June 30, 2003 net cash balance of US$138.9 million, or
US$3.48 per share). This analysis implied indicative ranges of values as
65
described below. Goldman Sachs calculated net present values of free cash flows
for Netro for the years 2003 through 2007 using discount rates ranging from 15%
to 35%. Goldman Sachs calculated per share value ranges of Netro's common stock
using multiples of estimated year 2007 EBITDA ranging from 6x to 14x. These
values were then discounted to a present value as of June 30, 2003 using
discount rates ranging from 15% to 35%. Present value as of June 30, 2003 was
then adjusted by adding US$3.48 per share, Netro management's estimate of the
net cash balance as of June 30, 2003. This analysis implied a range of present
values of US$2.45 to US$4.40 per share of Netro common stock. Goldman Sachs also
presented the range of values of Netro common stock indicated by a combined
company analysis, taking into account the dividend of US$100 million, and the
range of values of Netro common stock indicated by a stand-alone analysis. The
range of values indicated by a combined company analysis, taking into account
the dividend of US$100 million, was US$3.23 to US$6.16. The range of values
indicated by a stand-alone analysis was US$2.45 to US$4.40. Comparing the
results of these two analyses, the low end of the range on a stand-alone basis
was lower than the low end of the range on a combined company basis. In
addition, the high end of the range on a stand-alone basis was lower than the
high end of the range on a combined company basis.
Selected Transactions Data. Goldman Sachs provided certain information
relating to 169 selected transactions in the communications technology industry
since 2000. For each of the selected transactions, Goldman Sachs calculated:
- levered aggregate consideration as a multiple of latest twelve month, or
LTM, sales;
- equity consideration as a multiple of LTM net income;
- equity consideration as a multiple of estimated net income for the
calendar year following the transaction based on IBES and securities
analysts' estimates; and
- the premium paid in relation to the market value of the acquired
company's common stock five trading days prior to announcement.
The following table summarizes the results of these calculations:
SELECTED TRANSACTIONS
----------------------
RANGE MEDIAN
------------ -------
Levered Aggregate Consideration as a multiple of LTM
Sales..................................................... 0.5-460.5x 6.8x
Equity Consideration as a Multiple of:
LTM Net Income............................................ 19.4-976.2x 91.2x
Estimated Net Income for following calendar year....... 20.8-523.9x 59.1x
Premium to Market Value 5 trading days prior to
announcement.............................................. (6.8)-154.3% 34.2%
Goldman Sachs presented this data for general reference purposes. Goldman
Sachs did not perform calculations comparing the data to the consideration to be
received by Netro's stockholders.
Contribution Analysis. Goldman Sachs reviewed specific historical and
estimated future operating and financial information, including, among other
things, revenues, operating income, gross cash, net cash and pro forma ownership
for Netro, SR Telecom and the combined company resulting from the merger based
on Netro management's forecasts as of March 19, 2003. The analysis indicated
that Netro's stockholders would receive 43% of the outstanding common equity of
the combined company following consummation of the transaction. Goldman Sachs
also analyzed the relative revenue, operating income, gross cash and net cash
contributions of Netro and SR Telecom to the combined company following
consummation of the transaction taking into account payment of a dividend in the
aggregate amount of US$100 million on Netro's common
66
stock as contemplated pursuant to the merger agreement. The following table
presents the results of this analysis:
NETRO CONTRIBUTION TO COMBINED
REVENUE
CY2001A................................................... 18%
CY2002A................................................... 11%
CY2003E................................................... 11%
CY2004E................................................... 25%
CY2005E................................................... 29%
OPERATING INCOME
CY2001A................................................... NM+
CY2002A................................................... NM
CY2003E................................................... NM
CY2004E................................................... 8%
CY2005E................................................... 27%
GROSS CASH -- as of June 30, 2003
CY2003E................................................... 66%
NET CASH -- as of June 30, 2003
CY2003E................................................... NM
---------------
+ Based on publicly available information, in each of calendar years 2001 and
2002, the combined company's operating income was negative. Based on Netro
management's estimates, the combined company's estimated operating income in
calendar year 2003 is negative and the combined company's estimated net cash
(which is total cash less total debt) as of June 30, 2003 is negative.
The contribution analysis indicated that Netro stockholders would receive
43% of the outstanding common equity of the combined company following the
merger compared to contributions:
- ranging from 11% to 29% to the combined company's revenue in calendar
years 2001 to 2005;
- of 8% and 27% to the combined company's operating income in calendar year
2004 and calendar year 2005, respectively; and
- of 66% to the combined company's gross cash in calendar year 2003 (as of
June 30, 2003).
The contribution analysis indicated that the percentage of the outstanding
common equity of the combined company that Netro stockholders would receive
following the merger is:
- larger than Netro's implied contribution to the combined company's
revenue in calendar years 2001 to 2005;
- larger than Netro's implied contribution to the combined company's
operating income in calendar years 2004 and 2005; and
- smaller than Netro's implied contribution to the combined company's gross
cash, as of June 30, 2003.
Give/Get Analysis. Goldman Sachs reviewed selected projected revenue and
operating income information for calendar years 2003 through 2005 for Netro, SR
Telecom and the combined company based on estimates provided by Netro's
management as of March 19, 2003. Goldman Sachs compared Netro's projected
revenue and operating income on a stand-alone basis to the share of the combined
company's projected revenue and operating income on a pro forma basis
represented by the 41.5 million shares of SR Telecom common stock issued in the
merger. This comparison gave effect to estimated Netro restructuring costs of
US$20 million and related savings projected by the management of Netro to result
from
67
the transaction. Goldman Sachs assumed that Netro stockholders would receive
approximately 43% of the outstanding common equity of the combined company
following consummation of the transaction. The comparison of Netro's projected
revenue and operating income on a stand-alone basis to Netro stockholders' share
of the combined company's projected revenue and operating income on a pro forma
basis indicated a net increase in revenue to Netro stockholders of US$32.3
million, or 124%, in calendar year 2003, US$8.9 million, or 11%, in calendar
year 2004 and US$10.2 million, or 10%, in calendar year 2005 and a net increase
in operating income to Netro stockholders of US$23.1 million in calendar year
2003, US$27.3 million in calendar year 2004 and US$22.4 million in calendar year
2005.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all of its analyses and did not
attribute any particular weight to any factor or analysis considered by it.
Rather, Goldman Sachs made its determination as to fairness on the basis of its
experience and professional judgment after considering the results of all of its
analyses. No company or transaction used in the above analyses as a comparison
is directly comparable to Netro or SR Telecom or the contemplated transaction.
These analyses do not purport to be appraisals or necessarily reflect the
prices at which businesses or securities actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
these analyses. Because these analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Netro, SR Telecom, Goldman Sachs or any other
person assumes responsibility if future results are materially different from
those forecast.
As described above, Goldman Sachs' opinion to Netro's board of directors
was one of many factors taken into consideration by Netro's board of directors
in making its determination to approve the merger agreement. Although the
material financial analyses performed by Goldman Sachs are summarized, the
foregoing summary does not purport to be a complete description of the analyses
performed by Goldman Sachs in connection with the fairness opinion and is
qualified in its entirety by reference to the written opinion of Goldman Sachs
attached as Annex C-1.
Goldman Sachs, as part of its investment banking business, is continually
engaged in performing financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for estate, corporate and
other purposes. Goldman Sachs is familiar with Netro having provided certain
investment banking services to Netro from time to time, including having acted
as:
- sole lead manager and bookrunner of Netro's public offering of 6,000,000
shares of its common stock in March 2000;
- financial advisor to Netro in connection with the purchase of certain
assets from AT&T Wireless Services, Inc. in January 2002;
- financial advisor and dealer manager in connection with Netro's
self-tender for its shares of common stock in August 2002; and
- Netro's financial advisor in connection with, and having participated in
certain of the negotiations leading to, the merger agreement.
Goldman Sachs also may provide investment banking services to Netro and SR
Telecom in the future. The Netro board of directors selected Goldman Sachs as
its financial advisor because it is an internationally recognized investment
banking firm that has substantial experience in transactions similar to the
transaction.
Goldman Sachs provides a full range of financial advisory, financing and
securities services and, in the course of its normal trading activities, may
from time to time effect transactions and hold positions in securities,
including derivative securities, of Netro or SR Telecom for its own account and
for the accounts of customers.
68
Pursuant to a letter agreement dated October 30, 2002, Netro engaged
Goldman Sachs to act as its financial advisor in connection with the
contemplated transaction. Pursuant to the terms of this engagement letter, Netro
has agreed to pay Goldman Sachs a transaction fee equal to the greater of US$2
million or 2% of the aggregate consideration paid in the transaction (which for
purposes of the engagement letter includes any dividend declared by Netro on its
common stock after execution of the engagement letter), which is payable upon
consummation of the transaction. In addition, Netro has agreed to reimburse
Goldman Sachs for its reasonable expenses, including attorneys' fees and
disbursements, and to indemnify Goldman Sachs and related persons against
various liabilities, including certain liabilities under the federal securities
laws.
OPINION OF AMERICAN APPRAISAL ASSOCIATES, INC.
In a written preliminary opinion, delivered on March 26, 2003, American
Appraisal Associates stated that assuming the cash dividend and the merger were
consummated substantially as proposed, based upon the financial projections of
management and on other facts and assumptions it deemed relevant set forth in
Annex C-2, it was of the opinion that (1) the fair value of the aggregate assets
of each of Netro and the combined company will exceed their respective total
liabilities, including contingent liabilities, (2) the present fair saleable
value of the aggregate assets of each of Netro and the combined company will be
greater than their respective total liabilities, including contingent
liabilities, (3) each of Netro and the combined company will be able to pay its
respective liabilities, including contingent liabilities, as they mature, and
(4) each of Netro and the combined company will not have unreasonably small
capital to conduct its business, as management of SR Telecom has stated such
businesses are proposed to be conducted immediately following consummation of
the merger. The preliminary opinion, in customary form, included no
quantifications of Netro's or the combined company's assets or their ability to
pay their liabilities and conduct their businesses. As Netro's board of
directors had made its own independent determination that the dividend could be
legally declared just prior to the effective time of the merger having reviewed
Netro's historical financial statements and considered and deemed reasonable,
management's projections underlying American Appraisal Associates opinion, the
board of directors was satisfied that the opinion of American Appraisal
Associates need not contain such quantifications. Moreover, based on a review of
American Appraisal Associates' credentials in rendering similar solvency
opinions, the board determined that because the firm is a nationally recognized,
independent corporate valuation consulting firm with extensive experience and
expertise in rendering similar opinions, it was reasonable to rely upon the
opinion in the form provided.
American Appraisal Associates also rendered a preliminary opinion to the
effect that (1) immediately prior to the payment of the cash dividend, the
excess of the value of the aggregate assets of Netro over the total liabilities,
including contingent liabilities, of Netro, will exceed the value of the cash
dividend plus Netro's capital, or the aggregate par value of its issued and
outstanding common stock; and (2) after taking into account the payment of the
cash dividend but not the merger, the excess of the value of the aggregate
assets of Netro over the total liabilities, including contingent liabilities, of
Netro will exceed Netro's capital. The full text of American Appraisal
Associates' preliminary opinion is set forth in Annex C-2 and this summary is
qualified in its entirety by reference to the text of that opinion. The final
opinion, which is expected to be substantially similar in substance to that of
the preliminary opinion, will be delivered to Netro's board of directors prior
to the declaration of the cash dividend.
In rendering its opinion, American Appraisal Associates valued the
aggregate assets (i) of Netro before declaration of the cash dividend, (ii) of
Netro after declaration of the cash dividend but before consummation of the
merger, (iii) of the combined company after consummation of the cash dividend
and the merger on a consolidated basis and as a going concern and (iv) of Netro
as a going concern and as a wholly owned subsidiary of SR Telecom after
consummation of the cash dividend and the merger. The analysis conducted by
American Appraisal Associates for each of the four periods referred to in the
previous sentence was based on a balance sheet test, a cash flow test, and an
adequate capital test for each of Netro and the combined company, as applicable.
Balance Sheet Test. American Appraisal Associates reviewed Netro's and the
combined company's historical and projected financial performance, their
respective liquidity and capital structure, the fair value
69
and fair saleable value of their respective aggregate assets and liabilities and
their respective contingent liabilities as identified to American Appraisal
Associates by management of Netro and SR Telecom.
The balance sheet test for each of the four periods (on a pro forma basis,
as applicable) compared and analyzed the fair value and fair saleable value of
Netro's and the combined company's aggregate assets to their respective stated
liabilities and contingent liabilities, which were identified to American
Appraisal Associates by management of Netro and SR Telecom. The determination of
"fair value" and "present fair saleable value" were based on generally accepted
valuation principles used in the market as they apply to the businesses of Netro
and the combined company, including:
- Market Approach. Based on a review of (i) current stock market prices of
publicly held companies whose businesses are similar to those of Netro
and the combined company, (ii) acquisition prices paid for total
ownership positions in businesses whose lines of business are similar to
Netro and the combined company and (iii) offers to purchase Netro's total
common stock or its tangible and intangible assets, American Appraisal
Associates determined a range of fair values and fair saleable values of
the aggregate assets of Netro and the combined company, as compared to
the values, stated for accounting purposes, on their respective balance
sheets.
- Discounted Cash Flow Approach. Based on the present value of Netro's and
the combined company's future debt free operating cash flows as estimated
by management's financial projections, American Appraisal Associates
determined a range of fair values and fair saleable values of the
aggregate assets of Netro and the combined company, as compared to the
values, stated for accounting purposes, on their respective balance
sheets. The present value was determined by discounting the projected
debt free operating cash flow at a rate of return that reflects the
business and financial risks of the businesses underlying the financial
projections.
Cash Flow Test. American Appraisal Associates also conducted a cash flow
test by analyzing the ability of Netro and the combined company during each of
the four periods, as applicable, to pay their respective total liabilities as
they mature. In this regard, American Appraisal Associates considered Netro's
and the combined company's historical performance, business strategy and
financial projections, which included a sensitivity analysis of such financial
projections and analysis of Netro's and the combined company's ability to
generate cash flow during possible unexpected business downturns. In conducting
the cash flow test, American Appraisal Associates relied on the financial
projections through December 31, 2006 that were prepared by management of Netro
and SR Telecom.
Adequate Capital Test. American Appraisal Associates also analyzed, for
each of the four periods, whether the remaining equity of Netro or the combined
company, as applicable, would be unreasonably small for the business in which
such company is engaged, as management stated such business was then conducted
and proposed to be conducted in the future. In this analysis, American Appraisal
Associates considered for each of the four periods, whether Netro's and the
combined company's equity, as applicable, would be sufficient to meet such
company's capital needs as estimated by management in the relevant financial
projections. In this regard, American Appraisal Associates analyzed for each of
the four periods, the net equity capital of Netro or the combined company, as
applicable, as estimated in the balance sheet test, the degree of sensitivity in
the cash flow test, the maturity schedule of the obligations, the ability to
refinance those obligations and the available capital from line-of-credit
resources.
For purposes of American Appraisal Associates' preliminary opinion and the
final opinion to be rendered prior to the declaration of the dividend, the
following terms have the meanings set forth below:
(1) "fair value" means the amount at which the aggregate assets of the
combined company or Netro, as applicable, would change hands between a
willing buyer and a willing seller, within a commercially reasonable period
of time, each having reasonable knowledge of the relevant facts, neither
being under any compulsion to act, with equity to both.
(2) "present fair saleable value" means with respect to the assets of
the combined company or Netro, as applicable, the amount that may be
realized if such aggregate assets are sold with reasonable
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promptness in an arm's-length transaction under present conditions in a
current market for the sale of assets of a comparable business enterprise.
(3) "able to pay its liabilities as they mature" means with respect to
Netro for the period covered by its financial projections and for the
combined company for the period covered by its financial projections, that
assuming the cash dividend and the merger have been consummated as
proposed, each will have the ability in the ordinary course of business to
pay its liabilities, including contingent liabilities, as they mature.
(4) "will not have unreasonably small capital" means with respect to
the combined company or Netro, as applicable, that the combined company or
Netro, as applicable, will not lack sufficient capital for the needs and
anticipated needs for capital of its business, including its contingent
liabilities, as management of SR Telecom has stated such businesses are
proposed to be conducted following the consummation of the merger.
(5) "liabilities" means the debts or other obligations specifically
identified to American Appraisal Associates (whether matured or unmatured,
secured or unsecured, senior or subordinated, liquidated or unliquidated,
disputed or fixed, accrued or unaccrued, and including contingent
liabilities.
In the course of American Appraisal Associates' analysis of Netro and the
combined company, some of the liabilities brought to American Appraisal
Associates' attention by management of Netro and SR Telecom included: (1) SR
Telecom's Chilean project finance notes with Export Development Canada and
Inter-American Development Bank, (2) SR Telecom's outstanding public debentures,
(3) SR Telecom's operating line of credit with CIBC, (4) Netro's lease
obligations in San Jose, California and Redmond, Washington and (5) various
lawsuits and claims filed and/or pending against Netro or SR Telecom. Provisions
for any ongoing expenses related to these, among other, liabilities, deemed to
be material by the respective managements of Netro and SR Telecom, were included
in Netro's and the combined company's financial projections. American Appraisal
Associates took these among other liabilities into account in rendering its
opinion.
American Appraisal Associates' preliminary opinion was based on, and its
final opinion will be based on, among other things, the assumptions that: (1)
Netro's and the combined company's financial projections will be achieved; (2)
the combined company will ensure that the assets of Netro following the merger
will remain available for Netro to pay its liabilities; (3) either network
construction on SR Telecom's Chilean subsidiary will be completed (as defined in
CTR's Amended and Restated Performance Undertaking dated as of December 22,
1999) on or before February 12, 2004 or the existing waiver of the operating and
financial performance covenants in SR Telecom's outstanding notes with Export
Development Canada and Inter-American Development Bank will be renewed and
remain in effect through the period covered by the combined company's financial
projections; (4) the values of identified contingent liabilities of Netro and
the combined company are as provided by management of Netro and SR Telecom; (5)
the operating cash flows of the combined company, as represented by the combined
company's financial projections, will be used to satisfy the combined company's
liabilities as they mature and the operating cash flows of Netro, as represented
by Netro's financial projections, will be used to satisfy Netro's liabilities as
they mature; (6) any indebtedness of the combined company will be permitted to
be refinanced in conformity with common business practice; (7) any sale of the
combined company would be completed as the sale of an ongoing business entity;
and (8) each of Netro and the combined company would be saleable as a separate
business enterprise.
In preparing its preliminary opinion, American Appraisal Associates relied
on the accuracy and completeness of all information supplied or otherwise made
available to it by Netro and SR Telecom, and American Appraisal Associates did
not independently test the accuracy of such information. Nothing, however, came
to the attention of American Appraisal Associates in the course of preparing to
express its preliminary opinion that would lead it to believe that any such
information was incorrect in any material respect or that it was unreasonable
for it to utilize and rely upon such information. The preliminary opinion was
necessarily based on the business, economic, market and other conditions known
to American Appraisal Associates on the date it was rendered.
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The preliminary opinion was also based on, among other things, a review of
the merger agreement, the financial projections of Netro and the combined
company, the historical financial statements of Netro and SR Telecom, selected
financial analyses, asset valuations and other financial data provided by
management of Netro and SR Telecom, publicly available economic, financial and
market information relating to Netro and SR Telecom and businesses similar to
those of Netro and SR Telecom, as well as publicly available information
regarding the financial terms and post-transaction performance of recent
transactions involving businesses similar to Netro and SR Telecom. American
Appraisal Associates also discussed with Netro and its advisors the auction
process by which Netro was marketed to potential acquirers and discussed with
management of Netro and SR Telecom topics including the financial projections of
Netro and the combined company and the historical operating results of Netro and
SR Telecom.
American Appraisal Associates is continually involved in the business of
providing financial and valuation advisory services, including tax related
valuations, financial reporting advisory services, fairness opinions, solvency
opinions, and expert testimony. As part of its independent corporate valuation
consulting business, American Appraisal Associates is continually engaged in
performing financial analyses with respect to businesses and their assets and
securities in connection with mergers and acquisitions, corporate
recapitalizations, corporate divestitures, as well as for estate, corporate and
other purposes. American Appraisal Associates was chosen to render the
preliminary opinion and the final opinion to be delivered prior to the
declaration of the cash dividend because of its extensive experience and
recognized expertise in connection with rendering opinions like the one
described above.
Netro will pay American Appraisal Associates fees of up to US$175,000 for
services rendered in connection with delivering the preliminary opinion, the
final opinion and any interim opinions delivered to Netro's board of directors.
SR Telecom has also engaged American Appraisal Associates to assist in the fair
value financial reporting of the assets acquired in the merger. Fees for such
services are estimated to be US$27,000 plus expenses.
INTERESTS OF NETRO'S DIRECTORS AND OFFICERS IN THE MERGER
When considering the recommendation of Netro's board of directors that
Netro's stockholders approve and adopt the merger agreement and the merger, you
should be aware that some Netro directors and officers have interests in the
merger that are different from, or are in addition to, your interests. The Netro
board of directors was aware of these potential conflicts and considered them.
More specifically:
- Netro has entered into an employment agreement with Gideon Ben-Efraim,
which provides Mr. Ben-Efraim with severance pay equal to 12 months of
his then current base salary, which was US$288,750 in 2002, and continued
benefits for 12 months under Netro's benefit plans of general application
if he is involuntarily terminated other than for cause or if he
voluntarily terminates his employment for certain specific reasons
described under "Netro Management -- Executive Compensation -- Employment
Contracts, Termination of Employment and Change of Control Arrangements".
Also, as with all of Netro's employees, in the event of a reduction in
force at Netro, Mr. Ben-Efraim is, subject to the terms of his employment
agreement and Netro's severance policies available to employees
generally, entitled to a severance payment of two months' salary under
the California WARN Act and one month's salary for each year of service.
In the case of Mr. Ben-Efraim, this payment would amount to US$48,125
under the WARN Act and US$192,500 as a result of his eight years of
service (based on his 2002 salary). In addition, Netro has entered into a
change of control agreement with Mr. Ben-Efraim, which provides, in the
event that Mr. Ben-Efraim's employment is terminated without cause within
12 months of a change in control, his options will become immediately
vested to the extent they would have vested over the two-year period
following the monthly vesting date following such termination. Although
the transactions contemplated by the merger agreement do constitute a
"change of control" under Mr. Ben-Efraim's change of control agreement,
because all options to purchase shares of Netro common stock are being
terminated at the effective time of the merger, unless SR Telecom grants
Mr. Ben-Efraim additional options to purchase Netro common stock after
the effective time of the merger, Mr. Ben-Efraim will not be entitled to
any accelerated vesting of options to purchase Netro common stock in the
event that he is terminated without cause within 12 months of the
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effective time of the merger. SR Telecom has agreed to assume Gideon
Ben-Efraim's employment agreement, change of control agreement and rights under
Netro's severance policy without modifications. Furthermore, Netro's board of
directors agreed that Netro would pay up to US$50,000 of Mr. Ben-Efraim's
legal fees for services rendered to him in connection with the
transactions contemplated by the merger agreement. Such services covered
personal matters faced by Mr. Ben-Efraim in connection with such
transactions, including the effect of such transactions on Mr. Ben-
Efraim's rights under his existing employment arrangements.
- Following the effective time of the merger, SR Telecom's board of
directors has agreed to appoint an individual, named by Netro's board of
directors, to SR Telecom's board of directors. Netro has named Gideon
Ben-Efraim as its nominee, and SR Telecom's board of directors will
consider his nomination at its next regularly scheduled meeting. If SR
Telecom's board of directors approves Mr. Ben-Efraim's nomination, he
will be appointed to SR Telecom's board of directors for a term expiring
at the next SR Telecom annual meeting of shareholders.
- As of July 31, 2003, the executive officers and directors of Netro held
outstanding stock options to purchase an aggregate of 3,616,791 shares of
Netro common stock. Pursuant to the merger agreement, at the effective
time of the merger each outstanding option to purchase shares of shares
of Netro common stock under any stock option or compensation plan or
arrangement of Netro, whether or not exercisable or vested, will be
terminated and no consent of any holder of any stock option or any
employee will be required under any Netro stock option or compensation
plan or other arrangement of Netro for such termination.
- Netro has entered into retention agreements with each of Sanjay Khare,
Shlomo Yariv and Peter Carson, which provide each such executive with
severance pay, and accelerated vesting of options that would have become
vested over the one-year period following the date of termination, if the
executive is terminated other than for cause or resigns after a change of
control (including the proposed merger) or in certain circumstances is
terminated for any other reason. Mr. Yariv was terminated pursuant to a
reduction in force effective May 16, 2003. See "Netro
Management -- Executive Compensation -- Employment Contracts, Termination
of Employment and Change of Control Arrangements". Under these
agreements, Mr. Khare will be entitled to US$126,000 in severance pay and
accelerated vesting of options to acquire 160,832 shares of Netro common
stock; Mr. Yariv is entitled to US$192,500 in severance pay and
accelerated vesting of options to acquire 247,917 shares of Netro common
stock; and Mr. Carson will be entitled to US$122,500 in severance pay and
accelerated vesting of options to acquire 134,583 shares of Netro common
stock.
- Pursuant to the terms of Netro's 1997 Directors' Stock Option Plan, the
Netro board of directors has accelerated the vesting of all options held
by Netro's directors under that plan such that options to acquire an
additional 20,000 shares of Netro common stock will become immediately
exercisable. Any vested options which have not been exercised as of the
effective date of the merger will expire.
- SR Telecom has also agreed to cause Netro to maintain for a period of
three years directors' and officers' insurance that will cover those
persons who were, as of March 27, 2003, present or former officers or
directors of Netro on terms at least as favorable as the current
directors' and officers' insurance policy maintained by Netro, provided
that the annual premiums are not to exceed US$2.4 million.
- Upon completion of the merger, it is anticipated that the directors and
executive officers of Netro as a group will beneficially own
approximately 3.91% of the then outstanding shares of SR Telecom common
stock, assuming that each Netro share outstanding immediately prior to
the effective time is converted into 1.02697 shares of SR Telecom common
stock, and assuming the exercise of all vested stock options held by
Netro's directors and officers with an exercise price of $3.10 or less
prior to the effective time of the merger.
In addition, SR Telecom has agreed to cause Netro to continue to honor and
maintain for a period of six years certain indemnification arrangements in favor
of those persons who were, as of March 27, 2003, present or former officers or
directors of Netro.
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SR Telecom has also agreed to cause Netro to maintain for a period of three
years directors' and officers' insurance that will cover those persons who were,
as of March 27, 2003, present or former officers or directors of Netro on terms
at least as favorable as the current directors' and officers' insurance policy
maintained by Netro, provided that the annual premiums are not to exceed US$2.4
million. See "The Merger Agreement -- Directors of SR Telecom Following the
Merger".
In addition, as a condition to SR Telecom's entering into the merger
agreement, SR Telecom entered into voting agreements with Peter Carson, Sanjay
Khare, Shlomo Yariv and each director of Netro, pursuant to which each has
irrevocably appointed SR Telecom as his or her lawful attorney and proxy. Mr.
Yariv was terminated pursuant to a reduction in force effective May 16, 2003.
These proxies give SR Telecom the limited right to vote the shares of Netro
common stock beneficially owned by these Netro stockholders, including shares of
Netro common stock acquired after the date of the voting agreements, to vote for
the adoption of the merger agreement.
NETRO'S DIRECTORS AND OFFICERS AFTER COMPLETION OF THE MERGER
It is currently anticipated that upon completion of the merger, the
directors and executive officers of Netro will be:
NAME OFFICE TO BE HELD AT NETRO CURRENT POSITION
---- -------------------------- ----------------
Pierre St-Arnaud............... Director, President President & CEO, SR Telecom
David L. Adams................. Director, Vice President and Senior Vice President Finance and
Secretary Chief Financial Officer, SR
Telecom
COMPLETION AND EFFECTIVENESS OF THE MERGER
The merger will be completed if and after all the conditions to the merger
are satisfied or waived, including the approval and adoption of the merger
agreement and the merger by the Netro stockholders. The merger will become
effective upon the filing of a Certificate of Merger with the Secretary of the
State of Delaware, or at such later time as may be specified in the certificate
of merger. SR Telecom will issue a press release if and promptly after the
merger closes. SR Telecom and Netro are working toward closing the merger as
quickly as possible following stockholder approval. For purposes of this proxy
statement/prospectus, we have assumed that the closing will occur during the
first week of September 2003. Because the merger is subject to satisfaction of a
number of conditions we cannot predict the exact timing. Subject to certain
exceptions, either Netro or SR Telecom can terminate the merger agreement if the
merger has not been consummated on or before September 30, 2003. However, the
merger is subject to various conditions, and SR Telecom and Netro cannot predict
the exact timing of the closing of the merger or whether the merger will close
at all.
STRUCTURE OF THE MERGER AND CONVERSION OF NETRO COMMON STOCK
Under the merger agreement, Norway Acquisition Corporation, a wholly-owned
subsidiary of SR Telecom, will be merged with and into Netro. The wholly-owned
merger subsidiary is a recently-formed Delaware corporation created specifically
for the merger with no prior business or history. SR Telecom owns all of the
merger subsidiary's outstanding voting common stock.
As a result of the merger, the merger subsidiary will cease to exist as a
separate entity and Netro will continue in existence and be operated as a
wholly-owned subsidiary of SR Telecom.
THE CASH DIVIDEND
Contingent upon approval and adoption of the merger agreement and the
merger by Netro stockholders, Netro has agreed to declare and pay (subject to
permissibility under applicable law) a cash dividend in respect of each
outstanding share of Netro common stock in an amount equal to a fraction
(rounded to the nearest whole cent), the numerator of which shall be US$100
million and the denominator of which shall be the number of outstanding shares
of Netro common stock outstanding immediately prior to the effective time of
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the merger. Such cash dividend will be segregated and set aside immediately
prior to the effective time of the merger with respect to each share of Netro
common stock outstanding on the record date for the cash dividend, which will be
the closing date of the merger agreement. The cash dividend will be distributed
promptly following the effective time of the merger to Netro stockholders. For
example, if there are 40,410,218 shares of Netro common stock outstanding at the
effective time of the merger, and you hold 500 shares of Netro common stock, you
will be entitled to receive US$1,237.31. This is only an example; the actual
amount of the cash dividend will vary depending upon the number of shares of
Netro common stock outstanding immediately prior to the effective time of the
merger. If the number of shares of Netro common stock outstanding at the
effective time of the merger is greater or less than 40,410,218 the amount of
the cash dividend would be adjusted accordingly.
THE MERGER CONSIDERATION
At the effective time of the merger, each outstanding share of Netro common
stock and the associated preferred stock purchase right will be automatically
converted into the right to receive the number of shares of SR Telecom common
stock equal to a fraction, the numerator of which is 41.5 million and the
denominator of which is the number of shares of Netro common stock outstanding
immediately prior to the effective time of the merger. No fractional share will
be issued in connection with the merger. Any fraction equal to or higher than
one-half will be rounded up to the next succeeding whole share and any fraction
less than one-half will be rounded down. For example, if there are 40,410,218
shares of Netro common stock outstanding at the effective time of the merger,
and you hold 500 shares of Netro common stock, you will be entitled to receive
513.48 shares of SR Telecom common stock. This would be rounded down to 513
shares of SR Telecom common stock. This is only an example; the actual value of
the merger consideration will vary depending upon the number of shares of Netro
common stock outstanding immediately prior to the effective time of the merger.
If the number of shares of Netro common stock outstanding at the effective time
of the merger is greater or less than 40,410,218, the number of shares of SR
Telecom common stock received would be adjusted accordingly.
EXCHANGE OF NETRO STOCK CERTIFICATES
No transfer of shares of Netro common stock will be made on the stock
transfer books of Netro after the closing of the merger, and each surrendered
Netro certificate will be cancelled. If certificates representing shares of
Netro common stock are surrendered after the completion of the merger, they will
be exchanged without interest, for the shares of SR Telecom common stock into
which those shares of Netro common stock have been converted in the merger plus
the cash dividend.
Promptly after the effective time of the merger SR Telecom shall send, or
will cause the exchange agent to send, to each holder of shares of Netro common
stock at the effective time of the merger a letter of transmittal and
instructions for use in such exchange. Risk of loss and title of the shares of
Netro common stock will pass only upon proper delivery of the certificates
representing the shares of Netro common stock or the transfer of the
uncertificated shares of Netro common stock to the exchange agent.
Netro stockholders surrendering their Netro stock certificates for exchange
should carefully follow the letter of transmittal and instructions sent by the
exchange agent. American Stock Transfer and Trust Company can be reached at 59
Maiden Lane, Plaza Level, New York, NY 10038. Its telephone number is (212)
936-5100, and its email address is info@amstock.com.
In order to receive the shares of SR Telecom common stock issued as merger
consideration and the cash dividend, a Netro stockholder whose certificate or
certificates representing Netro shares has been lost, stolen or destroyed must
complete an affidavit of lost or destroyed certificate following the
instructions that accompany the letter of transmittal. These instructions
require, among other things, that the Netro stockholder furnish to American
Stock Transfer & Trust Company appropriate evidence as to the loss, theft or
destruction of the certificate and the ownership of the certificate by the
claimant, and provide appropriate and customary indemnification.
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None of SR Telecom, Norway Acquisition Corporation, Netro, nor the exchange
agent will be liable to any Netro stockholder or SR Telecom shareholder for any
undistributed shares SR Telecom common stock or cash amounts that are delivered
to a public official under applicable abandoned property, escheat or similar
laws.
SR Telecom will be entitled to deduct and withhold from the merger
consideration otherwise payable to any Netro stockholder any amounts it is
required to deduct and withhold under any federal, state, local or foreign tax
law. If SR Telecom withholds any amounts, these amounts will be treated for all
purposes of the merger as having been paid to the stockholders from whom they
were withheld. If withholding is required from shares of SR Telecom common
stock, SR Telecom will be treated as having sold those shares on behalf of their
holder for an amount, in cash, equal to the fair market value of such
consideration at the time of the deemed sale and paid the cash proceeds to the
taxing authority.
ACCOUNTING TREATMENT
SR Telecom will account for the merger in its financial statements prepared
in accordance with Canadian GAAP using the purchase method of accounting
pursuant to Section 1581 "Business Combinations" of the Canadian Institute of
Chartered Accountants. SR Telecom will account for the merger in the U.S. GAAP
reconciliation of its financial statements pursuant to Statement of Financial
Accounting Standards No. 141, "Business Combinations". The assets acquired and
liabilities assumed from Netro will be recorded at their fair values as of the
date of the merger. Any deficiency of the purchase price below the fair value of
the net tangible assets and identifiable intangible assets acquired will be
recorded as a reduction of the tangible assets and intangible assets and the
remainder, if any, as negative goodwill. Negative goodwill is recorded as an
extraordinary gain in the consolidated statement of operations. The results of
operations of Netro will be included in SR elecom's results of operations from
the date of the closing of the merger. A final determination of the required
purchase accounting adjustments and the fair value of the assets and liabilities
of Netro has not yet been made. Accordingly, the purchase accounting adjustments
reflected in the unaudited pro forma condensed consolidated financial
information and the comparative pro forma per share financial information
appearing elsewhere in this proxy statement/prospectus are preliminary and
subject to change.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules promulgated thereunder, SR Telecom and Netro were required to give notice
to and furnish certain information to the FTC and the DOJ and satisfy specified
waiting period requirements. SR Telecom and Netro filed notification and report
forms with the FTC and the DOJ on April 8, 2003, and received notification of
the early termination of the waiting period on April 18, 2003.
REVERSE STOCK SPLIT
SR Telecom intends to declare a reverse stock split, known as a
consolidation under Canadian corporate law, at a ratio to be determined by SR
Telecom's board of directors from within the range of 1:5 to 1:15. A
consolidation under Canadian law is functionally equivalent to a reverse stock
split under Delaware law. SR Telecom will solicit proxies from its current
shareholders pursuant to Canadian law to approve the reverse stock split. The SR
Telecom shareholder meeting to vote on the reverse stock split is expected to
occur in late August 2003. If its shareholders approve the reverse stock split,
SR Telecom expects to implement the reverse stock split after the Netro
stockholder special meeting but prior to the effective time of the merger. If
the reverse stock split is consummated, the 41.5 million shares of SR Telecom
common stock to be issued to Netro stockholders in connection with the merger
will be automatically reduced in accordance with the ratio selected by SR
Telecom's board of directors. If its shareholders do not approve this reverse
stock split, SR Telecom will likely be unable to satisfy the condition to the
merger that its shares of common stock be approved for quotation on the Nasdaq
National Market. In that event, the merger may not be consummated.
The reverse stock split will affect all holders of SR Telecom common stock
uniformly and will not affect any shareholder's percentage ownership interest in
SR Telecom, except to the extent that the reverse stock
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split would otherwise result in any shareholder owning a fractional share.
Current SR Telecom shareholders otherwise entitled to fractional shares will be
entitled to cash payments instead of such fractional shares in the reverse stock
split. The merger is expected to close after the reverse stock split, so Netro
stockholders would not be entitled to receive cash for fractional shares in the
reverse stock split. In addition, the reverse stock split will not affect any
shareholder's proportionate voting rights (subject to the treatment of
fractional shares). Each share of common stock of SR Telecom outstanding after
the reverse stock split will be entitled to one vote and will be fully paid and
non-assessable.
The principal effects of the reverse stock split will be that the number of
shares of common stock of SR Telecom issued and outstanding will be reduced from
approximately 60.9 million shares as of July 31, 2003 to between approximately
12.2 million shares (at a ratio of 1:5) and 4.1 million shares (at a ratio of
1:15), depending on the ratio selected by SR Telecom's board of directors. After
giving effect to the merger and the issuance of 41.5 million pre-reverse stock
split shares of common stock of SR Telecom to Netro stockholders, the number of
shares of common stock of SR Telecom will be reduced from an anticipated 102.4
million shares to between approximately 20.5 million shares (at a ratio of 1:5)
and 6.8 million shares (at a ratio of 1:15).
For example, if SR Telecom's board of directors were to select a ratio of
1:10, the number of shares of SR Telecom common stock outstanding prior to the
merger will be reduced from approximately 60.9 million to approximately 6.1
million and Netro stockholders would receive an aggregate of 4.15 million
shares. Under this 1:10 ratio, and based on the number of shares of Netro common
stock outstanding on July 31, 2003 and the number expected to be issued prior to
the closing date (anticipated to be in the first week of September 2003), each
share of Netro common stock would receive a cash dividend in the amount of
US$2.47462 and would be converted into the right to receive 0.102697 shares of
SR Telecom common stock. The exact number of shares of SR Telecom common stock
to be received per share of Netro common stock could be higher or lower
depending both upon the number of shares of Netro common stock outstanding and
the ratio at which the reverse stock split is conducted. The amount of the cash
dividend to be received per share of Netro common stock could be higher or lower
depending upon the number of shares of Netro common stock outstanding but would
be unaffected by the ratio at which the reverse stock split is conducted. For
further information on the assumptions made in the calculation above, see pages
42-45.
LISTING ON THE NASDAQ NATIONAL MARKET AND THE TORONTO STOCK EXCHANGE OF THE
SHARES OF SR TELECOM COMMON STOCK TO BE ISSUED IN THE MERGER
It is a condition to the consummation of the merger that the shares of SR
Telecom common stock to be issued in the merger shall have been approved for
listing on the Nasdaq National Market and shall have been reserved for listing
on the Toronto Stock Exchange, subject, in the case of the Nasdaq National
Market, to official notice of issuance. It is also a condition to the
consummation of the merger that such shares of SR Telecom common stock shall be
freely tradable under the applicable Canadian securities laws (to the extent
that such shares are not holdings out of a "control block" within the meaning of
such laws).
CERTAIN U.S. AND CANADIAN SECURITIES LAWS CONSIDERATIONS
The shares of SR Telecom common stock to be issued in the merger are
registered under the Securities Act. Those shares will be freely transferable
under the Securities Act, except for shares of SR Telecom common stock issued to
any person or entity that is an "affiliate" of SR Telecom or Netro under the
Securities Act. Persons and entities that may be considered affiliates include
individuals or entities that control, are controlled by or are under common
control with Netro. Netro's affiliates may not sell their shares of SR Telecom
common stock acquired in the merger, except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares of SR Telecom common stock;
- an exemption under Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
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The shares of SR Telecom common stock issued to residents of Canada
pursuant to the merger may be subject to issuance and resale provisions of the
applicable securities laws of the province in which the recipient of the shares
of SR Telecom common stock is resident. To the extent necessary, SR Telecom
plans to file applications or notices with applicable Canadian securities
regulators in order to exempt the resale of the shares of SR Telecom common
stock from applicable restrictions under Canadian provincial securities laws.
NO APPRAISAL RIGHTS
Delaware law provides appraisal rights to stockholders of Delaware
corporations in certain situations. However, those appraisal rights are not
available to stockholders of a corporation such as Netro:
- the securities of which are listed on a national securities exchange or
are designated as a national market security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.; and
- the stockholders of which are not required to accept in exchange for
their stock anything other than stock in another corporation listed on a
national securities exchange or an interdealer quotation system by the
NASD.
Due to the following factors, stockholders of Netro will not have appraisal
rights with respect to the merger:
- Netro common stock is traded on the Nasdaq National Market; and
- Netro stockholders are being offered shares of SR Telecom common stock,
which must be traded on the Nasdaq National Market as a condition to the
consummation of the merger.
The cash being paid to Netro stockholders by virtue of the dividend comes
from Netro, not SR Telecom, and is not part of the consideration being paid to
Netro stockholders by SR Telecom in the merger. Accordingly, the cash paid in
the dividend is not considered to be merger consideration for purposes of
determining the availability of appraisal rights.
DELISTING AND DEREGISTRATION OF NETRO COMMON STOCK AFTER THE MERGER
If the merger is completed, Netro's common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Exchange Act.
CERTAIN PENDING LITIGATION
On April 8, 2003, an action styled Fuller & Thaler Asset Management, Inc.
v. Netro Corp. et al., Case No. CV816170 (Cal. Super. Ct.), naming as defendants
Netro and its current and certain former directors was filed in the California
Superior Court for Santa Clara County by a plaintiff claiming to be a Netro
stockholder and alleging that it is asserting its claims on behalf of a class of
Netro stockholders. The complaint asserts claims for breach of fiduciary duty
against the current and former directors who are named as defendants based on
allegations that Netro's directors, among other things, breached their fiduciary
duties to Netro allegedly by failing to properly value and obtain the highest
price reasonably available for Netro, by favoring SR Telecom over competing
potential acquirers, including Wyndcrest, and by engaging in self-dealing in
connection with the merger. The complaint seeks certain injunctive relief
including, among other things, an injunction prohibiting Netro from completing
the merger, rescission of the individual defendants' receipt of stock options
and other benefits they may have received, as well as attorneys' fees and costs
of suit. On May 23, 2003, a second action styled Maritime Association -- I.L.A.
Pension Fund v. Netro Corp. et al., Case No. CV817375 (Cal. Super. Ct.), naming
as defendants Netro and its current directors was filed in the California
Superior Court for Santa Clara County by an entity claiming to be a Netro
stockholder and alleging that it is asserting its claims on behalf of a class of
Netro stockholders. The claims asserted and the relief sought in the Maritime
Association action are substantially similar to the claims asserted and the
relief sought in the Fuller & Thaler action. By agreed order, these two actions
have been consolidated under the caption In re Netro Corporation Shareholder
Litigation, Case No. CV816170 (Cal. Super. Ct.), and the complaint in
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the Maritime Association case has been designated the operative complaint. On
July 3, 2003, Netro and the individual defendants filed demurrers to the
operative complaint. On August 4, 2003, before the demurrers were scheduled to
be heard by the court, plaintiffs filed a consolidated class action complaint.
The claims asserted and the relief sought in the consolidated complaint are
substantially similar to those in the prior complaints, except that the
consolidated complaint adds certain additional allegations. Specifically, the
consolidated complaint alleges that Netro's directors, among other things,
breached their fiduciary duties to Netro allegedly by causing Netro to
repurchase stock in the August 2002 issuer self-tender in an effort to entrench
themselves in response to offers by Crosswind and Wyndcrest to acquire Netro,
failing to disclose offers it had received from Crosswind adequately and in a
timely manner, rejecting prior proposals by Wyndcrest to acquire Netro, and
refusing to invite or grant permission currently to Wyndcrest to make a proposal
to acquire Netro despite Wyndcrest's stated interest in making such a proposal.
Plaintiffs further allege that at a deposition taken in July 2003, with respect
to the lawsuit, a representative of Wyndcrest testified that Wyndcrest remains
interested in acquiring Netro and would like the opportunity to make another
proposal to acquire Netro after it has obtained further unspecified information
from Netro that is superior to SR Telecom's proposal but that Wyndcrest had
entered into a confidentiality agreement which prevented and prevents it from
making a bid for Netro unless expressly invited to do so by Netro. No one has
made a written proposal to acquire Netro, or has requested from Netro its
permission to make such a proposal, since Netro and SR Telecom entered into the
Merger Agreement on March 27, 2003. The time for Netro and the individual
defendants to respond to the consolidated complaint has not yet expired.
The parties have reached an agreement in principle to settle this lawsuit.
The terms of the settlement include, among other things, that Netro make certain
supplements and amendments to the disclosures in this proxy statement/prospectus
(which suggested changes have been made), that Netro covenant that it will not
sell all or substantially all of the assets of the Airstar or Angel product
lines for a period of nine months after the closing date of the merger (and to
the extent that such sale occurs prior to nine months of the closing date of the
merger, Netro shall pay US$4.5 million to the members of the class of Netro
stockholders defined in the lawsuit), that SR Telecom waive its right to a
termination fee under Section 11.04(b)(iii) of the merger agreement if the
merger agreement is terminated under the circumstances described therein and
Netro consummates a qualifying transaction, as such term is defined in the
merger agreement, more than fourteen months following the termination, and that
Netro agree not to oppose an award of fees to class counsel approved by the
court if such award does not exceed US$590,000 inclusive of expenses and costs.
The parties are preparing definitive settlement documents for submission to the
court for its required approval.
MATERIAL TAX CONSIDERATIONS
Following is a discussion of the material United States and Canadian
federal tax considerations relating to the cash dividend, the merger and the
ownership of shares of SR Telecom common stock. The discussion is based on the
federal tax laws of the United States and Canada as in effect on the date
hereof, and is subject to changes in United States or Canadian law, including
changes that could have retroactive effect. The following discussion does not
take into account or discuss the tax laws of any country other than the United
States and Canada.
THIS DISCUSSION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL
TAX CONSIDERATIONS APPLICABLE TO THE CASH DIVIDEND, THE MERGER OR THE OWNERSHIP
OF SHARES OF SR TELECOM COMMON STOCK AND DOES NOT TAKE INTO ACCOUNT THE
INDIVIDUAL CIRCUMSTANCES OF ANY PARTICULAR INVESTOR. THEREFORE, INVESTORS ARE
STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE UNITED STATES, CANADIAN
OR OTHER APPLICABLE JURISDICTIONS' TAX CONSEQUENCES OF THE CASH DIVIDEND, THE
MERGER AND THE OWNERSHIP OF SHARES OF SR TELECOM COMMON STOCK IN THEIR
PARTICULAR CIRCUMSTANCES.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material U.S. federal income tax
consequences of the cash dividend, the merger and owning and disposing of shares
of SR Telecom common stock. This discussion assumes that a U.S. holder (as
defined below) holds shares of Netro common stock and will hold shares of SR
Telecom common stock as capital assets within the meaning of the Internal
Revenue Code of 1986, as amended (the
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"Code"). This discussion does not address any tax considerations that may apply
to holders subject to special tax rules, such as banks, insurance companies,
dealers in securities or currencies, tax-exempt entities, individual retirement
or other tax-deferred accounts, persons subject to the alternative minimum tax,
persons that hold shares of Netro common stock or will hold shares of SR Telecom
common stock as a position in a straddle or as part of a hedging, constructive
sale or conversion transaction for U.S. federal income tax purposes, persons
that have a functional currency other than the U.S. dollar or persons that own
10% or more of the equity of Netro or will hold 10% or more of the equity of SR
Telecom.
This discussion is based on the Code, Treasury Regulations promulgated
thereunder, and judicial and administrative interpretations thereof, all as of
the date of this Prospectus. All of the foregoing are subject to change at any
time, and any change could be retroactive.
For purposes of this summary, a "U.S. holder" means a beneficial owner of
shares of Netro common stock or shares of SR Telecom common stock that is, for
U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States,
- a corporation, or other entity treated as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of the
United States or any state thereof or the District of Columbia,
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or
- a trust the administration of which is subject to the primary supervision
of a court in the United States and for which one or more U.S. persons
have the authority to control all substantial decisions.
The term "U.S. holder" also includes certain former citizens and residents
of the United States.
If a partnership holds shares of Netro common stock or shares of SR Telecom
common stock, the U.S. federal income tax treatment of a partner generally will
depend on the status of the partner and the activities of the partnership.
Partners of partnerships that hold shares of Netro common stock or that will
hold shares of SR Telecom common stock should consult their tax advisors.
As used herein, a "non-U.S. holder" is a beneficial owner of shares of
Netro common stock or shares of SR Telecom common stock that is not a U.S.
holder.
YOU SHOULD CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, AS
WELL AS STATE, LOCAL AND NON-U.S., TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR
PARTICULAR CIRCUMSTANCES, OF THE CASH DIVIDEND, THE MERGER AND THE OWNERSHIP OF
SHARES OF SR TELECOM COMMON STOCK.
Characterization of the Cash Dividend and the Merger
Netro believes and intends to take the position that the cash dividend and
the merger constitute separate taxable events and that the merger is properly
treated as a "reorganization", in each case for U.S. federal income tax
purposes. Whether the cash dividend and the merger constitute separate taxable
events and whether the merger is properly treated as a "reorganization" will
depend on certain facts (for example, the ultimate source of funds for the cash
dividend) that will not be known until the closing of the merger or thereafter.
As a result, the characterization of the cash dividend and the merger is not
entirely free from doubt. Moreover, the U.S. federal income tax consequences of
the merger will also depend upon whether the value of SR Telecom (excluding
certain liquid assets) is at least equal to the value of Netro (determined based
on market values on the closing date after taking into account the cash
dividend).
Neither Pillsbury Winthrop LLP, counsel to SR Telecom, nor Davis Polk &
Wardwell, counsel to Netro, is able to render an opinion that the cash dividend
and the merger constitute separate taxable events or that the merger is properly
treated as a "reorganization" in which neither gain nor loss is recognized, in
each case for U.S. federal income tax purposes, because such an opinion would
depend on the following facts which will not be known until the closing of the
merger or thereafter:
- the ultimate source of funds for the payment of the cash dividend;
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- the value of Netro determined based on Netro's market value on the
closing date (taking into account the cash dividend); and
- whether the value of SR Telecom (excluding certain liquid assets)
determined based on SR Telecom's market value on the closing date is at
least equal to Netro's value on the closing date.
In addition, the U.S. federal income tax consequences of the cash dividend
will also depend upon whether Netro has positive current or accumulated earnings
and profits, as determined under U.S. federal income principles, during the
taxable year in which the cash dividend is made.
Based on its anticipated earnings during 2003, Netro expects that it will
not have positive current or accumulated earnings and profits, but there can be
no assurance that Netro's expectation will be correct.
U.S. Federal Income Tax Consequences of the Cash Dividend, the Merger and the
Ownership of Shares of SR Telecom Common Stock
Based on the foregoing, and notwithstanding that neither counsel is able to
render an opinion that the cash dividend and the merger constitute separate
taxable events or that the merger is properly treated as a "reorganization" in
which neither gain nor loss is recognized, in each case for U.S. federal income
tax purposes, in the opinion of Pillsbury Winthrop LLP, counsel to SR Telecom,
and Davis Polk & Wardwell, counsel to Netro, the following discussion describes
the material U.S. federal income tax consequences of the cash dividend, the
merger and the owning and disposing of shares of SR Telecom common stock. In the
case of the cash dividend and the merger, the following discussion describes the
material U.S. federal income tax consequences in each relevant factual scenario.
U.S. HOLDERS
Cash dividend and the merger are treated as separate taxable events and the
merger is properly treated as a reorganization; value of SR Telecom is less
than value of Netro
If, as expected, (i) the cash dividend and the merger are treated as
separate taxable events for U.S. federal income tax purposes, (ii) the merger is
properly treated as a "reorganization" for U.S. federal income tax purposes and
(iii) the value of SR Telecom (excluding certain liquid assets) is less than the
value of Netro (determined based on market values on the closing date after
taking into account the cash dividend), it is the opinion of counsel that the
material U.S. federal income tax consequences to U.S. holders of Netro shares
will be as follows.
The amount of the cash dividend will be treated as a tax-free return of
capital to the extent of your adjusted tax basis in shares of Netro common stock
and, to the extent in excess of basis, as capital gain. Any amount treated as a
tax-free return of capital will reduce your adjusted tax basis in your shares of
Netro common stock. Any capital gain will be long-term if you have held the
shares of Netro common stock for more than one year and otherwise will be
short-term capital gain. Generally, for a U.S. holder who is an individual,
long-term capital gains are subject to preferential U.S. federal income tax
rates, which have been reduced for long-term capital gains recognized on or
after May 6, 2003. Short-term capital gains are taxed at U.S. federal income tax
rates applicable to ordinary income, which, for gains recognized on or after May
6, 2003, will be higher than the rates applicable to certain dividends.
You will recognize gain, but not loss, on the exchange of your shares of
Netro common stock for shares of SR Telecom common stock in the merger. The
amount of any gain recognized will equal the difference, if any, between the
fair market value of the shares of SR Telecom common stock received determined
at the time of the exchange and your adjusted basis in your shares of Netro
common stock immediately before the exchange (after taking into account the
reduction attributable to the cash dividend as described above). Any gain
recognized in the exchange will be capital gain, and will be long-term capital
gain if you held your shares of Netro common stock for more than one year prior
to the exchange and otherwise will be short-term capital gain. Generally, for a
U.S. holder who is an individual, long-term capital gains are subject to
preferential U.S. federal income tax rates, which have been reduced for
long-term capital gains recognized on or after
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May 6, 2003. Short-term capital gains are taxed at U.S. federal income tax rates
applicable to ordinary income, which, for gains recognized on or after May 6,
2003, will be higher than the rates applicable to certain dividends.
Your tax basis in the shares of SR Telecom common stock received in the
exchange for shares of Netro common stock will be equal to your adjusted basis
in your shares of Netro common stock immediately before the exchange (after
taking into account the reduction attributable to the cash dividend as described
above) increased by any gain recognized by you in the exchange. Your holding
period for the shares of SR Telecom common stock you receive will include your
holding period in your shares of Netro common stock exchanged.
You should consult your tax advisor regarding the proper U.S. federal
income tax treatment of the effect of rounding in lieu of fractional shares of
SR Telecom common stock.
Cash dividend and the merger are treated as separate taxable events and the
merger is properly treated as a reorganization; value of SR Telecom is at least
equal to value of Netro
If, (i) as expected, the cash dividend and the merger are treated as
separate taxable events for U.S. federal income tax purposes, (ii) as expected,
the merger is properly treated as a "reorganization" for U.S. federal income tax
purposes and (iii) contrary to our current expectations, the value of SR Telecom
(excluding certain liquid assets) is at least equal to the value of Netro
(determined based on market values on the closing date after taking into account
the cash dividend), it is the opinion of counsel that the material U.S. federal
income tax consequences to U.S. holders of Netro shares would be as follows.
The U.S. federal income tax consequences of the cash dividend would be the
same as described above under "-- Cash dividend and the merger are treated as
separate taxable events and the merger is properly treated as a reorganization;
value of SR Telecom is less than value of Netro". The U.S. federal income tax
consequences of the merger would also be the same as described above under
"-- Cash dividend and the merger are treated as separate taxable events and the
merger is properly treated as a reorganization; value of SR Telecom is less than
value of Netro," except that you would not recognize gain or loss on the
exchange of your shares of Netro common stock for shares of SR Telecom common
stock in the merger. As such, the discussion of capital gains would not be
relevant to you.
Cash dividend and the merger are treated as a single taxable event
If, contrary to our current expectations, the cash dividend and the merger
were treated as a single taxable event for U.S. federal income tax purposes, it
is the opinion of counsel that the material U.S. federal income tax consequences
to U.S. holders of Netro shares would be as follows. You would recognize gain or
loss on the exchange of your shares of Netro common stock for shares of SR
Telecom common stock in a fully taxable transaction. The amount of gain or loss
recognized would equal the difference between the cash you receive as a dividend
plus the fair market value of the shares of SR Telecom common stock received
determined at the time of the exchange and your adjusted basis in your shares of
Netro common stock exchanged. Any gain or loss recognized in the exchange would
be capital gain or loss, and will be long-term capital gain or loss if you held
your shares of Netro common stock for more than one year prior to the exchange
and will otherwise be short-term capital gain or loss. Generally, for a U.S.
holder who is an individual, long-term capital gains are subject to preferential
U.S. federal income tax rates, which have been reduced for long-term capital
gains recognized after May 6, 2003. Short-term capital gains are taxed at U.S.
federal income tax rates applicable to ordinary income, which, for gains
recognized on or after May 6, 2003, will be higher than the rate applicable to
certain dividends. The recognition of capital losses is subject to limitations.
NON-U.S. HOLDERS
A non-U.S. holder will not be subject to U.S. federal income tax from the
cash dividend or in respect of any gain recognized on the exchange of shares of
Netro common stock for shares of SR Telecom common stock in the merger unless
(1) the gain is effectively connected with the conduct of a trade or business of
the non-U.S. holder in the United States (and is attributable to a permanent
establishment maintained in the United States by such non-U.S. holder if an
applicable income tax treaty so requires as a condition for such
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non-U.S. holder to be subject to U.S. taxation on a net income basis in respect
of gain from the sale or other disposition of the shares of Netro common stock)
or (2) the non-U.S. holder is an individual and is present in the United States
for 183 or more days in the taxable year of the cash dividend and the merger and
certain other conditions apply. Effectively connected gain realized by a
corporate non-U.S. holder on the cash dividend or on the exchange of shares of
Netro common stock for shares of SR Telecom common stock in the merger may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
A non-U.S. holder will not be subject to U.S. federal withholding tax on
the cash dividend except to the extent Netro has positive current or accumulated
earnings and profits as determined under U.S. federal income tax principles and
thus all or a portion of the cash dividend is treated as a taxable dividend for
U.S. federal income tax purposes. In the event that a non-U.S. holder is subject
to U.S. federal withholding tax because a portion of the cash dividend is
treated as a dividend, Netro will be required to pay such withholding tax to the
IRS without reduction of the cash dividend. A non-U.S. holder should consult his
or her own tax advisor regarding the effect of that additional payment on his or
her own non-U.S. taxes, including the ability to claim such U.S. federal
withholding tax as a credit against his or her non-U.S. taxes.
TAXATION OF DIVIDENDS ON SHARES OF SR TELECOM COMMON STOCK
The gross amount of any dividend distributions to U.S. holders, including
any Canadian withholding taxes paid by SR Telecom with respect thereto, will be
taxable as ordinary income to the extent paid out of SR Telecom's current or
accumulated earnings and profits, as determined for U.S. federal income tax
purposes. Distributions in excess of SR Telecom's current or accumulated
earnings and profits will be treated as a tax-free return of capital to the
extent of a U.S. holder's basis in the shares of SR Telecom common stock and, to
the extent in excess of basis, as capital gain. Any such distribution will not
qualify for the dividends-received deduction allowed to U.S. corporations.
For taxable years beginning after December 31, 2002 and before January 1,
2009, dividends received by a U.S. holder who is an individual from a "qualified
foreign corporation" are subject to preferential U.S. federal income tax rates,
subject to certain holding period requirements and other limitations. For this
purpose, SR Telecom believes that it is a qualified foreign corporation.
Distributions on the shares of SR Telecom common stock paid in Canadian
dollars, including any associated withholding taxes paid by SR Telecom in
Canadian dollars, will be included in the gross income of a U.S. holder in a
U.S. dollar amount calculated by reference to the exchange rate in effect on the
day of receipt, regardless of whether the Canadian dollars are converted into
U.S. dollars at that time. If the Canadian dollars are converted into U.S.
dollars on the day received, U.S. holders generally should not be required to
recognize foreign currency exchange gain or loss. U.S. holders should consult
their own tax advisors regarding the treatment of any foreign currency exchange
gain or loss on Canadian dollars not converted into U.S. dollars on the day of
receipt.
Dividends received by a U.S. holder will be treated as foreign-source
income and will generally constitute "passive income" (or, in some cases,
"financial services income") for U.S. foreign tax credit purposes. A U.S. holder
may be eligible, subject to a number of complex limitations, to claim a foreign
tax credit in respect of Canadian withholding taxes withheld on a dividend paid
on shares of SR Telecom common stock. Alternatively, a U.S. holder may claim a
deduction in respect of such withholding taxes. The U.S./Canada Income Tax
Treaty generally provides for a maximum Canadian withholding tax rate of 15%
with respect to dividends paid to U.S. holders that are entitled to the benefits
of the treaty. U.S. holders should consult their own tax advisors concerning the
application of the U.S. foreign tax credit rules to their particular situations.
SALE OR EXCHANGE OF SHARES OF SR TELECOM COMMON STOCK
You will recognize capital gain or loss on the sale or exchange of shares
of SR Telecom common stock equal to the difference between the amount you
realize and your adjusted tax basis in the shares of SR Telecom common stock
sold or exchanged. This gain or loss will be long-term if you have held the
shares of SR Telecom common stock for more than one year and otherwise will be
short-term capital gain. Generally,
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for a U.S. holder who is an individual, long-term capital gains are subject to
preferential U.S. federal income tax rates, which have been reduced for
long-term capital gains recognized on or after May 6, 2003 and before January 1,
2009. Short-term capital gains are taxed at U.S. federal income tax rates
applicable to ordinary income, which, for gains recognized on or after May 6,
2003 and before January 1, 2009, will be higher than the rates applicable to
dividends. The distinction between capital gain or loss and ordinary income or
loss is also important in other contexts; for example, for purposes of the
limitations on a U.S. holder's ability to offset capital losses against ordinary
income. For foreign tax credit purposes, gain or loss recognized upon such sale
or exchange of shares of SR Telecom common stock generally will be treated as
from sources within the United States.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
The Code provides special anti-deferral rules regarding certain
distributions received by U.S. persons with respect to, and sales, exchanges and
other dispositions, including pledges, of shares of stock or options of a
passive foreign investment company ("PFIC"). A foreign corporation will be
treated as a PFIC for any taxable year if (1) 75% or more of its gross income
for the taxable year is passive income or (2) the average percentage of its
assets, generally by value, that produce or are held for the production of
passive income is at least 50%. SR Telecom believes that it will not be a PFIC
for the taxable year ended December 31, 2003. A foreign corporation's status as
a PFIC, however, is a factual determination that is made annually and thus may
be subject to change.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
U.S. backup withholding tax and information reporting requirements
generally apply to payments to non-corporate U.S. holders of shares of SR
Telecom common stock. Information reporting will apply to payments of dividends
on, and to proceeds from the disposition of, shares of SR Telecom common stock
within the U.S. to a U.S. holder other than an "exempt recipient." For this
purpose, "exempt recipients" include corporations and certain other persons
that, when required, demonstrate their exempt status. Backup withholding at the
applicable rate may also apply to payments of dividends on, and the proceeds
from the disposition of, shares of SR Telecom common stock within the U.S. to a
U.S. holder other than an exempt recipient. The backup withholding tax is not an
additional tax and may be credited against a U.S. holder's regular U.S. federal
income tax liability or refunded by the IRS, if applicable.
Non-U.S. holders are generally exempt from information reporting and backup
withholding provided, if necessary, they demonstrate their exemption.
CANADIAN FEDERAL TAX CONSIDERATIONS
Set forth below is a discussion of the material Canadian federal income tax
considerations under the Income Tax Act (Canada) (the "Canadian Tax Act") of
receiving shares of SR Telecom common stock pursuant to the merger, generally
applicable to Netro stockholders who, for purposes of the Canadian Tax Act and
at all relevant times, hold their shares of Netro common stock as capital
property and deal at arm's length with SR Telecom and Netro and are not
affiliated with SR Telecom or Netro and, insofar as it relates to matters of law
or legal conclusions, constitutes the opinion of Fasken Martineau DuMoulin LLP.
This discussion is applicable only to Netro stockholders who are not and have
not been resident or deemed to be resident in Canada for purposes of the
Canadian Tax Act at any time when they held shares of Netro common stock (or any
other property exchanged for shares of Netro common stock in a tax deferred
transaction) or when they will hold shares of SR Telecom common stock and who do
not use or hold and are not deemed to use or hold, the shares of Netro common
stock or the shares of SR Telecom common stock in connection with carrying on
business in Canada and for whom neither the shares of Netro common stock nor the
shares of SR Telecom common stock are "designated insurance property." (The
Netro stockholders to whom this summary applies are referred to herein as
"Non-resident holders.") This discussion does not apply to a non-resident
insurer which carries on business in Canada and elsewhere.
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This discussion is based on the Canadian Tax Act, the regulations
thereunder and the current published administrative policies and assessing
practices of the Canada Customs and Revenue Agency, all in effect as of the date
of this proxy statement/prospectus. This discussion also takes into account
proposed amendments (the "Proposed Amendments") to the Canadian Tax Act publicly
released by the Department of Finance Canada prior to the date of this proxy
statement/prospectus, although no assurances can be given that the Proposed
Amendments will be enacted in the form proposed, or at all. This discussion does
not take into account or anticipate any other changes in law, whether by
judicial, governmental or legislative action or decision, nor does it take into
account provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian federal income tax
considerations described herein. This discussion is based on the assumption that
the shares of SR Telecom common stock will at all times be listed on a
prescribed stock exchange for purposes of the Canadian Tax Act (which includes
both the Nasdaq National Market and the Toronto Stock Exchange).
THIS DISCUSSION IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSIDERED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
NETRO STOCKHOLDER. NETRO STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS
TO THE TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS IN THEIR PARTICULAR CIRCUMSTANCES.
Disposition of Shares of Netro Common Stock
The disposition of the shares of Netro common stock, and the receipt of
shares of SR Telecom common stock pursuant to the merger will not give rise to
tax for a Non-resident holder under the Canadian Tax Act.
Dividends
Dividends, if any, paid or credited (or deemed to have been paid or
credited) to a Non-resident holder by SR Telecom will be subject to a Canadian
non-resident withholding tax of 25% of the gross amount of such dividends
(subject to reduction in accordance with an applicable international tax treaty
between Canada and the Non-resident holder's country of residence). Where the
Non-resident holder is a resident of the United States for purposes of the
Canada-United States Income Tax Convention (1980) (the "Convention"), the rate
of such withholding tax is generally 15%. Under the Convention, dividends paid
to certain religious, scientific, literary, educational or charitable
organizations and to certain pension organizations that are resident in, and
generally exempt from tax in the United States are generally exempt from
Canadian non-resident withholding tax. Provided that certain administrative
procedures are observed by such an organization, SR Telecom would not be
required to withhold such tax from dividends paid or credited to such an
organization.
Disposition of Shares of SR Telecom Common Stock
A Non-resident holder will not be subject to tax under the Canadian Tax Act
in respect of any capital gain realized by such Non-resident holder on a
disposition of a share of SR Telecom common stock, other than a disposition to
SR Telecom, unless such shares constitute "taxable Canadian property" of the
Non-resident holder for purposes of the Canadian Tax Act and are not
"treaty-protected property." Provided that, at the time of disposition, the
shares of SR Telecom common stock are listed on a prescribed stock exchange, the
shares of SR Telecom common stock will generally not constitute "taxable
Canadian property" to a Non-resident holder unless, at any time during the 60
month-period immediately preceding the disposition of the shares, the holder,
persons with whom the holder does not deal at arm's length or the holder
together with such persons, own not less than 25% of the issued shares of any
class or any series of shares of the capital stock of SR Telecom.
Even if the shares of SR Telecom common stock are "taxable Canadian
property" to a Non-resident holder, they will be "treaty-protected property" to
a Non-resident holder who is a resident of the United States for purposes of the
Convention unless the value of such shares at the time of disposition is derived
principally from real property situated in Canada.
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CHANGE OF CONTROL
The merger will result in a change of control of Netro. However, because
holders of Netro common stock will own less than 50% of SR Telecom's common
stock after the merger, the merger will not result in a change of control to SR
Telecom for purposes of any of its employment, severance or other agreements.
EFFECT OF THE MERGER ON OUTSTANDING NETRO STOCK OPTIONS
At the effective time of the merger, all outstanding options to purchase
shares of Netro common stock under any stock option or compensation plan or
arrangement of Netro, whether or not exercisable or vested, will be terminated.
No consent of any holder of any stock option or any employee will be required
under any Netro stock option or compensation plan or other arrangement of Netro
for such termination.
As of July 31, 2003, there were outstanding options to purchase 7,336,228
shares of Netro common stock at exercise prices ranging from US$0.20 to
US$49.875. Of that number, options to purchase approximately 5,083,485 shares
will be vested and exercisable as of August 27, 2003. If those options are
exercised prior to the effective time of the merger, the shares acquired upon
exercise will be entitled to receive the cash dividend and the shares of SR
Telecom common stock to be issued in the merger.
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THE MERGER AGREEMENT
The following is a description of the material provisions of the agreement
and plan of merger, as amended, which we refer to as the merger agreement. While
SR Telecom and Netro believe this description covers the material terms of the
merger agreement, it may not contain all the information that is important to
you and is qualified in its entirety by reference to the merger agreement,
including amendment no. 1 and amendment no. 2 thereto, which are attached to
this proxy statement/prospectus as Annexes A, B-1 and B-2 and incorporated by
reference into this proxy statement/prospectus. You are urged to read the merger
agreement carefully and in its entirety.
STRUCTURE OF THE MERGER
The merger agreement provides for the merger of SR Telecom's wholly-owned
subsidiary, Norway Acquisition Corporation, with and into Netro, with Netro
surviving the merger as a wholly-owned subsidiary of SR Telecom.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware or at such later time as is
agreed by SR Telecom and Netro and specified in the certificate of merger. The
filing of the certificate of merger will occur no later than the third business
day after satisfaction or waiver of the conditions to the completion of the
merger described in the merger agreement, including the requisite vote of
Netro's stockholders and payment of the US$100 million cash dividend.
THE CASH DIVIDEND
Contingent upon approval and adoption of the merger agreement and the
merger by Netro stockholders, Netro has agreed to declare and pay (subject to
permissibility under applicable law) a cash dividend in respect of each
outstanding share of Netro common stock in an amount equal to a fraction
(rounded to the nearest whole cent), the numerator of which shall be US$100
million and the denominator of which shall be the number of outstanding shares
of Netro common stock outstanding immediately prior to the effective time of the
merger. Such cash dividend will be segregated and set aside immediately prior to
the effective time of the merger with respect to each share of Netro common
stock outstanding on the record date for the cash dividend, which will be the
closing date of the merger agreement. The cash dividend will be distributed
promptly following the effective time of the merger to Netro stockholders. For
example, if there are 40,410,218 shares of Netro common stock outstanding at the
effective time of the merger, and you hold 500 shares of Netro common stock, you
will be entitled to receive US$1,237.31. This is only an example; the actual
amount of the cash dividend will vary depending upon the number of shares of
Netro common stock outstanding immediately prior to the effective time of the
merger. If the number of shares of Netro common stock outstanding at the
effective time of the merger is greater or less than 40,410,218, the amount of
the cash dividend would be adjusted accordingly.
THE MERGER CONSIDERATION
At the effective time of the merger, each outstanding share of Netro common
stock and the associated preferred stock purchase right will be automatically
converted into the right to receive the number of shares of SR Telecom common
stock equal to a fraction, the numerator of which is 41.5 million and the
denominator of which is the number of shares of Netro common stock outstanding
immediately prior to the effective time of the merger. No fractional share will
be issued in connection with the merger. Any fraction equal to or higher than
one-half will be rounded up to the next succeeding whole share and any fraction
less than one-half will be rounded down. For example, if there are 40,410,218
shares of Netro common stock outstanding at the effective time of the merger,
and you hold 500 shares of Netro common stock, you will be entitled to receive
513.48 shares of SR Telecom common stock. This would be rounded down to 513
shares of SR Telecom common stock. This example merely illustrates one possible
number of shares of Netro common stock outstanding at the effective time of the
merger. If the number of shares of Netro common stock outstanding at the
effective
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time of the merger is greater or less than 40,410,218, the amount of the cash
dividend and the number of shares of SR Telecom common stock received would be
adjusted accordingly.
STOCK OPTIONS
At the effective time of the merger, each outstanding option to purchase
shares of Netro common stock under any stock option or compensation plan or
arrangement, whether or not exercisable or vested, shall be terminated.
THE EXCHANGE AGENT
Prior to the effective time of the merger, SR Telecom is required to make
available to the exchange agent the shares of SR Telecom common stock to be
exchanged for the shares of Netro common stock to which you may be entitled to
receive under the merger agreement.
PROCEDURES FOR EXCHANGING STOCK CERTIFICATES
Promptly after the effective time of the merger, the exchange agent will
mail to you a letter of transmittal and instructions for you to use in
surrendering your share certificates. When you properly surrender your share
certificates to the agent for cancellation, together with a duly executed letter
of transmittal and any other documents as the agent may require, you will be
entitled to receive
- your proportionate share of the cash dividend; and
- shares of SR Telecom common stock to be exchanged for shares of Netro
common stock represented by your share certificates
in accordance with the merger agreement, after giving effect to any required tax
withholdings, and your certificates will be canceled.
SR Telecom is entitled to any shares of SR Telecom common stock and any
cash made available to the exchange agent that remain unclaimed by Netro
stockholders one year after the effective time of the merger. After that date,
holders of Netro common stock who have not complied with the instructions to
exchange their shares of Netro common stock will be required to look to SR
Telecom for their shares of SR Telecom common stock and their share of the cash
dividend.
You should not send in your share certificates before you receive a letter
of transmittal and instructions from the exchange agent.
CERTIFICATE OF INCORPORATION AND BY-LAWS
The merger agreement provides that, at the effective time of the merger,
the certificate of incorporation of Netro will be amended in the merger to be
the same as the certificate of incorporation of Norway Acquisition Corporation,
except that Netro's name will remain unchanged, and as so amended, will be the
certificate of incorporation of Netro until amended in accordance with
applicable law. The by-laws of Norway Acquisition Corporation, as in effect
immediately prior to the effective time of the merger, will be the by-laws of
the surviving corporation following the merger until changed or amended.
OFFICERS AND DIRECTORS OF NETRO FOLLOWING THE MERGER
After the effective time of the merger, the directors and officers of
Norway Acquisition Corporation will become the directors and officers of Netro,
until their successors are duly elected, appointed and qualified.
DIRECTORS OF SR TELECOM FOLLOWING THE MERGER
Following the effective time of the merger, SR Telecom's board of directors
has agreed to appoint an individual, designated by Netro's board of directors
and reasonably acceptable to SR Telecom's board of directors, to serve on SR
Telecom's board of directors with a term expiring at the next annual meeting of
SR
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Telecom's stockholders following the effective time of the merger. SR Telecom's
board of directors has also agreed to include such person in the slate of
nominees recommended by SR Telecom's board of director's at such annual meeting.
Netro has named Gideon Ben-Efraim as its nominee.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
Netro and SR Telecom relating to, among other things:
- corporate organization and power;
- authorization, execution, delivery, performance and enforceability of,
and required consents, approvals, orders and authorization of
governmental authorities relating to, the merger agreement and related
matters;
- absence of conflicts with organizational documents and material
agreements;
- capital structure;
- subsidiaries;
- documents filed with the securities regulatory authorities, the accuracy
of the financial statements and other information contained in such
documents and the absence of undisclosed liabilities;
- the accuracy of information supplied in connection with this proxy
statement/prospectus;
- absence of particular changes or events;
- absence of undisclosed material liabilities;
- compliance with laws and court orders;
- outstanding and pending litigation;
- finders and brokers;
- filing of material tax returns and payment of taxes;
- environmental matters;
- satisfaction of takeover statute requirements;
- intellectual property rights; and
- absence of restrictions on business activities.
Representations and warranties made solely by Netro relate to:
- opinion of financial advisor;
- matters relating to the Employee Retirement Income Security Act and other
employee benefit matters;
- labor relations and employment matters;
- agreements, contracts and commitments;
- insurance;
- change of control payments;
- absence of discussions relating to competing acquisition proposals;
- absence of Canadian operations; and
- that after considering the advice of its advisors and after reviewing
other alternatives available to Netro, including liquidation, dissolution
or winding up of Netro, Netro's board of directors has determined
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that the distribution of the cash dividend and merger with SR Telecom are
in the best interests of Netro stockholders.
The representations and warranties in the merger agreement are complex and
not easily summarized. You are urged to carefully read the articles of the
merger agreement entitled "Representations and Warranties of the Company" and
"Representations and Warranties of Parent and Merger Sub."
DEFINITION OF MATERIAL ADVERSE EFFECT
Several of the representations and warranties and certain conditions
contained in the merger agreement are qualified by reference to whether the item
in question would have a "material adverse effect" on either Netro or SR
Telecom. The merger agreement provides that a "material adverse effect" means,
with respect to any person, a material adverse effect on the business, assets,
liabilities, operations, financial condition or results of operations of such
person and its subsidiaries, taken as a whole, or such person's ability to
perform its obligations under or to consummate the transactions contemplated in
the merger agreement, it being understood that none of the following, in and of
itself, will constitute a material adverse effect:
- changes attributable to the merger agreement or the transactions
contemplated thereby;
- changes attributable to the announcement of the merger;
- changes or conditions affecting the U.S., Canadian or any foreign
telecommunications or data networking industry generally;
- changes in U.S., Canadian or any foreign economic, regulatory or
political conditions generally or in U.S., Canadian or any foreign
financial markets;
- changes attributable to any attack on, outbreak or escalation of
hostilities or act of terrorism in the United States, Canada or abroad,
any declaration of war or any other national or foreign calamity;
- any failure to meet published revenue or earnings projections; or
- any change in the entity's stock price or trading volume.
PRINCIPAL COVENANTS
CONDUCT OF NETRO BUSINESS PENDING THE MERGER
Netro has agreed that until the earlier of the effective time of the merger
and the termination of the merger agreement or unless SR Telecom consents in
writing, Netro will conduct its business operations in the ordinary course
consistent with past practice (to the extent contemplated by Netro's business
plan, which was adopted by Netro's board of directors and provided to SR Telecom
prior to the execution of the merger agreement) and in accordance with all
applicable laws and regulations so as to reasonably maximize the cash and cash
equivalents available to the surviving corporation as it pays its liabilities
and obligations (including all customers, suppliers, licensors, and licensees)
in accordance with the business plan. Netro has agreed to use its commercially
reasonable efforts to preserve intact its business organization and
relationships of Netro and its subsidiaries to the extent contemplated by the
business plan.
Netro has also agreed to promptly advise SR Telecom in writing of all
material developments relating to the conduct of its business and the businesses
of its subsidiaries, including resolutions of litigation, disposition of
tangible and intangible assets and satisfaction of liabilities.
Netro has also agreed that, without the prior written consent of SR
Telecom, Netro will not, and will not permit any of its subsidiaries, to:
- materially deviate from the business plan, including incurring or paying
any expense or liability the amount of which exceeds the amount specified
in the business plan by more than US$75,000, or expenses or liabilities
the aggregate amount of which exceeds the amount specified in the
business plan by more than US$250,000;
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- adopt or propose any change to its certificate of incorporation or
bylaws;
- merge or consolidate with any other entity or acquire a material amount
of stock or assets of any other entity;
- incur or pay any fees and expenses of counsel and accountants in amounts
in excess of the sum of US$600,000 plus the excess (if any) of budgeted
operating expenses under the business plan over actual operating
expenses, to the extent Netro reasonably expects and certifies that such
excess will exist throughout the period reflected in the business plan
and on the closing date of the merger, in the aggregate, arising out of,
or in connection with or related to, the merger;
- sell, lease, license or otherwise dispose of any material subsidiary or
material amount of assets, securities or property except pursuant to
existing contracts or commitments and in the ordinary course consistent
with past practice or in accordance with the business plan;
- take any action that would make any representation and warranty of Netro
in the merger agreement inaccurate in any material respect at, or as of
any time prior to, the effective time of the merger or omit to take any
action reasonably necessary to prevent any such representation or
warranty from being inaccurate in any material respect at any such time;
- declare, set aside or pay any dividends (other than the cash dividend
described in this proxy statement/ prospectus) on, or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of, any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for any capital stock;
- except as set forth in the merger agreement, Netro has agreed not to
redeem the rights or terminate its rights agreement prior to the
effective time of the merger; and
- take other actions enumerated in the merger agreement.
At Netro's request, SR Telecom has agreed to provide written consent, which
consent may not be unreasonably withheld, to any action for which such consent
is required as promptly as possible.
CONDUCT OF SR TELECOM BUSINESS PENDING THE MERGER
SR Telecom has agreed that until the earlier of the effective time of the
merger and the termination of the merger agreement or unless Netro consents in
writing, SR Telecom will conduct its business operations in the ordinary course
consistent with past practice and will use its commercially reasonable efforts
to preserve intact its business organizations and relationships with third
parties and to keep available the services of their present officers and
employees.
SR Telecom has also agreed that, without the prior written consent of
Netro, SR Telecom will not, and will not permit any of its subsidiaries, to:
- adopt or propose any change to its certificate of incorporation, except
that SR Telecom may adopt a new general bylaw to conform to recent
amendments to the Canada Business Corporations Act as has been previously
disclosed by SR Telecom to Netro and may declare and effect a reverse
stock split of its shares of common stock so as to effectuate the
quotation of SR Telecom's common stock on the Nasdaq National Market; and
- take any action that would make any representation and warranty of SR
Telecom in the merger agreement inaccurate in any respect at, or prior
to, the effective time of the merger.
At SR Telecom's request, Netro has agreed to provide written consent, which
consent may not be unreasonably withheld, to any action for which such consent
is required as promptly as possible.
SR Telecom may repay, in whole or in part, CDN$5 million principal amount
outstanding under SR Telecom's credit facility with Canadian Imperial Bank of
Commerce.
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NO SOLICITATION
The merger agreement provides that, until the earlier of the effective time
of the merger and the termination of the merger agreement, Netro will not, nor
will it authorize or permit any of its subsidiaries or their respective
officers, directors, employees, investment bankers, attorneys, accountants,
consultants or other agents or advisors to, directly or indirectly:
- solicit, initiate, induce or take any action to facilitate or encourage
any inquiry with respect to, or the making, submission or announcement
of, any acquisition proposal, as described below;
- enter into, continue or otherwise participate in any discussions or
negotiations with, furnish any information relating to Netro or any of
its subsidiaries or afford access to the business, properties, assets,
books or records of Netro or any of its subsidiaries, otherwise cooperate
in any way with, or knowingly assist, participate in, facilitate or
encourage any inquiries or effort by any third party that is seeking to
make, or has made, or that may reasonably be expected to lead to, an
acquisition proposal,
- grant any waiver or release under any standstill or similar agreement
with respect to any class of equity securities of Netro or any of its
subsidiaries,
- authorize, approve or recommend any acquisition proposal or liquidation
alternative, as described below, or
- enter into any letter of intent, memorandum of understanding, agreement
in principle, merger agreement, acquisition agreement, option agreement,
joint venture agreement, partnership agreement or other similar agreement
constituting, contemplating or related to, or an agreement that is
intended to or would reasonably be expected to lead to, any acquisition
proposal.
Upon receipt by Netro of any acquisition proposal, any indication that any
third party is considering making an acquisition proposal or any request for
information relating to Netro or any of its subsidiaries or for access to the
business, properties, assets, books or records of Netro or any of its
subsidiaries by any third party that may be considering making, or has made, an
acquisition proposal. Netro has agreed to identify the third party making, and
the terms and conditions of, any such acquisition proposal, indication or
request to SR Telecom. Netro has agreed to keep SR Telecom fully informed, on a
current basis, of the status and material details of any such acquisition
proposal, indication or request, including any meeting of Netro's board of
directors at which the board of directors is reasonably expected to consider any
acquisition proposal.
Even though Netro has agreed to the provisions described above relating to
the solicitation of an acquisition proposal, if Netro receives an unsolicited,
bona fide written acquisition proposal that Netro's board of directors
reasonably believes, after considering advice from its outside legal counsel and
financial advisors, is from a person reasonably capable of consummating the
acquisition proposal and is or will lead to a superior proposal (as described
below), Netro, provided that it has not breached the non-solicitation provisions
of the merger agreement, may take the following actions:
- engage in negotiations or discussions with such third party;
- furnish to such third party nonpublic information relating to Netro or
any of its subsidiaries pursuant to a confidentiality agreement with
terms no less favorable to Netro than those contained in the
confidentiality agreement with SR Telecom and terms which shall not
include any provision calling for an exclusive right to negotiate with
such third party or having the effect of prohibiting Netro from
satisfying its obligations under the merger agreement, and
contemporaneously with furnishing any such nonpublic information to such
third party, Netro furnishes the same nonpublic information to SR Telecom
if Netro did not previously do so;
- following receipt of a superior proposal or a determination by Netro's
board of directors that a superior alternative exists, Netro's board of
directors may fail to make, withdraw or modify its recommendation to its
stockholders, if all of the following conditions are met:
- the special meeting to vote on the adoption of the merger agreement has
not occurred;
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- Netro delivers to SR Telecom, promptly following the board of directors
resolution to change its recommendation, written notice of the change of
recommendation, including the material terms and conditions of the
superior proposal, and the identity of the third party making any
superior proposal, or, in the case of a superior alternative, that such
superior alternative exists; and
- Netro's board of directors has concluded in its reasonable judgment by a
majority vote, after considering the advice its outside legal counsel
and financial advisors that, in light of the superior proposal or
superior alternative, as the case may be, the failure of Netro's board
of directors to change its recommendation would cause Netro's board of
directors to breach its fiduciary duties or otherwise be unlawful under
applicable law; or
- take any nonappealable, final action that any court of competent
jurisdiction orders Netro to take.
For three days after delivering the change of recommendation notice, Netro
has agreed to provide SR Telecom a reasonable opportunity to make adjustments in
the terms and conditions of the merger agreement, and negotiate in good faith
with respect to that agreement.
Netro's board of directors is not permitted to take any of the actions
referred to above unless Netro has delivered to SR Telecom a prior written
notice advising SR Telecom that it intends to take such action. Netro has
further agreed to continue to advise SR Telecom after taking such action.
For purposes of the merger agreement, "acquisition proposal" means, other
than the transactions contemplated by the merger agreement (including the cash
dividend), any third-party offer, proposal or inquiry relating to, or any
third-party indication of interest in, any of the following:
- any acquisition or purchase, direct or indirect, of 15% or more of the
consolidated assets of Netro and its subsidiaries or beneficial ownership
of securities representing 15% or more of the outstanding securities of
any class of equity or voting securities of Netro or of any of its
subsidiaries whose assets, individually or in the aggregate, constitute
more than 15% of the consolidated assets of Netro;
- any tender offer (including a self-tender offer) or exchange offer that,
if consummated, would result in any third party's beneficially owning 15%
or more of the outstanding securities of any class of equity or voting
securities of Netro or of any of its subsidiaries whose assets,
individually or in the aggregate, constitute more than 15% of the
consolidated assets of Netro;
- a merger, consolidation, share exchange, business combination, sale or
transfer of all or substantially all the assets, exclusive license,
reorganization, recapitalization, liquidation, dissolution, extraordinary
dividend (other than a liquidation alternative or the cash dividend) or
other similar transaction involving Netro or any of its subsidiaries
whose assets, individually or in the aggregate, constitute more than 15%
of the consolidated assets of Netro;
- the sale or transfer of all or substantially all of Netro's key
technology or the exclusive license thereof (other than a liquidation
alternative); or
- any other transaction (other than a liquidation alternative) the
consummation of which could reasonably be expected to impede, interfere
with, prevent or materially delay the merger or that could reasonably be
expected to dilute materially the benefits to SR Telecom of the
transactions contemplated in the merger agreement.
For purposes of the merger agreement, "liquidation alternative" means any
proposal or inquiry involving the liquidation, dissolution or winding up of
Netro that is not initiated by and (prior to the time of the determination that
a superior alternative exists) does not involve, a third party.
For purposes of the merger agreement, "superior alternative" means a
determination by the Netro board of directors in its reasonable judgment by a
majority vote, after considering the advice of its financial and legal advisors,
that a liquidation alternative would be more favorable to the stockholders of
Netro from a financial point of view than the terms of the merger (including the
distribution of the cash dividend) or that consummation of the transactions
contemplated by the merger agreement (including the distribution of the cash
dividend and the merger) are unlawful under applicable law.
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For purposes of the merger agreement, "superior proposal" means any bona
fide, unsolicited written acquisition proposal for at least 80% of the
outstanding Netro common stock on terms that Netro's board of directors
determines in its reasonable judgment by a majority vote, after considering the
advice of its financial advisor, to be more favorable to the stockholders of
Netro from a financial point of view than the terms of the merger (taking into
account all the terms and conditions of the acquisition proposal, including any
break-up fees, expense reimbursement provisions, conditions to consummation, the
timing of the consummation, the risk of nonconsummation and the need for any
required governmental consents, filings and approvals).
BOARD RECOMMENDATION
Netro has agreed that it will call, give notice of, convene and hold a
meeting of Netro stockholders to vote on adoption of the merger agreement,
regardless of the commencement, disclosure, announcement or submission to it of
any acquisition proposal, or of any withdrawal, amendment or modification of its
recommendation, and it will not subject to the vote of Netro stockholders any
acquisition proposal, or propose to do so.
INDEMNIFICATION AND INSURANCE
SR Telecom has agreed to indemnify and provide insurance to Netro's
officers and directors, all as described under the section entitled "The
Merger -- Interests of Netro's Directors and Officers in the Merger."
BENEFIT ARRANGEMENTS
SR Telecom has agreed to provide, or cause the surviving corporation in the
merger to provide, Netro employees who are subsequently employed by SR Telecom
after the effective time of the merger with employee benefits (other than
equity-based benefits) that are substantially comparable to those provided to
similarly situated active employees of SR Telecom, and to honor the severance
payments and benefits payable under Netro's severance plans, agreements and
policies in effect immediately prior to the closing.
In accordance with the terms and conditions of Netro's 1999 Employee Stock
Purchase Plan and the merger agreement, Netro's board of directors shortened the
purchase periods and offering periods in progress at the time of the signing of
the merger agreement and set June 30, 2003 as the final purchase date. Netro
notified all participants in the plan of the new purchase date at least ten days
prior to such date, and each participant's option under the plan was exercised
automatically on the new purchase date, unless the participant withdrew from the
offering period prior to the purchase date. The plan was terminated on June 30,
2003.
Netro may terminate its 401(k) plan prior to the effective time of the
merger, in which case, participants would be permitted to roll over their
accounts into (or to have their accounts directly transferred to), and would
continue to be eligible to participate in, a plan or plans qualified under
Section 401 of the Code maintained by SR Telecom. If Netro does not terminate
its 401(k) plan prior to the effective time, Netro employees that continue on as
employees of SR Telecom may be permitted to continue to participate in the
401(k) plan after the effective time of the merger.
Prior to the effective time of the merger, the board of directors, or an
appropriate committee of non-employee directors, of each of Netro and SR Telecom
will, if necessary, adopt a resolution consistent with the interpretative
guidance of the SEC so that the disposition of Netro stock, and acquisition of
SR Telecom stock as merger consideration, by Netro insiders will be exempt
transactions for purposes of Section 16(b) of the Exchange Act.
STOCK EXCHANGE LISTING
SR Telecom has agreed to use its commercially reasonable efforts to cause
the shares of SR Telecom common stock to be approved for listing on the Nasdaq
National Market (subject to official notice of issuance) and the Toronto Stock
Exchange.
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MUTUAL COVENANTS
The merger agreement contains several mutual covenants, including:
- using commercially reasonable efforts to take actions and do all things
necessary, proper or advisable to complete the merger and the other
transactions contemplated by the merger agreement;
- preparation and distribution of this proxy statement/prospectus;
- cooperation regarding filings with governmental and other agencies and
organizations;
- public announcements;
- further assurances;
- access to information;
- confidential treatment of non-public information; and
- notices of particular events.
CONDITIONS TO THE MERGER
The obligations of Netro and SR Telecom to consummate the merger depend
upon the satisfaction of, among others, the following conditions:
- the merger agreement and the merger must be approved and adopted by the
stockholders of Netro in accordance with Delaware law, the rules of
Nasdaq and Netro's organizational documents;
- there must be no provision of any applicable law or regulation and no
judgment, and no temporary, preliminary or permanent injunction, order or
decree which is in effect and has the effect of making the merger illegal
or otherwise prohibiting the consummation of the merger;
- the expiration or termination of any applicable waiting period relating
to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, notification of which was received on April 18, 2003;
- the effectiveness of, and the absence of stop order proceedings with
respect to, the registration statement that includes this proxy
statement/prospectus;
- the shares of SR Telecom common stock to be issued in the merger must
have been approved for listing on the Nasdaq National Market, which will
likely require a reverse stock split of the shares of SR Telecom common
stock, and the Toronto Stock Exchange, subject, in the case of the Nasdaq
National Market, to official notice of issuance, and such shares of SR
Telecom common stock must be freely tradable under the Canadian
securities laws;
- all actions by or in respect of, or filings with, any governmental
entity, required to permit the consummation of the merger must have been
taken, made or obtained;
- the declaration and payment of the cash dividend must be permissible
under applicable law; and
- notice must have been given to the NASD ten days in advance of the record
date for the cash dividend in accordance with Rule 10b-17 of the Exchange
Act, unless the SEC exempts Netro from compliance with such rule.
The obligations of SR Telecom and its merger subsidiary to consummate the
merger depend upon the satisfaction of the following further conditions:
- the representations and warranties of Netro contained in the merger
agreement must be true and correct in all material respects as of the
closing date, except to the extent such representations and warranties
expressly relate to an earlier date, in which case as of such earlier
date;
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- Netro must have performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the closing date;
- there must not be pending or threatened any suit, action or proceeding by
any governmental entity prohibiting the transactions contemplated by the
merger agreement or otherwise making them illegal;
- Netro must have delivered to SR Telecom evidence satisfactory to SR
Telecom of the resignation of all directors of Netro, effective as of the
effective time of the merger; and
- Netro must have declared the cash dividend.
The obligations of Netro to consummate the merger depend upon the
satisfaction of the following further conditions:
- the representations and warranties of SR Telecom contained in the merger
agreement must be true and correct in all material respects as of the
closing date, except to the extent such representations and warranties
expressly relate to an earlier date, in which case as of such earlier
date;
- SR Telecom must have performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the closing date; and
- there must not be pending or threatened any suit, action or proceeding by
any governmental entity prohibiting the transactions contemplated by the
merger agreement or otherwise making them illegal.
EXPENSES
Other than as described under "-- Payment of Applicable Termination Fee",
all fees and expenses incurred in connection with the merger agreement and
transactions contemplated by the merger agreement will be paid by the party
incurring those fees or expenses; provided, however, that SR Telecom and Netro
will share equally all fees and expenses (other than attorneys' and accountants'
fees) incurred in connection with the following:
- the printing, filing and mailing of the registration statement which
includes this proxy statement/prospectus;
- any SEC or other regulatory fees incurred in connection with this proxy
statement/prospectus; and
- the filing fee for the notification and report forms filed with the
Federal Trade Commission and Department of Justice under the
Hart-Scott-Rodino Antitrust Improvements Act and premerger notification
and report forms under similar applicable laws of other jurisdictions.
TERMINATION
The merger agreement may be terminated:
- by mutual written agreement of SR Telecom and Netro;
- by either SR Telecom or Netro, if:
- the merger is not consummated by September 30, 2003; provided that the
merger agreement may not be terminated by any party whose breach of any
provision of the merger agreement results in the failure of the merger
to be consummated by such date and may not be terminated by Netro if
failure to consumate by such date results from the outstanding
shareholder litigation;
- there is a law or regulation (other than relating to declaration or
payment of the cash dividend) that makes the consummation of the merger
illegal or otherwise prohibited, or any judgment, injunction, order or
decree of any government entity enjoining Netro or SR Telecom from
consummating the merger is entered and has become final and
nonappealable; or
- the merger agreement is not approved and adopted by the required vote of
Netro's stockholders at the special meeting; provided that Netro may not
terminate for this reason if the failure to obtain
96
stockholder approval is caused by Netro's action or failure to act and
such action or failure constitutes a breach by Netro of the merger
agreement; or
- by Netro, if:
- SR Telecom breaches any of its representations, warranties, covenants or
agreements under the merger agreement or if any representation or
warranty of SR Telecom will have become materially untrue, in either
case, such that either Netro's condition relating to representations and
warranties or Netro's condition relating to agreements and covenants
would not be satisfied at the time of such breach or as of the time such
representation or warranty shall have become untrue, subject to a 30-
day "cure" period and the condition that if Netro had materially
breached the agreement Netro may not terminate the agreement, or
- Netro's board of directors determines in its reasonable judgment, after
considering the advice of its advisors, that the declaration and payment
of the cash dividend is not permissible under applicable law; or
- by SR Telecom, if:
- Netro breaches any of its representations, warranties, covenants or
agreements under the merger agreement or if any representation or
warranty of Netro shall have become materially untrue, in either case,
such that either SR Telecom's condition relating to representation and
warranties or SR Telecom's condition relating to agreements and
covenants would not be satisfied at the time of such breach or as of
the time such representation or warranty shall have become untrue,
subject to a 30-day "cure" period and the condition that if SR Telecom
had materially breached the agreement it may not terminate the
agreement; or
- any one of the following events occurs prior to the approval and
adoption of the merger agreement and the merger by the required vote
of Netro stockholders:
- Netro's board of directors fails to make, withdraws or modifies in
a manner adverse to SR Telecom its recommendation in favor of the
approval and adoption of the merger agreement and merger with SR
Telecom;
- Netro's board of directors fails to publicly reaffirm its
recommendation in favor of the approval and adoption of the merger
agreement and merger with SR Telecom within ten business days after
SR Telecom requests in writing that Netro's board of directors
reaffirms its recommendation following the public announcement of
any acquisition proposal;
- Netro's board of directors or any committee of the board of
directors approves or recommends any acquisition proposal from a
third party; or
- Netro's board of directors does not convey to its stockholders a
statement in respect to a tender offer or exchange offer by a third
party that Netro's board of directors recommends rejection of such
offer within ten business days after the tender or exchange offer
is first published or received by Netro's board of directors; or
- within a reasonable time following the request of SR Telecom, Netro's
board of directors, based on the information available to Netro as of
the date of the request for such reaffirmation and on reasonable
assumptions based on such information and after consultation with its
advisors, fails to reaffirm that the declaration and payment of the
cash dividend as of the date of the request for such reaffirmation
would not be illegal under applicable law.
If the merger agreement is validly terminated, the agreement will become
void without any liability on the party of any party unless the party is in
willful breach of the agreement. However, certain provisions, including the
provisions relating to confidentiality, expenses and termination fees and right
of first negotiation and first refusal, will continue in effect notwithstanding
termination of the merger agreement.
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PAYMENT OF APPLICABLE TERMINATION FEE
Netro must pay SR Telecom the amounts set forth below after any of the
following events:
- US$6 million, upon termination of the merger agreement for one or more of
the following reasons:
- by SR Telecom if:
- Netro's board of directors fails to make, withdraws or modifies in a
manner adverse to SR Telecom its recommendation in favor of the
approval and adoption of the merger agreement and the merger with SR
Telecom;
- Netro's board of directors fails to publicly reaffirm its
recommendation in favor of the approval and adoption of the merger
agreement and merger with SR Telecom within 10 business days after SR
Telecom requests in writing that Netro's board of directors reaffirm
its recommendation following the public announcement of any
acquisition proposal;
- Netro's board of directors or any committee of the board of directors
approves or recommends any acquisition proposal from a third party; or
- Netro's board of directors does not convey to its stockholders a
statement in respect to a tender offer or exchange offer by a third
party that Netro's board of directors recommends rejection of such
offer within ten business days after the tender or exchange offer is
first published or received by Netro's board of directors; or
- by either SR Telecom or Netro, if the merger agreement is not approved
and adopted in accordance with Delaware law by Netro's stockholders at
the special meeting, but only if Netro's board of directors had issued a
change in its recommendation; or
- by SR Telecom if Netro materially and willfully breaches certain of its
material covenants or agreements;
- US$2 million plus an additional fee, if applicable, as described below,
upon termination of the merger agreement for one or more of the following
reasons:
- by either SR Telecom or Netro, if the merger agreement is not approved
and adopted in accordance with Delaware law by Netro's stockholders at
the special meeting, if Netro's board of directors had not issued a
change in its recommendation;
- by Netro, if Netro's board of directors determines in its reasonable
judgment, after considering the advice of its advisors, that the
declaration and payment of the cash dividend is not permissible under
applicable law; or
- by SR Telecom, if Netro incurs or pays any fees and expenses of counsel
and accountants in amounts in excess of the sum of US$600,000 plus the
excess (if any) of budgeted operating expenses under the business plan
over actual operating expenses, to the extent Netro reasonably expects
and certifies that such excess will exist throughout the period
reflected in the business plan and on the closing date of the merger, in
the aggregate, arising out of, or in connection with or related to, the
merger.
If Netro consummates a qualifying transaction, as described below, within
eighteen months of the termination of the merger agreement, concurrently with
consummation of such qualifying transaction, Netro is required to pay SR Telecom
an additional US$2.5 million, for an aggregate payment of US$4.5 million;
provided, however, that if such qualifying transaction involves the
participation of a third party who made an acquisition proposal that was
publicly announced and made known to Netro's stockholders prior to the
stockholder meeting, then Netro will pay SR Telecom an additional US$4 million
for an aggregate payment of US$6 million.
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For purposes of the merger agreement, a "qualifying transaction" means a
transaction whereby:
- Netro merges with or into, or is acquired, directly or indirectly, by
merger or otherwise by, a third party;
- a third party, directly or indirectly, acquires more than 50% of the
total assets of Netro and its subsidiaries, taken as a whole (other than
a liquidation, dissolution or winding up initiated by Netro or any of its
officers and directors in their capacities as such and not including any
third party prior to the time of adoption or implementation of such
liquidation, dissolution or winding up);
- a third party, directly or indirectly, acquires more than 50% of the
outstanding shares of Netro's common stock; or
- Netro adopts or implements a plan of liquidation, recapitalization or
share repurchase at the initiation of, or (prior to the time Netro so
adopts or implements such plan) involving, a third party relating to more
than 50% of the outstanding Netro common stock or an extraordinary
dividend relating to more than 50% of the outstanding Netro common stock
or 50% of the assets of Netro and its subsidiaries, taken as a whole.
If SR Telecom is entitled to receive a termination fee as described above,
then Netro also must pay SR Telecom all out-of-pocket expenses and fees actually
incurred by SR Telecom related to the transactions contemplated by the merger
agreement, including all fees and expenses of agents, counsel, commercial banks,
investment banking firms, accountants, experts and consultants to SR Telecom and
its affiliates.
RIGHT OF FIRST NEGOTIATION AND FIRST REFUSAL
If the merger agreement is terminated and Netro's board of directors
approves a plan to liquidate, dissolve or wind up Netro that, prior to the time
of such approval, does not involve a third party, then upon the public
announcement of such plan, SR Telecom will have until the 45th day after such
announcement with respect to Netro's AirStar and Angel technology:
- a right of first negotiation, and
- a right of first refusal.
During the 45-day period, Netro is free to negotiate with any prospective
transferee to obtain an offer to purchase the technology; provided that, such
offer must be a bona fide cash offer from an independent third party and must
contain customary representations and warranties, and must not contain any
special provisions which could not be fulfilled by the independent third party.
If Netro receives from a prospective transferee such an offer on terms that
Netro is willing to accept, Netro is required to provide written notice thereof
to SR Telecom, setting forth the cash price and the other principal terms and
conditions of the proposed transfer. Upon the receipt of such notice, SR Telecom
will have the right to purchase, at the offered price, the technology. After the
45-day period is over, SR Telecom has no further right of first negotiation or
first refusal and Netro may sell or transfer the technology to any third party
at any price on any terms or conditions.
COVENANT NOT TO SELL NETRO'S ASSETS
Pursuant to a proposed definitive settlement agreement with plaintiffs in a
consolidated class action lawsuit filed after the signing of the merger
agreement, Netro and SR Telecom have agreed that Netro will not sell all or
substantially all of the assets of the Airstar or Angel product lines for a
period of nine months after the closing date of the merger and to the extent
that such sale occurs prior to nine months of the closing date of the merger,
Netro will pay US$4.5 million to the members of the class of Netro stockholders
defined in the lawsuit. For further details about the lawsuit, see the section
entitled "The Merger -- Certain Pending Litigation" on page 78.
99
AMENDMENT
The parties may amend the merger agreement in writing at any time prior to
the effective time of the merger, provided that Netro's stockholders must
approve any amendment that occurs after their approval and adoption of the
merger agreement and merger which reduces the amount or changes the kind of
consideration to be received in exchange for any shares of capital stock of
Netro.
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THE VOTING AGREEMENTS
As a condition to SR Telecom's entering into the merger agreement, SR
Telecom entered into voting agreements with Peter Carson, Sanjay Khare, Shlomo
Yariv, each of whom is an officer of Netro, and with each director of Netro. Mr.
Yariv was terminated pursuant to a reduction in force effective May 16, 2003.
The form of these voting agreements is attached to this proxy
statement/prospectus as Annex D. The voting agreement with Gideon Ben-Efraim
contained certain additional terms dealing with the effect of the merger on Mr.
Ben-Efraim's employment agreement and change of control agreement with Netro, as
well as Netro's severance policy, which terms are summarized in the section
"Netro's Management -- Employment Contracts, Termination of Employment and
Change of Control Arrangements". In particular, the form of Mr. Ben-Efraim's
voting agreement provides that the merger will not operate to terminate or
otherwise diminish Mr. Ben-Efraim's rights under his employment agreement,
change of control agreement or Netro's severance policy. A form of Mr.
Ben-Efraim's voting agreement is attached to this proxy statement/ prospectus as
Annex E. By entering into the voting agreements, these Netro stockholders have
irrevocably appointed SR Telecom as their lawful attorney and proxy. These
proxies give SR Telecom the limited right to vote the shares of Netro common
stock beneficially owned by these Netro stockholders, including shares of Netro
common stock acquired after the date of the voting agreements:
- in favor of:
- the approval and adoption of the merger agreement and merger, and
- any action required in furtherance of the merger agreement and merger,
and
- against:
- any competing acquisition proposal,
- any dissolution, liquidation or winding up of Netro,
- any amendment of Netro's certificate of incorporation or bylaws or other
proposal or transaction involving Netro which would:
- impede, frustrate, delay, prevent, nullify or adversely affect the
consummation of the merger agreement;
- result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Netro under the merger agreement; or
- result in any of the conditions of Netro's or SR Telecom's obligations
under the merger agreement not being fulfilled.
These Netro stockholders may vote their shares of Netro common stock on all
other matters.
As of July 31, 2003, the record date for the special meeting, these
individuals collectively beneficially owned 5,810,941 shares of Netro common
stock which represented approximately 13.99% of the outstanding Netro common
stock, assuming the exercise of all options held by them which are exercisable
within 60 days of July 31, 2003. All of the shares of Netro common stock held by
directors and certain officers of Netro are subject to voting agreements. None
of the Netro stockholders who is party to the voting agreements was paid
additional consideration in connection with entering into the voting agreements.
Under these voting agreements, and except as otherwise waived by SR
Telecom, each stockholder has agreed not to sell, pledge, assign, encumber,
dispose of or otherwise transfer the Netro common stock, options or other
securities convertible into Netro common stock owned, controlled or acquired,
either directly or indirectly, by that person until the earlier of the
termination of the merger agreement and the effective time of the merger, except
for certain transfers to family members who sign a counterpart of the voting
agreement and agree to be bound by the terms and provisions of the voting
agreement. Each of these stockholders has also agreed that, until the earlier of
the termination of the merger agreement and the effective time of the merger, he
shall not deposit any Netro common stock, options or other securities
convertible into Netro common stock in a voting trust or grant any proxy or
enter into any voting agreement or similar agreement in contravention of
101
his obligations under the voting agreement with respect to any of the Netro
common stock, options or other securities convertible into Netro common stock.
Also under these voting agreements, each of these stockholders agreed,
until the earlier of the termination of the merger agreement and the effective
time of the merger, to:
- comply with the restrictions on solicitation set forth in the merger
agreement, as described under "-- No Solicitation", and
- use all reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to assist and cooperate in doing, all
things necessary, proper or advisable to consummate and make effective,
in the most expeditious manner practicable, the merger and the other
transactions contemplated by the merger agreement.
These voting agreements will terminate upon the earlier to occur of the
termination of the merger agreement and the effective time of the merger.
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SR TELECOM BUSINESS
OVERVIEW
SR Telecom provides fixed wireless access solutions for voice, data and
Internet access applications. SR Telecom designs, markets and sells fixed
wireless products to telecommunications service providers, who in turn use the
products to provide their subscribers with a full range of telecommunications
services. SR Telecom also provides full turnkey services to its customers. Most
of SR Telecom's sales are international, with its fixed wireless systems
currently being used by telecommunications service providers in over 110
countries worldwide. These customers include incumbent local exchange carriers,
in the countries they serve, as well as competitive local exchange carriers and
private operators of telecommunications systems. In addition, through its
majority-owned subsidiary CTR, SR Telecom provides local telephone service and
Internet access to residential, commercial and institutional customers, and
operates a network of payphones in a large, predominantly rural area of Chile.
The principal applications for SR Telecom's products are:
- Providing affordable telecommunications services to rural or isolated
regions where traditional copper telephony wiring is not cost effective
due to distance and other considerations. SR Telecom was a pioneer in the
provision of systems for this application.
- Providing voice and high-speed data services to residential end-users in
suburban or urban areas, in cases where the service provider prefers a
fixed wireless solution for economic or competitive reasons.
- Providing simultaneous voice, high-speed data and Internet access for
small and medium-sized businesses in urban centers.
- Providing connectivity for private voice and data networks owned by
specific users, such as utilities, government agencies, industrial
concerns and specialized carriers.
SR Telecom's products are designed to minimize the costs of deployment and
operation and to enable service providers to offer a combination of voice and
data services to their subscribers, using a single platform. SR Telecom's
products operate in licensed frequencies for the provision of fixed wireless
services as well as the unlicensed 2.4 GHz frequency band in the United States.
SR Telecom's products may require standardization in accordance with
established government regulations in the countries to which it exports. The
standardization process varies from country to country. In some countries the
process can require a formal set of tests and examinations performed by an
accredited laboratory in that country which then prepares a report on receipt
and approval of which the relevant government department, generally the
government body responsible for regulating telecommunications, will issue a
certificate. In other countries there is no standardization required at all.
Working with these different procedures and obtaining appropriate
standardization is part of the normal course of SR Telecom's business.
SR Telecom was incorporated under the Canada Business Corporations Act in
1981, and has been a public reporting company in Canada since 1986, when it
consummated an initial public offering in Canada. The company's legal name is SR
Telecom Inc. SR Telecom's common stock currently trades on the Toronto Stock
Exchange.
SR Telecom's registered head office and principal place of business is
located at 8150 Trans-Canada Highway, Montreal, Quebec, Canada, H4S 1M5 and its
telephone number is (514) 335-1210. SR Telecom's website is www.srtelecom.com.
The information on SR Telecom's website is not part of this proxy statement/
prospectus. SR Telecom's agent for service in the United States is CT
Corporation System, located at 111 Eighth Avenue, New York, NY 10011.
SR TELECOM'S BUSINESS
SR Telecom provides fixed wireless access solutions for use by
telecommunication service providers to serve their business and residential
end-users. SR Telecom's fixed wireless access solutions offer voice, data and
Internet connectivity for end-users located in urban, suburban and rural areas.
SR Telecom has broad
103
experience and an estimated 56% market share in rural fixed wireless access
telecommunications markets. Its products and installations have a track record
of consistent quality and reliability.
The network gap between the core telecommunications network and the
end-user can be bridged by several technologies that often involve laying wiring
between the subscriber and the core network. Fixed wireless access is an ideal
solution for bridging the access gap in networks where wiring is expensive,
nonexistent or difficult to deploy. Fixed wireless replaces the need for wiring
by deploying a central wireless site that can offer wireless connectivity to
subscribers who install a wireless terminal near or at their premises. In
addition, fixed wireless offers a combination of voice and data services on one
platform and can be deployed according to demand rather than as a large up-front
investment. Worldwide, governments have allocated radio frequency for the
provision of fixed wireless services both for residential and business end-user
applications. The growing demand for bandwidth with the emergence of the
Internet and other technologies has increased the role of fixed wireless because
it offers a cost effective way to offer broadband data connectivity to end-
users. In addition, governments in many countries with low numbers of telephone
lines per person in a given area, or tele-density, have introduced plans that
provide a strong incentive for service providers to reach underserved areas with
basic telephony and data service. SR Telecom's management believes that many
telecommunications service providers are focusing on the deployment of wireless
networks because of the inherent ability of wireless solutions to offer service
quickly to a large number of subscribers.
The following illustration shows how SR Telecom's products can be used to
provide a fixed wireless access system in a large geographical area. While this
illustration uses the SR500 system as an example, SR Telecom's other product
lines use a similar deployment architecture to provide different applications.
(SR TELECOM'S PRODUCTS USAGE ILLUSTRATION)
SR Telecom designs, engineers, manufactures, sells and installs
point-to-multipoint fixed wireless access systems for use by public and private
telephone and data networks worldwide. SR Telecom pioneered the use of
point-to-multipoint fixed wireless access radio systems and it has a broad
installed base of equipment. SR Telecom's products provide voice and data
transmission between a telephone exchange and telephone users and are an
alternative to wire and cable facilities. They are often used in rural areas
where, because of distance or other terrain considerations, traditional wire and
cable systems are not economical or suitable. In addition, some new carriers
that compete with the incumbent providers use SR Telecom's products to provide
simultaneous voice and data access to small and medium-sized businesses in urban
centers. SR Telecom's systems are also used in a growing number of private
networks owned and operated, for example, by power and other utilities, resource
developers, government departments and industrial concerns. The foregoing often
have
104
a need for highly reliable telephone and data transmission among scattered
facilities. The flexibility with which SR Telecom's products can be configured
to meet such needs, and the short time in which they can be installed and
commissioned, makes them a very attractive choice to such users.
Over the last 10 years SR Telecom has evolved from being primarily a
supplier of fixed wireless access systems to being able to provide its customers
full-scale turnkey projects, including installation, system integration, network
planning, maintenance and project management. This allows SR Telecom to meet the
needs of large scale telecommunications projects.
The following table provides information regarding SR Telecom's sales
during the last three years in the various geographic markets in which it
operates:
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
(THOUSANDS OF (PERCENTAGE OF (THOUSANDS OF (PERCENTAGE OF (THOUSANDS OF (PERCENTAGE OF
REGION CDN$) TOTAL REVENUE) CDN$) TOTAL REVENUE) CDN$) TOTAL REVENUE)
------ ------------- -------------- ------------- -------------- ------------- --------------
Latin America........... 23,076 12% 38,598 24% 56,896 30%
Europe and Africa....... 29,004 15% 18,483 11% 10,575 6%
Middle East............. 52,457 27% 28,156 17% 48,889 26%
Asia.................... 86,125 44% 70,681 44% 69,826 36%
Other................... 6,241 3% 5,569 3% 5,326 3%
------- --- ------- --- ------- ---
Total................... 196,903 100% 161,487 100% 191,512 100%
======= === ======= === ======= ===
The following table provides information regarding SR Telecom's revenues
during the last three years broken down by its main sources of revenue:
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
(THOUSANDS OF (PERCENTAGE OF (THOUSANDS OF (PERCENTAGE OF (THOUSANDS OF (PERCENTAGE OF
CATEGORY CDN$) TOTAL REVENUE) CDN$) TOTAL REVENUE) CDN$) TOTAL REVENUE)
-------- ------------- -------------- ------------- -------------- ------------- --------------
Equipment............... 146,118 74% 97,440 60% 134,584 70%
Services................ 34,911 18% 44,157 27% 34,826 18%
Telecommunications...... 15,874 8% 19,890 12% 22,102 12%
------- --- ------- --- ------- ---
Total................... 196,903 100% 161,487 100%* 191,512 100%
======= === ======= === ======= ===
---------------
* Percentages have been rounded to the nearest whole number.
HISTORY
SR Telecom began operations in 1975 as a division of Harris Canada Inc.,
which was then known as Farinon Electric of Canada Ltd. In 1981, the division
was purchased in a management-led buyout from Farinon and became SR Telecom Inc.
In 1986, SR Telecom Inc. completed an initial public offering in Canada.
In 1987, SR Telecom introduced the world's first high-capacity digital time
division multiple access system, the SR500. Upgraded and enhanced versions of
this product still generate most of SR Telecom's current revenue, especially
from rural voice applications. Over time SR Telecom has added products to its
portfolio to cover the applications, features and frequencies that its global
customer base is interested in, as well as new markets for fixed wireless, such
as small and medium-sized enterprises and rural U.S. carriers.
During the 1990s, the increasing availability of new telecommunications
products led many telecommunications service providers to rely on outside
vendors and manufacturers to install and maintain their equipment, rather than
their own in-house technical staff. In response to this, SR Telecom increased
the services it provided to its customers, from merely providing equipment to
providing full turnkey solutions.
In 2001, SR Telecom acquired the French assets of the Wireless Access
Solutions division of Lucent Technologies for CDN$2.9 million. The acquisition,
which added the SWING product line to SR Telecom's product portfolio, had an
immediate positive impact on SR Telecom's revenues and installed base.
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In 2002, SR Telecom acquired certain product-related assets from Nera
Telecommunications Inc. for CDN$500,000 plus limited royalties on future
revenues. This product, which was commercially launched under the name
"stride2400," is a 2.4 GHz unlicensed band access solution that delivers
carrier-grade voice capabilities as well as high-speed data for Internet access.
SR Telecom intends to primarily market stride2400 to rural telecommunications
carriers in the United States.
In early 2003, SR Telecom acquired from the receiver of Comdev the assets
and intellectual property associated with Comdev's CDMA2000 1xEV-DO product line
for US$635,000 plus limited royalties on future revenues. The product, which has
been branded shift, adds standards-based, high-performance broadband
capabilities to SR Telecom's fixed wireless access solutions portfolio.
SR Telecom has been awarded major contracts in a number of countries
including Australia, Canada, China, Hungary, Mexico, the Philippines, Thailand
and Saudi Arabia for the supply of its SR500, WL, Metropol and SWING systems.
Some of these contracts included turnkey responsibilities for the supply of
network equipment, network design, installation, maintenance, training and
project management services.
ORGANIZATIONAL STRUCTURE
Except as described below, SR Telecom's business is conducted directly, or
indirectly through wholly-owned subsidiaries. In addition, through its
majority-owned subsidiary CTR, SR Telecom provides local telephone service and
Internet access to residential, commercial and institutional customers, and
operates a network of payphones in a large, predominantly rural area of Chile.
SR Telecom has the following subsidiaries, which are wholly-owned unless
otherwise indicated:
COMPANY PLACE OF OPERATION BUSINESS OPERATIONS
------- ------------------ -------------------
Comunicacion y Telefonia Chile Rural local telephone operator
Rural S.A. (96% owned)
SR Telecom SAS France R&D facilities principally for the
SWING product line;
Regional sales office for Europe,
the Middle East and Africa
TDMA Services Co. Ltd. Thailand Repair center for Asia Regional
sales office for the Mekong region
SR Telecom (Shanghai) Co. Ltd. China Regional sales office for China
SR Telecom Philippines Inc. Philippines Regional Sales office for the
Philippines
Project office for administration
and installation of projects in the
Philippines
SR Telecom Pty Ltd. Australia Regional sales office
Project office for administration
of projects in Australia
SRT Telecommunications Ltd. Florida, USA Regional Sales office for Latin
America (except Brazil and Mexico)
and the U.S.A.
Telecomunicaciones Montreal, Mexico Repair center for Mexico
S.A. de C.V. Regional sales office for Mexico
SRT do Brasil Ltd. Brazil Regional sales office for Brazil
SRC South Africa Pty Ltd. (75% South Africa Sales and service company for South
owned) Africa
SR Telecom also has the following wholly-owned subsidiaries, which are in the process of being
wound up:
SR Telecom Corp Texas, USA R&D for the STRIDE product line --
moved to Montreal and France
SRT de Mexico S.A. de C.V. Mexico Regional sales office for Mexico --
operations now under
Telecomunicaciones Montreal, S.A.
de C.V.
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COMPANY PLACE OF OPERATION BUSINESS OPERATIONS
------- ------------------ -------------------
SR Telecom also has the following holding company wholly-owned subsidiaries:
SR (BV) Holdings Limited British Virgin Islands Holds CTR Holdings Limited
investment
CTR Holdings Limited British Virgin Islands Holds Servicios Rurales de
Telecomunicaciones S.A. investment
Servicios Rurales de Chile Holds CTR investment
Telecomunicaciones S.A.
The following SR Telecom subsidiaries are currently inactive:
Pacifican Telecom International Canada Inactive (holds 1% of SRT do
Brasil)
SR Telecom Ltd. United Kingdom Inactive
SR Telecom Subic Inc. Philippines Inactive
In 1996, CTR, an indirect wholly-owned subsidiary of SR Telecom, was
awarded concessions to operate local exchange carrier networks in ten zones of
rural Chile. In June 2001, CTR incorporated Rural Telecommunications Chile S.A.
as an indirect wholly-owned subsidiary to acquire network assets from Gilat-
To-Home Chile S.A. This acquisition was in exchange for 13% of CTR's total
issued and outstanding common shares. The valuation was based on the value of
Gilat-To-Home Chile's network assets and required Gilat-To-Home Chile to fulfill
certain ongoing obligations. CTR entered into this transaction in order to
improve its telecommunications assets. Pursuant to the requirements of the asset
purchase agreement, Gilat-To-Home Chile's shareholding in Rural
Telecommunications Chile was decreased by 8.9% to 4.1% as a result of its
failure to deliver certain equipment by specified deadlines. As a result, SR
Telecom's shareholding in CTR increased to 95.9%.
In December 2000, SR Telecom adopted a formal plan to exit its
telecommunication services business operated by CTR. However, on December 31,
2001, SR Telecom reversed its accounting treatment of CTR as a discontinued
operation, as SR Telecom's management believes any sale or disposition is
unlikely in the near term as a result of the uncertainty surrounding the South
American capital markets coupled with continuing weakness in the global
telecommunications industry.
SR Telecom also has two currently wholly-owned inactive companies, SRT de
Mexico S.A. de C.V. and Pacifican Telecom International Inc. (Canada). The total
combined assets of SR Telecom's subsidiaries, excluding CTR and RTC, constituted
12.4% of the consolidated assets of SR Telecom at December 31, 2002, and the
total combined revenues of such subsidiaries, excluding CTR and RTC, constituted
approximately 28% of the consolidated revenues of SR Telecom for the fiscal year
ended December 31, 2002. SR Telecom is in the process of dissolving SRT de
Mexico under Mexican law. Pacifican's only activity is to hold part of SR
Telecom's interest in SRT do Brasil Ltd.
There are no restrictions under Canadian law or the organizational
documents of any of SR Telecom's subsidiaries that restrict distributions from
the subsidiaries.
PRODUCT LINES
SR Telecom's products are used together to form point-to-multipoint
microwave telecommunications systems that connect telephone, Internet and data
users to a telephone exchange or control center.
SR Telecom currently sells products in six main families: the SR500,
Wireless Loop, Metropol, metroflex, SWING and Insight Network Management
Solutions software. SR Telecom has also recently introduced two additional
product families: stride2400 and shift. The term product family is used because
each product line consists of a number of components and user interfaces, which
may be assembled in different configurations to fit a wide range of different
customer applications. The applications can range from providing basic telephone
service to hundreds of communities to providing a data network to an electricity
generating authority or to a new wireless data service provider.
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SR500
Service providers around the world use SR500 systems to deploy rural
telephone networks, enterprise communication networks and, in some cases,
national data networks. The product offers a single wireless platform for the
distribution of voice, data and Internet services.
The SR500 is deployed in a hub-and-spoke, or point-to-multipoint
configuration. The SR500 central station, repeaters and outstations provide
wireless connectivity to the local telephone switch. In a typical SR500 rural
application, the physical distance from the user's phone to the exchange is
between ten and several hundred kilometers. Connections to sites that are beyond
line-of-sight due to distance or obstructions are achieved using repeaters. In
most cases, the final link from the outstation to the user's telephone has been
by wire, although SR Telecom can provide wireless connectivity through the
Wireless Loop product.
The SR500 is available in several frequency bands: 1.3 to 2.7 GHz, 3.5 GHz
and 10.5 GHz. These bands have been allocated by governments on a global basis
for fixed wireless services. The SR500 is used primarily to provide voice
service in rural areas, although it also can support dial-up Internet service at
speeds up to 500 kbps.
The SR500 can deliver services to thousands of subscribers within a 720
kilometer radius coverage area. Single and multi-line outstations terminate the
radio link and provide the necessary interfaces for the customer premises
equipment. Outstations can support both wireline interfaces and Wireless Loop
subsystems.
Additional subsystems such as solar power units, microwave towers and
antennas, test maintenance and repair facilities and, on occasion, rural
telephone exchanges can be supplied by SR Telecom to complete the end-to-end
solution for rural telephony provided by SR500.
WL500 WIRELESS LOOP SUBSYSTEM
Consisting of a wireless base station and a number of wireless subscriber
terminals, this product is used together with SR500 to provide a wireless
connection to the end-user's premises, providing the same voice and data
services without the need for a wireline connection. In effect, it replaces the
"last mile" of wire that is often required when one of SR Telecom's outstations
serves a cluster of subscribers. This offers telephone companies the ability to
have a high quality digital link directly to each user and avoid the high
maintenance and installation costs associated with wired connections. Wireless
Loop provides a 5 kilometer range without line-of-sight and up to 50 kilometers
with line-of-sight.
METROPOL
SR Telecom's Metropol point-to-multipoint system is a high-capacity fixed
wireless access system for service providers serving the small and medium-sized
enterprise market. The system links business customers to a service provider's
point-of-presence and provides integrated voice and data services. Metropol
offers bandwidth-on-demand in the 3.5 GHz and 10.5 GHz bands. The 10.5 GHz band
is used predominantly in Latin America and Asia for small and medium-sized
enterprise connectivity and services, and the 3.5 GHz band is used in several
regions for small and medium-sized enterprise connectivity as well as high-end
residential connectivity.
With Metropol point-to-multipoint, operators can provide businesses with
multiple voice lines, data links for local area network to local area network
connectivity and Internet access. Metropol is deployed in a hub-and-spoke
configuration, in urban and suburban areas, usually with few or no repeaters,
due to the small geographical areas covered.
Metropol point-to-multipoint also supports repeater stations that maximize
coverage, eliminate shadows and overcome obstacles to extend the network beyond
the central station's line-of-sight. Service providers can deploy Metropol
point-to-multipoint as a stand-alone wireless access technology or as an overlay
network.
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METROFLEX
metroflex is a point-to-multipoint broadband fixed wireless access system.
metroflex, unlike most of SR Telecom's other product lines, is a packet-based
system that handles Internet traffic as well as supporting legacy circuit-based
applications. metroflex is designed for service providers targeting small and
medium-sized enterprises, with advanced data services and broadband speeds.
metroflex is deployed in a hub-and-spoke architecture, with the base
station acting as the hub of the system, providing the network interfaces
connecting to core networking equipment, and the customer premise equipment,
which consists of an indoor unit and an outdoor subscriber radio, as the spokes.
metroflex operates in the 10.5 GHz frequency band.
SWING
In September 2001, SR Telecom acquired the French assets of Lucent
Technologies' Wireless Access Solutions division, and the SWING product line.
The SWING product line was developed by Lucent Technologies using the digital
enhanced cordless telecommunications standard, which is also used in cordless
telephony. For fixed wireless applications, this standard offers several
benefits: low cost mass-produced chipsets emanating from the global cordless
telephony industry and reduced requirements for radio frequency planning by the
service provider. The SWING product line is deployed in a hub-and spoke
architecture, and permits service providers to offer:
- toll-quality voice service, equal to or better than copper public
switched telephone network lines;
- fax and CLASS services, including call waiting, call forwarding,
automatic call back, caller ID, and others;
- 56 kbps high speed data service using a V.90 fax modem for Internet
access; and
- ISDN to offer a wide range of advanced features. ISDN stands for
integrated services digital network, a suite of internationally-adopted
standards for end-to-end digital communication over the public telephone
network.
SWING operates in the 0.5, 1.5, 1.9, 2.5 and 3.5 GHz bands.
INSIGHT NMS
Insight NMS is SR Telecom's powerful network management system. It allows
service providers to control and manage their access networks from local and
remote locations. Insight provides configuration, performance, fault and
security management. In addition, Insight's graphical user interface simplifies
all operations including local and remote software downloads. Insight can be
deployed to support any of SR Telecom's existing product families, and is
configured depending on the product it is supporting.
NEW PRODUCTS
In addition to its existing products, SR Telecom has also acquired
technology relating to two new product families. In early 2002, SR Telecom
acquired certain technology assets from Nera Telecommunications to develop the
stride2400 product. In March 2003, SR Telecom acquired from the receiver of
Comdev all of the assets and intellectual property associated with Comdev's
CDMA2000 1xEV-DO based product line, which SR Telecom has launched under the
name of "shift". While SR Telecom has launched shift, it has not yet received
any revenues either from it or from stride 2400.
STRIDE2400
Launched in February 2003, SR Telecom's stride2400 is intended for North
American rural operators who need a fixed wireless access solution to provide
telephone and broadband Internet service to rural customers. stride2400 operates
in the unlicensed 2.4 GHz band, enabling the service providers to avoid the
costs of obtaining radio spectrum.
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stride2400 is composed of two main functional elements. The base station is
an outdoor unit, deployed and managed remotely from the service provider's
central office. The base station connects to the central office through backhaul
equipment and services. The remote terminal station subscriber premise equipment
is an outdoor unit that delivers voice and data services to subscribers.
stride2400 end-user equipment can be connected to a digital subscriber line for
broadband data services.
SHIFT
shift is a broadband fixed wireless access solution based on third
generation wireless technology (CDMA2000 1xEV-DO), which is widely accepted in
mobile telephony to combine voice and data wireless communications on a common
platform using commodity chipsets. This solution is a competitive alternative to
DSL and cable modem services, and a complementary technology when DSL and cable
modem technologies are not economically viable or technically feasible. shift
allows national and regional service providers to offer broadband Internet and
data services to small and medium-sized enterprises and residential users. It
delivers full multimedia Internet connectivity to a multitude of end-user
devices including laptop, palmtop and desktop computers at speeds of up to 2.4
Mbps.
A complete shift system is composed of three main functional elements.
First, the access point acts as the shift base station and is provided by SR
Telecom. shift's second element is the core network management software, which
manages work sessions with end-users and performs user authentication and
provisioning. It also generates billing information and enables Internet access.
shift's third element, the end-user access terminal can take the form of either
a stand-alone desktop device, for connection to a desktop PC, or a PCMCIA card
that plugs directly into a laptop PC. The access terminal can be sourced from a
variety of third-party suppliers, and is not provided by SR Telecom.
An IP packet based-system, shift operates in the 800 MHz and 1.9 GHz
frequency bands.
MANUFACTURING
SR Telecom manufactures its products at its facilities in Montreal, Quebec.
Manufacturing activities in Montreal include mounting electronic components
onto printed circuit boards and the integration of these boards into
higher-level subassemblies and systems. To the extent possible, SR Telecom uses
a number of different suppliers to supply most parts. In addition, when required
as part of a customer order, SR Telecom will procure certain finished products
to integrate with its own manufactured products. These include microwave
antennas, microwave towers and solar power subsystems.
As part of the Lucent wireless access services acquisition, SR Telecom has
an agreement, renewable annually, with Viasystems Inc. for the subcontract
manufacturing of the SWING product line in Viasystems' facility located in
Rouen, France. Viasystems filed for Chapter 11 protection from creditors in 2002
and its French operations were placed at that time with an administrator in
bankruptcy who has recommended liquidation of that site. SR Telecom is pursuing
several options to maintain the delivery of the SWING products to customers. An
offer has been submitted to the receiver in late April 2003 by a third party. If
this party is successful in the acquisition of the Viasystems' facility, SR
Telecom intends to negotiate a replacement sub-contracting agreement with this
party or else to repatriate manufacture of the SWING product to Canada.
In 1996, SR Telecom obtained ISO 9001 certification for its Montreal
facilities and in 2003 received its ISO 9001:2000 certification update.
SERVICES
SR Telecom provides project management services, including network design,
installation and network construction to its customers. SR Telecom also trains
its customers' employees in the installation, operation and maintenance of SR
Telecom equipment.
110
SALES AND MARKETING
SR Telecom employs its own professional sales force to deal directly with
customers, often in conjunction with local representatives or distributors. SR
Telecom's sales to carriers either involve a sale of equipment to be installed
by the telecommunications carrier or an in-country contractor, or a project
contract pursuant to which SR Telecom undertakes responsibility for
commissioning, installing, project management and buildout of the fixed wireless
network. SR Telecom makes its sales on a variety of terms, depending on the
customer and the project, with common terms including payments due upon
completion milestones for turnkey projects, monthly invoices as products or
services are provided and payments secured by letters of credit.
A typical sales cycle for a first-time major customer may take several
years and includes activities such as:
- preliminary marketing visits;
- technical seminars to the customer's staff;
- visits by customers to SR Telecom's facilities;
- analysis of the customer's needs;
- preparation of a request for tender by the customer;
- the response to a customer's tender, which is often competitive; and
- contract negotiations.
In some cases, the customer may wish to start with a limited field or
technical trial of SR Telecom's products before making the final decision to
proceed. Once a customer makes that initial decision to purchase and has
installed SR Telecom's products in its telecommunications network on a full
scale committed basis, SR Telecom typically expects expansions resulting in
additional business. Such expansions may include the addition of subscribers or
new subscriber sites, as well as complete new systems to serve new areas. In any
given year, approximately two-thirds of SR Telecom's sales in the three-year
period from 2000 to 2002 were repeat orders from existing customers. This is a
fundamental characteristic of SR Telecom's business and a key factor in its rate
of growth. In SR Telecom's experience, once a customer has standardized on one
of SR Telecom's products, expansions and upgrades generally arise in subsequent
years.
In order to respond successfully to larger requests for tenders and complex
projects, SR Telecom provides project management and installation services. SR
Telecom is able to undertake turnkey fixed wireless access telecommunications
projects virtually anywhere in the world independently or through other prime
contractors.
Key targeted markets for SR Telecom's sales and marketing activities are
certain regions within the Asia-Pacific, Latin America, Europe and Africa, and
Middle East regions. Since a substantial part of SR Telecom's business is repeat
business, SR Telecom gives a high priority to maintaining good relations with
its customers and providing a high level of service after sales. To this end,
regional sales, service or project offices are opened at strategically selected
locations around the world to provide SR Telecom's customers with sales and
technical support, as well as to develop new markets. Worldwide office locations
include Australia, Bolivia, Brazil, China, France, Indonesia, Mexico,
Philippines, Saudi Arabia, South Africa, Thailand and the United States.
CUSTOMERS
SR Telecom sells to incumbent local exchange carriers, competitive local
exchange carriers and owners of private telecommunications networks.
The primary group of customers for SR Telecom is comprised of incumbent
local exchange carriers. In 2002 this group accounted for a majority of SR
Telecom's sales. SR Telecom's products for telephony are installed primarily,
but not exclusively, in areas where tele-density is low. SR Telecom's SR500,
SWING and Wireless Loop products are ideally suited for this market.
111
The second customer group consists of competitive local exchange carriers
who offer competitive voice and data services in both developing and developed
countries. The Metroflex and Metropol systems address this market, which is
characterized by the need for small and medium-sized business applications, such
as 64 kbps and n x 64 kbps data circuits and high quality voice, fax and
Internet connectivity.
The third group of customers for SR Telecom's systems consists of users who
operate their own private telecommunications networks. Such customers include
energy-generating companies (electricity and gas), pipeline operators (oil and
gas), resource companies (mining, exploration, etc.), and industrial and service
organizations with scattered facilities. These organizations, generally spread
out over wide geographical areas, require highly reliable voice and data
communications to control crucial factors of their operations. SR Telecom's
products are used for transmission and monitoring and control signals otherwise
known as Supervision, Control and Data Acquisition.
SR Telecom provides training courses to its customers in the operation and
maintenance of its products as well as in network design. These training courses
are provided by a team of professional instructors at SR Telecom's headquarters,
regional offices or, when appropriate, at the customer's premises. Training is
not only important from a technical point of view but also in maintaining an
ongoing relationship with the customer's staff.
As of December 2002, SR Telecom's systems had been purchased for use in
over 110 countries. SR Telecom's current installed base includes more than 1.5
million subscriber lines.
SR Telecom's products require the use of certain radio frequencies that are
generally licensed by governmental agencies to the carrier. The vast majority of
SR Telecom's products are designed to use frequencies which governments have
previously allocated to its customers, which minimizes the need to seek
additional governmental approvals. Governments typically allocate these radio
frequencies to promote competition or to support the provision of telephony
services in underserved regions.
COMPETITION
SR Telecom has several categories of competition or potential competition
in the rural voice telecommunications market for its SR500 and Wireless Loop
products.
- The first of these includes all the traditional methods of connecting
telephone and data subscribers: pole lines with open wire or overhead
cable, buried cable and electronic systems designed to enhance these
methods. The choice between using SR Telecom's systems or one of these
other methods is generally determined by an engineering and economic
feasibility study performed by the customer.
- A second category is that of other radio methods of connecting
subscribers. Cellular mobile radio systems can be used in a fixed mode
(non-mobile) to provide subscriber telephone service. Such products are
designed to mobile standards and currently cannot meet the high quality
requirements for the fixed service that SR Telecom's products meet. They
also typically offer a lower data rate when compared to SR Telecom's
products. Since cellular systems are optimized for very high-density
subscriber applications, they are generally not economical in the rural
situations where SR Telecom's products are traditionally used. In
addition, cellular systems need a means to connect the various cells of a
network together (a backhaul or trunking system) which adds significantly
to their cost, whereas this backhaul is an integral part of SR Telecom's
product design architecture.
- A third category is that of satellite-based systems, which are used to
provide telephone service to some extremely remote locations where
terrestrial facilities would clearly be far too expensive or impractical.
Most of the above-mentioned technologies have applications in mobile or
other than rural or local private network telecommunications, whereas SR
Telecom's products are specifically designed to fit these niches.
Another category of competition comprises companies that have developed and
are manufacturing point-to-multipoint systems in direct competition with SR
Telecom's systems in rural applications, in particular, Intracom.
112
Wireless Loop competitors include Airspan, Alvarion, Huawei and NEC.
With the Metropol and Metroflex families, SR Telecom faces other
competition from similar technologies. To date, competition has been seen from,
among others, Alvarion, Harris, Marconi, Netro, Airspan and Cambridge Broadband.
No one product currently on the market combines all attributes of the
stride2400. SR Telecom is aware that there may be some companies currently
developing products that would more directly compete for the rural U.S. customer
niche. However, none of such products have yet been launched. ADTRAN is a
currently existing product using a different technology that competes indirectly
but may not be economically appropriate for U.S. rural customer applications.
shift may face competition from other 1xEV-DO technology providers
including Nortel, Ericsson, Lucent Technologies, LG Electronics, Samsung,
Hitachi and Motorola. These providers' products are sold for use in mobile
applications. Once produced, shift will have the mobility option disengaged for
use in fixed applications which allows service providers to deploy the
technology to a different market. shift retains the ability to be used as a
mobile technology which the service provider could then sell at an increased
price to its mobility customers. Indirect competition comes from broadband fixed
wireless access technology, wireless local area network technology, ADSL and
cable modem providers.
Newcomers face severe barriers to entry including high initial research and
development costs, a long product development phase and sales cycle and the
existence of an installed base of current manufacturers' products. Since the
current manufacturers' products are not compatible with one another and all are
based on proprietary designs, network expansion is normally done with the
manufacturer whose product has been installed first.
SR Telecom continuously monitors new technologies to determine whether they
represent potential new competition. New technologies include such things as
future fiber-optic cable to individual subscribers, digital cellular, PCS
systems and mobile satellite systems. Fiber-optic links are more expensive than
wire or cable links and are otherwise no different from the traditional methods
described earlier when used for basic telephone service. New digital cellular
mobile systems can be adapted to provide fixed subscriber service but suffer
from the same disadvantages as existing analog systems and remain more
expensive. Competition from such technologies can exist however, especially in
situations where subscriber density is relatively high or located near an urban
area or existing cellular infrastructure.
Until 2002, prior to the acquisition of Netro, SR Telecom's business niche
was wireless access rural market. Management is not aware of any analyst firms
currently quantifying this sector. Accordingly, SR Telecom hired a consultant,
Louis Caouette Inc, to estimate the wireless access rural market, to assess the
demand by major countries, and to assess SR Telecom's position among traditional
competitors.
The consultant concluded, based on the data available and related
assumptions, that the size of the wireless access rural market was between
US$120 million and US$135 million in 2001. It was also concluded that SR
Telecom's market share in 2001 was between 56% and 66%. To be conservative, SR
Telecom publicly says that its market share in this very narrow niche was 56%.
SR Telecom has several advantages over its competitors:
- Point-to-multipoint technology with a twenty year track record, which
provides a wide variety of features:
- Fully digital, cost-effective interfaces, including V5.2;
- Efficient use of radio spectrum by means of TDMA technology;
- High quality voice service, which is far better than fixed cellular;
- Support for all CLASS services, such as Caller ID;
- Support for V.90 modems at maximum speed;
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- Support for a variety of end-customer densities with a variety of
terminal sizes from 2 to 100 lines for customer network demand
flexibility;
- Support for data services to speed up to 512 kbps;
- A local presence in many countries on six continents with sales offices
in thirteen countries and project offices in ten countries; and
- The ability to provide a full suite of before and after sales services to
the customer including engineering, network planning, project management,
installation, local support, technical support, training and maintenance.
Most competitors do not provide all these services, which are often
requested by customers.
However, SR Telecom suffers from several competitive disadvantages:
- Some customers demand an extremely low price per telephone line, to the
detriment of voice quality, data capability and grade of service quality.
In these situations, mobility systems used in a fixed configuration might
have a competitive advantage.
- Other customers demand data capabilities which either exceed the speed
that SR Telecom's equipment can provide, or are in a mix of data and
voice that is beyond the capabilities of SR Telecom's technology. In
these situations, certain products of SR Telecom's competitors can have a
competitive edge over SR Telecom's products.
- Still other customers demand specific technologies, such as VoIP, CDMA or
GSM, that are not compatible with SR Telecom's products. In these
situations, SR Telecom is at a competitive disadvantage.
RESEARCH AND DEVELOPMENT
As of December 31, 2002, SR Telecom had a full-time staff of 188 engineers
and technicians dedicated to research and development, 137 of whom were located
in Montreal, 10 in Texas and 41 in France. SR Telecom's laboratories are
equipped with all the necessary resources to carry out research and development
in microwave radio, digital and analog circuitry, network management, mechanical
packaging, circuit and packet switching and software systems.
The research and development efforts are devoted exclusively to the
development of SR Telecom's products. Activities include developing new
products, improving existing products, introducing new technologies into
existing products to improve performance and reduce manufacturing costs and
making design changes that will further increase the product's flexibility and
the number of customer applications that SR Telecom's products can effectively
serve.
An important feature of SR Telecom's research and development activities
are the field trials it conducts with key customers to examine and confirm the
ability of SR Telecom's products to operate in new configurations and carry new
types of telecommunications traffic. Expenditures by SR Telecom on research and
development over the five years ended December 31, 2002 are as follows:
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN THOUSANDS OF CANADIAN DOLLARS)
Gross expenditure......................... 28,555 26,048 28,255 23,686 23,943
Government grants and investment tax
credits................................. 7,219 7,009 9,166 7,881 7,629
------ ------ ------ ------ ------
Net expense............................... 21,336 19,039 19,089 15,805 16,314
====== ====== ====== ====== ======
The gross amount spent in recent years on research and development is
typically within the range of 10 to 15% of sales. In some years, it was
necessary to exceed this range to complete key research and development
activities to achieve and maintain SR Telecom's market lead. These percentage
figures are considered appropriate by SR Telecom to maintain its technological
competitiveness. SR Telecom expenses all research and development expenditures
in the year in which they occur.
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SR Telecom believes that its business is not materially dependent upon
patents and relies primarily upon the expertise of its employees and continued
research and development activities to maintain a competitive advantage. In
addition, many of SR Telecom's products rely on commercially available chipsets
from similar telecommunications wireless technologies.
BUSINESS AND GROWTH STRATEGY
SR Telecom's goal is to grow profitably while maintaining or increasing its
market share and expanding into new but related markets for fixed wireless
products.
SR Telecom's strategies for achieving this goal are:
- Product development
- To introduce new products and application features to extend the use of
point-to-multipoint radio systems to a broader range of
telecommunications customers, thereby increasing SR Telecom's market.
- To add new products that expand SR Telecom's market and make its
products as a whole more attractive to its customers.
- To reduce the average cost per subscriber through technological
innovation. This will serve both to increase the competitiveness of the
product family and justify its use in a larger number of situations when
compared with alternative technologies.
- Technology acquisitions
- To add new technologies to the product mix that expand its potential
market and make its products as a whole more attractive to its customers
at a lower cost than developing such technologies internally.
- Manufacturing
- To increase SR Telecom's manufacturing productivity and capabilities by
increasing automation.
- Where appropriate, to enter into long-term subcontracting or outsourcing
arrangements in order to gain access to economies of scale and scope in
purchasing and manufacturing.
- Sales and marketing
- To capitalize on long-term relationships developed with key customers in
a number of countries to ensure that ongoing orders are received.
- To expand into countries and regions that SR Telecom has not previously
served in order to increase SR Telecom's installed base and consequently
the amount of repeat business.
- To open sales and service offices when justified to ensure that the
appropriate support is given to customers.
- To maintain existing relationships and pursue new ones with major
international prime contractors bidding on large telecommunications
projects.
- To maintain and develop its international project management and
installation skills to permit successful bidding and implementation of
future turnkey projects.
- To increase the focus of business on its 3 main customer bases:
- Rural and Suburban Residential (Telecommunication service providers)
- Urban Business (Largely newly created carriers)
- Industrial (Supervisory Control and Data Acquisition Industrial
applications)
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CTR
The following provides a brief narrative description of the business,
history and certain points of operational interest relating to CTR.
In 1995, SR Telecom identified a new business opportunity to provide local
telephone service and Internet access in a large area of Chile that is
predominantly rural and was without fixed phone service. The former state owned
local phone company Cia. Telefonos de Chile had a monopoly on local and long
distance service until 1994. Since deregulation, competition has increased
significantly in the highly populated areas such as Santiago. However, the vast
rural regions remained generally unserved. CTR was created to address this
opportunity, and is currently managed by a team of Canadian and Chilean
personnel, supervised by SR Telecom.
In December 2000, SR Telecom decided to divest itself of its investment in
CTR because CTR was not part of SR Telecom's core business. This decision
necessitated the reporting of CTR's results as a discontinued operation. In
December 2001, SR Telecom reversed its treatment of CTR as a discontinued
operation. Consequently all financial information of SR Telecom for the fiscal
year ended December 31, 2002 included in this proxy statement/prospectus present
the operations of CTR as part of continuing operations. For the year ended
December 31, 2002, CTR contributed CDN$15.9 million in revenues, or
approximately 8.1% of SR Telecom's consolidated revenues.
Since 1996, CTR has participated in different bids through the Fondo de
Desarrollo de las Telecommunicaciones organization of the Ministry of Transport
and Telecommunications, whose objective is to stimulate the roll-out of
telephone and Internet services to rural areas of the country. CTR has been
awarded 53 concessions to provide service in selected rural areas along with a
concession to provide service to the city of Curico.
The 10 zones covered by CTR encompass an area of 300,000 square kilometers
with a total rural population of approximately 1.4 million.
The concessions granted to CTR allow an exclusive right of coverage over a
30-year period in the 1.5 GHz and 2.4 GHz radio bands. These bands are ideally
suited for SR Telecom's SR500 point-to-multipoint products. In total, rights to
the exclusive use of 25 frequency pairs in these bands have been granted. In
addition to the concessions, CTR was given exclusive access to the 370 to 380
MHz frequency band which permits the use of SR Telecom's Wireless Loop
technology.
The concessions awarded through the Fondo de Desarrollo de las
Telecommunicaciones obligate CTR to provide telephone service by means of public
telephones for a minimum 10-year period. These concessions will require ongoing
maintenance until the year 2010.
CTR may also provide pay telephone service at locations it selects itself,
as well as commercial or residential service throughout its coverage area. At
the end of 2002, CTR operated 4,767 commercial payphones and provided private
telephone services to 16,511 residential, commercial and institutional
subscribers. In addition, CTR is providing other services including Internet
access, prepaid cards, dedicated data services and complementary services
including voice mail, toll-free and 800 numbering.
Other than as stated above, the concessions are non-exclusive in that
others are free to apply for similar concessions. However there is no assurance
for any applicant that spectrum will be available. A number of other carriers,
including Cia. de Telefonos de Chile, the Chilean incumbent local exchange
carrier, offer telephone service in larger towns within the ten zones and
currently use conventional wire and cable technology. The cellular network in
Chile is expanding rapidly and represents CTR's principal competition.
CTR's business plans do not call for the expansion of the network into
larger towns already served by others. As SR Telecom has the exclusive right to
use clearly defined frequency pairs, which are the only frequencies currently
available for fixed wireless access service, any competition for local service
would have to be provided by more expensive traditional wire line or cellular
networks. Because of certain cash flow restrictions, investment in the network
will be limited to those required to improve service and reduce customer churn.
116
On December 31, 2001 SR Telecom wrote down certain long-lived network
assets by approximately CDN$58 million to reflect their estimated recoverable
amounts. As of December 2001, SR Telecom determined that the estimated future
undiscounted cash flows from the long-lived assets of CTR were insufficient to
recover their carrying amount, and as a result, wrote-down the carrying value of
the telecommunication networks to their estimated recoverable amounts. The net
cost of the telecommunications network assets including construction in progress
as at December 31, 2002 was CDN$113.9 million, compared to CDN$113.7 million as
of December 31, 2001.
The capital required by SR Telecom's wholly-owned Chilean subsidiary,
Comunicacion y Telefonia Rural, or CTR, for completion of its network has been
provided by equity investments and loans from SR Telecom of approximately US$68
million in the aggregate. Export Development Canada, a Canadian governmental
agency and the InterAmerican Development Bank of Washington have also provided
US$50 million in term debt financing. As of June 16, 2003, a principal amount of
US$38 million was outstanding. Payments of principal and interest are due in
semi-annual installments until maturity in 2007 and 2008. Currently, the lenders
would have full recourse against SR Telecom for the full amount of the loans, if
performance, financial performance and financial position covenants are not met.
While CTR and SR Telecom have not met all of these covenants, default of the
covenants has been waived by the lenders until February 13, 2004, in return for
a fee paid by SR Telecom. While CTR does not expect to meet these covenants in
the foreseeable future, these covenants were waived in previous years and SR
Telecom believes that these covenants will continue to be waived on an annual
basis until the balance of the amounts outstanding are repaid or the debt is
refinanced. However, there can be no assurance of an additional waiver in
February 2004 or after that date. If the lenders decline to waive the defaults,
all amounts due under the loans, including principal and interest and other
fees, could be declared due and immediately payable. In addition, if Export
Development Corporation and Inter-American Development Bank accelerated the
loans, a default would be triggered under SR Telecom's public debentures and its
bank indebtedness, which means that all amounts due and payable under the
debentures could also be declared due and payable.
Counterparts for both long-term project financing facilities are
governmental export or development financing organizations. CTR's term loans
rank pari passu and are secured by a pledge of all of the assets of CTR and a
pledge of the shares in the share capital of CTR and intermediate holding
companies. SR Telecom has also agreed to provide CTR with the necessary funds
and resources to complete the network as well as maintain its initial equity
investment in CTR. Currently, CTR is approximately 3,000 lines short of
achieving construction completion. Although SRT has committed to provide the
necessary funds to achieve this construction completion, the ultimate amount of
funds required is not determinable at this time. The amount may vary depending
on whether CTR decides to construct the lines itself or purchase them from
another carrier. Furthermore, the amount of funds that CTR will be able to
contribute towards this construction is not known at this time. The
InterAmerican Development Bank and Export Development Canada have been provided
with full recourse against SR Telecom in certain circumstances, but the recourse
against SR Telecom would be limited to an aggregate amount of US$12 million if
CTR meets certain requirements, including installation of 22,500 telephone
lines, consisting of 19,500 commercial lines and 3000 public payphones. The time
and cost of completing the network cannot be estimated at this time due to the
state of the economy in Chile and other factors such as cancellation of service
by customers on lines installed by CTR, which would be deducted from the number
of lines installed to date. SR Telecom will be released from such obligations
once CTR meets certain financial milestones. In certain limited circumstances,
such as non-completion of the project or the failure by SR Telecom to complete
the network project, SR Telecom would be required to fund CTR. In addition, SR
Telecom may have to provide credit enhancements to Export Development Canada and
the InterAmerican Development Bank in a form agreeable to Export Development
Canada and the InterAmerican Development Bank. The combined company will be able
to support the current debt repayment structure of CTR without impairment to the
combined company's results of operations.
On June 30, 2001 Rural Telecommunications Chile S.A., an indirect
wholly-owned subsidiary of CTR, acquired network assets from Gilat-To-Home Chile
S.A. in exchange for 13% of CTR's total issued and outstanding common shares.
The transaction was measured using the estimated fair value of the assets
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received of CDN$14.6 million. The reduction in the direct and indirect ownership
in CTR resulted in a dilution gain of CDN$9.4 million. SR Telecom's consolidated
statement of earnings for the year ended December 31, 2002 includes revenue and
expenses related to the acquired network assets from July 1, 2001, to December
31, 2002. In 2001, the resulting non-controlling interest was allocated losses
to the extent of their equity. As a result of failing to meet certain
performance requirements contained in the asset purchase agreement,
Gilat-To-Home Chile S.A.'s shareholding in Rural Telecommunications Chile
decreased by 8.9% to 4.1%. SR Telecom's resulting increase in the direct and
indirect ownership in CTR resulted in an estimated charge to earnings of
CDN$3.97 million, subject to final negotiations.
Fifty-six concessions of public telephone service and one data transmission
concession have been transferred from Gilat-To-Home Chile to Rural
Telecommunications Chile. These telephone concessions include or cover virtually
all of the country's land mass and will be in force, in favor of Rural
Telecommunications Chile, for 30 years. The terms of all payphone concessions
run until 2009.
INTELLECTUAL PROPERTY
SR Telecom relies on a combination of copyright, trademark, trade secret
rights, licensing and confidentiality agreements in order to develop and protect
its property technology. SR Telecom currently holds, through the acquisition of
intellectual property rights from Nera Wireless Broadband Access A.S. in March
2002, nine United States patent and patent applications. SR Telecom has also
acquired from Lucent Technologies certain of its intellectual property rights in
and to SWING products including the object code and the source code relating
exclusively to Lucent's SWING business. Although SR Telecom has been granted a
license to every patent which was issued to Lucent or a related company thereto
with respect to technology needed to manufacture and sell the SWING products, SR
Telecom cannot ensure that Lucent Technologies would enforce its rights against
potential infringers.
Notwithstanding SR Telecom's efforts to protect its proprietary rights,
existing copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do not protect its
proprietary rights to the same extent as do the laws of the United States.
Attempts may be made to copy or reverse engineer aspects of SR Telecom's
products or to obtain and use information that SR Telecom regards as
proprietary. Accordingly, SR Telecom may not be able to protect its proprietary
rights against unauthorized third-party copying or use. Furthermore, policing
the unauthorized use of SR Telecom's products is difficult. Litigation may be
necessary in the future to enforce SR Telecom's intellectual property rights, to
protect its trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on SR
Telecom's future operating results.
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights to technologies in various jurisdictions
that are important to SR Telecom's business. Any claims could be time-consuming
to deal with, result in costly litigation, divert the efforts of SR Telecom's
technical and management personnel, cause product shipment delays or require SR
Telecom to enter into royalty or licensing agreements, any of which could have
an adverse effect on SR Telecom's operating results. Royalty or licensing
agreements, if required, may not be available on terms acceptable to SR Telecom,
if at all. In addition, SR Telecom's sales agreements, oblige it to indemnify
its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties.
HUMAN RESOURCES
At December 31, 2003, SR Telecom (including CTR) had 1,054 employees.
In its core business, 136 employees worked in manufacturing, 188 in
research and development, 412 in sales, marketing, customer support and service
and 76 in administration and general management. All employees are
non-unionized, except for approximately 150 unionized CTR employees in Chile.
They are predominantly technicians and are represented by one union. The
collective bargaining agreement expires in April 2004. CTR employs a total of
242 persons in Chile. SR Telecom considers relations with employees to be very
good.
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FACILITIES
SR Telecom owns a modern 125,000 square-foot building located on 332,000
square feet of land in Montreal, Quebec, Canada, which contains manufacturing,
research and development and office facilities. This is SR Telecom's
headquarters.
SR Telecom also leases land and buildings for its sales and service offices
worldwide, the principal offices of which are located in France, Mexico, the
Philippines and Saudi Arabia. SR Telecom does not believe that any of these
leases is material to its operations.
ENVIRONMENT
As a global company SR Telecom adheres to strict environmental standards
both at the local and international level. Its products have life span of 10 to
15 years and provide telecommunications access to regions that cannot be covered
by the wire line infrastructure, and are designed to reduce the environmental
impact of network deployment.
SR Telecom has implemented Workplace Hazardous Material Information Systems
procedures and policies, and periodically reviews the environmental requirements
at the federal, provincial, regional and municipal levels that apply to SR
Telecom's facility.
SR Telecom has a health and safety committee to evaluate environmental or
social concerns that may arise.
AVAILABLE INFORMATION
SR Telecom's website is www.srtelecom.com. SR Telecom makes its annual
reports and annual information form filed with the various securities
commissions in Canada and any amendments to those reports available free of
charge on or through its website. Information on SR Telecom's website is not
incorporated by reference in, and is not a part of, this proxy
statement/prospectus.
LITIGATION
HAITI ARBITRATION
In December 2001, SR Telecom filed a statement of claim in New York for
US$4.86 million against MCI International and Telecommunications d'Haiti,
S.A.M., or Teleco de Haiti. The claim was filed pursuant to a clause mandating
three party arbitration before the International Court of Arbitration in respect
of funds which ceased flowing to SR Telecom under a Tripartite Agreement between
Teleco de Haiti, MCI International and SR Telecom. The agreement provides for
the financing of a contract between SR Telecom and Teleco de Haiti pursuant to
which SR Telecom was to supply and install certain telecommunications equipment
for Teleco de Haiti for approximately US$12.88 million. In July, 2002, MCI
International filed for bankruptcy and the United States Bankruptcy Court issued
an order staying all collateral litigation against MCI International, including
this arbitration. As a result, MCI International continued in the proceeding as
an observer. In February 2002, Teleco de Haiti filed a counter-claim for US$1.2
million in respect of funds transferred to SR Telecom since the execution of a
termination agreement between SR Telecom and Teleco de Haiti, alleging that such
termination agreement ended their obligations under the Tripartite Agreement.
The arbitration is proceeding with MCI as an observer.
On April 24, 2003, the arbitration tribunal rendered a decision, denying
both the claim by SR Telecom against Teleco de Haiti and the counterclaim by
Teleco de Haiti against SR Telecom. However, the arbitration tribunal also held
that the termination agreement preserved and did not extinguish SR Telecom's
right to continue to receive payments from MCI under the Tripartite Agreement.
Prior to the decision, SR Telecom filed a claim for US$4.8 million against MCI
International with the United States Bankruptcy Court and SR Telecom cannot
determine what amount, if any it may recover from MCI International. If MCI
accepts the Tripartite Agreement then SR Telecom would have claims on both
pre-petition amounts paid (based on the consolidation motion) and post-petition
amounts up to the full amount still due. Such post-
119
petition and future flows of funds would be paid from the MCI/Teleco Voice
Settlement Account. To date, MCI has not objected to the Proof of Claim, nor has
it rejected the Tripartite Agreement. If SR Telecom cannot recover a substantial
amount from MCI International, it could have a material impact on SR Telecom's
results of operations.
GHANA ARBITRATION
In August, 2000 SR Telecom entered into a contract with SSNIT (Ghana) for
US$4.5 million to upgrade its pension plan database and related items. SR
Telecom subcontracted Jasmin Consulting Services Inc. to perform the work under
this contract. Although no formal agreement was finalized between SR Telecom and
Jasmin, a verbal understanding was reached that payment of Jasmin's invoices was
to be on a "pay-on-pay" basis. SR Telecom issued a performance bond to SSNIT in
the amount of US$406,000 expiring August 2, 2002. In February, 2001, SSNIT
halted payment of SR Telecom's invoices and SR Telecom, in consultation with
Jasmin, decided to stop the work until SSNIT resumed payment of its invoices.
Jasmin thereafter sued SR Telecom for failure to make payments under the
subcontract claiming US$1,262,773 plus special damages plus interest plus costs
based on terms of net 30 days from receipt of Jasmin's invoices. SSNIT called
the performance bond for an alleged breach of contract by SR Telecom and SR
Telecom alleged that the call by SSNIT was wrongful, and filed a claim with
Export Development Canada under its Export Development Canada Performance
Security Insurance policy for reimbursement of the US$406,000 payment. Parties
have been discussing resolution and if they fail to reach an agreement will go
to arbitration. Discovery concluded in this matter in May 2003. The court
dismissed in its entirety Jasmin's motion for summary judgment to dismiss SR
Telecom's counterclaims against Jasmin and against Andrea Smith personally. The
arbitrator also awarded costs to SR Telecom. SR Telecom is uncertain at this
time what the amount of costs to be awarded will be, but believes it could be
over CDN$100,000.
If SR Telecom were to lose this arbitration and be forced to pay the full
amount of damages it could be material to SR Telecom's results of operations,
but SR Telecom believes it is unlikely that that will happen.
CTR LITIGATION
Development and Engineering of Software Ltda. filed a claim against CTR for
breach of a contract to update CTR's computer software in the amount of Chilean
peso 200 million (approximately US$261,602). CTR filed a counter-claim for
US$1,534,012 million for breach of contract, specifically the failure to provide
services contracted for. The first witnesses in the case were called at the end
of April 2003.
INDUSTRY DATA
The information SR Telecom uses in this proxy statement/prospectus
concerning the fixed wireless access market, its general expectations concerning
this industry and the market positions and market shares of SR Telecom and its
competitors are based on estimates SR Telecom prepared using data from publicly
available industry sources as well as from various research analysts' reports,
market research and industry analyses, and on assumptions SR Telecom has made,
based on data and its knowledge of this industry, which it believes to be
reasonable. While SR Telecom is not aware of any material misstatements
regarding any industry or country data presented herein, its estimates,
particularly as they relate to its general expectations concerning the wireless
telecommunications industry, involve risks and uncertainties and are subject to
change based on various factors, including those discussed under the caption
"Risk Factors" in this proxy statement/prospectus.
Information concerning rural telecommunications markets found in this proxy
statement/prospectus is based in part on a study conducted by a consultant hired
by SR Telecom. Industry and company data are approximate and reflect rounding in
certain cases.
SR TELECOM SECURITIES HELD IN THE UNITED STATES
1,522,410 shares of SR Telecom common stock are held in the United States
by 22 registered holders as of March 31, 2003.
120
HISTORICAL STOCK PRICE DATA
Shares of SR Telecom's common stock are listed on the Toronto Stock
Exchange and traded under the symbol "SRX." Following the effective time of the
merger, shares of SR Telecom common stock will be listed on the Nasdaq National
Market. The table below sets forth for the periods indicated the high and low
sale prices per share of SR Telecom common stock, in Canadian dollars, and the
average daily trading volume on the Toronto Stock Exchange. Netro stockholders
will receive shares of SR Telecom common stock as part of the merger. For
current price information with respect to shares of SR Telecom common stock, you
are urged to consult publicly available sources. No assurance can be given as to
future prices of, or markets for, shares of SR Telecom common stock, or the
effect of the merger on prices of, or markets for, shares of SR Telecom common
stock.
SR TELECOM COMMON STOCK
---------------------------------------
DAILY AVERAGE
HIGH LOW TRADING VOLUME
--------- -------- ----------------
(CANADIAN DOLLARS) NUMBER OF SHARES
FISCAL YEAR ENDED DECEMBER 31, 1998............... 7.50 2.27 27,123
FISCAL YEAR ENDED DECEMBER 31, 1999............... 5.20 1.90 17,998
FISCAL YEAR ENDED DECEMBER 31, 2000............... 13.20 2.70 165,418
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter................................... 4.40 1.55 112,525
Second Quarter.................................. 2.30 1.50 129,530
Third Quarter................................... 1.95 1.10 67,561
Fourth Quarter.................................. 2.59 1.65 75,708
FISCAL YEAR ENDED DECEMBER 31, 2002
First Quarter................................... 2.75 1.85 47,216
Second Quarter.................................. 2.17 1.26 38,840
Third Quarter................................... 1.55 0.70 19,360
Fourth Quarter.................................. 1.25 0.75 51,493
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter................................... 1.21 0.59 94,299
Second Quarter.................................. 1.50 0.55 358,808
MONTH ENDED
February 28, 2003............................... 1.08 0.83 58,595
March 31, 2003.................................. 0.94 0.59 172,489
April 30, 2003.................................. 0.78 0.55 270,067
May 31, 2003.................................... 0.94 0.64 442,138
June 30, 2003................................... 1.50 0.87 364,219
July 31, 2003................................... 1.14 0.90 212,854
August 2003 (through August 5, 2003)............ 0.98 0.93 152,850
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SR TELECOM'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with SR Telecom's
audited consolidated financial statements and the related notes contained
elsewhere in this proxy statement/prospectus.
The discussion contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
projected. SR Telecom's consolidated financial statements have been prepared in
accordance with Canadian GAAP (Generally Accepted Accounting Principles). There
are several differences between US GAAP and Canadian GAAP, some of which can
yield material differences in reported data. For the US GAAP reconciliation, see
note 25 to the accompanying audited consolidated financial statements.
OVERVIEW
SR Telecom provides fixed wireless access solutions for voice, data and
Internet access applications. SR Telecom designs, markets and sells fixed
wireless products to telecommunications service providers, who in turn use the
products to provide their subscribers with a full range of telecommunications
services. SR Telecom also provides full turnkey services to its customers. Most
of SR Telecom's sales are international, with its fixed wireless systems
currently being used by telecommunications service providers in over 110
countries worldwide. These customers include large incumbent local exchange
carriers as well as competitive local exchange carriers and private operators of
telecommunications systems. In addition, through its majority-owned subsidiary
CTR, SR Telecom provides local telephone service and Internet access to
residential, commercial and institutional customers, and operates a network of
payphones in a large, predominantly rural area of Chile.
CRITICAL ACCOUNTING POLICIES
SR Telecom's consolidated financial statements are based on the selection
and application of accounting policies, which require SR Telecom's management to
make significant estimates and assumptions. SR Telecom believes that the
following accounting policies may involve a higher degree of judgment and
complexity in their application, and represent SR Telecom's critical accounting
policies.
REVENUE RECOGNITION
Revenue is recognized when persuasive evidence of an agreement exists,
delivery has occurred or the service has been performed, the fee is fixed and
determinable, and collection of the resulting receivable is probable.
SR Telecom recognizes revenue through two primary revenue streams: revenue
from the sale of equipment and service revenue. Service revenue is comprised of
site survey and engineering, prior to installation, as well as installation of
the equipment, training of customer personnel and repair contracts. Revenue for
equipment sold separately is recognized upon delivery and when all significant
contractual obligations have been satisfied and collection is probable. SR
Telecom also enters into contracts involving multiple elements, or "turnkey"
contracts, which include the sale of equipment as well as the sale of services.
Turnkey contracts generally include the sale of equipment as well as site survey
and engineering, which involves the assessment of the locations to be installed
and the requirements of the equipment to be installed, as well as installation
of the equipment at the site. The service elements are not essential to the
functionality of the delivered equipment. Recognition of revenue in turnkey
contracts on the sale of manufactured equipment is recognized upon shipment.
Recognition of revenue on the performance of site survey and engineering, and
installation of the equipment is recognized when the services are performed. The
establishment of the selling prices of services and equipment in these contracts
is determined by reference to similar contracts whereby these elements are
offered on a stand alone basis and are incorporated in the contract details. For
contracts involving multiple elements, SR Telecom allocates revenue to each
element based on relative fair values. Telecommunication service revenue is
recognized as the services are rendered.
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SR Telecom products and services are generally sold as part of a contract
or purchase order, of which many are for periods extending beyond one year.
Revenue and cost estimates on long-term contracts are revised periodically based
on changes in circumstance; any losses are recognized in the period that such
losses become known.
WARRANTY OBLIGATIONS
Accruals for warranty costs are established at the time of shipment and are
based on contract terms and experience from prior claims. SR Telecom's usual
warranty terms are one year, with two year warranty periods in certain limited
circumstances. SR Telecom evaluates its obligations related to product warranty
on an ongoing basis. If warranty costs change substantially, SR Telecom's
warranty accrual could change significantly. SR Telecom tracks historical
warranty cost, including labor and replacement parts, and uses this information
as the basis for the establishment of its warranty provision. With respect to
the introduction of new products, warranty accruals are determined based on SR
Telecom's historical experience with similar products.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
SR Telecom performs ongoing credit evaluations of its customers' financial
condition and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers and on-going project risks.
Wherever practicable, SR Telecom requires accounts receivable to be insured by
an export credit agency, by confirmed irrevocable letters of credit or by a
security interest on the customer's assets. SR Telecom believes that it has
sufficient allowances for doubtful accounts to address the risk associated with
its outstanding accounts receivable.
PROVISION FOR EXCESS OR OBSOLETE INVENTORY
Inventories are valued at the lower of cost and net realizable value or
replacement cost, with cost computed at standard, which approximates actual cost
computed on a first-in, first-out basis. SR Telecom maintains a reserve for
estimated obsolescence based upon assumptions regarding future demand for its
products and the conditions of the markets in which its products are sold. This
provision to reduce inventory to net realizable value is reflected as a
reduction to inventory in the consolidated balance sheets. Significant
management judgments and estimates must be made and used in connection with
establishing these reserves. If actual market conditions are less favorable than
SR Telecom's assumptions, additional reserves may be required.
ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS
SR Telecom evaluates events and circumstances that can have an effect on
the carrying value of its long-lived assets on an ongoing basis. In order to
determine whether an impairment exists, management considers the undiscounted
cash flows estimated to be generated by those assets as well as other
indicators. If the estimated undiscounted cash flows are projected to be less
than the carrying value of the related assets, a permanent impairment in the
carrying value of assets is charged against earnings in the period an impairment
is determined.
FOREIGN CURRENCIES
Monetary assets and liabilities denominated in foreign currencies are
translated at exchange rates in effect at the balance sheet dates. Non-monetary
assets and liabilities are translated at historical rates. Translation gains and
losses are reflected in the statement of operations. Revenue and expenses are
translated at average exchange rates prevailing during the period.
All of SR Telecom's subsidiaries are financially and/or operationally
dependent on SR Telecom and are accounted for using the temporal method. Under
this method, monetary assets and liabilities are translated at exchange rates in
effect at the balance sheet dates. Non-monetary assets and liabilities are
translated at
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historical rates. Revenue and expenses are translated at average rates for the
period. Translation exchange gains or losses of such subsidiaries' accounts are
reflected in the statement of operations.
FUTURE INCOME TAXES
Future income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the tax rates which will be in effect when
the differences are expected to reverse. A valuation allowance is provided for
the amount of future income tax assets which are not considered more likely than
not to be realized. SR Telecom intends to use the balance of these assets prior
to expiry either as an offset to future net income or through the use of other
tax planning initiatives.
RESULTS OF OPERATIONS
The consolidated statement of operations includes the results of CTR and
prior comparative periods have been restated to reflect the adoption of the
Canadian Institute of Chartered Accountants new accounting recommendation,
Foreign Currency Translation. The adoption of this new section resulted in a
charge to earnings in 2001 of CDN$2.4 million and in 2000 of CDN$1.1 million.
Results of operations also include revenue and expenses attributable to the
SWING product line acquired from Lucent and CTR's purchase of telecommunications
network equipment assets from Gilat-to-Home Chile.
Effective January 1, 2002, SR Telecom also adopted the new Canadian
Institute of Chartered Accountants recommendations relating to the reporting of
stock option-based compensation.
Preliminary Second Quarter 2003 Results of Operations. Revenue for the
second quarter is expected to be slightly above first quarter results. As
previously announced, revenue for the first half of 2003 remains lower than in
the comparable period of 2002, mainly due to the impact of the war in Iraq on SR
Telecom's customers in the Middle East region. SR Telecom also expects to report
smaller losses in the second quarter than those experienced in the first quarter
of year 2003. SR Telecom's management believes that delays in closing a number
of significant orders may prevent it from achieving its previously stated
revenue target of meeting 2002 revenue levels.
SR Telecom operates in two business segments. The first is the Wireless
Telecommunications Products Business Segment and the second is the
Telecommunications Service Provider Business Segment.
The following table outlines the breakdown of revenues by segment during
the period:
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------- ------------------
2003 2002 2002 2001 2000
----- ----- ---- ---- ----
Wireless Telecommunications Products Business
Segment........................................... 87.7% 89.2% 91.9% 87.7% 88.5%
Telecommunications Service Provider Business
Segment........................................... 12.3% 10.8% 8.1% 12.3% 11.5%
Major contract awards from longstanding customers increased Wireless
Telecommunications Products revenue ("wireless revenue") as a percentage of
overall revenue to 91.9% in 2002 from 87.7% in 2001. In 2001, wireless revenue
decreased as a percentage of total revenue, from 88.5% in 2000, as a result of
the continued slowdown in the telecommunications industry. Telecommunications
Service Provider revenue as a percentage of overall revenue decreased to 8.1% of
overall revenue in 2002 from 12.3% in 2001. In 2001, Telecommunications Service
Provider revenue increased to 12.3% from 11.5% in 2000. Although
Telecommunications Service Provider revenue decreased in dollar terms over the
period the percentage change in total revenue is the result of the increases and
decreases in wireless revenue.
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THREE-MONTHS ENDED MARCH 31, 2003 VERSUS THREE-MONTHS ENDED MARCH 31, 2002
WIRELESS TELECOMMUNICATIONS PRODUCTS BUSINESS SEGMENT
PERCENT OF
REVENUE
-----------
2003 2002
---- ----
Revenue..................................................... 100% 100%
Cost of revenue............................................. 54% 50%
--- ---
Gross profit................................................ 46% 50%
Agents commissions........................................ 6% 8%
Selling, general and administrative expenses.............. 39% 25%
Research and development expenses, net.................... 21% 12%
--- ---
Total operating expenses.......................... 66% 45%
--- ---
Operating (loss) earnings................................... (20)% 5%
Interest expense, net....................................... (5)% (3)%
Loss on foreign exchange.................................... (17)% (1)%
Income tax recovery (expense)............................... 12% (1)%
--- ---
Net loss.................................................... (30)% --
=== ===
Revenue
Revenue by geographical area based on the location of SR Telecom's original
customers were as follows:
For the three-months ended March 31, 2003 and 2002:
PERCENT OF
WIRELESS
REVENUE REVENUE
----------------- -----------
2003 2002 2003 2002
------- ------- ---- ----
(IN THOUSANDS OF
CANADIAN DOLLARS)
Latin America.......................................... 2,694 2,036 11% 5%
Europe and Africa...................................... 5,005 5,666 19% 14%
Middle East............................................ 5,523 11,917 21% 29%
Asia................................................... 11,694 20,139 45% 50%
Other.................................................. 1,048 801 4% 2%
------ ------ --- ---
25,964 40,559 100% 100%
====== ====== === ===
Revenue in Latin America and Europe as a percentage of Wireless revenue
fluctuated with respect to the three-months ended March 31, 2003, versus the
three-months ended March 31, 2002, but remained relatively stable in dollar
terms. The percentage increase is a result of a decline in Wireless revenue over
the period. Revenue in the Middle East declined during the three-months ended
March 31, 2003 versus 2002 due to delays in shipments to the Middle East
precipitated by the war in Iraq. Revenue in Asia declined due to a decrease in
shipments to two large customers in the area.
125
Revenue from customers that comprised more than 10% of wireless revenue for
the three months ended March 31, 2003 were as follows:
PERCENT OF
REVENUE WIRELESS REVENUE
----------------- ----------------
2003 2003
----------------- ----------------
(IN THOUSANDS OF
CANADIAN DOLLARS)
Telstra Corporation Limited........................... 6,219 24%
Siemens Telecommunications............................ 3,283 13%
----- ---
Aggregate amount...................................... 9,502 37%
===== ===
Revenue from customers that comprised more than 10% of wireless revenue for
the three-months ended March 31, 2002 were as follows:
PERCENT OF
REVENUE WIRELESS REVENUE
----------------- ----------------
2002 2002
----------------- ----------------
(IN THOUSANDS OF
CANADIAN DOLLARS)
Lucent Technologies................................... 6,297 15%
Telstra Corporation Limited........................... 8,486 21%
------ ---
Aggregate amount...................................... 14,783 36%
====== ===
Revenue
For the quarter ended March 31, 2003, equipment revenue decreased by 49% to
CDN$16.5 million in the first quarter of 2003, from CDN$32.7 million for the
same period last year. Although a decrease in first quarter revenue was
anticipated, much of this decrease can be attributed to a slowdown precipitated
by the war in Iraq, delaying the shipment of certain large orders to the
mid-eastern region to other quarters. Service revenue increased by 20% to
CDN$9.4 million in the first quarter of 2003 as compared to CDN$7.8 million in
the first quarter of 2002, resulting mainly from the completion of various
stages of projects in Asia.
Gross Profit
Gross profit represents total revenue less the cost of revenue. Cost of
revenue with respect to equipment revenue consists of manufacturing costs,
material costs, labor costs, manufacturing overhead, warranty reserves and other
direct product costs. Cost of revenue with respect to service revenue consists
of labor costs, travel, telephone, vehicles and other costs that are directly
attributable to the revenue recognized. Gross profit as a percentage of
equipment sales decreased to 50.6% or CDN$8.4 million in the first quarter of
2003, from 57.6% or CDN$18.9 million in the first quarter of 2002. Lower overall
volume coupled with an increase in service revenue, which experiences lower
gross margin, over equipment sales, accounted for the decrease.
Services gross profit also varies substantially due to the mix of OEM
equipment such as towers, solar panels and other network components that are
purchased as part of a turnkey solution. In addition, services gross profit can
be affected by external factors associated with the execution of a project in a
developing country such as political disruptions, poor or delayed performance by
subcontractors and other matters impacting the timely and efficient
implementation of a project. Service gross profit increased to CDN$3.6 million
for the quarter ended March 31, 2003, from CDN$1.3 million for the quarter ended
March 31, 2002.
Agent Commissions
Agent commissions consist of payments to third parties who act as an
extension of SR Telecom's international sales and marketing organization. SR
Telecom has agents and representatives in 47 countries globally and uses this
network in many cases in lieu of having to maintain a permanent presence in
countries
126
where the level, uncertainty and timing of orders do not justify a permanent
presence or where the local custom and practice requires the use of local
partners.
Agent commissions as a percentage of revenue decreased slightly from 7.5%
or CDN$3.0 million in the first quarter of 2002 to 6.2% or CDN$1.6 million in
the first quarter of 2003. Commissions correlate directly with the level and
type of equipment sales and vary in amount by local jurisdiction.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
compensation costs, travel and related expenses for marketing, sales, human
resources, finance, executive and management and professional services fees and
expenses. Selling, general and administrative expenses as a percentage of sales
increased to 39% or CDN$10.1 million in the first quarter of 2003, compared to
25% or CDN$10.1 million in the same period in the prior year. The lower overall
revenue base, caused in part by shipment delays in the first quarter of 2003,
resulted in a higher operating expense to revenue ratio.
Research and Development Expenses
Research and development expenses consist of compensation costs, the cost
of software development tools, consultant fees and prototype expenses related to
the design, development and testing of SR Telecom's products, net of government
investment tax credits associated with these activities. Gross research and
development expenses on a comparable basis showed a slight increase over 2002
levels. Gross research and development increased to CDN$6.9 million for the
quarter ended March 31, 2003, as compared to CDN$6.6 million for the quarter
ended March 31, 2002. SR Telecom expects research and development expenses to
remain stable in the near term as the research expenditures related to the
addition of the new product lines acquired through asset purchases and
acquisitions continue.
Interest Expense
Interest expense remained relatively stable in the first quarter,
increasing slightly to CDN$1.3 million in the first quarter of 2003, from
CDN$1.2 million in the first quarter of 2002.
Foreign Exchange
SR Telecom's trade receivables are almost exclusively in U.S. dollars and
Euros. The foreign exchange loss of CDN$4.4 million or 17% of revenue in the
first quarter of 2003, compared to CDN$0.4 million or 1% in the first quarter of
2002, resulted from the increase in the value of the Canadian dollar compared to
the U.S. dollar and the Euro. Gains or losses on foreign exchange relate
primarily to fluctuations between the U.S. dollar and Euro compared to the
Canadian dollar.
Operating (Loss) Earnings
As forecast in SR Telecom's third quarter 2002 results, revenue for the
first quarter of 2003 was less than revenue in prior periods. The operating loss
of CDN$5.1 million or 20% of sales, incurred in the current quarter, as compared
to operating earnings of CDN$2.0 million or 5% of sales, in the first quarter of
2002, is a direct result of decreased revenue. SR Telecom expects an improvement
in operating earnings in the latter half of the year and continues to focus on
keeping costs in line with expected revenue.
Income Taxes
SR Telecom's change in effective tax rates primarily reflects the changes
in geographic distribution of earnings mix. The income tax provision includes
tax loss carryforward benefits and other future income tax assets based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the tax rates which will be in effect when
the differences are expected to reverse. The tax loss carryforwards recognized
relate primarily to losses incurred in Canada and expire in approximately five
years.
127
Backlog
Continued global economic uncertainty and the protracted slowdown in the
telecommunications industry have affected SR Telecom's order book. Backlog at
the end of the first quarter in 2003 stood at CDN$65 million, all of which is
expected to be delivered in 2003, down from CDN$82 million at the end of fiscal
2002. However, significant orders are expected to be generated from increased
activity in a number of SR Telecom's traditional markets and from the
introduction of stride2400, which should result in growth in the second half of
2003.
TELECOMMUNICATION SERVICE PROVIDER BUSINESS SEGMENT (CTR)
CTR is a rural telephone service provider in Chile. CTR provides local
telephone services to residential, commercial and institutional customers and
operates a network of payphones throughout Chile.
The weakness in the global telecommunications industry and the financial
uncertainty surrounding the South American capital markets were largely
responsible for SR Telecom not having received a reasonable offer for CTR. The
first quarter of 2003 has shown little improvement, and SR Telecom believes it
unlikely that the sale of CTR will be accomplished in the short term.
Revenue
The comparative declines in revenue from CDN$4.9 million in the first
quarter of 2002, to CDN$3.6 million in the first quarter of 2003, are due to a
weak local economy, resulting in a decrease in network traffic. Revenue has also
been affected by the decline in the value of the Chilean peso compared to the
Canadian dollar.
Operating Expenses
Operating expenses consist of compensation costs, travel and related
expenses, as well as wire support and maintenance, and professional services
fees and expenses. Operating expenses excluding depreciation decreased by 12% to
CDN$3.6 million in the first quarter of 2003 from CDN$4.1 million in the same
quarter last year, reflecting CTR's efforts to increase earnings before
interest, taxes, depreciation and amortization (EBITDA) by reducing expenses at
CTR, and to maximize CTR's debt repayment contributions. SR Telecom believes
that increased revenue from CTR's satellite operations and the v-sat based
network assets will aid in increasing this contribution.
SR Telecom uses EBITDA as a means of evaluating the performance of CTR, as
it is an aid in the determination of CTR's ability to support additional debt
and interest payments, as well as a means of evaluating the amount of cash
generated by CTR.
Operating Loss
Operating loss increased to CDN$1.9 million for the quarter ended March 31,
2003, compared to CDN$1.3 million in the first quarter of 2002. The increased
loss was due to the weakness in revenue associated in part with the continued
effects of economic instability on the Chilean economy.
Interest Expense
Interest expense for the quarter ended March 31, 2003, has decreased to
CDN$1.0 million from CDN$1.4 million for the same period in 2002. The decline is
due to a decrease in the general level of interest rates and to the reduction in
the amount of long-term debt outstanding.
Foreign Exchange
The foreign exchange gain of CDN$4.0 million in the first quarter of 2003,
compared to CDN$0.3 million in the first quarter of 2002, is a function of the
effect of fluctuations in the Canadian dollar, U.S. dollar and Chilean Peso on
the assets and liabilities of CTR, especially the U.S. dollar denominated debt.
128
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Working Capital
SR Telecom's working capital decreased by CDN$12.5 million to CDN$70
million in the first quarter of 2003, from CDN$82.5 million in the first quarter
of 2002, as a result of increased collection efforts reducing the accounts
receivable balance, the repayment of CDN$5 million of SR Telecom's operating
line of credit, CDN$3 million in principal repayments at CTR and a reduction in
accounts payable. Working capital further decreased as a result of the reduction
in the overall sales levels.
Cash and Short-Term Investments
The consolidated cash and short-term investment position decreased to
CDN$26.9 million at March 31, 2003, compared to CDN$41.9 million at December 31,
2002, as a result of debt repayments as well as a reduction in SR Telecom's
accounts payable balance.
Accounts Receivable
The trade receivables decrease of CDN$22.8 million over the quarter results
from SR Telecom's constant collection efforts as well as decreased sales during
the quarter. In December 2001, SR Telecom filed a statement of claim in New York
for US$4.86 million against MCI International and Telecommunications d'Haiti,
S.A.M., or Teleco de Haiti. The claim was filed pursuant to a clause mandating
three party arbitration before the International Court of Arbitration in respect
of funds which ceased flowing to SR Telecom under a Tripartite Agreement between
Teleco de Haiti, MCI International and SR Telecom. The agreement provides for
the financing of a contract between SR Telecom and Teleco de Haiti pursuant to
which SR Telecom was to supply and install certain telecommunications equipment
for Teleco de Haiti for approximately US$12.88 million. In July, 2002, MCI
International filed for bankruptcy and the United States Bankruptcy Court issued
an order staying all collateral litigation against MCI International, including
this arbitration. As a result, MCI International continued in the proceeding as
an observer. In February 2002, Teleco de Haiti filed a counter-claim for US$1.2
million in respect of funds transferred to SR Telecom since the execution of a
termination agreement between SR Telecom and Teleco de Haiti, alleging that such
termination agreement ended their obligations under the Tripartite Agreement.
The arbitration is proceeding with MCI as an observer.
On April 24, 2003, the arbitration tribunal rendered a decision, received
by SR Telecom on May 1, 2003, denying both the claim by SR Telecom against
Teleco de Haiti and the counterclaim by Teleco de Haiti against SR Telecom.
However, the arbitration tribunal also held that the termination agreement
preserved and did not extinguish SR Telecom's right to continue to receive
payments from MCI under the tripartite Agreement. Prior to the decision, SR
Telecom filed a claim for US$4.8 million against MCI International with the
United States Bankruptcy Court and SR Telecom cannot determine what amount, if
any it may recover from MCI International. If MCI accepts the Tripartite
Agreement then SR Telecom would have claims on both pre-petition amounts paid
(based on the consolidation motion) and post-petition amounts up to the full
amount still due. Such post-petition and future flows of funds would be paid
from the MCI/Teleco Voice Settlement Account. To date, MCI has not objected to
the Proof of Claim, nor has it rejected the Tripartite Agreement. If SR Telecom
cannot recover a substantial amount from MCI International, it could have a
material impact on SR Telecom's results of operations. The results of this claim
cannot be determined at this time.
Inventory
The increase in inventory of CDN$4.4 million to CDN$38.8 million at March
31, 2003, from CDN$34.4 million at December 31, 2002, was a function of the
delay in shipments to the Middle Eastern region until the second quarter. It is
anticipated that the inventory balance will be further reduced compared to the
year-end balance as these shipments are delivered in the second quarter of 2003.
SR Telecom has had considerable success in decreasing manufacturing cycle time
and the adoption of more conservative policies
129
towards the advance procurement of components and the use of pull-through
manufacturing is expected to aid in further reductions in the inventory balance.
Investment Tax Credits and Future Income Tax Assets
Investment tax credits are created from eligible research and development
expenditures. Future income tax assets are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the substantially enacted tax rates which will be in effect when
the differences are expected to reverse. SR Telecom intends to use the balance
of these assets prior to expiry either as an offset to future net income or
through other tax planning initiatives.
To use the investment tax credits existing of CDN$19.2 million at March 31,
2003, future taxable income of approximately CDN$96 million is required. The
investment tax credits have an initial expiration period of 10 years. SR
Telecom's existing credits have an average remaining life of approximately 7
years.
Although SR Telecom has had losses in the past few years, SR Telecom had a
history of profit prior thereto. Profitability for the past few years has been
adversely impacted by the market conditions in the telecommunications industry
and other political, economic and social events that affected our customers. SR
Telecom believes these issues are temporary and that the industry will return to
profitability. SR Telecom is working to strategically position itself and return
to profitability when the industry conditions improve.
Capital Expenditures
Capital expenditures are being kept to the minimum level required to
execute SR Telecom's business plan. CTR property, plant and equipment additions
were CDN$0.1 million in the first quarter of 2003, compared to CDN$0.2 million
in the first quarter of 2002, and relate principally to existing network
upgrades and enhancements. Wireless Products additions were CDN$2.3 million,
related to the Mergy asset purchase in the first quarter of 2003. The Nera
transaction in the first quarter of 2002 made up substantially all of that
quarter's capital expenditures. SR Telecom presently has no material commitments
for capital expenditures.
Bank Indebtedness
During the quarter ended March 31, 2003, SR Telecom's operating line of
credit was renewed on more favorable terms and conditions but at a reduced
amount of CDN$5 million.
Liabilities
Trade payables and accrued liabilities of CDN$50.3 million are in line with
SR Telecom's current level of operations.
LONG-TERM DEBT AND SHAREHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
2003 2002
-------------- -----------------
(IN THOUSANDS OF CANADIAN DOLLARS)
Debentures.............................................. $75,000 $ 75,000
Long-term project financing............................. $57,384 $ 64,760
Shareholders' equity.................................... $95,802 $102,326
SR Telecom's debentures are unsecured and bear interest at 8.15%, payable
semi-annually.
The balance of the debentures is due in a bullet payment at maturity in
April 2005. SR Telecom intends to partially refinance this debt and expects to
generate sufficient cash flow by that time to repay a substantial portion of the
balance.
The long-term project financing relates to outstanding notes with Export
Development Canada and the Inter-American Development Bank that are obligations
of CTR. As of June 16, 2003, a principal amount of US$38 million was
outstanding. Payments of principal and interest are due in semi-annual
installments until
130
maturity in 2007 and 2008. Currently, the lenders would have full recourse
against SR Telecom for the full amount of the loans, if performance, financial
performance and financial position covenants are not met. While CTR and SR
Telecom have not met all of these covenants, default of the covenants has been
waived by the lenders until February 13, 2004, in return for a fee paid by SR
Telecom. These covenants were waived in previous years and SR Telecom believes
that these covenants will continue to be waived on an annual basis until the
balance of the amounts outstanding are repaid or the debt is refinanced. If the
lenders decline to waive the defaults, all amounts due under the loans,
including principal and interest and other fees, could be declared due and
immediately payable. In addition, if Export Development Corporation and
Inter-American Development Bank accelerated the loans, a default would be
triggered under SR Telecom's public debentures and its bank indebtedness, which
means that all amounts due and payable under the debentures could also be
declared due and payable.
Counterparts for both long-term project financing facilities are
governmental export or development financing organizations. Both tranches rank
pari passu and are secured by a pledge of all of the assets of CTR and a pledge
of the shares in the share capital of CTR and intermediate holding companies. SR
Telecom has also agreed to provide CTR with the necessary funds and resources to
complete the network as well as maintain its initial equity investment in CTR.
Currently, CTR is approximately 3,000 lines short of achieving construction
completion. Although SR Telecom has committed to provide the necessary funds to
achieve this construction completion, the ultimate amount of funds required is
not determinable at this time. The amount may vary depending on whether SR
Telecom decides to construct the lines itself or purchase them from another
carrier. Furthermore, the amount of funds that CTR will be able to contribute
towards this construction is not known at this time. The amount of funds that SR
Telecom may have to contribute towards the construction completion ranges from
zero dollars to CDN$6 million, depending on which of the above-mentioned
circumstances occurs.
SR Telecom has an employee share participation plan, a directors'
compensation plan and a stock option plan that provides stock options to key
employees, the options vesting over a period of four to five years. For the
three-months ended March 31, stock issued under the first two programs totaled
244,398 (2002 -- 72,277) for cash consideration of CDN$157,000 (2002 --
CDN$141,000).
Cash Flows
Cash flows used in operations totaled CDN$4.7 million in the first quarter
of 2003, compared to an inflow of CDN$2.4 million in the first quarter of 2002.
Projected increases in sales levels in subsequent quarters should generate
operating income as well as positive operating cash flow.
Cash outflows from financing activities were CDN$7.9 million for the
quarter ended March 31, 2003, as compared to CDN$1.3 million for the quarter
ended March 31, 2002. The increase in outflows over the corresponding quarter in
the prior year is a function of the repayment of CDN$5 million of the operating
line of credit as well as increased debt repayments during the period.
131
FOR THE YEARS ENDED DECEMBER 31, 2002 VERSUS DECEMBER 31, 2001 AND 2000
WIRELESS TELECOMMUNICATIONS PRODUCTS BUSINESS SEGMENT
PERCENT OF REVENUE
------------------
2002 2001 2000
---- ---- ----
Revenue..................................................... 100% 100% 100%
Cost of revenue............................................. 49% 53% 46%
--- --- ---
Gross profit................................................ 51% 47% 54%
Agents commissions........................................ 8% 13% 13%
Selling, general and administrative expenses.............. 26% 24% 23%
Research and development expenses, net.................... 12% 13% 11%
Restructuring and asset impairment charges................ 3% 3% 3%
--- --- ---
Total operating expenses.......................... 49% 53% 50%
--- --- ---
Operating earnings (loss)................................... 2% (6%) 4%
Interest expense, net....................................... (3%) (4%) (3%)
(Loss) gain on foreign exchange............................. (1%) 3% --
Income tax recovery (expense)............................... -- 2% (1%)
--- --- ---
Net loss.................................................... (2%) (5%) --
=== === ===
Revenue
Revenue by geographical area based on the location of SR Telecom's original
customers were as follows:
For the years ended December 31, 2002, 2001 and 2000:
REVENUE PERCENT OF WIRELESS REVENUE
------------------------------------ ---------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ------- ------- -------
(IN THOUSANDS OF CANADIAN DOLLARS)
Latin America.................... 7,833 22,004 35,254 4% 16% 21%
Europe and Africa................ 23,724 17.060 9,783 13% 12% 6%
Middle East...................... 57,147 26,211 45,186 32% 18% 26%
Asia............................. 86,125 70,680 71,444 48% 50% 42%
Other............................ 6,200 5,642 7,743 3% 4% 5%
------- ------- ------- --- --- ---
181,029 141,597 169,410 100% 100% 100%
======= ======= ======= === === ===
Revenue in Latin America as a percentage of Wireless revenue declined from
21% in 2000 to 16% in 2001 and 4% in 2002. This was the result of the fact that
the shipments to Axtel, which represented a large part of Latin American
revenue, were completed in the first half of 2001. Revenue in the Middle East
decreased to 18% of Wireless revenue in 2001 from 26% in 2000 due to the
completion of two major sales orders in that area. In 2002, revenue from the
Middle East increased to 32% of Wireless revenue from 18% in 2001 as SR Telecom
signed two new contracts in Saudi Arabia in 2002. Revenue in Europe and Africa
increased to 13% in 2002 from 12% in 2001 and 6% in 2000, due to increased
orders in Africa in 2001 and 2002 and the signing of a large contract with a
national exchange carrier in 2002.
132
Revenue from customers that comprised more than 10% of wireless revenue for
the year ended December 31, 2002 were as follows:
PERCENT OF
REVENUE WIRELESS REVENUE
----------------- ----------------
2002 2002
----------------- ----------------
(IN THOUSANDS OF
CANADIAN DOLLARS)
Saudi Telecom Company................................. 31,295 17%
Telstra Corporation Limited........................... 32,881 18%
------ ---
Aggregate amount...................................... 64,176 35%
====== ===
Revenue from customers that comprised more than 10% of wireless revenue for
the year ended December 31, 2001 were as follows:
PERCENT OF
REVENUE WIRELESS REVENUE
------------------ ----------------
2001 2001
------------------ ----------------
(IN THOUSANDS OF
CANADIAN DOLLARS)
Rural Telephone Services Company Limited............. 25,001 18%
Department of Transport and Communications........... 18,114 13%
------ ---
Aggregate amount..................................... 43,115 31%
====== ===
Revenue from customers that comprised more than 10% of wireless revenue for
the year ended December 31, 2000 were as follows:
PERCENT OF
REVENUE WIRELESS REVENUE
----------------- ----------------
2000 2000
----------------- ----------------
(IN THOUSANDS OF
CANADIAN DOLLARS)
Axtel SA de CV........................................ 20,583 12%
Department of Transport and Communications............ 55,895 33%
------ ---
Aggregate amount...................................... 76,478 45%
====== ===
Equipment sales increased by 50% to CDN$146.1 million in 2002 from CDN$97.4
million in 2001. This substantial increase in annual revenue is primarily due to
major contract awards from longstanding customers including Saudi Telecom
Company, Rural Telephone Services Company Limited in Thailand and Department of
Transport and Communications in the Philippines. Also contributing to the
increase is the revenue growth stemming from SR Telecom's acquisition of the
SWING product line from Lucent in September 2001. Equipment sales decreased by
28% in 2001 from CDN$134.6 million in 2000 as a result of the continued slowdown
of the telecommunications industry partially compensated by increased market
share.
Service revenue decreased by CDN$9.3 million in 2002 to CDN$34.9 million
primarily as a result of the timing of work performed on various contracts in
progress. Service revenue increased by 27% to CDN$44.2 million in 2001 as
compared to the prior year, due to increased installation activity associated
with major contracts.
Continued global economic uncertainty and the protracted slowdown in the
telecommunication industry have affected SR Telecom's order book. Backlog at the
end of 2002 stood at CDN$82 million, all of which is expected to be delivered in
2003, down from CDN$150 million at the end of 2001 and from CDN$204 million as
at December 31, 2000. In view of ongoing market volatility, SR Telecom adopted a
more conservative approach in reporting backlog in 2001 by removing the
remaining value of the Axtel frame contract in Mexico. A frame contract includes
several delivery dates scheduled over many years and is therefore prone to
significant changes in dollar amounts over the years. Consequently, backlog as
currently reported includes only orders anticipated to be delivered in the first
year of multiple year frame contracts. SR Telecom expects sales
133
volumes to decrease in the first half of 2003. However, significant orders are
expected to be generated from increased activity in a number of traditional
markets and from the introduction of stride2400.
Gross Profit
SR Telecom has experienced substantial fluctuations in gross profit. The
principal drivers of the fluctuations in equipment gross profit are the level of
revenue and the product and customer sales mix. Equipment gross profit improved
to CDN$86.8 million or 59.4% in 2002 from CDN$50.5 million or 51.8% in 2001 due
to higher overall volumes and the impact of production and supply chain
efficiencies, which will continue to be emphasized by SR Telecom. Equipment
gross profit was negatively impacted in 2001 as compared to CDN$72.1 million or
53.6% in 2000, primarily as a result of lower production volumes which affected
SR Telecom's overhead absorption rate.
Service gross profit was CDN$4.9 million for the year ended December 31,
2002, as compared to CDN$16.0 million for the year ended December 31, 2001 and
CDN$19.2 million for the year ended December 31, 2000. Service gross profit was
negatively impacted in 2001 and in 2002 as compared to 2000 by political
disruptions that impacted the delivery schedule on two major turnkey contracts
in progress. Delayed contract awards in other jurisdictions resulted in gross
profit erosion due to unanticipated mobilization and demobilization costs.
Agent Commissions
Agent commissions as a percentage of equipment and service sales decreased
to 7.7% in 2002 from the 13% level experienced in 2001 and 2000. Commissions
correlate directly with the level and type of equipment and vary in amount by
local jurisdiction. The jurisdiction and equipment mix changed significantly in
2002, partly due to the effect of the purchase of the SWING product line from
Lucent in 2001.
Selling, General and Administrative
Selling, general and administrative expenses increased by CDN$13.7 million
or by 41% over 2001. The commencement of operations in France, subsequent to the
asset acquisition from Lucent accounts for CDN$8.4 million of the increase in
2002. Higher selling and marketing costs to support sales growth and non-
recurring expenses relating to arbitration proceedings and process improvement
and cost reduction initiatives also contributed to the increase. Selling,
general and administrative costs declined by 14% to CDN$33.3 million in 2001 as
compared to 2000 as a result of the cost containment and reduction program
initiated in the fourth quarter of 2000.
Research and Development
Net research and development expenditures increased by CDN$2.3 million to
CDN$21.3 million or by 12% over 2001. This was mainly as a result of
expenditures related to the addition of the SWING product line and to the launch
of the stride2400 product. Excluding the impact of these asset acquisitions, R&D
expenditures would have decreased significantly, reflecting the cost reduction
and restructuring efforts in SR Telecom's Canadian operations. In 2001, net R&D
expenses were effectively the same as in 2000. Gross research and development
expenses in 2001, excluding research and development in France, decreased by
more than CDN$2.6 million or by 10.5% year over year. This decrease is a result
of the restructuring program implemented at the end of fiscal 2000. This
decrease was partially offset by the impact of the start-up of the French
operations in the third quarter of 2001.
Restructuring Charges and Asset Impairment
In November 2002, restructuring charges of CDN$4.9 million were accrued.
These charges were undertaken by SR Telecom to reduce its cost structure, and
were comprised primarily of severance and termination benefits, as well as the
elimination of inventory balances in certain specified locations. An amount for
lease termination costs relating to the closure of a research and development
site in Montreal has also been included. In total, approximately 90 employees
were terminated including 39 research and development
134
employees, 31 project management employees, 8 sales and marketing employees and
12 general and administrative employees. The inventory write-down relates to SR
Telecom's offices in Asia, where existing repair service centers are being
reorganized.
In June 2001, restructuring charges of CDN$3.7 million were accrued. This
amount consisted primarily of severance and related costs resulting from cost
reduction initiatives and the rationalization of international operations.
Approximately 35 employees were terminated including 12 project management
employees, 12 sales and marketing employees and 11 general and administrative
employees.
In December 2000, SR Telecom decided to consolidate all research and
development programs in Montreal and reduce its personnel requirements in most
other areas of its operations. This resulted in a restructuring charge of
CDN$4.4 million consisting of severance payments and associated costs,
write-down of related property, plant and equipment and lease termination
payments. In total, approximately 110 employees were terminated including 48
research and development employees, 16 project management employees, 6 sales and
marketing employees, 29 factory employees and 11 general and administrative
employees. The fixed asset write-down and lease termination payments relate to
the closure of the Kanata research and technology site.
Foreign Exchange
SR Telecom's trade receivables are almost exclusively denominated in U.S.
dollars and Euros. The foreign exchange loss of CDN$2.0 million in 2002, foreign
exchange gain of CDN$4.5 million in 2001, and foreign exchange gain of CDN$0.5
million in 2000, resulted from the fluctuation in the value of the Canadian
dollar compared to the U.S. dollar and the Euro. Gains or losses on foreign
exchange relate primarily to fluctuations between the U.S. dollar and the Euro
as compared to the Canadian dollar.
Interest Expense
The interest expense in the wireless segment relates predominantly to the
interest paid on SR Telecom's senior unsecured debentures in the amount of
CDN$75 million. The debentures, due in April 2005, bear interest at 8.15%. The
remainder of the interest expense relates to interest paid on bank indebtedness.
Interest expense increased to CDN$6.2 million in 2002, from CDN$5.4 million in
2001 and CDN$4.7 million in 2000.
Income Taxes
SR Telecom's change in effective tax rates primarily reflects the changes
in geographic distribution of earnings mix. The income tax provision includes
tax loss carryforward benefits and other future income tax assets based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the tax rates which will be in effect when
the differences are expected to reverse. The tax loss carryforwards recognized
relate primarily to losses incurred in Canada and expire in approximately five
years.
TELECOMMUNICATIONS SERVICE PROVIDER BUSINESS SEGMENT (CTR)
The financial uncertainty surrounding the South American capital markets
and the weakness in the global telecommunications industry were largely
responsible for SR Telecom not having received a reasonable offer for CTR. The
impact of the Argentinean crisis and the Brazilian election served to exacerbate
this situation in 2002 and SR Telecom believes it unlikely that the sale of CTR
will be accomplished in the short term.
CTR continues to generate positive Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA). CTR generated EBITDA of CDN$2.4 million,
(Net loss of CDN$17 million plus interest of CDN$5.9 million, depreciation and
amortization of CDN$9.5 million and a loss on change in ownership in subsidiary
of CDN$4.0 million) during 2002. The non-cash purchase of the VSAT-based network
assets in 2001 from Gilat-To-Home Chile, expanded CTR's market reach and growth
potential. Although these assets did not perform to expectations in 2002, due to
delays in implementation, it is expected that CTR will continue to contribute
positively to EBITDA in 2003. The increase in SR Telecom's holding in CTR and
the
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resulting charge, as described below, were directly related to the delay in the
implementation and performance of these assets.
Revenue
Revenues in 2002 decreased by CDN$4 million or 20.2% compared to 2001. This
is due to the implementation of a telecommunication regulatory change, severe
inclement weather in the winter months of 2002 and a weak local economy
resulting in a decrease in network traffic. The decrease was partially offset by
the inclusion of an entire year of revenue associated with the newly acquired
satellite network. Total annual net revenue in Chilean pesos in 2002 declined by
13% on a year over year basis. Revenue has also been affected by the decline in
the value of the Chilean peso compared to the Canadian dollar. In 2001, the
CDN$2.2 million or 10% reduction in revenue as compared to 2000 is primarily
attributable to the decline in the value of the Chilean peso over this period.
The beginning of the Argentinean crisis in the fourth quarter of 2001 also had
an adverse affect on the local economy and continues to impact CTR revenue.
Operating Expenses
Operating expenses in 2002 decreased by CDN$1.3 million or 5.5% from 2001.
In Chilean peso terms, however, operating expenses excluding depreciation
increased by 30%, on an annual basis primarily reflecting the inclusion of an
entire year from the satellite operations and increased costs associated with
delays in the integration of the VSAT-based network assets acquired from
Gilat-To-Home Chile in 2001. Operating expenses increased by 7% or CDN$1.5
million in 2001 over 2000's levels due to increased numbers of lines associated
with the build out of the network and unusually high maintenance expenses
associated with the severe winter.
Loss (Gain) on Change in Ownership of Subsidiary Company
On June 30, 2001, CTR acquired VSAT-based telecommunications assets
totaling CDN$14.6 million from Gilat-To-Home Chile in exchange for 13% of CTR's
issued and outstanding common shares. The reduction in ownership of CTR resulted
in a gain on dilution of CDN$9.4 million. During 2002, SR Telecom increased its
shareholding in CTR by 8.9% to 95.9%. The asset purchase agreement of 2001 with
Gilat-To-Home Chile specified the attainment of certain performance levels being
met with respect to the acquired assets. The increase in the shareholding was a
function of the degree to which these performance requirements were not met.
This increase in the direct and indirect ownership in CTR resulted in an
estimated non-cash charge to earnings of CDN$3.97 million in 2002, subject to
final negotiations. The charge was determined using management's best estimate
of the increase of the holding of CTR. It is not expected to materially
fluctuate, nor is it expected that SR Telecom will further increase its holding.
Discontinued Operations
In December 2001, SR Telecom reversed its treatment of CTR as a
discontinued operation. The financial uncertainty surrounding the South American
market coupled with a continuing weakness in the telecommunications industry
made the sale of CTR unlikely in the near term. Consequently, the consolidated
statements of loss for the year ended December 31, 2001, as reclassified,
present the results of operations of CTR as part of continuing operations.
The CDN$46.9 million (net of future income taxes of CDN$8.6 million) of
earnings from discontinued operations reflects the reversal of the provision
recorded at the end of December 31, 2000. The estimated loss on the disposal of
CTR in 2000 was based on management's best estimate of the impact of the
prevailing market conditions.
As of December 2001, SR Telecom, as a result of the conditions described
above, determined that the estimated future undiscounted cash flows from the
long-lived assets of CTR were insufficient to recover their carrying amount, and
as a result, wrote-down the carrying value of the telecommunication networks by
CDN$58 million to their estimated recoverable amounts.
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Interest Expense
Interest expense was CDN$5.9 million in 2002, as compared to CDN$7.8
million in 2001 and CDN$7.1 million in 2000. The fluctuation in interest expense
is a function of the change in interest rates and the reduction in the amount of
long-term debt outstanding.
Foreign Exchange
The foreign exchange losses of CDN$0.5 million in 2002, CDN$5.3 million in
2001 and CDN$2.8 million in 2000 are a function of the effect of fluctuations in
the Canadian dollar, U.S. dollar and Chilean peso on the assets and liabilities
of CTR, especially with respect to the U.S. dollar denominated debt of CTR.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Continual improvement of SR Telecom's working capital position remains a
top priority. SR Telecom's working capital decreased by CDN$12.8 million to
CDN$82.5 million at December 31, 2002, from CDN$95.3 million at December 31,
2001, as a result of SR Telecom's direct efforts to reduce its operating cycle.
In spite of this reduction, SR Telecom believes that further significant
reductions in capital employed in relation to sales volume can be achieved.
Revenue as a percentage of accounts receivable and inventory increased to 163%
from 115% in the prior year, evidence of SR Telecom's ability to generate
increased business while working with less capital employed.
Cash and Short-Term Investments
The consolidated cash and short-term investment position of CDN$41.9
million compared to CDN$20.4 million as at December 31, 2001 reflects SR
Telecom's efforts to reduce receivable collection time and maintain lower
inventory levels as well as increase overall liquidity.
Accounts Receivable
The trade receivables decrease of CDN$23.3 million over the previous year
results from attaining project payment milestones. The working capital demands
associated with large long-term projects can be significant.
In December 2001, SR Telecom filed a statement of claim in New York for
US$4.86 million against MCI International and Telecommunications d'Haiti,
S.A.M., or Teleco de Haiti. The claim was filed pursuant to a clause mandating
three party arbitration before the International Court of Arbitration in respect
of funds which ceased flowing to SR Telecom under a Tripartite Agreement between
Teleco de Haiti, MCI International and SR Telecom. The agreement provides for
the financing of a contract between SR Telecom and Teleco de Haiti pursuant to
which SR Telecom was to supply and install certain telecommunications equipment
for Teleco de Haiti for approximately US$12.88 million. In July, 2002, MCI
International filed for bankruptcy and the United States Bankruptcy Court issued
an order staying all collateral litigation against MCI International, including
this arbitration. In February 2002, Teleco de Haiti filed a counter-claim for
US$1.2 million in respect of funds transferred to SR Telecom since the execution
of a termination agreement between SR Telecom and Teleco de Haiti, alleging that
such termination agreement ended their obligations under the Tripartite
Agreement. The arbitration is proceeding with MCI as an observer.
On April 24, 2003, the arbitration tribunal rendered a decision, received
by SR Telecom on May 1, 2003, denying both the claim by SR Telecom against
Teleco de Haiti and the counterclaim by Teleco de Haiti against SR Telecom.
However, the arbitration tribunal also held that the termination agreement
preserved and did not extinguish SR Telecom's right to continue to receive
payments from MCI under the tripartite Agreement. Prior to the decision, SR
Telecom filed a claim for US$4.8 million against MCI International with the
United States Bankruptcy Court and SR Telecom cannot determine what amount, if
any it may recover from MCI International. As a result, no provision for loss
has been recorded in these financial statements. If SR Telecom cannot recover a
substantial amount from MCI International, it will have a
137
material impact on SR Telecom's results of operations and financial position.
The results of this claim cannot be determined at this time.
Inventory
The year over year decrease in inventory of CDN$3.2 million to CDN$34.4
million at December 31, 2002, from CDN$37.6 million at December 31, 2002,
reflects SR Telecom's success in decreasing manufacturing cycle time and the
adoption of more conservative policies towards advance procurement of components
and the use of pull-through manufacturing.
Investment Tax Credits and Future Income Tax Assets
Investment tax credits are created from eligible research and development
expenditures. Future income tax assets are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the substantially enacted tax rates which will be in effect when
the differences are expected to reverse. SR Telecom intends to use the balance
of these assets prior to expiry either as an offset to future net income or
through the use of other tax planning initiatives.
To use the investment tax credits existing of CDN$18.3 million at December
31, 2002, future taxable income of approximately CDN$92 million is required. The
investment tax credits have an initial expiration period of 10 years. SR
Telecom's existing credits have an average remaining life of approximately 7
years.
Although SR Telecom has had losses in the past few years, SR Telecom had a
history of profit prior thereto. Profitability for the past few years has been
adversely impacted by the market conditions in the telecommunications industry
and other political, economic and social events that affected our customers. SR
Telecom believes these issues are temporary and that the industry will return to
profitability. SR Telecom is working to strategically position itself and return
to profitability when the industry conditions improve.
Capital Expenditures
Capital expenditures are being kept to the minimum level required to
execute SR Telecom's business plan. CTR property, plant and equipment additions
were CDN$0.5 million, compared to CDN$5.3 million in 2001, (excluding the
CDN$14.6 million in telecommunication network assets purchased from Gilat-To-
Home Chile) and relate principally to existing network upgrades and
enhancements. Wireless products additions of CDN$3.1 million compared to CDN$4.2
million in 2001, includes the CDN$0.5 million in fixed assets purchased as part
of the Nera transaction.
Bank Indebtedness
Subsequent to year-end SR Telecom's operating line of credit was renewed on
more favorable terms but at a reduced amount of CDN$5 million.
Liabilities
Trade payables and accrued liabilities of CDN$58.1 million (of which
CDN$3.5 million relates to CTR) are in line with SR Telecom's current level of
operations. Customer advances remained relatively stable over the prior year.
LONG-TERM DEBT AND SHAREHOLDERS' EQUITY
2002 2001
------- -------
(THOUSANDS OF
CANADIAN DOLLARS)
Debentures.................................................. 75,000 75,000
Long-term project financing................................. 64,760 73,260
Shareholders' equity........................................ 102,326 122,456
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SR Telecom's debentures are unsecured and bear interest at 8.15%, payable
semi-annually.
The balance of the debentures is due in a bullet payment at maturity in
April 2005. SR Telecom intends to partially refinance this debt and expects to
generate sufficient cash flow by that time to repay a substantial portion of the
balance.
The long-term project financing relates to outstanding notes with Export
Development Canada and the InterAmerican Development Bank that are obligations
of CTR. As at December 31, 2002, there was US$41 million outstanding
The following table outlines the cash payments due with respect to SR
Telecom's contractual cash obligations:
PAYMENTS DUE BY:
TOTAL
2003 2004 2005 2006 2007 THEREAFTER OBLIGATIONS
------ ------ ------ ------ ------ ---------- -----------
(IN THOUSANDS OF CANADIAN DOLLARS)
CONTRACTUAL OBLIGATIONS
Long-term Debt Obligations... 9,477 14,216 86,846 11,846 11,846 5,529 139,760
Capital Lease Obligations.... 149 84 84 76 76 71 540
Operating Lease
Obligations................ 4,717 1,685 490 184 20 -- 7,096
------ ------ ------ ------ ------ ----- -------
Total Contractual Cash
Obligations................ 14,343 15,985 87,420 12,106 11,942 5,600 147,396
====== ====== ====== ====== ====== ===== =======
SR Telecom has an employee share participation plan, a directors'
compensation plan and a stock option plan that provides stock options to key
employees, the options vesting over a period of four to five years. Stock issued
under the first two programs totaled 675,174 shares in 2002, (2001 -- 468,351,
2000 -- 155,743) for cash consideration of CDN$754 thousand (2001 -- CDN$815
thousand, 2000 -- CDN$890 thousand).
Cash Flows
Cash flows from operations (adjusted for the impact of discontinued
operations) increased by CDN$23.3 million from 2001, to CDN$33.3 million
primarily as a result of the reduction in receivables and non-cash working
capital items.
Cash outflows from financing activities were CDN$7.7 million for the year
ended December 31, 2002, compared to an inflow of CDN$6.7 million for the same
period in 2001. The difference is mainly due to a cash flow generation in 2001
of CDN$13.9 million from the issuance of shares.
Cash used in investing activities for the year ended December 31, 2002,
relates predominantly to the increase in short-term investments. For the same
period in 2001, the outflows relate to the asset acquisition from Lucent and the
integration of the RTC infrastructure.
SR Telecom believes that its cash and cash equivalents balance and
short-term investments will be sufficient to satisfy its cash requirements for
at least the next twelve months. SR Telecom intends to invest its cash in excess
of current operating requirements in interest-bearing, investment-grade
marketable securities.
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ACCOUNTING PRONOUNCEMENTS
The Canadian Institute of Chartered Accountants ("CICA") has recently
issued the following new accounting recommendations:
DISCLOSURE OF GUARANTEES
Accounting Guideline 14, "Disclosure of Guarantees": This guideline applies
to interim and annual financial statements beginning January 1, 2003. SR Telecom
has determined that no additional disclosures are necessary with respect to this
guideline.
IMPAIRMENT OF LONG-LIVED ASSETS
CICA Handbook Section 3063, "Impairment of Long-Lived Assets": These
recommendations establish the standards for the recognition, measurement and
disclosure of the impairment of long-lived assets held for use, which include
property, plant and equipment, intangible assets with finite useful life and
deferred start-up costs. In accordance with these recommendations, an impairment
loss is recognized when the carrying amount of the long-lived asset is not
recoverable and exceeds its fair value, and is measured as the amount by which
the carrying amount of the long-lived asset exceeds its fair value. These
recommendations are to be applied prospectively for years beginning on or after
April 1, 2003, however earlier adoption is permitted. SR Telecom has not yet
assessed the impact these recommendations will have on its results of
operations, and financial position.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISKS
SR Telecom transacts business in various foreign currencies and,
accordingly, it is subject to exposure from adverse movements in foreign
currency exchange rates. SR Telecom's revenue is primarily denominated in U.S.
dollars and Euros. Telecommunications service provider revenue is denominated in
Chilean pesos. Operating expenses incurred by its foreign subsidiaries are
denominated primarily in local currencies. SR Telecom currently does not use
financial instruments to hedge these operating exposures, however, SR Telecom
has used foreign currency forward contracts in the past to hedge its exposure to
currency fluctuations and will periodically utilize financial instruments to
hedge currency exposures on an ongoing basis. SR Telecom's ability to utilize
such instruments is limited by the availability of such instruments.
To a certain degree, there exists a natural hedge on a consolidated basis.
At December 31, 2002, SR Telecom had approximately US$35 million in net assets
and US$41 million in debt resulting in a foreign exchange loss on the assets
which was eliminated by a foreign exchange gain on the debt. SR Telecom does not
use derivative financial instruments for speculative trading purposes.
FIXED INCOME INVESTMENTS
SR Telecom's exposure to market risks from changes in interest rates
relates primarily to corporate debt securities. SR Telecom places its
investments with high credit quality issuers and, by policy, limits the amount
of the credit exposure to any one issuer.
SR Telecom's general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with a maturity of less than three months at the date
of purchase are considered to be cash equivalents. All investments with
maturities of three months or greater and less than one year are considered to
be short-term marketable securities.
INTEREST RATE RISK
SR Telecom is exposed to both fixed and floating rate financial assets and
liabilities with the net exposure being to long-term debt instruments bearing
approximately equally fixed and floating rate interest obligations. Floating
rates are based on both US dollar LIBOR rates and the Canadian central bank
prime rate.
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SR Telecom places its investments with high credit-quality issuers and, by
policy, limits the amount of the credit exposure to any one issuer. All
investments consist of government and corporate debt securities. All of SR
Telecom's investments are in investment grade commercial paper or government
backed obligations. This investment policy reduces SR Telecom's exposure to
long-term interest rate changes. All highly liquid investments with a maturity
of less than three months at the date of purchase are considered to be cash
equivalents. All investments with maturities of three months or greater and less
than one year are considered to be short-term marketable securities.
The SEC's rule related to market risk disclosure requires that SR Telecom
describe and quantify its potential losses from market risk sensitive
instruments attributable to reasonably possible market changes. SR Telecom is
exposed to changes in interest rates on its marketable securities and debt
instruments. A hypothetical 100 basis point increase in short-term global
interest rates would increase the annualized net interest expense at December
31, 2002 by approximately CDN$400,000.
141
SR TELECOM MANAGEMENT
The following table sets forth information concerning the directors and
executive officers of SR Telecom as of July 31, 2003:
NAME POSITION
---- --------
John C. Charles...................... Director
Constance L. Crosby.................. Director, Secretary
J.V. Raymond Cyr..................... Director
Paul A. Dickie....................... Chairman of the Board of Directors
Francis R. Fox....................... Director
Lionel P. Hurtubise.................. Director
Paul E. Labbe........................ Director
Nancy E. McGee....................... Director
Pierre St-Arnaud..................... President & Chief Executive Officer; Director
David L. Adams....................... Senior Vice President, Finance and Chief Financial Officer
Remy Brodeur......................... Vice President, Marketing
Marie-France Desnoyers............... Vice President, Human Resources
Wido Hoville......................... Vice President, International Business Development
Albert Israel........................ Vice President, Engineering
Claude Giguere....................... Senior Vice President, Sales
Allan Klein.......................... Vice President, Technology
Michael J. Morris.................... Senior Vice President and General Manager, SR Telecom SAS,
France
Benoit Pinsonnault................... Senior Vice President and General Manager Product
Bruce Robinson....................... Senior Vice President and General Manager, Projects and
Services
Marc St-Onge......................... Vice President, Product Line Management
JOHN C. CHARLES has served on the board of SR Telecom since 2001 and is a
Managing Director of LeBlanc & Royle Enterprises Inc., SR Telecom's largest
shareholder. He is also a Director of Prism Equities Inc., a publicly traded
Canadian medical products investment corporation, and a Director of Northern
Property Real Estate Investment Trust, which is listed on the Toronto Stock
Exchange. From 1997 to 2001, Mr. Charles was President, CEO and a Director of
LeBlanc Ltd., a Canadian based wireless infrastructure services company, which
operated throughout North America and, through subsidiaries, in Australia,
Southeast Asia and the Middle East. He is a chartered accountant and from 1995
to 1997, Mr. Charles was a Senior Vice President and a Director of Midland
Walwyn Inc. (now Merrill Lynch Canada Inc.). Mr. Charles is a graduate of
Queen's University.
CONSTANCE L. CROSBY has served on the board of SR Telecom since 1986 and as
its Secretary since 2003. She is a Partner of Byrne, Crosby in Toronto engaged
primarily in the field of commercial law. She serves on the board of Norcom
Telecommunications Inc., a cable television company, and The Coutts Halsall
International Bank, Inc.. Ms. Crosby is also the Secretary of LeBlanc & Royle
Enterprises Inc., SR Telecom's largest shareholder, and is an officer of Psion
Teklogix Inc., a Canadian company that is a leading supplier of wireless data
communications systems. She graduated from Osgoode Hall Law School and is a
member of the Canadian and American Bar Associations.
J.V. RAYMOND CYR has served on the board of SR Telecom since 1996 and is
Chair of Polyvalor Inc. A former Chairman of BCE, Bell Canada, Telesat Canada
and TMI Communications, Mr. Cyr also serves on the boards of Univalor Inc., Air
Canada, Canadian National, G.T.C. Transcontinental Ltd., ART Advanced Research
and Technologies, the Old Port of Montreal Corporation Inc., Cable Satisfaction
Intl Inc., Cogni-
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Science, Triton Electronik Inc., Archeveche de Montreal Conseil Economique and
Fonds-Groupe Investissements Technologiques. He is also a member of the Canadian
Academy of Engineering and Gouverneurs Associes de l'Universite de Montreal and
is a Director Emeritus of Ecole Polytechnique de Montreal. Mr. Cyr has a
Bachelor of Science in Engineering from the University of Montreal.
PAUL A. DICKIE was instrumental in the creation of SR Telecom and has
served on the board of SR Telecom since SR Telecom's incorporation in 1981. He
serves as the Chairman of the Board of SR Telecom. Mr. Dickie, a chartered
accountant, is a Managing Director of LeBlanc & Royle Enterprises Inc., SR
Telecom's largest shareholder. He joined LeBlanc & Royle in 1972. He serves on
the board of Performance Improvements Speed Shops Ltd, a retailer of automotive
specialty parts.
FRANCIS R. FOX has served on the board of SR Telecom since 1994. He is the
Chairman of Rogers Telecommunications (Q), President, Strategic Relations,
Rogers Wireless Inc. and a former Minister of Communications for Canada. He is a
member of the Ontario and Quebec bars, as well as the Canadian Bar Association,
and prior to 1997 was a partner with Fasken Martineau DuMoulin LLP, SR Telecom's
principal legal counsel. A member of the House of Commons from 1972 to 1984, he
filled several positions in the federal cabinet starting in 1976. Mr. Fox holds
degrees from the University of Montreal, Harvard University and Oxford, where he
studied as a Rhodes Scholar.
LIONEL P. HURTUBISE has served on the board of SR Telecom since 1999 and is
the Chairman of the Board of Ericsson Canada Inc., a corporation for which he
has also served as President and Chief Executive Officer. Mr. Hurtubise has been
in the forefront of telecommunications and computer science technology in Canada
for many years. Prior to joining Ericsson in 1986, he served as President of
International Systcoms Ltd., then a leader in the field of mobile radio
telephony. He was also a principal in the formation of Westech Systems Ltd., a
joint venture in which Alberta Government Telephones was a participant in
developing Canada's first cellular mobile telephone network. Mr. Hurtubise is
active in private and governmental organizations dedicated to the advancement of
telecommunications research and development. Mr. Hurtubise studied Science at
Loyola College, Montreal and Economics at McGill University.
PAUL E. LABBE has served on the board of SR Telecom since 1999. He is the
Executive Director of the Foundation for Sustainable Growth and a Consultant on
matters of international trade and finance. Mr. Labbe is the former Chairman of
the Board and Chief Executive Officer of Citibank Canada. Prior to joining
Citibank, he served for over five and a half years as President and CEO of the
Export Development Corporation, following six years as President of Investment
Canada. Mr. Labbe has spent most of his career in the field of international
trade and finance, having started in 1966 as a Canadian Trade Commissioner in
Paris, France, serving as Executive Assistant to the Minister of International
Trade until 1973, when he became a founding partner of Interimco Ltd., an
international trading company. Mr. Labbe studied Political Science and Economics
at the University of Ottawa and obtained a law degree from McGill University. He
also studied at the Ecole nationale d'administration in Paris and attended the
ISMP Program at the Harvard Business School.
NANCY E. MCGEE has served on the board of SR Telecom since 1984 and is a
Managing Director of LeBlanc & Royle Enterprises Inc., SR Telecom's largest
shareholder. Ms. McGee is a chartered accountant. She joined LeBlanc & Royle in
1978 and was involved in the growth of that company's various communications
infrastructure businesses throughout the world. Ms. McGee also serves on the
boards of several non-profit organizations. Ms. McGee has a Bachelor of Science
from Trent University and an MBA from McMaster University.
PIERRE ST-ARNAUD joined SR Telecom in 2000 as President and Chief Operating
Officer and was appointed as CEO in April 2001. He has served on the board of SR
Telecom since 2001. Mr. St-Arnaud also sits on the board of directors of Electro
Composites Inc. From 1981 to 1995 he was employed in the national and
international operations of the Asea Brown Boveri (ABB) group of companies. In
1993, he became President of Power Transmission and Distribution Segment, ABB
Canada. In 1996, he served Hydro Quebec as Executive Vice President, Technology
and Development. From 1997 to 1999 he was engaged as President and Chief
Executive Officer at Geomat International Inc., a leader in the global geomatics
industry.
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Mr. St-Arnaud holds a Master's degree in Business Administration from Universite
du Quebec a Montreal and a Bachelor's degree in Electrical Engineering from
Ecole Polytechnique de Montreal.
DAVID L. ADAMS, SR Telecom's Senior Vice President Finance and Chief
Financial Officer, joined SR Telecom in March 1999. He is responsible for
executive management and oversight of all financial operations for the company.
Prior to joining SR Telecom, Mr. Adams had spent ten years with CAE Inc., where
he was Vice President, Finance and Administration and Vice President Human
Resources of CAE Electronics Ltd. Mr. Adams earned his Bachelor's degree in
Commerce and Finance from the University of Toronto in 1979. He began his career
at Clarkson Gordon, a Canadian affiliate of Ernst & Young, where he gained his
chartered accountant designation. In 1984, he joined The Bank of Nova Scotia. As
Senior Manager, he was responsible for the corporate finance and account
management activities of the bank's largest corporate banking unit in Canada.
REMY BRODEUR, SR Telecom's Vice President, Marketing, joined SR Telecom in
February 2002 as Director, Marketing. He was promoted to Vice President,
Marketing in July 2003 with responsibility for business and market development.
Previously, he enjoyed a 30 year career with BCE Inc. and its subsidiaries,
mainly with Bell Canada where he held the positions of Director of Network
Planning and Director of Sales. Just prior to joining SR Telecom, Mr. Brodeur
was with Bell Canada International as Director of Network Operations, managing
BCI's operations in Latin America. Mr. Brodeur has a B. Sc. from Laval
University (Quebec).
MARIE-FRANCE DESNOYERS joined SR Telecom in December 1998, as Vice
President, Human Resources. In this capacity she leads the company's effort to
attract, retain and direct the career development of SR Telecom's top talent.
Ms. Desnoyers has accumulated 12 years of experience in compensation & benefits,
organizational development and international human resources. Prior to joining
SR Telecom she worked for four years in a high technology environment as
Manager, human resources with CAE Electronics and before that at Avon Canada.
Ms. Desnoyers has a bachelor degree in Sciences from the Universite de Montreal.
WIDO HOVILLE is Vice President, International Business Development of SR
Telecom. Mr. Hoville is responsible for expanding SR Telecom's relationships
with development and financing institutions in all of its markets and managing
its national and international government relations efforts. Mr. Hoville joined
SR Telecom in 2002 and brings more than 20 years of experience in business
development at the global level and solid relationships around the world to SR
Telecom. Prior to joining SR Telecom, Mr. Hoville was Vice President,
International Marketing and Sales for the Transmission and Distribution
operations of ABB Inc., where he led major infrastructure projects in the power
sector.
ALBERT ISRAEL is Vice President of Engineering of SR Telecom. Mr. Israel
joined SR Telecom in September 1999 as Director of Research and Development and
was promoted to Vice President, Engineering in December 2001. Mr. Israel is
responsible for leading SR Telecom's overall research and development strategy
and managing the product development and management teams that deliver the
industry's leading fixed wireless solutions. Mr. Israel has more than 15 years
of management experience in the telecommunications industry. Before joining SR
Telecom, Mr. Israel was Vice President of Strategy and Technology at Positron
Industries Inc., a leading provider of 911 communication systems, which he
joined in 1986 after completing a bachelor's degree in Electrical Engineering at
McGill University.
CLAUDE GIGUERE joined SR Telecom in March 2003 as Senior Vice President,
Sales of SR Telecom and is responsible for the development of SR Telecom's
global sales strategy and leading its sales team toward the fulfillment of that
strategy. Mr. Giguere has over 25 years of experience in the telecommunications
industry. A graduate of Engineering from McGill University, Mr. Giguere started
his career with Bell Canada in engineering management and spent two years as
director of engineering at France Telecom. He spent 17 years with Nortel
Networks where he directed various sales and marketing teams followed by
assignments as General Manager for the establishment and successful launch of
two major alternative service providers in North America. During his career, Mr.
Giguere has completed a number of international assignments including those in
France, Mexico and most recently in Atlanta, Georgia, where he was Vice
President, Sales and Marketing for Nortel's Optical Systems Group.
144
ALAN KLEIN is Vice President, Technology of SR Telecom, where he leads the
effort of SR Telecom's development organization focusing on strategic research
and development and emerging technologies. Under his direction, SR Telecom
continues to focus significant resources on technology innovation and execution.
Mr. Klein joined SR Telecom in 1987 and has held several management positions in
the areas of product and technology development.
MICHAEL J. MORRIS is Senior Vice President and General Manager, SR Telecom
SAS in France. In this role, Mr. Morris oversees the sales, marketing, research
and development, and worldwide customer services functions for SR Telecom's
SWING product line. He also leads the development of internal and external
strategic initiatives and works with other members of SR Telecom's executive
team and staff to execute and implement these initiatives. Mr. Morris is a
graduate of Imperial College in London, England, where he received his
Bachelor's of Science (Honours) degree in Physics. Mr. Morris joined SR Telecom
in 1984, as Vice President Engineering.
BENOIT PINSONNAULT is Senior Vice President and General Manager, Products
of SR Telecom. Mr. Pinsonnault is responsible for the development of SR
Telecom's manufacturing and supply-chain strategy. Additionally, Mr. Pinsonnault
oversees the day-to-day operations of the company's manufacturing organization,
including all product fulfillment and logistics to meet SR Telecom's goal of
total customer satisfaction. Mr. Pinsonnault joined SR Telecom in December 1992
as Director of Manufacturing Engineering. He subsequently held the positions of
Director -- Production, and Director -- Manufacturing, and was promoted to Vice
President Customer Satisfaction and Operations in September 2000.
BRUCE G. ROBINSON is Senior Vice President and General Manager, Projects
and Services of SR Telecom with responsibility for network design, planning,
installation, engineering, testing, program management and maintenance. The
Projects group provides pre- and post-sale technical support to customers around
the world, responding to technical, operational and maintenance inquiries as
well as providing technical support for product upgrades, network growth and new
network deployments. Mr. Robinson joined SR Telecom in October 2000, following a
25-year career in the international high technology sector. He worked 20 years
with CAE Electronics where he held senior positions in sales, marketing and
project management. Prior to joining SR Telecom Inc., Mr. Robinson was Vice
President of Project Management for the SNC Lavalin, Energy Control System
Division. Mr. Robinson has a B.Sc.-Major in Physics from Loyola College.
MARC ST-ONGE is Vice President, Product Line Management of SR Telecom. Mr.
St-Onge's responsibilities include the management of SR Telecom's existing
product portfolio and the definition of new products. Mr. St-Onge joined SR
Telecom in September 1997 as Product Manager and was named Vice President of
Marketing in 1998 where he was responsible for setting the company's marketing
strategy as well as the identification of present and future wireless product
requirements. Prior to joining SR Telecom, Mr. St-Onge held product management
positions with Gandalf Technologies (now a division of Mitel), and Bell Canada,
where he was Senior Network Design Specialist.
TERMINATION OF EMPLOYMENT AND EMPLOYMENT CONTRACTS
The employment agreement of Mr. Pierre St-Arnaud, Chief Executive Officer
of SR Telecom, provides for continuance of salary for a period of up to
twenty-four months, as well as full vesting of all options then held, in the
event of termination of employment for any reason other than cause. Full vesting
of options will also occur in the event of a change of control of SR Telecom.
AUDIT COMMITTEE
SR Telecom's audit committee consists of Messrs. Lionel P. Hurtubise and
Francis R. Fox and Ms. Nancy E. McGee.
145
EXECUTIVE COMPENSATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table summarizes the compensation, expressed in Canadian
dollars, during the three fiscal years ended December 31st, 2002, for the Chief
Executive Officer of SR Telecom, the four most highly compensated executive
officers, other than the CEO, of SR Telecom who were serving SR Telecom at the
end of the financial year, and one other executive officer of SR Telecom who
would have been included within the four most highly compensated executive
officers had he been in the employ of SR Telecom at the year end. We refer to
these five officers collectively as the named executive officers. The
determination of the most highly compensated executive officers is made on the
basis of the total annual salary and annual incentive bonuses earned during the
fiscal year ended December 31, 2002.
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------
-------------------------- OTHER ANNUAL ALL OTHER
SALARY BONUS(1) COMPENSATION STOCK OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (CDN$) (CDN$) (CDN$) GRANTED (#) (CDN$)(4)
--------------------------- ---- ------- -------- ------------ ------------- ------------
Pierre St-Arnaud.............. 2002 310,000 155,000 0 100,000 15,452
President & Chief 2001 278,461 0 0 70,000 13,296
Executive Officer 2000 112,115(2) 0 0 100,000 2,354
David L. Adams................ 2002 203,000 66,990 0 40,000 10,161
Senior Vice President, Finance
& 2001 203,000 15,225 0 50,000 12,015
Chief Financial Officer 2000 195,000 35,100 0 15,000 4,095
Marc St-Onge.................. 2002 200,000 40,000 0 35,000 28,656
Vice President, Product 2001 151,827 0 0 65,000 8,590
Line Management 2000 99,192 0 0 8,000 2,079
Benoit Pinsonnault............ 2002 180,000 59,400 0 50,000 8,953
Senior Vice President and 2001 175,950 22,950 0 50,000 8,845
General Manager, Products 2000 137,308 0 0 10,000 2,879
Bruce Robinson................ 2002 168,789 57,750 0 35,000 8,953
Senior Vice President & 2001 156,000 23,400 0 50,000 6,753
General Manager, Projects and 2000 31,731 20,000 0 20,000 666
Services
Wadih Tawa(3)................. 2002 171,538 0 0 0 95,996
Senior Vice President, Sales 2001 182,211 25,573 0 50,000 9,775
2000 125,000 14,472 0 25,000 2,544
---------------
Notes:
(1) Bonus amounts are paid in cash in the year following the fiscal year in
which they were earned/accrued.
(2) For the period from July 10 to December 31, 2000.
(3) Salary shown for Mr. Tawa includes full salary to termination date, being
October 30, 2002. All other compensation includes the following severance
payments: CDN$34,000 in lump sum severance for salary continuance benefits,
and CDN$23,936 for vacation payout.
(4) All other compensation includes overseas housing allowances, car leases, car
insurance and other compensation.
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OPTION GRANTS DURING 2002
The following table provides summary information regarding stock options
granted to the named executive officers from SR Telecom's Restated 1998 Key
Employee Stock Option Plan during the fiscal year ended December 31, 2002.
OPTIONS TO MARKET VALUE OF
PURCHASE % OF TOTAL SECURITIES
SR TELECOM OPTIONS UNDERLYING OPTIONS
STOCK GRANTED TO EXERCISE OR ON THE DATE
GRANTED IN EMPLOYEES BASE PRICE OF GRANT
NAME AND PRINCIPAL POSITION 2002 (#)(1) IN 2002 (CDN$/SECURITY) (CDN$/SECURITY) DATE OF EXPIRATION
--------------------------- ----------- ---------- --------------- ------------------ ------------------
Pierre St-Arnaud............. 50,000 9.71% CDN$2.29 CDN$2.29 February 14, 2012
President & Chief 50,000 0.88 0.88 December 18, 2012
Executive Officer
David L. Adams............... 25,000 3.88% 1.94 1.94 April 17, 2012
Senior Vice President, 15,000 0.88 0.88 December 18, 2012
Finance & Chief Financial
Officer
Marc St-Onge................. 25,000 3.40% 1.94 1.94 April 17, 2012
Vice President, Product 10,000 0.88 0.88 December 18, 2012
Line Management
Benoit Pinsonnault........... 35,000 4.85% 1.94 1.94 April 17, 2012
Senior Vice President and 15,000 0.88 0.88 December 18, 2012
General Manager, Products
Bruce Robinson............... 25,000 3.88% 1.94 1.94 April 17, 2012
Senior Vice President & 15,000 0.88 0.88 December 18, 2012
General Manager, Projects and
Services
NAMED EXECUTIVES NOT IN THE EMPLOY OF SR TELECOM AT YEAR END
Wadih Tawa................... 0 0.00% 0.00 0.00 n/a
Senior Vice President, Sales
---------------
Note:
(1) The options become exercisable in 20% increments, commencing on the first
anniversary of the date of grant. Options expire if not exercised within 10
years of the date of grant.
147
AGGREGATED OPTION EXERCISES DURING 2002 AND FINANCIAL YEAR-END OPTION VALUES
The following table provides summary information concerning the exercise of
options by SR Telecom's named executive officers in 2002 and the shares of SR
Telecom common stock represented by outstanding stock options held by each of
them as of December 31, 2002. The value realized is based on the market value on
the date of exercise, net of the exercise price. The value of unexercised
in-the-money options is calculated based on the difference between the exercise
price of the option and the fair market value of the common stock at December
31, 2002. At December 31, 2002, the fair market value of SR Telecom's common
stock was CDN$0.85 per share.
AGGREGATE VALUE OF UNEXERCISED
SECURITIES VALUE NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON REALIZED OPTIONS AT YEAR END YEAR END (CDN$)
NAME AND PRINCIPAL POSITION EXERCISE (#) (CDN$) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------- ------------ --------- ------------------------- -------------------------
Pierre St-Arnaud............... 0..... 0 54,000/216,000 0/0
President & Chief Executive
Officer
David L. Adams................. 0 0 40,000/105,000 0/0
Senior Vice President, Finance
& Chief Financial Officer
Marc St-Onge................... 0 0 16,200/91,800 0/0
Vice President, Product Line
Management
Benoit Pinsonnault............. 0 0 30,600/98,400 0/0
Senior Vice President and
General Manager, Products
Bruce Robinson................. 0 0 18,000/92,000 0/0
Senior Vice President & General
Manager, Projects and Services
NAMED EXECUTIVES NOT IN THE EMPLOY OF SR TELECOM AT YEAR END
Wadih Tawa(1).................. 0 0 20,000/0 0/0
Senior Vice President, Sales
---------------
Note:
(1) Employment terminated on October 30, 2002.
DIRECTORS' COMPENSATION FOR 2002
The aggregate compensation paid to directors in 2002 is set forth in the
table below. Mr. St-Arnaud received no additional compensation in his capacity
as director of SR Telecom. The table also includes for each such director, the
number of options to acquire shares of common stock held by such director.
Certain of SR Telecom's directors received additional compensation in
connection with consulting services in connection with the financing and
proposed sale of CTR. Mr. Charles performed certain consulting services for SR
Telecom's Chilean subsidiary, for which his associate, LeBlanc & Royle
Enterprise Inc., received compensation in the amount of CDN$104,000 in 2002. Mr.
Labbe was paid CDN$42,000 in consultant fees by SR Telecom in 2002 in connection
with the financing and proposed sale of CTR. Mr. Couchman resigned from his
director position on October 16th, 2002. He also received CDN$40,000 in
consultant fees during 2002.
148
ATTENDANCE AT
ATTENDANCE COMMITTEE
ATTENDANCE AT REGULARLY MEETING HELD ATTENDANCE OPTIONS TO
AT REGULARLY SCHEDULED OTHER THAN AT BOARD PURCHASE SHARES
SCHEDULED COMMITTEE ON BOARD MEETING HELD OF SR TELECOM
RETAINER BOARD MEETINGS MEETING MEETING DAY TELEPHONICALLY COMMON STOCK
NAME OF DIRECTOR (CDN$) (CDN$) (CDN$) (CDN$) (CDN$) (#)
---------------- -------- -------------- ------------ ------------- -------------- ---------------
John C. Charles............ 10,000 8,000 0 0 0 0
Constance L. Crosby........ 10,000 8,000 1,500 3,000 500 5,000
J.V. Raymond Cyr........... 10,000 8,000 1,500 1,000 500 5,000
Paul A. Dickie............. 10,000 9,000 1,500 1,000 500 5,000
Francis R. Fox............. 10,000 7,000 1,000 1,000 500 5,000
Lionel P. Hurtubise........ 10,000 7,000 0 0 500 5,000
Paul E. Labbe.............. 10,000 9,000 1,500 3,000 0 5,000
Nancy E. McGee............. 10,000 9,000 1,500 3,000 500 5,000
Pierre St- Arnaud.......... 0 0 0 0 0 270,000
W. Ronald Couchman......... 10,000 5,000 0 0 0 5,000
Under the Directors' Share Compensation Plan, approved at SR Telecom's
meeting of shareholders held on April 19, 2000, directors are entitled to fix at
the start of each fiscal year, a percentage of their directors' compensation
between 10% and 100% to be paid quarterly in common stock of SR Telecom, at the
market price at the time such payment is made. In the year 2002, an aggregate of
120,746 shares of common stock were issued to directors under the Directors'
Share Compensation Plan, at share prices ranging from CDN$0.82 to CDN$1.93.
SHARE COMPENSATION ARRANGEMENTS
SR Telecom has put into place a Restated 1998 Key Employee Stock Option
Plan, a Directors' Share Compensation Plan and a Restated 1998 Employee Stock
Purchase Plan. These plans are all incentive based plans, designed to increase
performance of employees, senior management, officers and directors, as the case
may be, and further align the interests of each of these participants with
shareholder interests. The Plans also serve as a tool to retain talented
individuals within SR Telecom.
Restated 1998 Key Employee Stock Option Plan
As of July 31, 2003, there were options to purchase 3,210,600 shares of
common stock outstanding under this plan, from a total authorized reserve amount
still available under this plan of 4,388,000, leaving 1,177,400 share
reservations available for further option grants.
The following table summarizes the outstanding stock options at December
31, 2002.
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS REMAINING EXERCISE PRICES
CDN$ OUTSTANDING CONTRACTUAL LIFE CDN$
------------------------ ----------- ---------------- ----------------
1 to 3..................................... 2,065,500 9.0 years 1.68
4 to 6..................................... 938,300 7.2 years 5.09
7 and over................................. 283,000 6.5 years 9.30
--------- --------- ----
3,287,300 8.3 years 3.31
Directors' Share Compensation Plan
Under the Directors' Share Compensation Plan each non-employee director of
SR Telecom may at the commencement of the year, elect to receive all, part or
none of the remuneration paid to him by SR Telecom for directors' retainer and
meeting attendance fees in shares of common stock of SR Telecom. Since
implementation, a total of 326,213 shares of common stock have been issued to
directors, at the then current market price, in lieu of cash compensation. The
aggregate number of shares of common stock reserved for
149
issuance under this plan is 450,000 and, at present, a current reserve of
123,787 shares of common stock is available under this plan for future
issuances.
Restated 1998 Employee Stock Purchase Plan
In February 2003, the number of shares of common stock reserved for
issuance under the Restated 1998 Employee Stock Purchase Plan was increased by
250,000 from 2,000,000 to 2,250,000. As of July 31, 2003, 391,136 shares of SR
Telecom common stock are available for issuance under the employee stock
purchase plan. The average share issuance in 2002 under this plan was 138,532
shares issued per quarter.
Under this plan, employees with six months of continuous service may
purchase shares of common stock by contributing up to 5% of their annual
salaries through payroll deductions. SR Telecom supplements the contributions of
the employees, enrolled in this plan to an extent determined by the compensation
and nominating committee of the board of directors of SR Telecom, from time to
time. Such supplements are not to exceed one-third of the amount contributed by
the employees, who are required to commit to the retention of any shares of
common stock so purchased for a minimum of two years. From its inception in
1998, the total number of shares that have been reserved for issuance under the
Restated 1998 Employee Share Purchase Plan is 2,250,000, of which 1,858,864
shares of common stock have been issued, and 391,136 shares remain available for
issuance.
MANAGEMENT INCENTIVE PLANS
SR Telecom has put in place management incentive plans for members of its
management team pursuant to which the amount of additional cash compensation, or
bonuses, is determined. The plans are based on the performance of SR Telecom and
the individual. The individual's performance will be evaluated based on the
level of achievement of pre-set objectives for the year and SR Telecom's
performance will be established by comparing year-end results vs. plan in terms
of "Net Earnings after Tax Results" of its core business. Individuals become
eligible to receive a bonus ranging from 0% to 10% of the individual's base
salary when SR Telecom exceeds 80% of its budgeted performance, 0% to 30% when
SR Telecom exceeds 100% of its budgeted performance and 0% to 50% when SR
Telecom exceeds 120% of its budgeted performance. The amount any given person
receives within the available range depends, in turn, on that person's
achievement of individual goals.
PENSION AND RETIREMENT BENEFITS
SR Telecom has not set aside or accrued any amounts to provide pension,
retirement or similar benefits.
COMPOSITION OF THE COMPENSATION COMMITTEE
The following individuals have served on SR Telecom's compensation and
nominating committee for the entire fiscal year of 2002: J.V. Raymond Cyr
(Chair), Paul A. Dickie and Francis Fox.
REPORT ON EXECUTIVE COMPENSATION
The policies followed by SR Telecom's compensation committee with respect
to the compensation paid to all executive officers are set out below.
Compensation for named executive officers, as for executive officers as a
whole, may, in addition to base salary, include compensation in the form of an
annual bonus and, over a longer term, benefits arising from the grant of a stock
option.
SR Telecom paid a bonus to some executive officers in 2002. The Committee
considered the overall performance of SR Telecom versus other companies in the
telecom sector and the acquisition of intellectual property and fully developed
products that will improve the position of SR Telecom in the future as
determinant factors for the bonus.
150
The committee approves base salaries for executive officers based on
reviews of market data. The level of base salary is also determined by the level
of past performance, as well as by the level of responsibility and the
importance of the position to SR Telecom.
Base salaries are set at levels which are competitive with base salaries
paid by leading high technology corporations of a comparable size, especially
those within the telecommunications industry, thereby enabling SR Telecom to
compete for and retain executives critical to SR Telecom's long term success.
Annual bonuses are awarded as incentives and quantified in light of corporate
and individual performance. Share ownership opportunities are provided to align
the interests of executive officers with the long-term interests of
shareholders.
Under the general policy with respect to compensation, executive officers
may qualify for annual incentive awards. Corporate performance, as assessed by
the Board of Directors, determines the aggregate amount of incentive bonus that
may be paid to all senior managers as a group in respect of a fiscal year.
Corporate performance is measured by comparing performance targets included in
SR Telecom's annual operating plan with actual results for a fiscal year.
Consideration of individual performance enables SR Telecom to recognize and
effectively reward those individuals whose special efforts have assisted SR
Telecom to attain its corporate performance objectives.
SR Telecom maintains its Restated 1998 Key Employees Stock Option Plan to
give each option holder an interest in preserving and maximizing shareholder
value in the long term, to enable SR Telecom to attract and retain individuals
with experience and ability, and to reward individuals for current performance
and expected future performance.
No one element of executive compensation is permanently emphasized over
another. All segments are believed to be of major importance to SR Telecom in
assuring the engagement and retention of executives. Some elements may be deemed
temporarily more important than others in certain periods and in differing
circumstances.
Compensation Of Chief Executive Officer
As a general rule, SR Telecom's compensation committee bases the
compensation of the chief executive officer on the policies described above,
considering in particular, the responsibilities of the office and results
achieved measured by reference to SR Telecom's annual operating plan presented
to the board of directors at the commencement of each fiscal year. The chief
executive officer is eligible to be granted stock options under the Restated
1998 Key Employee Stock Option Plan and participate in SR Telecom's Restated
1998 Employee Stock Purchase Plan.
Submitted by the Compensation
Committee
J.V. Raymond Cyr, Chair
Paul A. Dickie
Francis R. Fox
151
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS
Each of Messrs. Charles and Dickie and Ms. McGee is a director of SR
Telecom and a managing director of LeBlanc & Royle Enterprises Inc., SR
Telecom's largest shareholder. Constance Crosby is a director and the Secretary
of SR Telecom and the Secretary of LeBlanc & Royle Enterprises Inc. LeBlanc &
Royle from time to time performs consulting work for SR Telecom. In connection
with these services, SR Telecom has paid an aggregate of approximately
CDN$720,000 to LeBlanc & Royle since January 1, 2000. In 2001, LeBlanc & Royle
purchased 3,125,000 shares of SR Telecom common stock at CDN$1.60 per share as
part of a rights offering.
Constance Crosby, a member of SR Telecom's board of directors and Secretary
of SR Telecom, is a partner in Byrne, Crosby, which acts as corporate secretary
to SR Telecom, and performs certain other work for SR Telecom. In connection
with these services, SR Telecom has paid an aggregate of approximately
CDN$324,089 to Byrne, Crosby since January 1, 2000.
Certain of SR Telecom's directors received fees in connection with
consulting services in 2002. For further details about the fees paid to
directors, see "-- Executive Compensation -- Directors' Compensation for 2002".
INDEBTEDNESS OF DIRECTORS, EXECUTIVES & SENIOR OFFICERS UNDER SECURITIES
PURCHASE PROGRAMS
The aggregate indebtedness outstanding to SR Telecom or any of its
subsidiaries, for indebtedness entered into in connection with a purchase of
securities of SR Telecom, of all directors, executive officers and senior
officers of SR Telecom, that held such position or office at any time during the
fiscal year 2002, as of July 31, 2003 is CDN$128,000.
NUMBER OF
LARGEST AMOUNT SECURITIES BOUGHT
AMOUNT OUTSTANDING WITH FINANCIAL
OUTSTANDING AT APRIL 30, ASSISTANCE
SINCE 2000 2003 DURING SECURITY
NAME AND PRINCIPAL POSITION INVOLVEMENT OF ISSUER CDN($) CDN($) THE YEAR 2002 FOR DEBT
--------------------------- --------------------- ----------- ------------ ----------------- ---------
Pierre St-Arnaud(1)............... Loan to assist with 70,000 70,000 0 Unsecured
President & Chief purchase of shares
Executive Officer of common stock of SR
Telecom
David L. Adams(1)................. Loan to assist with 58,000 58,000 0 Unsecured
Senior Vice President, purchase of shares
Finance & Chief of common stock of
Financial Officer SR Telecom
---------------
Note:
(1) Principal is due July 3, 2006, with interest at 5% per annum calculated on
principal outstanding payable annually on July 3, in each year prior to
maturity. These loans were made pursuant to Formal Loan Agreements dated
July 3, 2001.
152
INDEBTEDNESS OF DIRECTORS, EXECUTIVES & SENIOR OFFICERS OTHER THAN UNDER
SECURITIES PURCHASE PROGRAMS
The aggregate indebtedness outstanding to SR Telecom or any of its
subsidiaries, for indebtedness not entered into in connection with a purchase of
securities of SR Telecom, of all directors, executive officers and senior
officers of SR Telecom, that held such position or office at any time during the
fiscal year 2002, as of July 31, 2003 was CDN$34,000. Other than loans disclosed
elsewhere in this section, there are no loans between the company and its
directors, executives and senior officers.
LARGEST AMOUNT
OUTSTANDING DURING AMOUNT
PERIOD SINCE OUTSTANDING AT
JANUARY 1, 2000 APRIL 30, 2003 SECURITY
NAME AND PRINCIPAL POSITION INVOLVEMENT OF ISSUER CDN($) CDN($) FOR DEBT
--------------------------- --------------------- ------------------ -------------- ---------
Pierre St-Arnaud(1)............... Loan associated 34,000 34,000 Unsecured
President & Chief with relocation of
Executive Officer principal residence
---------------
Note:
(1) Principal is due July 3rd, 2006, with interest at 5% per annum calculated on
principal outstanding payable annually on July 3rd, in each year prior to
maturity. This loan was made pursuant to a Formal Loan Agreement dated June
13, 2002.
153
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF SR TELECOM
The following table provides information about the beneficial ownership of
shares of SR Telecom's common stock as of July 31, 2003 by:
- each person known by SR Telecom to own beneficially five percent or more
of SR Telecom's common stock;
- each of SR Telecom's directors;
- each of SR Telecom's named executive officers who will continue to serve
in their capacities as such after the merger; and
- all of SR Telecom's current executive officers and directors as a group.
Beneficial ownership includes any shares for which a person has sole or
shared voting power or investment power and any shares of which the person has
the right to acquire beneficial ownership within 60 days after July 31, 2003
through the exercise of any option or otherwise. All shares included in the
"Right to acquire" column represent shares subject to outstanding stock options
exercisable within 60 days after July 31, 2003. Except as noted below, SR
Telecom believes that the persons named in the table have sole voting and
investment power with respect to the shares of common stock set forth opposite
their names. The inclusion of shares listed as beneficially owned does not
constitute an admission of beneficial ownership. The percentage of beneficial
ownership is based on 60,946,415 shares of SR Telecom common stock outstanding
as of July 31, 2003. The information as to each person has been furnished by
such person.
NUMBER OF SHARES BENEFICIALLY OWNED
----------------------------------------- PERCENT
OUTSTANDING RIGHT TO BENEFICIALLY
NAME SHARES ACQUIRE TOTAL NUMBER OWNED
---- ------------- -------- ------------ ------------
LeBlanc & Royle Enterprises Inc.(1)...... 14,229,578 0 14,229,578 23.36%
Howson Tattersall Investment
Counsel Limited(2)..................... 5,598,000 0 5,598,000 9.19%
John C. Charles.......................... 14,239,578(3) 0 14,239,578(3) 23.36%
Constance L. Crosby...................... 51,208 5,000 56,208 *
J.V. Raymond Cyr......................... 74,871 5,000 79,871 0.13%
Paul A. Dickie........................... 15,907,578(3) 5,000 15,912,578(3) 26.11%
Francis R. Fox........................... 26,441 5,000 31,441 *
Lionel P. Hurtubise...................... 21,213 5,000 26,213 *
Paul E. Labbe............................ 44,014 5,000 49,014 *
Nancy E. McGee........................... 14,829,578(3) 5,000 14,834,578(3) 24.34%
Pierre St-Arnaud......................... 57,500 98,000 155,500 0.25%
David L. Adams........................... 40,000 66,000 106,000 0.17%
Benoit Pinsonnault....................... 12,000 50,000 62,000 *
Bruce Robinson........................... 19,016 33,000 52,016 *
Marc St-Onge............................. 500 34,800 35,300 *
All directors and executive officers as a
group (18 persons)..................... 16,935,409(3) 486,300 17,419,709(3) 28.36%
---------------
* Less than 0.1%.
(1) LeBlanc & Royle is SR Telecom's largest shareholder.
(2) Based on information contained in an alternative monthly report dated
October 31, 2002 filed with the Canadian securities regulators.
154
(3) Includes 14,229,578 shares of SR Telecom common stock held by LeBlanc &
Royle, of which each of Messers. Charles, Dickie and Ms. McGee is a
shareholder and serves as a managing director. Each of Messers. Charles,
Dickie and Ms. McGee disclaims beneficial ownership of these shares.
SIGNIFICANT CHANGES IN OWNERSHIP
In 2001, LeBlanc & Royle Enterprises Inc. purchased 3,125,000 shares of SR
Telecom common stock at CDN$1.60 per share as part of a rights offering. As a
result of this purchase and other smaller purchases, its ownership in SR Telecom
increased from 23.9% in March 2001 to 25.7% in March 2003.
CONTROL PERSONS
To the knowledge of SR Telecom, no person or group directly or indirectly
controls SR Telecom, except that the directors and officers of SR Telecom as a
group may be deemed to control SR Telecom.
CANADIAN BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
Under Canadian law, holders of 10% or more of SR Telecom's common stock are
required to report their holdings to the Canadian securities regulators. As a
result, there is no public record available to SR Telecom of persons who hold
between 5% and 10% of its shares of common stock.
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NETRO BUSINESS
OVERVIEW
Netro designs, markets and sells broadband, point-to-multipoint, fixed
wireless equipment. Telecommunications service providers use Netro's equipment
as an alternative to using wired connectivity or point-to-point fixed wireless
equipment. The three principal applications for Netro's products are:
- Providing voice and high speed data access connections to residences,
principally through Netro's Angel product line, although to date Netro
has not had material sales of Angel,
- Providing voice and high speed data access connections for businesses,
principally through Netro's AirStar product line, and
- Connecting mobile phone base stations to the core telecommunications
network, principally through Netro's AirStar product line.
Netro began commercially shipping its first point-to-multipoint product,
AirStar, in 1998 and has a significant installed base for this product. AirStar
operates at the higher end of the licensed frequency spectrum (10 -- 39 GHz)
with support for an additional frequency at the lower range (3.5 GHz).
In February of 2002 Netro acquired from AT&T Wireless their fixed wireless
development team, a license to intellectual property, equipment and proprietary
software assets. This product, called Angel, was commercially deployed in the
United States by AT&T Wireless, however since acquiring it, Netro has modified
the Angel platform to conform to international standards and Netro is marketing
this product line principally in international locations. Angel operates at the
lower end of the licensed frequency spectrum (1.9 -- 3.5 GHz). To date, Netro
has not had material sales of Angel.
Both the AirStar and Angel platforms have been designed to minimize the
costs of deployment and operation and to permit operators to offer a broad range
of voice, Internet Protocol, or "IP", and data services. Netro offers complete
solutions that operate at point-to-multipoint frequencies licensed in every
major geographical area in the world, including Europe, Asia, Australia, North
America and South America, which Netro believes is a significant competitive
advantage.
Netro was incorporated in California on November 14, 1994 and was
reincorporated in Delaware on June 19, 2001. Netro's principal corporate offices
are located at 3860 North First Street, San Jose, California 95134.
THE NETRO SOLUTION
The global telecommunications industry has experienced substantial
deregulation during the past several years. Simultaneously, the emergence of the
Internet and other telecommunications services has increased the demand for
bandwidth. In addition, Netro believes that there is a growing demand for public
telecommunications voice services in some less developed countries where the
number of telephone lines per 100 inhabitants, known as tele-density, is below
10, but there is significant per capita income growth. This is driving local
access service providers to upgrade their networks and increase their service
offerings. However, the public telecommunications infrastructure does not
currently meet all the public access demand and therefore fixed wireless access
systems have emerged as an alternative to copper wired infrastructure for
telephony and access to the Internet. Fixed wireless technology is an attractive
solution for network access needs, since it offers quick deployment,
independence from the limitations of an existing wired network, lower
infrastructure costs and lower operating costs.
At the same time that deregulation and the emergence of the Internet have
influenced telecommunications networks around the world, governments are also
licensing mobile service providers to use new spectrum for advanced mobile phone
services that include both voice calls and data functionality, such as Internet
browsing. This next generation of cellular phone service, typically referred to
as 3G, is expected to require significantly more hub sites than existing
cellular topologies. In addition, these hub sites will be transmitting not only
voice, but also high speed data traffic. Netro believes that point-to-multipoint
technology such as
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AirStar can be a more efficient and cost-effective alternative for connecting
these 3G cellular hubs to the core mobile network than alternate methods, such
as leased lines and point-to-point radios.
Netro's AirStar system operates at the higher licensed frequencies (10 --
39 GHz, with a low frequency version for 3.5 GHz) and is designed to allow
service providers to offer a wide range of high speed data and voice services to
small and medium-sized enterprises and to enable mobile service providers to
deploy cost effective transmission infrastructure for their 3G cellular
networks. AirStar has an impressive track record of performance and stability
across a worldwide installed base. AirStar can handle a wide range of services
providing on-demand bandwidth and allowing for oversubscription of available
spectrum, thereby allowing service providers to maximize revenues from their
broadband wireless installation.
Netro's Angel system operates at the lower licensed frequencies (1.9 -- 3.5
GHz) and is designed to offer residences and small businesses primary voice and
high speed data services with speeds similar to those offered by DSL. Angel uses
orthogonal frequency division multiplexing to allow service providers
non-line-of-sight coverage within a cell, to ensure that up to 95% of the
population within a given cell will be covered by the base station. This
non-line-of-sight capability, along with the quality of the services offered by
Angel, make it a leading edge solution. Angel was deployed in the United States
to 47,000 subscribers and was the first solution of its kind to be mass deployed
and field proven.
Both AirStar and Angel are designed to provide the following benefits to
service providers:
- CARRIER CLASS VOICE AND HIGH SPEED DATA SERVICES. Many existing high
speed access technologies are optimized for either voice or data traffic.
However, offering both voice and data services can increase the average
revenue per user a service provider can realize. Voice traffic requires
fixed-speed, low-capacity transmissions, while data traffic requires
variable-speed, high-capacity transmissions. Consequently, network
operators wishing to carry both types of traffic, whether because they
offer access solutions or are aggregating mobile phone traffic, often
must choose among setting aside capacity to service peak transmission
data traffic requirements, which typically requires installing more base
stations, allowing degradation of service during heavy usage, or
servicing a smaller number of subscribers. In contrast, service providers
using the Angel or AirStar systems can support voice and high speed data
from the same system without having to make these performance
compromises.
- COST-EFFECTIVE DEPLOYMENT AND OPERATION. Both AirStar and Angel use
point-to-multipoint deployment architectures. By employing a
point-to-multipoint architecture, one hub radio can serve multiple
subscriber radios. This results in lower total radio costs than
point-to-point architectures in which each radio can communicate with
only one other radio. In addition, a significant portion of the cost to
build an AirStar or Angel network is directly related to subscriber
growth. To add subscribers in a sector, a provider simply installs
equipment at the subscriber's premises and activates the service
remotely, allowing the service provider to incur costs concurrently with
the subscriber growth. The Angel system also uses orthogonal frequency
division multiplexing and therefore allows non-line-of-sight deployment,
meaning that there is up to a 95% chance in a given cell that a
subscriber can indeed be connected to the network even if the path
between the subscriber and the hub is obstructed. This reduces capital
expenditures in terms of the number of hubs that need to be deployed and
reduces service provider operating costs since there are fewer cases
where, due to unanticipated coverage gaps, a service technician will fail
to connect a subscriber who has requested service.
- QUALITY OF SERVICE AND RELIABILITY. Service providers using Netro's
products can deploy bundles of voice and high speed data services at
different price points to different market segments with high levels of
service availability. In addition, AirStar permits differentiated service
levels among subscribers. AirStar can prioritize transmissions depending
on their source and type, and fill available transmission capacity with
lower priority transmissions. Furthermore, Netro's products are
engineered to enable service providers top[offer the same high
reliability and availability for services that traditional service
providers have historically offered for voice services. Reliability is
accomplished through an error correction algorithm, redundancy and
comprehensive network management software.
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- GLOBAL MARKET COVERAGE. Netro currently offers products to address
point-to-multipoint licensed frequencies in Europe, Asia, Australia,
North America, and South America. Netro is also in the process of
adapting its products to additional frequencies to address new markets
and new spectrum auctions ongoing in its existing markets. Netro believes
its experience around the world makes its products more attractive to
service providers with multi-country strategies and enhances its ability
to apply learning from established markets to developing markets.
- RAPID TIME TO MARKET. Service providers using Netro's products can
achieve rapid time to market for integrated voice and high speed data
connections through efficient installation, network management software
and the ability to dynamically allocate capacity among subscribers.
Service providers that Netro targets have typically committed a high
level of capital investment to enter the high speed wireless
telecommunications services market, and thus are focused on quickly
realizing a return on their investment. Netro's systems are scalable and
allow service providers to rapidly offer new services to existing or
incremental subscribers within a coverage area by a simple software
command and a radio installation that is automatically configured by the
base station with little technician intervention. By installing one base
station, the service provider can attain coverage of many potential
subscribers. For example, an AirStar cell operating at the 26 GHz
frequency band can cover ranges from 5 to 15 square miles, depending on
local conditions, and has a transmission capacity of over 600 Mbps.
Compared to other high speed, wire-based technologies that often require
lengthy and expensive upgrades before offering service or do not support
integrated voice and data services, Netro's products allow a service
provider to rapidly deploy integrated voice and high speed data services
as demand warrants.
PRODUCTS AND TECHNOLOGY
Netro currently develops, markets and sells the AirStar product for access
offerings to small and medium-sized businesses and mobile infrastructure, and
the Angel platform for access offerings to residences and small businesses. Each
of Netro's product lines is comprised of three principal components:
- CUSTOMER PREMISE EQUIPMENT, which includes a radio element which sends
and receives signals to and from the hub equipment, and a digital signal
processing unit, which connects and provides interfaces to the end-user's
telecommunications and/or data network;
- HUBS, which include several radio elements that each send and receive
signals from multiple customer premise equipment units and an aggregation
unit, which aggregates data from the outdoor units and interfaces to the
telecommunications service provider's core network; and
- NETWORK MANAGEMENT SOFTWARE, which controls and monitors the operation of
hubs and customer premise equipment.
Netro believes its AirStar and Angel products have industry-leading
technologies including air interface technology, software and hardware
implementations, advanced networking architecture, radio transmission technology
and networking software capabilities. Key technology elements of Netro products
include the following:
- AIR INTERFACE PROTOCOL. Netro believes its products' proprietary air
interface protocols maximize the benefit of its point-to-multipoint
architecture, and advanced peak traffic management techniques. Netro's
air interface technology for AirStar, CellMAC, schedules transmissions
from each subscriber in very small increments. It allows subscribers to
request additional capacity from the base station for peak demand data
services through a capacity reservation mechanism that requires little
wasted radio frequency. The base station can prioritize the requests
according to service level agreements and allocates just enough capacity
or time slots to enable the transfer of each transmission. Netro's air
interface technology for Angel uses orthogonal frequency division
multiplexing, which allows deployment in non-line-of-sight mode. In
addition, Angel's air interface technology supports adaptive modulation,
thereby increasing bandwidth to some subscribers and doing the opposite
for others, all based on a dynamic analysis of the link characteristics
for each subscriber. This results in a larger
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effective transmission capacity and better bandwidth utilization. Angel's
air interface technology also supports circuit-switched voice services
and packet data services, with data capacity allocated on demand.
- EFFECTIVE COMBINATION OF VOICE AND DATA. In AirStar, the CellMAC air
interface utilizes asynchronous transfer mode, to efficiently combine
voice and data onto a single stream. This transports voice and data
traffic simultaneously and maintains a guaranteed quality of service for
each traffic type. Using this architecture, capacity for services can be
provided based on average throughput requirements rather than peak
throughput requirements. As a result, the capacity of the transmission is
increased, resulting in better use of radio frequency and thus lower
equipment expenditures. Netro's Angel technology carries circuit switched
voice over narrow channels, without any degradation in voice quality.
This leaves more bandwidth for dynamic sharing of data services.
- RADIO TECHNOLOGY. Since Netro's inception, it has worked extensively on
radio designs and volume manufacturing processes to create robust yet
cost-effective radios that support advanced radio technology and peak
demand transmission capabilities. The current AirStar radios are fourth
generation designs. Current Angel radios are third generation designs and
Netro is in the process of developing fourth generation designs which
will reduce cost and enhance performance.
- CARRIER CLASS MANAGEMENT SOFTWARE. Netro believes that the network
management systems it offers provide a significant competitive advantage.
Netro's software architecture and use of object-oriented design
principles for both real-time and network management software are key to
making Netro's software modular and adjustable to additional
communications protocols. Netro's software extends the ability of its
systems to enable the inter-working of voice protocols and support the
concentration of voice traffic.
SALES AND MARKETING
Netro has sales representatives in Mexico, China, France, Germany,
Singapore and Spain, as well as in Florida, Redmond, Washington and in Netro's
corporate headquarters in San Jose, California. Netro sells its products
indirectly through OEMs and local resellers in addition to through its direct
sales force. In addition, Netro offers installation and maintenance services
through Netro's system integration partners and third-party installation and
support organizations.
During 2002, most of Netro sales were direct or through local resellers who
rely heavily on Netro sales personnel and Netro expects this to continue in the
future. In determining which accounts are appropriate for direct sales, Netro
tries to identify those that are key early adopters that can help drive Netro's
product feature sets in a manner that will better address the needs of the
marketplace as a whole. These customers usually have the ability to install,
integrate, service and maintain their systems themselves. For customers
requiring significant installations integration and maintenance services, Netro
typically sells its product through OEMs.
Revenues by geographical area based on to the location of Netro's original
customers were as follows:
PERCENTAGE OF
REVENUES TOTAL REVENUES
--------------------------- ------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ---- ---- ----
Latin America......................... $ 1,815 $ 9,872 $ 6,661 11% 42% 10%
Europe................................ 12,998 6,028 1,447 76 25 2
Middle East........................... 471 482 40 3 2 --
Asia.................................. 910 468 192 5 2 --
------- ------- ------- --- --- ---
International......................... 16,194 16,850 8,340 95 71 12
United States......................... 913 6,809 60,187 5 29 88
------- ------- ------- --- --- ---
$17,107 $23,659 $68,527 100% 100% 100%
======= ======= ======= === === ===
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Substantially all of Netro's United States revenues are related to products
sold to OEMs and local resellers. In both 2001 and 2000, almost all of their end
customers were located outside of the United States. In 2002, US$400,000 of the
United States revenues were for an end user located in the United States.
Netro derives the substantial majority of its revenues from an
international customer base. International sales are subject to a number of
risks and uncertainties, including those described under "Risk Factors -- Risks
Related to the Businesses of SR Telecom and the Combined Company -- If the
combined company is unable to manage its international operations effectively,
including exposure to greater political and economic risk than doing business in
North America, and the dependence of payments from such service providers on the
political and economic situations in those countries, its business would be
adversely affected." Regardless of the distribution channel that services the
account, Netro's direct sales force maintains contact with the service provider
and the system integrator account team. This contact keeps Netro close to the
evolving needs of the service providers and helps ensure that Netro is well
positioned within each account.
Netro's marketing group provides marketing support services for Netro's
executive staff, its direct sales force and for Netro's OEMs and resellers.
Through Netro's marketing activities, Netro provides technical and strategic
sales support to Netro's direct sales personnel and system integrators or
resellers including in-depth product presentations, technical manuals, sales
tools, pricing, marketing communications, marketing research, trademark
administration and other support functions. Netro's marketing group is also
responsible for product management activities throughout each product's
lifecycle. These include the definition of product features, approval of product
releases and specification of enhancements to Netro's future product and service
offerings.
CUSTOMERS
Historically, the predominant portion of Netro's revenues have come from
sales to OEMs who have in turn resold Netro products to competitive phone
service providers in Europe. Netro has implemented a strategy centered around
changing its customer base to incumbent phone service providers and mobile
service providers. Although the majority of Netro's revenues in 2002 were
ultimately related to installations by competitive phone service providers,
Netro's strategy for future growth is dependent on the acceptance of Netro
products by these new target customers.
Revenues from customers that comprised more that 10% of revenue were as
follows:
PERCENTAGE OF
REVENUES TOTAL REVENUES
-------------------------- ------------------
2002 2001 2000 2002 2001 2000
------ ------- ------- ---- ---- ----
Lucent................................. $6,891 $ 7,110 $59,220 40% 30% 86%
Techtel................................ * 7,007 * * 30 *
Condumex............................... * 2,390 * * 10 *
------ ------- ------- --- --- ---
Aggregate amount....................... $6,891 $16,507 $59,220 40% 70% 86%
====== ======= ======= === === ===
---------------
* Revenues less than 10% for period
See "Netro Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OPERATIONS AND MANUFACTURING
Netro's manufacturing activities, based in its San Jose and Redmond
facilities, consist primarily of prototype manufacturing, final testing and
system staging. Netro's strategy is to outsource manufacturing to contract
manufacturers, which have the expertise and ability to achieve cost reductions
associated with volume manufacturing and to respond quickly to customer orders
while maintaining high quality standards. This also serves to turn some of
Netro's fixed costs into variable costs and enables Netro to share in the
purchasing efficiencies enjoyed by these larger manufacturers.
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Netro's operations and manufacturing groups facilitate technology transfer
between Netro's research and development group and the contract manufacturers.
Netro may also use its own manufacturing operation in situations where it needs
product before the full product is released to external manufacturers.
RESEARCH AND DEVELOPMENT
Netro believes that its extensive experience designing and implementing
high-quality network and radio components and system software has enabled it to
develop high-value integrated systems solutions. As a result of these
development efforts, Netro believes it has created an industry-leading platform
for cost-effective high speed wireless voice and data delivery with dynamic
allocation of capacity.
Netro believes that its future success depends on its continued investment
in research and development in core radio, networking and software technologies,
particularly in an effort to reduce product cost. Netro's research and
development expenses were US$28 million in 2002, US$25.8 million in 2001 and
US$24.3 million in 2000. Netro is committed to an ongoing research and
development program that is focused around reducing the manufacturing cost of
its products and a continuous assessment of service providers' needs and
technological changes in the communications market.
CUSTOMER ADVOCACY
A high level of continuing service and support is critical to Netro's
objective of developing long-term customer relationships. Netro consolidates all
aspects of its customer service, satisfaction and quality assurance initiatives
into a customer advocacy group. Netro's customer advocacy organization is based
in Netro's San Jose headquarters. Netro's customer advocacy organization in San
Jose serves as the interface to Netro's research and development group to
highlight certain problems and also provides information about customers' needs
to Netro's marketing and research and development organizations. Netro's
customer support model consists of three tiers of support:
- local problem isolation, which provides for on-site problem
identification and resolution of relatively simple issues;
- fault isolation and repair, which provides for consultation and
instruction by technicians trained by product experts; and
- expert level support from product engineering experts for the resolution
of problems not remedied by the first two levels of support.
Netro's main focus is to provide system integrators and first-tier support
partners with the ability to provide local support worldwide to service
providers, including training, spare parts, maintenance and installation. As
most of the hands-on support is provided through system integrators, local
resellers, service and installation partners, or the service providers
themselves, Netro focuses on offering various training courses to enable system
integrators, service and installation partners and service providers to perform
both local problem isolation and fault isolation and repair. Currently, the
majority of Netro's service and support activities are related to training and
installation support for service providers. These services are provided directly
at customer installations by Netro's customer advocacy group or remotely by
Netro's San Jose headquarters team.
Netro has a number of flexible hardware and software maintenance and
customer support programs available for products beyond the applicable warranty
period, depending on its customers preferences.
COMPETITION
The market for high speed, wireless, point-to-multipoint telecommunications
equipment is rapidly evolving and highly competitive. Increased competition is
likely to result in price reductions, shorter product life cycles, longer sales
cycles and loss of market share, any of which would adversely affect Netro's
business.
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Depending on the market Netro is addressing, Netro faces different types of
competition:
- ENTERPRISE ACCESS. As an enterprise access technology,
point-to-multipoint fixed wireless solutions compete with wire-based
solutions, such as fiber optic cable and leased T1 and E1 lines and
wireless solutions, such as point-to-point radios. As a company within
the point-to-multipoint fixed wireless industry addressing small and
medium enterprise access, Netro competes through its AirStar product with
large OEMs, such as Alcatel, Ericsson and Marconi, as well as with
smaller wireless-only companies, such as Alvarion.
- RESIDENTIAL AND SMALL BUSINESS ACCESS. As a residential and small
business access technology, point-to-multipoint fixed wireless solutions
compete with wire-based solutions, such as DSL and cable modems. As a
company within the point-to-multipoint fixed wireless industry addressing
residential and small business access, Netro competes through its Angel
product with established wireless local loop vendors, such as Innowave (a
division of ECI Telecommunications which has executed an agreement to be
acquired by Alvarion), AirSpan and Alvarion, as well as with numerous
startup companies that are developing products for Netro's industry.
- MOBILE INFRASTRUCTURE. As a technology for connecting cellular base
stations to the core telecommunications network, point-to-multipoint
fixed wireless solutions compete with wire-based solutions such as leased
T1 and E1 lines and wireless solutions such as point-to-point radios. As
a company within the point-to-multipoint fixed wireless industry
addressing cellular infrastructure, Netro competes through its AirStar
product principally with large systems integrators, such as Alcatel,
Ericsson and Marconi.
Netro expects competition to persist and intensify in the future. Many of
Netro's competitors are substantially larger than it is and have significantly
greater financial, sales, marketing, technical, manufacturing and other
resources and more established distribution channels. These competitors may be
able to respond more rapidly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources to the
development, promotion, sale and financing of their products than Netro can.
Netro's competitors may also attempt to influence the adoption of standards that
are not compatible with Netro's current architecture. Netro's larger, more
established competitors may have more influence with standards-setting bodies
than Netro does. If standards other than Netro's are adopted, this may require
Netro to incur additional development and integration costs and may delay
Netro's sales efforts.
Some of Netro's competitors may make strategic acquisitions or establish
cooperative relationships to increase their ability to gain customer market
share rapidly. These competitors may enter Netro's existing or future markets
with solutions that may be less expensive, provide higher performance or
additional features or be introduced earlier than Netro's solutions. Netro also
expects that other companies may enter its market with better products and
technologies. If any technology that is competing with Netro's is more reliable,
faster or less expensive or has other advantages over Netro's technology, then
the demand for Netro's products and services would decrease, which would
seriously harm Netro's business.
Netro's expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
may supplant or provide lower cost alternatives to Netro's products. To be
competitive, Netro must continue to invest significant resources in research and
development, sales and marketing and customer support. Netro cannot be sure that
it will have sufficient resources to make these investments or that it will be
able to make the technological advances necessary to be competitive. As a
result, Netro may not be able to compete effectively against its competitors.
GOVERNMENT REGULATION
Netro's products and business are affected by government regulation in
three principal ways.
- First, Netro's products must comply with the applicable regional or
national specifications regarding the technical characteristics for
similar products. For example, in order for products to be sold in the
United States, they must comply with the specifications mandated by the
Federal Communications Commission. Similarly, in the United States,
products which consume electrical power, typically must be certified by
Underwriters' Laboratories as safe. A similar set of regulatory bodies
regulates products
162
sold in the European Community. Some countries outside of the United
States and Europe allow products which meet U.S. or European regulatory
requirements to be sold there, but certain other countries, such as
Russia, have their own regulatory regimes with which Netro must comply
prior to selling products in those countries.
- Second, some countries require that Netro utilize local components or
labor in order for Netro's products to be sold in those countries, or in
order for Netro's products to avoid import duties which may make them
non-competitive with products from local manufacturers.
- Finally, Netro's products are designed to provide carrier class grades of
service. In order to provide this service, dedicated spectrum that is
free of interference from other equipment is required. In most countries,
the allocation of spectrum is controlled by the federal government. As a
result, government action or inaction with respect to licensing spectrum
affects Netro's ability to effectively make sales in a region. For
example, although Netro's products met the technical requirements
specified by Chinese regulators, delays in the process of actually
allocating 26 GHz spectrum to operators in China were a significant
factor in delaying its sales of products in that region.
Netro's failure to receive regulatory approval in a given jurisdiction, its
inability to comply with local content regulations, or delays in the regulatory
processes for awarding spectrum could all have the effect of delaying or even
preventing sales of Netro's products.
INTELLECTUAL PROPERTY
Netro relies on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. Netro presently has five issued
United States patents, with additional applications in process. Netro has also
acquired from AT&T Wireless a license to several patents and numerous patent
applications associated with the Angel platform. Although AT&T Wireless has
agreed not to license these patents to Netro's competitors for a period of five
years from the date of acquisition, Netro cannot assure that they will enforce
their rights against potential infringers. Despite Netro's efforts to protect
its proprietary rights, existing copyright, trademark and trade secret laws
afford only limited protection. In addition, the laws of some foreign countries
do not protect its proprietary rights to the same extent as do the laws of the
United States. Attempts may be made to copy or reverse engineer aspects of
Netro's products or to obtain and use information that Netro regards as
proprietary. Accordingly, Netro may not be able to protect its proprietary
rights against unauthorized third-party copying or use. Furthermore, policing
the unauthorized use of Netro's products is difficult. Litigation may be
necessary in the future to enforce Netro's intellectual property rights, to
protect its trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on Netro's
future operating results.
From time to time, third parties may assert patent, copyright, trademark
and other intellectual property rights to technologies in various jurisdictions
that are important to Netro's business. Any claims could be time-consuming to
deal with, result in costly litigation, divert the efforts of Netro's technical
and management personnel, cause product shipment delays or require Netro to
enter into royalty or licensing agreements, any of which could have an adverse
effect on Netro's operating results. Royalty or licensing agreements, if
required, may not be available on terms acceptable to Netro, if at all. In
addition, in Netro's sales agreements, Netro agrees to indemnify its customers
for any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. As part of Netro's acquisition of
assets from AT&T Wireless, Netro was assigned by AT&T Wireless, and assumed,
several contracts with third party software vendors. Netro is required to
indemnify AT&T Wireless against claims that arise out of or in connection with
the assumed contracts after the date of assignment and against claims that the
assigned software infringes the intellectual or proprietary rights of others.
EMPLOYEES
As of December 31, 2002, Netro employed approximately 134 full-time
employees. Netro's full-time employees include 87 people in research and
development, 23 in sales and marketing, and 24 in general and
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administrative. None of Netro's employees is represented by collective
bargaining agreements, and Netro considers relations with its employees to be
good.
AVAILABLE INFORMATION
Netro's website is www.netro-corp.com. Netro makes its annual reports on
Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K
and any amendments to those reports available free of charge on the website.
PROPERTIES
Netro leases an approximately 100,000 square foot facility in San Jose,
California, which it uses for executive offices and for administrative, AirStar
engineering and product development, AirStar prototype manufacturing and sales
and marketing purposes. The lease for this facility expires in September 2006.
Netro leases an approximately 175,000 square foot facility in Redmond,
Washington, which its uses for Angel related engineering, product development
and prototype manufacturing purposes. The lease for this facility expires in
February 2006. It also maintains leases for executive office space in China,
France and Mexico, which do not represent material financial obligations.
SUBSIDIARIES
Netro subsidiaries include Netro Ltd. (Israel), Netro GmbH (Germany), Netro
S.A.R.L. (France), Bungee Communications, Inc. (Delaware, USA), Netro Eurasian
Holdings International, Inc. (Delaware, USA), Netro American Holdings
International, Inc. (Delaware, USA) and AAS, Inc. (Delaware, USA). All of these
companies are 100% owned by Netro. Netro American Holdings International, Inc.
owns 99% of Netro Corporation Mexico Services S. de R.L. de C.V. (Mexico) and
Netro Corporation Mexico Operations S. De R.L. de C.V. (Mexico). Netro Eurasian
Holdings International, Inc. owns the remaining 1% of the two Mexican companies.
All of the subsidiaries except Netro Ltd., Bungee Communications, Inc. and AAS,
Inc. are sales and marketing offices and have immaterial net assets. Netro Ltd.
is not, and has never been, an active company. Bungee Communications, Inc. owns
100% of Bungee Communications, Ltd. (Israel), an engineering subsidiary with
less than US$100,000 of net assets, which ceased operations in 2002. AAS, Inc.
was formed to acquire the assets of Project Angel from AT&T Wireless. There are
no laws or organizational documents that would materially restrict distributions
from these subsidiaries.
LITIGATION
IPO ALLOCATION LITIGATION
On or around August 23, 2001, Ramiro Soto-Gonzalez, who alleges that he is
a former stockholder of Netro common stock, commenced a purported class action
lawsuit in the U.S. District Court for the Southern District of New York against
Netro, Richard Moley, Gideon Ben-Efraim and Michael T. Everett ("Individual
Defendants"), as well as against Dain Rauscher, Inc., FleetBoston Robertson
Stephens, Inc., and Merrill Lynch, Pierce, Fenner and Smith, Inc. ("Underwriter
Defendants"). The action is styled Soto-Gonzalez v. Netro Corporation, Inc., et
al., No. 01 Civ. 7993 (S.D.N.Y.). On or around December 6, 2001, Zion Badichi,
who alleges that he is a former shareholder of Netro common stock, commenced a
purported class action lawsuit in the U.S. District Court for the Southern
District of New York against Netro, the Individual Defendants (except Mr. Moley)
and the Underwriter Defendants. The action is styled Badichi v. Netro
Corporation, Inc., et al., No. 01 Civ. 8348 (S.D.N.Y.).
The Soto-Gonzalez and Badichi actions are two of more than 1,000 lawsuits
filed in the U.S. District Court for the Southern District of New York against
more than 300 different issuers, certain officers and directors of these issuers
and more than 45 different underwriters arising out of initial public offerings
occurring between December 1997 and December 2000 (collectively "IPO Allocation
Litigation"). By Order dated August 9, 2001, Chief Judge Michael B. Mukasey
assigned the IPO Allocation Litigation, including the Soto-Gonzalez and Badichi
actions, to the Honorable Shira A. Scheindlin for all pre-trial purposes. On
September 7, 2001, Judge Scheindlin adjourned the time for all defendants in the
IPO Allocation Litigation,
164
including Netro and the Individual Defendants, to answer, move or otherwise
respond to current and future complaints indefinitely pending further
instruction from the court. On or about March 2002, the Soto-Gonzalez and
Badichi actions were consolidated into a single action styled In re Netro Corp.
Initial Public Offering Securities Litigation, No. 01 Civ. 7035, 21 MC 92 (SAS)
("Netro Litigation"). Other lawsuits alleging similar claims arising out of
Netro's August 1999 initial public offering against the Underwriter
Defendants -- but not against Netro or the Individual Defendants -- were also
consolidated into the Netro Litigation. Those actions are styled Gutner v.
Merrill Lynch, Pierce, Fenner & Smith Incorporated et al., No. 01 Civ. 7035
(S.D.N.Y.) and Bryant v. Merrill Lynch, Pierce, Fenner & Smith Incorporated et
al., No. 01 Civ. 9184 (S.D.N.Y.).
On April 19, 2002, plaintiffs filed a consolidated amended class action
complaint in the Netro Litigation ("Complaint"). The Complaint alleges claims
against Netro arising under Section 11 of the Securities Act and Section 10(b)
of the Exchange Act, and Rule 10b-5 promulgated thereunder, and against the
Individual Defendants under Section 10(b), Rule 10b-5 and Section 20(a) of the
Exchange Act, and Section 15 of the Securities Act. The claims allege various
misconduct arising from Netro's August 1999 initial public offering and March
2000 follow-on offering of its common stock, including, among other things, that
the disclosures made in connection with the offerings were incomplete or
misleading in various respects. The allegations include, among other things,
that Netro and the Individual Defendants failed to disclose that the Underwriter
Defendants:
- charged Netro excessive commissions and inflated transaction fees in
violation of the securities laws and regulations; and
- allowed certain investors to take part in Netro's initial public offering
in exchange for promises that these investors would purchase additional
shares in the after-market for the purpose of inflating and maintaining
the market price of Netro common stock.
The Complaint seeks to certify a class of stockholders who purchased Netro
common stock between August 18, 1999 and December 6, 2000, and to recover
monetary damages from defendants in an unspecified amount, as well as
plaintiff's attorneys' fees and expenses in bringing the action.
On October 9, 2002, the claims against the Individual Defendants were
dismissed without prejudice on consent of the parties. In addition, counsel for
the plaintiffs, liaison counsel for the issuer defendants and counsel for
insurers of the issuer defendants have taken part in discussions mediated by a
former federal district court judge to explore a possible settlement of the
claims against all of the issuer defendants in the IPO Allocation Litigation,
including Netro. In June 2003, a memorandum of understanding was entered into by
and among the plaintiffs, liaison counsel for the issuer defendants and counsel
for the insurers which would result in dismissal of the action against the
issuers, including Netro, on terms that would not require any current payment by
Netro and would carry only a remote risk that any future payment by Netro would
be required. On July 14, 2003, Netro's Audit Committee approved the memorandum
of understanding and authorized Netro to enter into the proposed settlement. The
memorandum of understanding and proposed settlement are expected to be submitted
to the Court for its required approval shortly.
The IPO Allocation Litigation in general, and the Netro Litigation in
particular, are in an early phase, and no date has yet been set by the court for
completion of pre-trial discovery or trial.
FUTURE COMMUNICATIONS COMPANY KUWAIT LITIGATION
This matter involves a dispute regarding the alleged improper draw down by
Netro of a letter of credit opened by Future Communications Company with the
Bank of Kuwait and the Middle East in Kuwait, and the alleged refusal by Netro
to accept return by Future Communications Company of certain equipment provided
to Future Communications Company by Netro. The next hearing on this matter is
scheduled for October 15, 2003, at which time Future Communications Company will
submit its initial brief. The amount in dispute is approximately US$1,013,000
plus interest from December 31, 1999.
165
SOLECTRON ARBITRATION
On or around December 19, 2002, Solectron California Corporation demanded
arbitration to resolve disputes arising under its May 31, 1998 "Manufacturing
Agreement" with Netro. Solectron's principal claim is that during the third
quarter of 2000, it purchased materials on the basis of Netro's forecasts which
were not followed by corresponding orders. Solectron claims that as a result it
now has an excess inventory of materials which it cannot sell. Netro vigorously
disputes the claims on the ground that the acquisition of material had not been
approved by Netro as required by the agreement. The total claim, including the
cost of materials and asserted carrying charges, is approximately US$14.5
million. The parties attempted to resolve the matter through mediation in May
2003, however, no resolution was reached. Netro has filed a complaint in Santa
Clara County seeking declaratory relief with respect to certain matters and a
stay of any arbitration proceedings pending resolution of such matters.
MERGER-RELATED LITIGATION
On April 8, 2003, an action styled Fuller & Thaler Asset Management, Inc.
v. Netro Corp. et al., Case No. CV816170 (Cal. Super. Ct.), naming as defendants
Netro and its current and certain former directors was filed in the California
Superior Court for Santa Clara County by a plaintiff claiming to be a Netro
stockholder and alleging that it is asserting its claims on behalf of a class of
Netro stockholders. The complaint asserts claims for breach of fiduciary duty
against the current and former directors who are named as defendants based on
allegations that Netro's directors, among other things, breached their fiduciary
duties to Netro allegedly by failing to properly value and obtain the highest
price reasonably available for Netro, by favoring SR Telecom over competing
potential acquirers, including Wyndcrest, and by engaging in self-dealing in
connection with the merger. The complaint seeks certain injunctive relief
including, among other things, an injunction prohibiting Netro from completing
the merger, rescission of the individual defendants' receipt of stock options
and other benefits they may have received, as well as attorneys' fees and costs
of suit. On May 23, 2003, a second action styled Maritime Association -- I.L.A.
Pension Fund v. Netro Corp. et al., Case No. CV817375 (Cal. Super. Ct.), naming
as defendants Netro and its current directors was filed in the California
Superior Court for Santa Clara County by an entity claiming to be a Netro
stockholder and alleging that it is asserting its claims on behalf of a class of
Netro stockholders. The claims asserted and the relief sought in the Maritime
Association action are substantially similar to the claims asserted and the
relief sought in the Fuller & Thaler action.
By agreed order, these two actions have been consolidated under the caption
In re Netro Corporation Shareholder Litigation, Case No. CV816170 (Cal. Super.
Ct.), and the complaint in the Maritime Association case has been designated the
operative complaint. On July 3, 2003, Netro and the individual defendants filed
demurrers to the operative complaint. On August 4, 2003, before the demurrers
were scheduled to be heard by the court, plaintiffs filed a consolidated class
action complaint. The claims asserted and the relief sought in the consolidated
complaint are substantially similar to those in the prior complaints, except
that the consolidated complaint adds certain additional allegations.
Specifically, the consolidated complaint alleges that Netro's directors, among
other things, breached their fiduciary duties to Netro allegedly by causing
Netro to repurchase stock in the August 2002 issuer self-tender in an effort to
entrench themselves in response to offers by Crosswind and Wyndcrest to acquire
Netro, failing to disclose offers it had received from Crosswind adequately and
in a timely manner, rejecting prior proposals by Wyndcrest to acquire Netro, and
refusing to invite or grant permission currently to Wyndcrest to make a proposal
to acquire Netro despite Wyndcrest's stated interest in making such a proposal.
Plaintiffs further allege that at a deposition taken in July 2003 with respect
to the lawsuit, a representative of Wyndcrest testified that Wyndcrest remains
interested in acquiring Netro and would like the opportunity to make another
proposal to acquire Netro, after obtaining further unspecified information from
Netro, that is superior to SR Telecom's proposal but that Wyndcrest had entered
into a confidentiality agreement which prevented and prevents it from making a
bid for Netro unless expressly invited to do so by Netro. No one has made a
written proposal to acquire Netro, or has requested from Netro its permission to
make such a proposal, since Netro and SR Telecom entered into the Merger
Agreement on March 27, 2003. The time for Netro and the individual defendants to
respond to the consolidated complaint has not yet expired. The parties have
reached an agreement in principle to settle this
166
lawsuit. The terms of the settlement include, among other things, that Netro
make certain supplements and amendments to the disclosures in this proxy
statement/prospectus (which suggested changes have been made), that Netro
covenant that it will not sell all or substantially all of the assets of the
Airstar or Angel product lines for a period of nine months after the closing
date of the merger (and to the extent that such sale occurs nine months after
the closing date of the merger, Netro shall pay US$4.5 million to the members of
the class of Netro stockholders defined in the lawsuit), that SR Telecom waive
its right to a termination fee under Section 11.04(b)(iii) of the merger
agreement if the merger agreement is terminated under the circumstances
described therein and Netro consummates a qualifying transaction, as such term
is defined in the merger agreement, more than fourteen months following the
termination, and that Netro agree not to oppose an award of fees to class
counsel approved by the court if such award does not exceed US$590,000 inclusive
of expenses and costs. The parties are preparing definitive settlement documents
for submission to the court for its required approval.
GENERAL
From time to time, Netro is involved in various legal proceedings in the
ordinary course of business. Netro is not currently involved in any additional
litigation that, in management's opinion, would have a material adverse effect
on its business, cash flows, operating results or financial condition; however,
there can be no assurance that any such proceeding will not escalate or
otherwise become material to Netro's business in the future.
HISTORICAL STOCK PRICE DATA
Shares of Netro common stock are quoted on the Nasdaq National Market and
traded under the symbol "NTRO." The table below sets forth for the periods
indicated the high and low sale prices per share of Netro common stock, in U.S.
dollars, and the average daily trading volume on the Nasdaq National Market. For
current price information with respect to shares of Netro common stock, you are
urged to consult publicly available sources.
NETRO COMMON STOCK
--------------------------
AVERAGE
TRADING
HIGH LOW VOLUME
------ ----- ---------
(U.S. DOLLARS) (NUMBER
OF
SHARES)
FISCAL YEAR ENDED DECEMBER 31, 1999....................... 51.00 11.25 885,930
FISCAL YEAR ENDED DECEMBER 31, 2000....................... 119.62 6.31 1,185,165
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter........................................... 11.62 4.88 803,787
Second Quarter.......................................... 6.25 3.31 484,214
Third Quarter........................................... 4.00 2.21 329,657
Fourth Quarter.......................................... 4.10 2.36 191,259
FISCAL YEAR ENDED DECEMBER 31, 2002
First Quarter........................................... 3.94 2.60 201,836
Second Quarter.......................................... 3.01 2.06 173,310
Third Quarter........................................... 3.70 2.03 344,232
Fourth Quarter.......................................... 3.22 1.56 170,921
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter........................................... 3.01 2.30 157,410
Second Quarter.......................................... 3.09 2.65 138,826
167
NETRO COMMON STOCK
--------------------------
AVERAGE
TRADING
HIGH LOW VOLUME
------ ----- ---------
(U.S. DOLLARS) (NUMBER
OF
SHARES)
MONTH ENDED
February 28, 2003....................................... 2.69 2.30 63,489
March 31, 2003.......................................... 2.74 2.42 300,547
April 30, 2003.......................................... 2.84 2.66 124,670
May 31, 2003............................................ 2.94 2.65 104,305
June 30, 2003........................................... 3.09 2.80 187,486
July 31, 2003........................................... 3.01 2.84 112,196
August 2003 (through August 5, 2003).................... 2.98 2.88 53,100
168
NETRO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
projected. You should read the following management's discussion and analysis of
financial condition and results of operations in conjunction with the section
entitled "Risk Factors" and with Netro's consolidated financial statements and
the related notes contained elsewhere in this proxy statement/prospectus.
OVERVIEW
Netro sells its products indirectly through original equipment
manufacturers ("OEMs") and local resellers in addition to through a direct sales
force. Netro's revenue from OEMs comprised approximately 7% of revenues for the
three months ended March 31, 2003 and 35% of revenues for the three months ended
March 31, 2002, and 40% of revenues in 2002, 31% of revenues in 2001, and 89% of
revenues in 2000. Due to past realignments of its relationships with certain of
its systems integrator partners and its current low visibility regarding
potential future revenues, Netro is uncertain what portion of revenues system
integrators will represent in future periods. However, in the event of
significant declines in indirect sales, Netro will be required to improve and
expand its internal sales, customer advocacy and sales administration functions.
Furthermore, as a result of these realignments Netro could experience order
delays and order cancellations and, therefore, revenues could be adversely
affected. Overall, Netro's visibility regarding potential future revenues is
unclear.
International revenues represented approximately 100% of revenues during
the first quarter of 2003 and 94% of revenues during the first quarter of 2002,
and 95% of revenues in 2002, 71% of revenues in 2001, and 12% of revenues in
2000. In 2000, 86% of Netro's sales were to Lucent in the United States.
Substantially all of Netro's domestic revenues in 2001 and 2000 were related to
products sold to systems integrators and local resellers (predominantly Lucent)
who resold the products to end customers located outside of the U.S. In 2001,
Lucent altered its purchasing pattern and had its international subsidiaries
order directly from Netro for resale to end users in the countries those
subsidiaries supported. Netro's domestic revenues in 2002 included approximately
US$400,000 of sales to a domestic end user. With international revenues
comprising such a large proportion of its total revenues, Netro's revenues can
be significantly impacted by changes in the economy of a geographical area or
particular country. For example, revenues from Argentina constituted
approximately 30% of Netro's revenues for the year ended December 31, 2001.
However, as a result of economic instability in Argentina, Netro recognized less
than US$0.1 million of revenue from Argentina in each of the three-month period
ended March 31, 2003 and the year ended December 31, 2002.
Netro outsources substantially all of its volume product manufacturing and
assembly to contract manufacturers. Netro maintains small facilities for
prototype production in support of its research and development efforts in both
its San Jose, California and Redmond, Washington locations.
On February 12, 2002, Netro acquired from AT&T Wireless their fixed
wireless development team, a license to intellectual property, inventory,
equipment and proprietary software assets. The technology was originally
developed under the code name "Project Angel." The acquisition was accounted for
as a purchase of assets. The purchase price was allocated based on the estimated
fair values of the assets acquired. The purchase consideration was approximately
US$48.8 million, consisting of 8.2 million shares of Netro's common stock,
valued at approximately US$29.5 million, approximately US$16 million in cash and
transaction costs of approximately US$3.3 million.
A total of US$45.7 million of the purchase consideration was allocated to
intangible assets, including US$24.9 million of developed and core technology,
US$17.6 million of in-process research and development costs, and US$3.2 million
of other intangibles, which include the acquired workforce. The remaining US$3.1
million of purchase consideration was allocated to fixed assets (US$2.5 million)
and inventory (US$0.6 million). Acquired in-process research and development
costs represent research and development projects relating to expanding product
capacity. These projects had not yet reached technological feasibility
169
and, accordingly, this amount was expensed in the first quarter of 2002. The
intangible assets are being amortized over a three-year period. To date, Netro
has not had material sales of the Angel product.
During the year ended December 31, 2002, Netro undertook efforts to reduce
its cost structure and cash usage. At December 31, 2001, Netro had 225
employees. In February 2002, Netro closed its Israel-based engineering
organization and reduced its San Jose-based Airstar research and development
organization, reducing headcount by 54 employees. Also in February 2002, Netro
added 141 employees in connection with the acquisition of the Angel assets. In
August 2002, Netro made further headcount reductions in its Angel and Airstar
research and development and general and administrative organizations, reducing
headcount by 68 employees. Finally in November 2002, Netro did a further
restructuring of its global operations reducing its headcount by 110 employees
and closing two of its international sales offices. At March 31, 2003, Netro had
133 employees.
In November 2002, Netro announced plans to evaluate strategic alternatives
that could include a possible sale, merger or liquidation. Following a review of
various alternatives, negotiations with several parties and extensive due
diligence, Netro entered into an agreement with SR Telecom under which Netro
will, subject to the conditions in the merger agreement, (1) declare a dividend
of US$100 million, to be distributed among its stockholders on a pro rata basis
and (2) merge with a subsidiary of SR Telecom and become a wholly-owned
subsidiary of SR Telecom. If the merger is consummated as proposed, Netro's
stockholders at the effective time of the merger will also receive an aggregate
of 41.5 million shares of SR Telecom common stock (as adjusted to take account
of the proposed reverse stock split), which will also be distributed among
Netro's stockholders on a pro rata basis. The transaction is subject to certain
conditions, including approval by Netro's stockholders.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. Revenues consist of sales made directly to end users
and indirectly through systems integrators and local resellers. Revenues from
product sales are recognized when all of the following conditions are met:
delivery has occurred and title has passed to the customer, an arrangement
exists with the customer and Netro has the right to invoice the customer,
collection of the receivable is reasonably assured and Netro has fulfilled all
of its material contractual obligations to the customer. Provisions are made at
the time of revenue recognition for estimated warranty costs. If Netro believes
that it has not fulfilled all of its material contractual obligations to the
customer (such as when Netro has primary responsibility for installation or if
there are acceptance criteria that cannot or are not tested and verified prior
to shipment), or if the collection of the receivable is not reasonably assured,
Netro defers revenue recognition from such shipment until such time as the
amounts due have been collected. Some of the factors that Netro uses in
evaluating whether or not to defer revenue from a particular customer include:
- any material contract obligations not fulfilled,
- acceptance criteria not yet met,
- the customer's liquid assets,
- actual and projected cash flows for the customer, and
- the political and economic environment in the country in which the
customer operates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Netro performs ongoing credit evaluations
of its customers' financial condition and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other available information. Although Netro does not
require collateral on certain accounts receivable on sales to large,
well-established companies, it does require standby letters of credit or
prepayments on certain sales to smaller companies. Netro believes that it has
sufficient allowances for doubtful accounts to address the risk associated with
its outstanding accounts receivable. If actual experience differs from Netro's
estimates used to determine these allowances, revisions to Netro's allowance
would be required.
170
ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS. Netro periodically
evaluates whether events and circumstances have occurred which indicate that the
carrying value of its long-lived assets may not be recoverable. If Netro
determines an asset has been impaired, the impairment charge is recorded based
on the excess of the carrying value over the fair value of the impaired asset,
with the reduction in value charged to expense.
PROVISION FOR EXCESS AND OBSOLETE INVENTORY. Inventory, which includes
material and labor costs, is valued at standard cost, which approximates actual
cost computed on a first-in, first-out basis, not in excess of market value.
Netro maintains a reserve for estimated obsolescence or unmarketable inventory
based upon assumptions about future demand for its products, changes or
revisions of its products, and the conditions of the markets in which its
products are sold. This reserve to reduce inventory to net realizable value is
reflected as a reduction to inventory in the accompanying consolidated balance
sheets. Significant management judgments and estimates must be made and used in
connection with establishing these reserves. If actual market conditions are
less favorable than Netro's assumptions, additional reserves may be required.
WARRANTY OBLIGATIONS. Netro evaluates its obligations related to product
warranties on a quarterly basis. Netro offers a standard one-year warranty on
all products shipped. Netro also indemnifies its customers against any actions
from third parties whose technologies it licenses. Netro monitors historical
warranty rates and tracks costs incurred to repair units under warranty. These
costs include labor, replacement parts and certain freight costs. This
information is then used to calculate the accrual needed based on actual sales
and remaining warranty periods. For new product introductions, estimates are
made based on test and manufacturing data as well as Netro's historical
experience on similar products. If circumstances change, or if Netro experiences
a significant change in its failure rates, Netro's warranty accrual estimate
could change significantly.
171
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
RESULTS OF OPERATIONS
The following discussion and analysis addresses the historical results of,
and known trends and uncertainties with respect to, the business of Netro as a
separate company, and does not specifically contemplate the effect of the
proposed merger with SR Telecom. The announcement of the proposed merger with SR
Telecom may have a negative effect on Netro's ability to make significant
product sales and limits its ability to provide forward-looking guidance
regarding its future revenues and results of operations.
The following table sets forth Netro's condensed consolidated statements of
operations expressed as a percentage of total revenue:
THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
----- -----
Revenues.................................................... 100% 100%
Cost of revenues............................................ 78 88
---- ----
Gross profit................................................ 22 12
---- ----
Operating expenses:
Research and development.................................. 200 144
Sales and marketing....................................... 83 74
General and administrative................................ 199 125
Amortization of deferred stock compensation............... 4 4
Amortization of acquired intangible assets................ 106 8
Acquired in-process research and development.............. 0 351
---- ----
Total operating expenses............................... 592 706
---- ----
Loss from operations........................................ (570) (694)
Other income, net........................................... 36 47
---- ----
Net loss before provision for income taxes.................. (534) (647)
Provision for income taxes.................................. 0 1
---- ----
Net loss.................................................... (534)% (648)%
==== ====
REVENUES. Revenues by geography based on the location of Netro's original
customers were as follows:
PERCENT OF
REVENUES REVENUES
--------------- ----------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ----------------
2003 2002 2003 2002
------ ------ ----- -----
Latin America.................................... $ 38 $ 686 2% 14%
Europe........................................... 1,875 3,998 85 80
Middle East...................................... 190 15 9 --
Asia............................................. 102 13 4 --
------ ------ --- ---
International.................................... 2,205 4,712 100 94
United States.................................... -- 296 -- 6
------ ------ --- ---
$2,205 $5,008 100% 100%
====== ====== === ===
172
Countries that accounted for more than 10 percent of revenues based on to
the location of our original customers were as follows:
% OF TOTAL
REVENUES REVENUES
--------------- ----------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ----------------
2003 2002 2003 2002
----- ------- ----- -----
Spain................................................. $812 $1,056 37% 21%
Germany............................................... $468 * 21% *
France................................................ * $1,514 * 30%
---------------
* Revenues less than 10 percent for period
Revenues from customers that comprised more that 10 percent of revenues
were as follows:
REVENUES PERCENT OF REVENUES
--------------- -------------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- -------------------
2003 2002 2003 2002
------ ------ -------- --------
Lucent............................................. * $1,765 * 35%
Broadnet........................................... $ 871 1,056 40% 21
NewCom............................................. * 674 * 13
MediaScope......................................... 468 * 21 *
------ ------ ------ ------
Aggregate amount................................... $1,339 $3,495 61% 69%
====== ====== ====== ======
---------------
* Revenues less than 10 percent for period
Revenues primarily consist of sales of the AirStar system. Revenues
decreased to US$2.2 million for the three months ended March 31, 2003 from
US$5.0 million for the three months ended March 31, 2002. The decrease in
revenues was principally related to a reduction in orders resulting from the
uncertainty during the first quarter of 2003 surrounding Netro's announcement in
November 2002 of a decision to pursue strategic alternatives. In addition, Netro
failed to achieve previously forecasted revenues from its Angel product line
during the first quarter of 2003. Overall, Netro's visibility regarding
potential future revenue is unclear due to weakness in the telecommunications
equipment market and due to uncertainty resulting from its November 2002
announcement. Netro expects its revenue for 2003 to continue to be less than the
levels for comparable periods in 2002 until such uncertainty is resolved.
GROSS PROFIT. Gross profit represents total revenues less the cost of
revenues. Cost of revenues consists of contract manufacturing costs, material
costs, labor costs, manufacturing overhead, warranty reserves and other direct
product costs. Netro has experienced substantial fluctuations in gross
profit(loss). The principal drivers of the fluctuations, other than reserves for
inventory and material-related commitments, are the level of revenues, the
product sales mix and the customer sales mix.
In general, customer premise equipment sales result in lower gross profit
percentages than hub sales. The ratio of customer premise equipment can vary
depending upon the stage of rollout of Netro's systems by a customer. Typically,
early stages of rollout have a very low ratio of customer premise equipment to
base stations. In later stages of rollout, the ratio of customer premise
equipment to base stations tends to increase substantially. The unit ratio of
customer premise equipment sales to hub sales was 118:1 for the three months
ended March 31, 2003 compared to 30:1 for the three months ended March 31, 2002.
Netro expects the unit ratio of customer premise equipment to base stations in
future periods to be closer to the 30:1 ratio experienced in the three months
ended March 31, 2002, as opposed to the levels incurred in the three months
ended March 31, 2003.
173
Sales to OEMs generally generate lower gross profit percentages than sales
to local resellers or direct sales to customers. Sales to OEMs represented 7
percent of revenues for the first quarter of 2003, compared to 35 percent of
revenues for the first quarter of 2002.
Gross profit decreased to US$0.5 million for the first three months of 2003
from US$0.6 million in the corresponding period in 2002. The gross profit
percentage improved to 21.9 percent in the first quarter of 2003 from 12.2
percent in the corresponding period in 2002. The decrease in gross profit for
the first quarter of 2003 as compared to the first quarter of 2002 is
principally related to the lower average selling prices and lower volumes of
sales in 2003. The improvement in gross profit percentage in the first quarter
of 2003 compared to the first quarter of 2002 resulted from the general
availability of Netro's cost reduced product, offset in part by the lower
average selling prices. Netro experienced pressure on average selling prices
during the first quarter of 2003. Netro has initiatives underway to reduce
direct manufacturing and indirect manufacturing overhead costs. Netro completed
cost reduction initiatives on certain Airstar products in the third quarter of
2002, which resulted in improved gross profit percentage in the first quarter of
2003 as compared to the year-earlier period. However further cost reduction
initiatives on additional Airstar products, which Netro had originally expected
to be completed in the first half of 2003, have been delayed until late 2003, as
a result of Netro's reorganizations and reductions in allocated budget and
headcount. To the extent that Netro is unable to reduce its product costs at a
rate faster than the rate at which average selling prices and/or total revenues
decline, gross profit as a percentage of revenues will not improve as compared
with the corresponding period in 2002 and would decline. Netro expects that, due
to the introduction of the Angel product, the introduction of new customers,
channel mix, product mix, declining average selling prices, and Netro's efforts
to reduce product costs, Netro's gross profit in future periods will continue to
fluctuate.
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
compensation costs, the cost of software development tools, consultant fees and
prototype expenses related to the design, development and testing of Netro's
products. Research and development expenses decreased to US$4.4 million for the
three months ended March 31, 2003 from US$7.2 million for the three months ended
March 31, 2002. The decrease of US$2.8 million was principally the result of the
restructuring activities Netro undertook in 2002, offset in part by the full
quarter impact of research and development activities in 2003 related to the
Angel product. As a result of Netro's restructuring activities, Netro had 85
research and development employees at March 31, 2003 compared to 202 at March
31, 2002. As a result of Netro's restructuring activities in 2002 and a
forecasted reduction in engineering projects in 2003 as compared with 2002,
Netro expects research and development expenses to be lower during 2003 than in
the comparable periods in 2002.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation costs, commissions, travel and related expenses for marketing,
sales, customer advocacy and field service support personnel. Netro also incurs
expenses related to product management, trade show and promotional expenses.
Sales and marketing expenses decreased to US$1.8 million in the first quarter of
2003 from US$3.7 million in the comparable period in 2002. The decrease was
primarily due to a decrease in personnel and related compensation costs related
to the restructuring activities Netro undertook in 2002, partially offset by the
full quarter impact of sales and marketing activities in 2003 related to the
Angel product. Sales and marketing headcount at March 31, 2003 was 26 people and
67 people at March 31, 2002. As a result of Netro's restructuring activities in
2002, Netro expects sales and marketing expenses to be lower during 2003 than in
the comparable periods in 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation costs and related expenses for executive, finance,
management information systems, human resources and administrative personnel.
These expenses also include professional fees, facilities and other general
corporate expenses. General and administrative expenses decreased to US$4.4
million in the first quarter of 2003 from US$4.5 million in the first quarter of
2002. The decrease was primarily due to a decrease in personnel and related
compensation costs related to the restructuring activities Netro undertook in
2002, offset in part by the full quarter impact of costs (primarily facilities
costs) in 2003 related to the Angel acquisition and approximately US$0.5 million
of expenses incurred related to strategic alternative activities. General and
administrative headcount at March 31, 2003 was 22 people and 43 people at March
31, 2002. As a result of Netro's restructuring activities in 2002, Netro expects
general and administrative expenses to be lower during
174
2003 than in the comparable periods in 2002. However, Netro expects to incur
additional expenses as a result of the current review of strategic alternatives
that it is undergoing, and the proposed merger that it is undertaking with SR
Telecom, and as a result, general and administrative costs will increase on an
absolute basis pending resolution of Netro's review and the proposed
transaction.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation results from the granting of stock options to employees with
exercise prices per share determined to be below the estimated fair values per
share of Netro's common stock at dates of grant. The deferred compensation that
results is being amortized to expense over the vesting periods of the individual
options, generally four years. Amortization of deferred stock compensation was
US$0.1 million for the three months ended March 31, 2003 as compared to US$0.2
million for the three months ended March 31, 2002. The decrease reflects the
expiration of vesting periods related to stock options for which deferred stock
compensation expense was being recognized. As of March 31, 2003, all of Netro's
deferred stock compensation had been amortized.
AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. In February 2002, in
connection with the Angel acquisition, Netro acquired approximately US$24.9
million of developed and core technology and US$3.3 million of other
intangibles. Amortization of acquired intangible assets increased to US$2.3
million for the first quarter of 2003 compared to US$0.4 million for the first
quarter of 2002 due to a full quarter's amortization in the first quarter 2003
compared to a month's amortization based upon a preliminary estimate of the
acquired intangible assets related to the Angel acquisition. These intangible
assets are being amortized over a three-year period. Netro anticipates future
amortization to be approximately US$2.3 million per quarter.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In February 2002, in
connection with the Angel acquisition, Netro acquired approximately US$17.6
million of in-process research and development costs. These costs were valued by
an independent appraisal firm based on Netro management's forecast of future
revenues, cost of revenues and operating expenses related to the purchased
technologies. The calculation gave consideration to relevant market sizes and
growth factors, expected industry trends, the anticipated nature and timing of
new product introductions by Netro and its competitors, individual product
cycles, and the estimated lives of each of the products underlying the
technology. In-process research and development costs consist of two research
and development projects that had not yet reached technological feasibility.
Accordingly, the costs were charged to operations in the first quarter of 2002.
The value of acquired in-process technology was computed using a discounted cash
flow analysis on the anticipated income stream of the related product revenues.
One project, begun in the second half of 2001, was related to the
development of a new 3.5 GHz front end for existing platforms that will triple
capacity. The other project, begun in the last quarter of 2001, was related to
re-architecting the core Airlink technology that will result in next generation
base station and remote unit products. These next generation Angel solutions
were approximately 41 percent complete as to cost at the date of acquisition.
The value of acquired in-process technology was computed using a discounted cash
flow analysis on the anticipated income stream of the related product revenues.
The net cash flows from the identified projects were based upon Netro's
estimates of revenues, cost of revenues, research and development costs, selling
and marketing costs, general and administrative costs and income taxes from the
projects. The estimated revenues were based on Netro's projections for the
projects and are expected to peak in 2008 and decline thereafter. The discount
rate used was 35 percent, reflecting the added uncertainty of the completion of
the development, the relative success of the development effort and its
commercialization and the risk premium for in-process projects versus existing
technology.
RESTRUCTURING AND ASSET IMPAIRMENT
First Quarter 2002 Restructuring and Asset Impairment
In the first quarter of 2002, Netro incurred US$1.8 million in
restructuring charges related to various initiatives undertaken to reduce its
cost structure. Netro closed Bungee Communications, Inc., its Israeli
engineering entity, and reduced the workforce in its San Jose, California
headquarters location. The charges included the termination of approximately 54
employees (50 research and development employees, 3 sales and marketing
employees and 1 general and administrative employee), the termination of the
Bungee office lease
175
and the write-down of assets associated with the Bungee operations. All actions
relating to this plan were completed in 2002. The following table summarizes the
components of the charge recorded during the quarter ended March 31, 2002 (in
thousands):
RESTRUCTURING AND ASSET
IMPAIRMENT CHARGES
-----------------------
Impairment of assets..................................... $ 797
Severance................................................ 763
Lease and other expense.................................. 265
------
Total............................................... $1,825
======
Third Quarter 2002 Restructuring and Asset Impairment
In the third quarter of 2002, Netro incurred US$2.0 million in
restructuring charges to further reduce its cost structure. Netro reduced its
worldwide workforce by approximately 68 employees (43 research and development
employees, 13 sales and marketing employees and 12 general and administrative
employees) and wrote-down certain fixed assets. All actions relating to this
plan were completed in 2002. The following table summarizes the components of
the charge recorded during the quarter ended September 30, 2002 (in thousands):
RESTRUCTURING AND ASSET
IMPAIRMENT CHARGES
-----------------------
Impairment of assets..................................... $ 117
Severance................................................ 1,883
------
Total............................................... $2,000
======
Fourth Quarter 2002 Restructuring.
In the fourth quarter of 2002, Netro incurred US$4.3 million in
restructuring charges to further reduce its cost structure. Netro reduced its
worldwide workforce by approximately 110 employees (80 research and development
employees, 21 sales and marketing employees and 9 general and administrative
employees), closed two sales offices and wrote down certain fixed assets. The
following table summarizes the activity related to the fourth quarter 2002
restructuring charges through the quarter ended March 31, 2003 (in thousands):
RESTRUCTURING AND LIABILITY AT LIABILITY AT
ASSET IMPAIRMENT AMOUNT PAID/ DECEMBER 31, MARCH 31,
CHARGES WRITTEN OFF 2002 AMOUNTS PAID 2003
----------------- ------------ ------------ ------------ ------------
Impairment of assets............. $ 797 $ (154) $ -- $ -- $--
Severance........................ 763 (3,429) 671 (644) 27
------ ------- ---- ----- ---
Total....................... $1,825 $(3,583) $671 $(644) $27
====== ======= ==== ===== ===
The remaining liability relates to severance charges and is expected to be
paid in the second quarter of 2003. Netro expects that it may undertake further
restructuring activities in 2003.
OTHER INCOME, NET. Other income, net, consists primarily of interest
income earned on low-risk marketable securities and interest paid on outstanding
capital leases. Other income, net decreased to US$0.8 million for the three
months ended March 31, 2003 from US$2.4 million for the three months ended March
31, 2002 due to the decrease in cash balances and lower market interest rates.
INCOME TAXES. Netro has incurred a net loss for each fiscal year since
inception. Recorded income taxes represent taxes provided for by Netro's foreign
subsidiaries.
176
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, cash and cash equivalents were US$32.0 million,
short-term marketable securities were US$64.5 million and long term marketable
securities were US$44.1 million.
Cash used in operating activities was US$11.0 million in the first quarter
2003 due primarily to the net loss, adjusted for non-cash charges of US$3.4
million, including amortization of acquired intangible assets related to the
Angel acquisition. Cash used in operating activities was US$12.9 million for the
quarter ended March 31, 2002, primarily due to the net loss adjusted for non
cash charges of US$19.9 million, including the US$17.6 million write-off of
acquired in-process research and development. Netro expects cash used in
operating activities to decline substantially in the second quarter of 2003 as
compared to the first quarter as a result of decreased working capital
requirements.
Cash used in investing activities was US$0.8 million for the quarter ended
March 31, 2003, primarily due to the purchase of restricted cash deposits of
US$6.4 million and capital equipment purchases of US$0.2 million, partially
offset by net maturities of marketable securities of US$5.8 million. Cash
provided by investing activities was US$15.9 million for the quarter ended March
31, 2002, primarily due to net maturities of marketable securities of US$32.6
million, partially offset by US$0.8 million in capital equipment purchases and
US$16 million of asset purchases related to Netro's acquisition of the Angel
assets.
Cash provided by financing activities was US$0.3 million for the quarter
ended March 31, 2003, primarily due to proceeds from the issuance of common
stock of US$0.4 million, partially offset by payments under capital leases of
US$0.1 million. For the quarter ended March 31, 2002, cash provided by financing
activities was US$0.2 million, primarily due to proceeds from the issuance of
common stock of US$0.6 million, partially offset by payments under capital
leases of US$0.4 million.
The capital required for volume manufacturing is being committed by Netro's
contract manufacturers. Netro provides six or twelve month forecasts to its
contract manufacturers. Netro generally makes rolling 60-day purchase
commitments, subject to cancellation fees. In specific instances Netro may agree
to assume liability for limited quantities of specialized components with lead
times beyond this 60-day period. In addition, from time to time in the past,
Netro has committed to purchase minimum volumes of products from certain of its
contract manufacturers. As of March 31, 2003, amounts outstanding under
forecasts and long-lead time commitments were US$2.4 million, of which US$0.9
million was related to non-cancelable, minimum purchase commitments.
Additionally, at March 31, 2003, Netro had US$13.7 million accrued related to
estimated losses arising from non-cancellable minimum purchase commitments
(i.e., material-related commitments) to certain contract manufacturers. Netro
believes that its currently forecasted demand for products, combined with its
reserves for inventory and material related commitments will be sufficient to
meet these commitments in the future.
In addition, pursuant to the merger agreement between SR Telecom, Norway
Acquisition Corporation and Netro, Netro's board of directors is, subject to
certain conditions specified in the merger agreement including the legality of
the dividend, committed to declaring and paying a US$100.0 million cash dividend
to Netro's stockholders of record immediately prior to the effective time of the
merger.
Netro has no other material unaccrued commitments. Netro's future capital
requirements will depend upon many factors, including the timing of research and
product development efforts and expansion of marketing efforts for both its
AirStar and Angel products.
Netro believes that its cash and cash equivalents balances and short-term
and long-term marketable securities will be sufficient to satisfy its cash
requirements for at least the next twelve months.
177
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEARS ENDED DECEMBER 31, 2001 AND 2000
RESULTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
------------------
2002 2001 2000
---- ---- ----
Revenues.................................................... 100% 100% 100%
Cost of revenues............................................ 100 264 76
---- ---- ---
Gross profit (loss)......................................... (0) (164) 24
Operating expenses:
Research and development.................................. 164 109 36
Sales and marketing....................................... 81 56 15
General and administrative................................ 124 72 14
Amortization of deferred stock compensation............... 4 4 2
Amortization of acquired intangible assets................ 46 0 0
Write-off of in-process technology........................ 103 0 0
Restructuring and asset impairment charges................ 47 0 0
---- ---- ---
Total operating expenses.......................... 569 241 67
---- ---- ---
Loss from operations........................................ (569) (405) (43)
Other income, net
Interest income and realized gains on sales of marketable
securities............................................. 42 73 29
Interest expense.......................................... (3) (3) (1)
---- ---- ---
Total other income, net........................... 39 70 28
---- ---- ---
Net loss before provision for income taxes.................. (530) (335) (15)
Provision for income taxes.................................. 0 0 0
---- ---- ---
Net loss.................................................... (530%) (335%) (15%)
==== ==== ===
REVENUES. Revenues by geographical area based on the location of Netro's
original customers were as follows:
PERCENT OF TOTAL
REVENUES
REVENUES ------------------
--------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------- ------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ---- ---- ----
Latin America......................... $ 1,815 $ 9,872 $ 6,661 11% 42% 10%
Europe................................ 12,998 6,028 1,447 76 25 2
Middle East........................... 471 482 40 3 2 --
Asia.................................. 910 468 192 5 2 --
------- ------- ------- --- --- ---
International......................... 16,914 16,850 8,340 95 71 12
United States......................... 913 6,809 60,187 5 29 88
------- ------- ------- --- --- ---
$17,107 $23,659 $68,527 100% 100% 100%
======= ======= ======= === === ===
178
Countries that accounted for more than 10 percent of revenues based on to
the location of our original customers were as follows:
REVENUES % OF TOTAL REVENUES
------------------------- ---------------------
2001 2001 2000 2001 2001 2000
------ ------ ------- ----- ----- -----
Poland.................................. $4,143 * * 24% * *
France.................................. $2,039 $2,343 * 12% 10% *
Spain................................... $1,711 * * 10% * *
United States........................... * $6,809 $60,187 * 29% 88%
Argentina............................... * $7,175 * * 30% *
---------------
* Revenues less than 10 percent for period
Substantially all of Netro's United States revenues are related to products
sold to OEMs and direct resellers in both 2001 and 2000. Almost all of their end
customers are located outside of the United States. In 2002, US$400,000 of the
United States' revenues were for an end user in the United States.
Revenues from customers that comprised more than 10% of consolidated
revenues were as follows:
PERCENT OF TOTAL
REVENUES
REVENUES ------------------
-------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------- ------------------
2002 2001 2000 2002 2001 2000
------ ------- ------- ---- ---- ----
Lucent................................. $6,891 $ 7,110 $59,220 40% 30% 86%
Techtel................................ * 7,007 * * 30 *
Condumex............................... * 2,390 * * 10 *
------ ------- ------- --- --- ---
Aggregate amount....................... $6,891 $16,507 $59,220 40% 70% 86%
====== ======= ======= === === ===
---------------
* Revenues less than 10% for period
Revenues decreased to US$17.1 million in 2002 from US$23.7 million in 2001,
due principally to reduced demand for broadband wireless access equipment from
competitive local exchange carriers in Latin America, particularly Argentina
which has experienced dramatic currency exchange problems during all of 2002. In
addition, order activity slowed for several weeks following Netro's announcement
in November 2002 that its board of directors was exploring strategic
alternatives. Revenues decreased to US$23.7 million in 2001 from US$68.5 million
in 2000, due principally to reduced demand for broadband wireless access
equipment from competitive local exchange carriers in Europe, which was
reflected in delayed and cancelled orders from some of Netro's OEM partners.
Overall, Netro's visibility regarding potential future revenue is unclear due to
weakness in the telecommunications equipment market and due to uncertainty
resulting from its November 2002 announcement.
GROSS PROFIT (LOSS). Gross profit (loss) represents total revenues less
the cost of revenues. Cost of revenues consists of contract manufacturing costs,
material costs, labor costs, manufacturing overhead, warranty reserves and other
direct product costs. Netro has experienced substantial fluctuations in gross
profit (loss). The principal drivers of the fluctuations, other than the
inventory and material-related commitments in 2002 and 2001, are the level of
revenues, the product sales mix and the customer sales mix.
In general, customer premise equipment sales result in lower gross profit
percentages than hub sales. The ratio of customer premise equipment can vary
depending upon the stage of rollout of Netro's systems by a customer. Typically,
early stages have a very low ratio of customer premise equipment to base
stations. In later stages of rollout, the ratio of customer premise equipment to
base stations tends to increase substantially. The unit ratio of customer
premise equipment sales to hub sales was 36:1 for 2002 compared to 25:1 for 2001
and 8:1 for 2000.
179
Sales to OEMs generally generate lower gross profit percentages than sales
to local resellers or direct sales to customers. Sales to OEMs represented 40%
of revenues in 2002, compared to 31% of revenues in 2001 and 89% of revenues in
2000. In 2002, Netro's gross loss was negatively impacted by both a higher ratio
of customer premise equipment and the increase in the proportion of revenue
coming from OEMs.
Gross profit (loss) improved to a gross loss of (US$100,000) in 2002 from a
gross loss of (US$38.9) million in 2001. The gross loss as a percent of revenue
improved to less than (1)% in 2002 from (164.2)% in 2001. The decline in the
gross loss in 2002 compared to 2001, reflects a US$4.2 million charge related to
excess and obsolete inventory and US$0.5 million material-related commitments in
2002 compared to a US$26.4 million charge related to excess and obsolete
inventory and US$16 million material-related commitments in 2001; these
material-related commitments represented estimated losses on non-cancelable,
minimum purchase commitments with certain of Netro's contract manufacturers due
to a significant decline in forecasted demand and represented primarily the
value of inventory that Netro had committed to purchase. These amounts were
offset in part by lower average selling prices in 2002. Gross loss in 2002 was
also benefited by a US$2 million reduction in Netro's accrued warranty liability
due to improved product quality experience. Gross profit decreased to a loss of
(US$38.9) million in 2001 from a profit of US$16.4 million in 2000. As a
percentage of revenues, gross profit decreased to (164.2)% in 2001 from 24% in
2000. The decline in gross profit on a dollar basis as well as on a percentage
basis primarily reflects a US$42.4 million charge related to excess and obsolete
inventory and other material-related commitments made in anticipation of
significantly higher revenue volumes than those achieved.
Netro expects continued pressures on average selling prices for its
products during 2003. Netro has initiatives underway to reduce direct
manufacturing and indirect manufacturing overhead costs. Netro completed cost
reduction initiatives on certain Airstar products in the third quarter of 2002,
however further cost reduction initiatives on additional Airstar products, which
Netro had originally expected to be completed in the first half of 2003, have
been delayed until late 2003, as a result of its reorganizations and reductions
in allocated budget and headcount. To the extent that Netro is unable to reduce
its product costs at a rate faster than the rate at which average selling prices
and/or total revenues decline, gross profit as a percentage of revenues will
decline during 2003. Netro expects that, due to the introduction of the Angel
product, the introduction of new customers, channel mix, product mix, declining
average selling prices, and its efforts to reduce product costs, Netro's gross
profit in future periods will continue to fluctuate.
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
compensation costs, the cost of some software development tools, consultant fees
and prototype expenses related to the design, development and testing of Netro's
products. Research and development expenses increased to US$28 million in 2002
from US$25.8 million in 2001. The increase of US$2.2 million was the result of
approximately US$13.2 million of expenses resulting from the addition of the
Angel organization and its 110 people and engineering projects in February 2002,
offset in part by the closure of Netro's Israel-based Airstar engineering
operation and additional restructuring activities Netro undertook in August and
November 2002. As a result, Netro had 87 research and development people at
December 31, 2002 compared to 142 at December 31, 2001. In addition to the
headcount reductions, Netro reduced third-party engineering cost, prototype and
other expenses related to its Airstar engineering activities by US$4 million in
2002 compared to 2001 as it continued the reduction in Airstar development
activities. Research and development expenses increased US$1.5 million in 2001
from US$24.3 million in 2000, primarily due to an increase in research and
development personnel and related expenses, partially offset by a US$1.2 million
decrease in prototype material expenses related to the release of new product
features for the AirStar system. As a result of Netro's restructuring activities
in 2002 and a forecasted reduction in engineering projects in 2003 as compared
with 2002, Netro expects research and development expenses to be lower during
2003 than in the comparable periods in 2002.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation costs, commissions, travel and related expenses for marketing,
sales, customer advocacy and field service support personnel. Netro also incurs
expenses related to product management, trade show and promotional expenses.
Sales and marketing expenses increased to US$13.9 million in 2002 from US$13.3
million in 2001. The increase was primarily due to an increase in personnel and
related compensation costs of US$1.1 million related to the addition of 13
people supporting Angel and reduced by the impact of the restructuring
activities Netro
180
undertook in February 2002, August 2002 and November 2002. Sales and marketing
headcount at the beginning of 2002 was 56 people and was 23 people at December
31, 2002. Sales and marketing expenses increased to US$13.3 million in 2001 from
US$10.5 million in 2000. The increase was primarily due to the significant
expansion in Netro's sales, technical assistance and field support personnel
necessary to support both the pre-sale and post-sale activities associated with
the AirStar system. As a result of its restructuring activities in 2002, Netro
expects sales and marketing expenses to be lower during 2003 than in the
comparable periods in 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation costs and related expenses for executive, finance,
management information systems, human resources and administrative personnel.
These expenses also include professional fees, facilities and other general
corporate expenses. General and administrative expenses increased to US$21.2
million in 2002 from US$16.2 million in 2001. The US$5 million increase was
primarily due to approximately US$0.6 million of personnel expenses from the 18
people added related to Angel, additional facilities expenses of US$2 million
related to the Angel acquisition and an increase of US$2.4 million related to
cost of directors and officers insurance. These were offset by headcount
reductions in February, August and November 2002 and US$500,000 reduction in
Netro's allowance for bad debt. General and administrative headcount at December
31, 2001 was 27 people and 24 people at December 31, 2002. General and
administrative expenses increased US$6.4 million in 2001 compared to 2000 due to
increased personnel and related compensation costs related to an increase in
general and administrative personnel, an increase of US$1.3 million for doubtful
accounts reserves, fixed assets disposals of US$400,000, increased facilities
expenses of US$2.4 million associated with additional leased building space and
growth in Netro's infrastructure, in addition to increased director and officer
insurance of US$400,000. As a result of its restructuring activities in 2002,
Netro expects general and administrative expenses to be lower during 2003 than
in the comparable periods in 2002. However, Netro expects to incur additional
expenses as a result of the current review of strategic alternatives that it is
undergoing, and the proposed merger that it is undertaking with SR Telecom, and
as a result, general and administrative costs will increase on an absolute basis
pending resolution of its review and the proposed transaction.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation results from the granting of stock options to employees with
exercise prices per share determined to be below the estimated fair values per
share of Netro common stock at dates of grant. The deferred compensation that
results is being amortized to expense over the vesting periods of the individual
options, generally four years. Netro has recorded total deferred stock
compensation of US$5.4 million through December 31, 2002. Amortization of
deferred stock compensation was US$600,000 in 2002, US$900,000 in 2001 and
US$1.1 million in 2000.
AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS. In February 2002, in
connection with the Angel acquisition, Netro acquired approximately US$24.9
million of developed and core technology and US$3.2 million of other
intangibles, which include technical synergies and the competitive advantage in
providing a one-stop fixed broadband wireless solution for its customers. These
intangible assets will be amortized over a three-year estimated useful life
based on the product life cycle of the acquired technology. Netro expects future
quarterly amortization to be approximately US$2.3 million.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In February 2002, in
connection with the Angel acquisition, Netro acquired approximately US$17.6
million of in-process research and development costs. These costs were valued by
an independent appraisal firm based on management's forecast of future revenues,
cost of revenues and operating expenses related to the purchased technologies.
The calculation gave consideration to relevant market sizes and growth factors,
expected industry trends, the anticipated nature and timing of new product
introductions by Netro and its competitors, individual product cycles, and the
estimated lives of each of the products underlying the technology. In-process
research and development costs consist of two research and development projects
that had not yet reached technological feasibility at the time of acquisition.
Accordingly, the costs were charged to operations in the first quarter of 2002.
One project, begun in the second half of 2001, was related to the
development of a new 3.5 GHz front end for existing platforms that was expected
to triple capacity. The other project, begun in the last quarter of 2001,
181
was related to re-architecting the core Airlink technology that was expected to
result in next generation base station and remote unit products. These next
generation Angel solutions were approximately 41 percent complete as to cost at
the date of acquisition. The value of acquired in-process technology was
computed using a discounted cash flow analysis on the anticipated income stream
of the related product revenues. The net cash flows from the identified projects
are based upon Netro's estimates of revenues, cost of revenues, research and
development costs, selling and marketing costs, general and administrative costs
and income taxes from the projects. The estimated revenues are based on Netro's
projections for the projects and are expected to peak in 2008 and decline
thereafter. The discount rate used was 35 percent, reflecting the added
uncertainty of the completion of the development, the relative success of the
development effort and its commercialization and the risk premium for in-process
projects versus existing technology.
RESTRUCTURING AND ASSET IMPAIRMENT
First Quarter 2002 Restructuring and Asset Impairment
In the first quarter of 2002, Netro incurred US$1.8 million in
restructuring charges related to various initiatives undertaken by Netro to
reduce its cost structure. Netro closed Bungee Communications, Inc., its Israeli
engineering entity, and reduced its workforce in its San Jose, California
headquarters location. The charges included the termination of approximately 54
employees (50 research and development employees, 3 sales and marketing
employees and 1 general and administrative employee), the termination of the
Bungee office lease and the write-down of assets associated with the Bungee
operations. The following table summarizes the activity related to the first
quarter restructuring charges for the year ended December 31, 2002 (in
thousands):
REMAINING LIABILITY
RESTRUCTURING AMOUNTS PAID/ AT DECEMBER 31,
CHARGES WRITTEN-OFF 2002
------------- ------------- -------------------
Impairment of assets...................... $ 797 $ (797) --
Severance................................. 763 (763) --
Lease and other expense................... 265 (265) --
------ ------- ----
Total..................................... $1,825 $(1,825) --
====== ======= ====
Third Quarter 2002 Restructuring and Asset Impairment
In the third quarter of 2002, Netro incurred US$2 million in restructuring
charges to further reduce its cost structure. Netro reduced its worldwide
workforce by approximately 68 employees (43 research and development employees,
13 sales and marketing employees and 12 general and administrative employees)
and wrote-down certain fixed assets. The following table summarizes the activity
related to the third quarter restructuring charges for the year ended December
31, 2002 (in thousands):
REMAINING LIABILITY
RESTRUCTURING AMOUNTS PAID/ AT DECEMBER 31,
CHARGES WRITTEN-OFF 2002
------------- ------------- -------------------
Impairment of assets...................... $ 117 $ (117) --
Severance................................. 1,883 (1,883) --
------ ------- ----
Total..................................... $2,000 $(2,000) --
====== ======= ====
Fourth Quarter 2002 Restructuring
In the fourth quarter of 2002, Netro incurred US$4.3 million in
restructuring charges to further reduce its cost structure. Netro reduced its
worldwide workforce by approximately 110 employees (80 research and development
employees, 21 sales and marketing employees and 9 general and administrative
employees),
182
closed two sales offices and wrote-down certain fixed assets. The following
table summarizes the activity related to the fourth quarter restructuring
charges for the year ended December 31, 2002 (in thousands):
REMAINING LIABILITY
RESTRUCTURING AMOUNTS PAID/ AT DECEMBER 31,
CHARGES WRITTEN-OFF 2002
------------- ------------- -------------------
Impairment of assets...................... $ 154 $ (154) --
Severance................................. 4,100 (3,429) $671
------ ------- ----
Total..................................... $4,254 $(3,583) $671
====== ======= ====
The remaining liability relates to severance charges and is expected to be
paid in the first quarter of 2003. As a result of these restructurings, Netro
expects to realize a savings of US$12.5 million in 2003 as compared to 2002.
Netro expects that it may undertake further restructuring activities in
2003.
OTHER INCOME, NET. Other income, net consists primarily of interest income
earned on low-risk, marketable securities and interest paid on outstanding debt.
Other income, net decreased to US$6.6 million in 2002 from US$16.5 million in
2001 due to decreased cash balances and declining interest rates. Other income,
net decreased to US$16.5 million in 2001 from US$19 million in 2000 due to
decreased cash balances and declining interest rates.
INCOME TAXES. Netro has incurred a net loss for each period since
inception. Recorded income taxes represent taxes paid by Netro's foreign
subsidiaries. As of December 31, 2002, Netro had a Federal net operating loss
carry forward of approximately US$241.9 million and a State net tax loss carry
forward US$95.8 million. These expire at various dates through 2023. Due to the
uncertainty of future profitability, a valuation allowance equal to the deferred
tax asset has been recorded. A change in ownership could limit the future annual
realization of the tax net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, cash and cash equivalents were US$43.5 million,
short-term marketable securities were US$57.6 million and long term marketable
securities were US$57.3 million. Netro also had a US$10 million bank line of
credit that expired in March 2003. Under the agreement, Netro was required to
comply with certain financial and other covenants. As of December 31, 2002,
Netro was in compliance with all covenants. As of December 31, 2002, there were
no borrowings outstanding and amounts utilized for outstanding letters of credit
were US$6.1 million under this agreement. When this line of credit expired,
Netro did not renew it. Capital lease obligations were US$0.1 million at
December 31, 2002. Operating lease obligations through 2006 were US$18.8 million
at December 31, 2002.
Cash used in operating activities was US$61.9 million in 2002 due primarily
to the net loss, adjusted for non-cash charges of 35.4 million, including
acquired in process research and development, amortization of acquired
intangible assets related to the Angel acquisition and provisions for inventory,
doubtful accounts and material-related commitments. Cash used in operating
activities was US$28.3 million for the year ended December 31, 2001, primarily
due to the net loss adjusted for non cash charges of US$43 million, including
provisions for inventory, doubtful accounts and material-related commitments.
Cash provided by investing activities was US$97.1 million for the year
ended December 31, 2002, primarily due to net maturities of marketable
securities of US$117.8 million, partially offset by US$16 million of assets
acquired and US$4.7 million in capital equipment purchases. Cash used in
investing activities was US$30.4 million for the year ended December 31, 2001,
primarily due to net purchases of marketable securities of US$37.8 million,
partially offset by US$5.8 million in capital equipment purchases.
Cash used in financing activities was US$82.3 million for the year ended
December 31, 2002, primarily due to a US$82.8 million repurchase of Netro common
stock. Cash used in financing activities was US$3.2 million for the year ended
December 31, 2001, primarily due to payments on the bank line of credit and
capital leases of US$6.1 million, partially offset by proceeds from the issuance
of common stock of
183
US$2.9 million. Cash used in financing activities was US$82.3 million for the
year ended December 31, 2002, primarily due to an US$82.8 million repurchase of
Netro common stock. Cash used in financing activities was US$3.2 million for the
year ended December 31, 2001, primarily due to payments on the bank line of
credit and capital leases of US$6.1 million, partially offset by proceeds from
the issuance of common stock of US$2.9 million.
The capital required for volume manufacturing is being committed by Netro's
contract manufacturers. Netro provides six or twelve month forecasts to its
contract manufacturers. Netro generally commits to purchase products to be
delivered within the most recent 60 days covered by these forecasts with
cancellation fees. In specific instances Netro may agree to assume liability for
limited quantities of specialized components with lead times beyond this 60-day
period. In addition, from time to time in the past, Netro has committed to
purchase minimum volumes of products from certain of its contract manufacturers.
As of December 31, 2002, Netro had committed to make purchases totaling US$2.7
million from these manufacturers in the next 60 days, of which US$1.1 million
was related to non-cancelable, minimum purchase commitments. Additionally, at
December 31, 2002, Netro had US$14.0 million accrued related to estimated losses
arising from non-cancelable minimum purchase commitments (i.e. material-related
commitments) with certain contract manufacturers. Netro believes that its
currently forecasted demand for products, combined with its reserves for
inventory and material-related commitments will be sufficient to meet these
commitments in the future.
Netro has no other material unaccrued commitments. Netro's future capital
requirements will depend upon many factors, including the timing of research and
product development efforts and expansion of its marketing efforts for both its
AirStar and Angel products.
Netro believes that its cash and cash equivalents balances, short-term and
long-term marketable securities and funds available under its existing line of
credit will be sufficient to satisfy its cash requirements for at least the next
twelve months.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations", which addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and associated retirement costs. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.
Netro does not expect the adoption of SFAS No. 143 to have a material effect on
its results of operations or consolidated financial statements.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146
replaces EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. Netro does not
expect the adoption of SFAS No. 146 to have a material impact on its results of
operations or consolidated financial statements, although SFAS No. 146 may
impact the timing of recognition of costs associated with future restructuring,
exit or disposal activities.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees
184
issued. The recognition provisions of FIN 45 are effective for any guarantees
issued or modified after December 31, 2002. Netro's consolidated financial
statements comply with the disclosure requirements of this interpretation.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure that amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for employee stock options using the fair value method. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. Netro's consolidated
financial statements comply with the requirements of SFAS No. 148.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by
business enterprises of variable interest entities. Under that interpretation,
certain entities known as Variable Interest Entities ("VIEs") must be
consolidated by the primary beneficiary of the entity. The primary beneficiary
is generally defined as having the majority of the risks and rewards arising
from the VIE. For VIEs in which a significant (but not majority) variable
interest is held, certain disclosures are required. It applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. Netro is currently assessing the impact the adoption of
this interpretation will have on its results of operations and consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group ("DIG") process that effectively required
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. Netro does not
believe the adoption of SFAS No. 149 will have a material impact on its results
of operations or condensed consolidated financial statements.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
On May 24, 2002, Netro, with the approval of the audit committee dismissed
its independent auditors, Arthur Andersen LLP, who had provided auditing
services in addition to providing advice on federal, state and local tax matters
to Netro for eight years. After an evaluation of services provided by a number
of independent accounting firms as well as their knowledge of the industry,
Netro's audit committee and full board of directors decided to engage
PricewaterhouseCoopers LLP as their independent accountants effective as of May
24, 2002.
Arthur Andersen's reports on the financial statements of Netro for December
31, 2000 and 2001 contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principle. Prior to the change of accountants, Netro had no disagreements with
Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Arthur Andersen would have caused them to make
reference thereto in their report on the financial statements of Netro for such
years.
185
Prior to the change of accountants, Netro had no reportable events (as defined
in Item 304(a)(1)(v) of Regulation S-K).
Netro requested that Arthur Andersen furnish it with a letter addressed to
the SEC stating whether or not it agrees with the above statements. A copy of
such letter, dated May 28, 2002 was filed as Exhibit 16 to Netro's current
report on Form 8-K, filed with the SEC on May 31, 2002.
During the two most recent fiscal years prior to the change of accountants,
Netro did not consult with PricewaterhouseCoopers LLP on items which (1)
concerned the application of accounting principles to any specific transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on Netro's consolidated financial statements or (2) concerned the
subject matter of a disagreement or reportable event with the former auditor (as
described in Item 304(a)(2) Regulation S-K).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Hedging Instruments. Netro transacts business in various
foreign currencies and, accordingly, it is subject to exposure from adverse
movements in foreign currency exchange rates. To date, the effect of changes in
foreign currency exchange rates on operating expenses has not been material.
Netro's revenues are denominated in U.S. dollars. Operating expenses incurred by
its foreign subsidiaries are denominated primarily in local currencies. Netro
currently does not use financial instruments to hedge these operating expenses.
Netro intends to assess the need to utilize financial instruments to hedge
currency exposures on an ongoing basis.
Netro does not use derivative financial instruments for speculative trading
purposes.
Fixed Income Investments. Netro's exposure to market risks from changes in
interest rates relates primarily to corporate debt securities. Netro places its
investments with high credit quality issuers and, by policy, limits the amount
of the credit exposure to any one issuer.
Netro's general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. All highly
liquid investments with a maturity of less than three months at the date of
purchase are considered to be cash equivalents; all investments with maturities
of three months or greater and less than one year are considered to be
short-term marketable securities; all investments with maturities greater than
one year are considered to be long-term marketable securities. All investments
are classified as either "available for sale" or "held-to-maturity" and consist
of government and corporate debt securities.
The SEC's rule related to market risk disclosure requires that Netro
describe and quantify its potential losses from market risk sensitive
instruments attributable to reasonably possible market changes. Netro is exposed
to changes in interest rates on its investments in marketable securities. All of
Netro's investments are in funds that hold investment grade commercial paper,
treasury bills or other United States government obligations. This investment
policy reduces Netro's exposure to long-term interest rate changes. A
hypothetical 100 basis point decline in short-term interest rates would reduce
the annualized earnings on Netro's US$137.1 million of marketable securities at
March 31, 2003 by approximately US$1.4 million.
186
NETRO MANAGEMENT
The following table sets forth information concerning the directors and
executive officers of Netro as of July 31, 2003, 2003:
NAME AGE POSITION
---- --- --------
Gideon Ben-Efraim.................... 60 Chief Executive Officer, President and Chairman
of the Board of Directors
Thomas R. Baruch..................... 64 Director
Irwin Federman....................... 67 Director
Richard M. Moley..................... 64 Director
Sanford Robertson.................... 72 Director
Shirley Young........................ 68 Director
Shlomo Yariv......................... 55 Chief Operating Officer
Sanjay Khare......................... 36 Vice President and Chief Financial Officer
John Saw, Ph.D. ..................... 41 Senior Vice President, Fixed Wireless Access
Peter Carson......................... 55 Senior Vice President, Worldwide Sales
GIDEON BEN-EFRAIM has served as Netro's President, Chief Executive Officer
and a director since founding Netro in November 1994. From November 1994 to
March 1998, Mr. Ben-Efraim was also Chairman of the Board of Directors and he
was re-appointed as Chairman in April 2000. Prior to joining Netro, Mr.
Ben-Efraim was a founder of and Executive Vice President, Engineering and
Business Development at P-Com Inc., a digital microwave radio company, from June
1991 to November 1994. Mr. Ben-Efraim received a B.S. in Industrial Engineering
and Management from Tel Aviv University.
THOMAS R. BARUCH has been a director of Netro since November 1994. He has
also been a General Partner in CMEA Ventures ("CMEA"), a venture capital firm,
since 1988. Mr. Baruch was also a Special Partner in New Enterprise Associates,
a venture capital firm from 1990 until 1996. Prior to joining CMEA, Mr. Baruch
was the President and Chief Executive Officer of Microwave Technology, Inc., a
wireless technology firm, from 1983 to 1988. Mr. Baruch serves on the boards of
directors of Physiometrix Inc., a developer and manufacturer of non-invasive
advanced medical products, Symyx Technologies, Inc., a developer of industrial
materials, ACLARA BioSciences, Inc., a developer and manufacturer of analytical
tools for biotechnology, and AeroGen, a developer and manufacturer of inhalation
drug delivery products, in addition those of several privately held companies.
IRWIN FEDERMAN has been a director of Netro since June 1995. Mr. Federman
has been a General Partner of U.S. Venture Partners, a venture capital firm,
since 1990. Mr. Federman serves on the boards of directors of Centillium
Communications, Inc., a developer and supplier of communications integrated
circuits, CheckPoint Software Technologies, Inc., a network security software
company, Nuance Communications, Inc., a speech recognition software company,
SanDisk Corporation, a solid-state memory system company, and several
privately-held companies.
RICHARD M. MOLEY has been a director of Netro since November 1997, Chairman
of the Board of Directors from March 1998 to April 2000 and Chairman Emeritus
since April 2000. Since August 1997, Mr. Moley has been a private investor. From
July 1996 to August 1997, he served as Senior Vice President, Networking and as
a director of Cisco Systems, Inc., a networking and network solutions company.
Mr. Moley became a director at Cisco following Cisco's purchase of StrataCom,
Inc., a company at which Mr. Moley had been the Chairman of the Board, Chief
Executive Officer and President from June 1986 to July 1996. Mr. Moley serves on
the boards of directors of Linear Technology Corporation, a designer and
manufacturer of linear integrated circuits, Echelon Corporation, a developer of
control network hardware and software products, Spirent PLC, a British
international networking technology company, and several privately held
companies. Mr. Moley holds a B.Sc. from Manchester University in the United
Kingdom, an MSEE from Stanford University and an MBA from Santa Clara
University.
187
SANFORD ROBERTSON has been a director of Netro since April 2000. Mr.
Robertson is a founding partner of Francisco Partners, a leveraged buyout firm,
where he has served since January 2000. From September 1998 to January 2000, Mr.
Robertson served as President of S.R. Robertson & Co., LLC, an investment
services company. Mr. Robertson also founded Robertson, Stephens & Co., an
investment bank, and served as its Chairman from 1978 to September 1998. Mr.
Robertson serves on the board of directors of Pain Therapeutics, a medical
research and pharmaceutical company. Mr. Robertson received a BBA and an MBA
from the University of Michigan.
SHIRLEY YOUNG has been a director of Netro since October 2001. Ms. Young is
the President of Shirley Young Associates, LLC, a business advisory company that
she founded in January 2000, and has been a Senior Advisor to General
Motors-Asia Pacific since 2000. From 1988 until December 31, 1999, she served as
Corporate Vice President of General Motors Corporations, where her most recent
assignments were as Vice President for China Strategic Development and as Asia
Pacific Counselor. Ms. Young holds a BA from Wellesley College and is a member
of Phi Beta Kappa.
SHLOMO YARIV has served as Netro's Chief Operating Officer since May 2001,
prior to which time, he served as President of Netro's subsidiary, Bungee
Communications, Ltd. ("Bungee") from July of 2000. Mr. Yariv served as a
director of Bungee from August 2000 to January 2002. Prior to joining Bungee, he
was President and CEO of Innowave Wireless Systems, Ltd., a wireless local loop
company, from October 1996 to July 2000. From October 1995 to October 1996, he
was Assistant to the Development Division General Manager at Motorola
Communications Israel, a land mobile radios development company, and from
October 1994 to October 1995 he was a Division General Manager for Tadiran
Communications, Ltd., a military communications equipment company. Mr. Yariv
received a B.Sc. in Electrical Engineering from Technion-Haifa (Israel) and an
M.Sc. in Electrical Engineering from Columbia University. Mr. Yariv was
terminated pursuant to a reduction in force effective May 16, 2003.
SANJAY KHARE has served as Netro's Chief Financial Officer since November
2000. Prior to serving as Netro's Chief Financial Officer, Mr. Khare served as
Netro's Vice President, Business Development since May 2000. Before joining
Netro, Mr. Khare was a corporate attorney from October 1995 to May 2000 with
Venture Law Group, a law firm. Prior to practicing law, Mr. Khare was a
management consultant with Monitor Company, a strategy consulting firm in
Cambridge, Massachusetts. Mr. Khare received an M.B.A. and a J.D. from Stanford
University, and a B.A. in Economics and Statistics from the University of
Chicago.
JOHN SAW, PH.D. has served as Netro's Senior Vice President, Fixed Wireless
Access since February 2002. Prior to joining Netro, Dr. Saw served as a Vice
President, Engineering and Chief Engineer, Fixed Wireless Services at AT&T
Wireless, a digital wireless network operator and wireless communications
services company, from May 2001 until February 2002. He also served as Vice
President, Platform Realization, Fixed Wireless Services at AT&T Wireless from
November 1999 until May 2001, and as Director, Hardware Development, Wireless
Local Technologies Group at AT&T, a voice, video and data communications
company, from April 1997 until November 1999. Dr. Saw holds B.Eng., M.Eng. and
Ph.D. degrees in electrical engineering from McMaster University in Canada.
PETER CARSON has served as Netro's Senior Vice President, Worldwide Sales
since May 2001, prior to which time he served as Netro's Vice President,
Worldwide Sales since November 2000 and Netro's Vice President, Americas Sales
since January 2000. From April 1993 to November 1999, Mr. Carson was Vice
President-General Manager of the worldwide Transportation Electronics Division
at Raychem Corporation, a diversified manufacturing company. Prior to that, he
was in charge of Raychem's Interconnect Division from April 1989 to March 1993.
Mr. Carson received a B.S. from Vanderbilt University in Materials Engineering
and an M.B.A. from Harvard University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCES. Section 16(a) of
the Exchange Act requires Netro's directors, executive officers and persons who
own more than 10% of Netro's common stock (collectively, "Reporting Persons") to
file with the SEC initial reports of ownership and changes in ownership of
Netro's common stock. Reporting Persons are required by SEC regulations to
furnish Netro with copies of all Section 16(a) reports they file. To Netro's
knowledge, based solely on its review of the copies of such reports received or
written representations from certain Reporting Persons that no other reports
were required,
188
Netro believes that during its fiscal year ended December 31, 2002, all
Reporting Persons complied with all applicable filing requirements.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation received for all services rendered to Netro during the fiscal years
ended December 31, 2002, 2001 and 2000, by each of its named executive officers
as of December 31, 2002.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION SECURITIES -------------------------
------------------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
--------------------------- ------ ---------- --------- ------------ ----------
Gideon Ben-Efraim......................... 2002 $288,750 -- -- 500,000
Chief Executive Officer, 2001 272,917 -- -- 425,000
President and Chairman 2000 250,000 $93,750 -- --
Shlomo Yariv(1)........................... 2002 231,000 40,000 $38,200 250,000
Chief Operating Officer 2001 220,493 61,653 27,000 370,000
2000 73,790 36,710 -- 80,000
Sanjay Khare.............................. 2002 189,000 25,000 -- 150,000
Vice President and 2001 179,583 40,000 -- 170,000
Chief Financial Officer 2000 100,756 35,000 -- 150,000
John Saw, Ph.D............................ 2002 159,577 45,000 -- 250,000
Senior Vice President, 2001 -- -- -- --
Fixed Wireless Access 2000 -- -- -- --
Peter Carson.............................. 2002 183,750 15,000 -- 80,000
Senior Vice President, 2001 193,899 55,000 18,899 160,000
Worldwide Sales 2000 199,518 -- 58,861 140,000
---------------
(1) Mr. Yariv's salary for 2001 was paid partially by Netro and partially by
Netro's subsidiary Bungee Communications Ltd. ("Bungee"). For 2000, Mr.
Yariv's salary was paid entirely by Bungee. The exchange rate used to
determine the Bungee portions of Mr. Yariv's compensation listed in the
table above was 4.14809 shekels per 1 U.S. dollar. Mr. Yariv was terminated
pursuant to a reduction in force effective May 16, 2003.
OPTION GRANTS IN FISCAL YEAR 2002
The following table provides summary information regarding stock options
granted to the named executive officers from Netro's 1996 stock option plan,
1999 executive stock option plan and its 2000 Non-executive Option Plan during
the fiscal year ended December 31, 2002. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by the rules of the SEC and do
not reflect management's projections of future performance of Netro's stock
price.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING TO EMPLOYEES IN PRICE PER EXPIRATION ---------------------------
OPTIONS GRANTED FISCAL YEAR(1) SHARE DATE 5% 10%
--------------- ---------------- --------- ---------- ----------- -------------
Gideon Ben-Efraim....... 500,000 10.35% $3.17 1/23/2012 $996,798 $2,526,082
Shlomo Yariv............ 250,000 5.18% $3.17 1/23/2012 $498,399 $1,263,041
Sanjay Khare............ 150,000 3.11% $3.17 1/23/2012 $299,039 $ 757,825
John Saw................ 250,000 5.18% $3.00 2/12/2012 $471,671 $1,195,307
Peter Carson............ 80,000 1.66% $3.17 1/23/2012 $159,488 $ 404,173
---------------
(1) Based on a total of 4,829,956 options granted to employees in fiscal year
2002.
189
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2002 AND FISCAL YEAR-END OPTION
VALUES
The following table provides summary information concerning the exercise of
options by Netro's named executive officers in 2002 and the shares of Netro
common stock represented by outstanding stock options held by each of them as of
December 31, 2002. The value realized is based on the market value on the date
of exercise, net of the exercise price. The value of unexercised in-the-money
options is calculated based on the difference between the exercise price of the
option and the fair market value of the common stock at December 31, 2002. At
December 31, 2002, the fair market value of Netro's common stock was US$2.72 per
share.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OF OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
Gideon Ben-Efraim............ -- $ -- 742,084 775,001 $88,801 $ --
Shlomo Yariv................. -- $ -- 219,999 480,001 $ -- $ --
Sanjay Khare................. -- $ -- 176,999 295,001 $ 1,440 $ --
John Saw..................... -- $ -- -- 250,000 $ -- $ --
Peter Carson................. -- $ -- 138,540 241,460 $ -- $ --
COMPENSATION OF DIRECTORS
Directors currently receive no cash fees for services provided in their
capacity as such but are reimbursed for out-of-pocket expenses incurred in
connection with attendance of meetings of the board. Netro's 1997 Directors'
Stock Option Plan (the "Directors' Plan") provides that each non-employee
director of Netro will receive an initial grant of an option to purchase 50,000
shares, which vests in four equal increments on the first four anniversaries of
the date the director joins the Board of Directors. In addition, it provides
that each director of Netro will receive an annual grant of an option to
purchase 12,500 shares on the first day of each fiscal year, which vests in full
on the fourth anniversary of the date of grant, provided such non-employee
director has served on the board for at least six months on the date of grant.
No shares were available for an annual grant in 2003 and no shares are available
for future grants under the Directors' Plan. In accordance with the terms of the
Directors' Plan, all outstanding options under the plan became fully vested and
exercisable when Netro and SR Telecom entered into the merger agreement.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
In March 1995, Netro entered into an employment agreement with Gideon
Ben-Efraim, Netro's Chief Executive Officer, President and Chairman. The
agreement was amended in June 1995. Under the agreement, as amended, Mr.
Ben-Efraim's base salary is established annually pursuant to review by the
Board. Pursuant to the agreement, Mr. Ben-Efraim is entitled to participate in
any annual executive bonus plan of Netro in addition to Netro's employee benefit
plans of general application. In the event that (1) Mr. Ben-Efraim's employment
is terminated other than for cause, as defined in the employment agreement, (2)
he voluntarily terminates his employment with Netro within 180 days of the
commencement of employment of a Chief Executive Officer not previously approved
by him in writing or by his affirmative vote as a member of the Board of
Directors, (3) he voluntarily terminates his employment relationship with Netro
within 30 days of a non-consensual change in the place of his employment to
outside of the Silicon Valley in northern California, or (4) he voluntarily
terminates his employment relationship with Netro within 60 days of a failure by
Netro to comply with any material provision of this Agreement which has not been
cured within 30 days of written notice from Mr. Ben-Efraim, then he shall be
entitled to receive severance payments equal to 12 months of his then-current
base salary and continued benefits for 12 months under Netro's benefit plans of
general application. If his termination is other than for cause, the agreement
also entitles Mr. Ben-Efraim to a lapse of 25% of Netro's repurchase option on
his then unvested shares, including those held by his family trust. If Netro
enters into certain change-of-control transactions, as defined in the employment
agreement, Mr. Ben-Efraim's shares subject to repurchase, including those held
by his family trust, will become fully vested and will no longer be subject to
repurchase by Netro. The agreement also provides that, in the event
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Netro grants registration rights to any officers or investors, Netro will grant
no less favorable rights to Mr. Ben-Efraim. Pursuant to a change of control
agreement dated as of December 9, 1997, between Netro and Mr. Ben-Efraim, if Mr.
Ben-Efraim's employment is terminated without cause within 12 months after a
change of control, his options would become immediately vested to the extent
they would have vested over the two years following the monthly vesting date
following such termination.
Netro has entered into retention agreements with each of Sanjay Khare,
Shlomo Yariv and Peter Carson, which provide each such executive with severance
pay, and accelerated vesting of options that would have become vested on or
before August 31, 2004, if the executive is terminated other than for cause or
resigns after a change of control (including the proposed merger), after the
filing of a plan of liquidation approved by Netro's stockholders or in certain
circumstances is terminated for any other reason. Under these agreements, Mr.
Khare will be entitled to US$126,000 in severance pay and accelerated vesting of
options to acquire 160,832 shares of Netro common stock; Mr. Yariv is entitled
to US$192,500 in severance pay and accelerated vesting of options to acquire
247,917 shares of Netro common stock; and Mr. Carson will be entitled to
US$122,500 in severance pay and accelerated vesting of options to acquire
134,583 shares of Netro common stock. Mr. Yariv was terminated pursuant to a
reduction in force effective May 16, 2003.
Netro has entered into severance agreements with three employees, which
provide minimum severance amounts equal to three months, four months and 180
days, respectively of base salary) and continuation of certain other benefits.
In addition, the Netro board of directors authorized additional severance to be
granted to six employees in the event their employment is terminated. These
additional payments total US$95,816.
In the event of a reduction in force prior to January 1, 2004, Netro has
committed to all current employees, including foreign employees, a severance
payment equal to one month's base salary per completed year of service, provided
that where local regulations require a larger payment to be made to a foreign
employee, the local regulations will be applied instead. SR Telecom agreed to
assume this commitment at the effective time of the merger. Netro does not
maintain a formal severance policy other than for certain reductions in force
and individual arrangements, as described above.
Other than the agreements and arrangements of Mr. Ben-Efraim, Mr. Khare,
Mr. Carson, and Mr. Yariv and options granted to directors as described under
"-- Compensation of Directors," none of the named executive officers is or was
within the last fiscal year a party to any contract, arrangement or
understanding with respect to any future employment by Netro or its affiliates
or any future transactions to which Netro or any of its affiliates will or may
be a party.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Thomas R. Baruch and Irwin Federman. Neither member of the compensation
committee serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of
Netro's board of directors or compensation committee. Furthermore, no executive
officer of Netro served as a member of the board of directors or the
compensation committee of another entity, one of whose executive officers served
on either Netro's board of directors or compensation committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Notwithstanding anything to the contrary set forth in any of Netro's
filings under the Securities Act or the Exchange Act that might incorporate
future filings, including this proxy statement/prospectus, in whole or in part,
the following report and the stock performance graph included elsewhere in this
proxy statement/ prospectus shall not be deemed to be incorporated by reference
into any such filings.
The following is a report of the compensation committee of Netro's board of
directors describing the compensation policies applicable to Netro's executive
officers and other employees during the fiscal year ended December 31, 2002. The
compensation committee is responsible for establishing and monitoring the
general compensation policies and compensation plans of Netro, as well as the
specific compensation levels for
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Netro's executive officers. Executive officers who are also directors have not
participated in deliberations or decisions involving their own compensation.
GENERAL COMPENSATION POLICY
Under the supervision of the board of directors, Netro's compensation
policy is designed to attract and retain qualified key executives critical to
Netro's growth and long-term success. It is the objective of Netro's board of
directors to have a portion of each executive's compensation contingent upon
Netro's performance as well as upon the individual's personal performance.
Accordingly, each executive officer's compensation package is comprised of three
elements: (1) base salary, which reflects individual performance and expertise,
(2) variable bonus awards payable in cash and tied to the achievement of certain
performance goals that the board of directors establishes form time to time for
Netro and (3) stock-based incentive awards which are designed to strengthen the
mutuality of interests between the executive officers and Netro's stockholders.
The summary below describes in more detail the factors that the board of
directors considers in establishing each of the three primary components of the
compensation package provided to the executive officers.
BASE SALARY
The level of base salary is established primarily on the basis of the
individual's qualifications and relevant experience, the strategic goals for
which he or she has responsibility, the compensation level at companies that
compete with Netro for business and executive talent, and the incentives
necessary to attract and retain qualified management. Base salary is adjusted
each year to take into account the individual's performance and to maintain a
competitive salary structure. Netro's performance does not play a significant
role in the determination of base salary.
CASH-BASED INCENTIVE COMPENSATION
Cash bonuses are discretionarily awarded to executive officers on the basis
of their success in achieving designated individual goals and on Netro's success
in achieving specific company-wide goals, such as customer satisfaction, revenue
growth and earnings growth.
STOCK-BASED INCENTIVE COMPENSATION
Netro has utilized its stock option plans to provide executives and other
key employees with incentives to maximize long-term stockholder values. Awards
granted under stock option plans by the board of directors take the form of
stock options designed to give the recipient a significant equity stake in Netro
and thereby closely align his or her interests with those of Netro's
stockholders. Factors considered in making such awards include the individual's
position in Netro, his or her performance and responsibilities, and internal
comparability considerations.
Each option grant allows the executive officers to acquire shares of common
stock at a fixed price per share (the fair market value on the date of grant)
over a specified period of time (up to 10 years). The options typically vest in
periodic installments over a four-year period, contingent upon the executive
officer's continued employment with Netro. Accordingly, the option will provide
a return to the executive officer only if he or she remains in Netro's service,
and then only if the market price of the common stock appreciates over the
option term.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Gideon Ben-Efraim has served as Netro's Chief Executive Officer, President
and Chairman since Netro's inception in 1994. His base salary for fiscal 2002
was US$288,750 and he received no cash bonus. The compensation committee
determined Mr. Ben-Efraim's salary and bonus targets for fiscal 2002 in January
2002. At the end of the year, it was determined that Mr. Ben-Efraim should not
be awarded a cash bonus based on Netro's overall financial performance in 2002.
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The factors discussed above in "Base Salaries," "Cash-Based Incentive
Compensation," and "Stock-Based Compensation" were also applied in establishing
the amount of Mr. Ben-Efraim's salary and stock option grants. Significant
factors in establishing Mr. Ben-Efraim's cash and stock-based compensation were
the amount of his current stock ownership, including the portion that was
unvested, changes in the compensation for similarly situated chief executive
officers, whether revenue targets were achieved, whether customer contracts were
obtained and the growth of Netro.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The compensation committee has considered the impact of Section 162(m) of
the Internal Revenue Code adopted under the Omnibus Budget Reconciliation Act of
1993, which section disallows a deduction for any publicly held corporation for
individual compensation exceeding US$1 million in any taxable year for the CEO
and four other most highly compensated executive officers, respectively, unless
such compensation meets the requirements for the "performance-based" exception
to Section 162(m). As the cash compensation paid by Netro to each of its
executive officers is expected to be below US$1 million and the compensation
committee believes that options granted under Netro's 1996 Stock Option Plan and
its 1999 Executive Stock Plan to such officers will meet the requirements for
qualifying as performance-based, the compensation committee believes that
Section 162(m) will not affect the tax deductions available to Netro with
respect to the compensation of its executive officers. It is Netro's policy to
establish executive compensation at levels which should qualify for
deductibility under applicable tax law.
COMPENSATION COMMITTEE:
Thomas Baruch
Irwin Federman
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STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return data
for Netro's common stock since August 19, 1999 (the date on which Netro's stock
was first traded on Nasdaq) through December 31, 2002, to the cumulative return
over such period of (1) The Nasdaq Stock Market Composite Index, and (2) the
Nasdaq Telecommunications Index. The graph assumes that US$100 was invested in
the common stock of Netro and in each of the comparative indices on August 19,
1999. The graph further assumes (a) that such amount was initially invested in
the common stock of Netro at the price at which such stock was first offered to
the public by Netro on the date of its initial public offering and (b) the
reinvestment of any dividends. The stock price performance on the following
graph is not necessarily indicative of future stock price performance.
(STOCK PERFORMANCE GRAPH)
CUMULATIVE TOTAL RETURN
8/19/99 12/31/99 12/31/00 12/31/01 12/31/02
------- -------- -------- -------- --------
Netro........................................ $100.00 $637.50 $86.73 $45.88 $34.01
Nasdaq Stock Market (U.S.)................... $100.00 $154.99 $93.22 $73.97 $51.12
Nasdaq Telecommunications Index.............. $100.00 $145.81 $62.10 $41.58 $19.19
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF NETRO
The following table sets forth information regarding the beneficial
ownership of Netro's common stock as of July 31, 2003, by:
- each person who is known to Netro to own beneficially more than 5% of
Netro's common stock;
- each of Netro's directors;
- Netro's Chief Executive Officer and next four most highly compensated
executive officers (the "named executive officers"); and
- all directors and executive officers as a group.
Percentage of beneficial ownership is based on 39,121,425 shares of common
stock outstanding as of July 31, 2003, together with options that are
exercisable within 60 days of July 31, 2003 for each stockholder. Beneficial
ownership is determined in accordance with the rules of the SEC.
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OWNERSHIP STOCK
---- ---------- ----------
Global Telecom LLC.......................................... 9,440,000 24.1%
SR Telecom Inc.(2).......................................... 5,810,941 13.99%
Gideon Ben-Efraim(3)........................................ 3,989,728 9.9%
Dimensional Fund Advisors(4)................................ 2,082,641 5.3%
Shlomo Yariv(5)............................................. 381,706 1.0%
Richard Moley(6)............................................ 292,818 0.7%
Sanjay Khare(7)............................................. 306,302 0.8%
Thomas Baruch(8)............................................ 246,618 0.6%
Peter Carson(9)............................................. 230,061 0.6%
Sanford Robertson(10)....................................... 182,499 *
Irwin Federman(11).......................................... 158,709 *
John Saw(12)................................................ 101,047 *
Shirley Young(13)........................................... 22,500 *
All officers and directors as a group (10 persons)(14)...... 5,911,988 14.2%
---------------
* Indicates less than 1%.
(1) The information in this footnote is based on an amended Schedule 13G filed
on February 8, 2002, by Global Telecom LLC. ("Telecom"). 9,440,000 shares
are held by Telecom. Carso Global Telecom, S.A. de C.V. ("CGT"), as the
sole member of Telecom, is deemed to beneficially own indirectly the
9,440,000 shares. Members of the family of Carlos Slim Helu directly and
indirectly own a majority of the issued and outstanding voting securities
of CGT and are also deemed to beneficially own individually the 9,440,000
shares. Telecom, CGT and the Slim family share voting and investment power
with respect to the shares held by these entities. The address for Telecom
is 1000 Louisiana Street, Suite 565, Houston, Texas 77002.
(2) SR Telecom Inc. is a party to a voting agreement with each of Gideon
Ben-Efraim, Shlomo Yariv, Richard Moley, Sanjay Khare, Thomas Baruch, Peter
Carson, Sanford Robertson, Irwin Federman and Shirley Young, pursuant to
which SR Telecom was granted an irrevocable proxy to vote the shares owned
and thereafter acquired by such individuals in favor of the merger of Netro
with a wholly owned subsidiary of SR Telecom. Represents shares
beneficially owned by these individuals and includes 2,412,409 shares
issuable upon exercise of options exercisable within 60 days of July 31,
2003. The address for SR Telecom Inc. is 8150 Trans-Canada Highway,
Montreal, Quebec H4S 1M5, Canada.
195
(3) Includes 1,069,167 shares issuable upon exercise of options exercisable
within 60 days of July 30, 2003.
(4) The information in this footnote is based on a Schedule 13G filed with the
Securities and Exchange Commission on February 7, 2003, by Dimensional Fund
Advisors Inc. ("Dimensional"). Dimensional, an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940,
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other commingled group trusts and separate accounts (collectively,
the "Funds"). In its role as investment advisor or manager, Dimensional
possesses voting and investment power over the shares owned by the Funds,
and may be deemed to be the beneficial owner. However, the shares are owned
by the Funds. Dimensional disclaims beneficial ownership of these shares.
The address for Dimensional Fund Advisors is 1299 Ocean Avenue, 11th Floor,
Santa Monica, CA 90401.
(5) Includes 377,706 shares issuable upon exercise of options exercisable
within 60 days of July 31, 2003. Mr. Yariv was terminated pursuant to a
reduction in force effective May 16, 2003.
(6) Includes 191,249 shares issuable upon exercise of options exercisable
within 60 days of July 31, 2003.
(7) Includes 299,499 shares issuable upon exercise of options exercisable
within 60 days of July 31, 2003.
(8) Includes 75,833 shares issuable upon exercise of options exercisable within
60 days of July 31, 2003.
(9) Includes 228,123 shares issuable upon exercise of options exercisable
within 60 days of July 31, 2003.
(10) Includes 82,499 shares issuable upon exercise of options exercisable within
60 days of July 31, 2003.
(11) Includes 75,833 shares issuable upon exercise of options exercisable within
60 days of July 31, 2003.
(12) Includes 98,958 shares issuable upon exercise of options exercisable within
60 days of July 31, 2003.
(13) Includes 12,500 shares issuable upon exercise of options exercisable within
60 days of July 31, 2003.
(14) Includes 2,511,367 shares issuable upon exercise. of options exercisable
within 60 days of July 31, 2003.
Except as otherwise noted, the address of each person listed in the table
is c/o Netro Corporation, 3860 N. First Street, San Jose, CA 95134, and Netro
believes that the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them, subject to community property laws where applicable.
DESCRIPTION OF SR TELECOM SHARE CAPITAL
SR Telecom's authorized capital consists of an unlimited number of shares
of common stock without nominal or par value and an unlimited number of
preferred shares without nominal or par value, issuable in series, of which
55,478,088 shares of common stock and no preferred shares are outstanding as of
June 16, 2003.
COMMON STOCK
SR Telecom's shares of common stock entitle their holders to receive notice
of all meetings of shareholders and to attend and vote at those meetings, except
meetings at which only holders of a specified class of shares (other than the
shares of common stock) or a specified series of shares are entitled to vote.
Each share of common stock entitles its holder to one vote at a meeting of
shareholders. The holders of shares of common stock are entitled to dividends
that the board of directors of SR Telecom may declare, in its discretion,
subject to any restriction as provided in the Canada Business Corporations Act,
on a proportionate basis. The shares of common stock are entitled upon
bankruptcy, winding-up, dissolution or liquidation of SR Telecom to receive the
remaining assets of the corporation, after payment to any other class of shares
of SR Telecom that is preferred to the shares of common stock.
PREFERRED SHARES
SR Telecom's preferred shares may be issued in one or more series. The
directors have the ability to issue these series, subject to the sending of
articles of amendment to the "director" appointed under the Canada
196
Business Corporations Act for that purpose in prescribed form and the issuance
of a certificate of amendment in respect of the articles of incorporation. The
directors may fix before such issue the number of shares which is to comprise
each series and the designation, rights, privileges, restrictions and conditions
attaching to each series of preferred shares. Except as otherwise specifically
provided in the Canada Business Corporations Act, the holders of preferred
shares shall not be entitled to vote for the election of directors or for any
other purpose. The preferred shares of each series shall, with respect to the
payment of dividends and the distribution of assets or return of capital in the
event of bankruptcy, winding-up, dissolution or liquidation of SR Telecom,
whether voluntary or involuntary, or any other return of capital or distribution
of assets of SR Telecom among its shareholders for the purpose of winding-up its
affairs, rank on a parity with the preferred shares of every other series,
Preferred shares will also be entitled to preference over the shares of common
stock and over any other shares of SR Telecom ranking junior to the preferred
shares of any series.
PREVIOUS PURCHASES AND SALES OF SECURITIES
During the three years immediately preceding the date hereof, SR Telecom
has issued the following securities, with each such issuance having been duly
authorized by a resolution of SR Telecom's board of directors:
(1) 5,280,000 units on July 18, 2003 for aggregate net proceeds of
CDN$4,220,800, each unit consisting of one share of common stock of SR
Telecom and one-half of one share of common stock purchase warrant (the
funds from the private placement will be used for working capital
purposes);
(2) rights to its shareholders to acquire shares of common stock, on
May 31, 2001 and the subsequent issuance of 8,168,968 shares of common
stock on July 5, 2001 for aggregate net proceeds of CDN$12,491,000,
pursuant to the exercise of such rights;
(3) 6,037,500 shares of common stock on July 11, 2000 for aggregate
net proceeds of CDN$46,157,899;
(4) 4,000,000 shares of common stock on February 4, 2000 for aggregate
net proceeds of CDN$20,680,000;
(5) 143,000 shares of common stock pursuant to the exercise of options
under SR Telecom's Restated 1998 Key Employee Stock Option Plan for
aggregate net proceeds of CDN$840,600;
(6) 220,746 shares of common stock pursuant to the Director's Share
Compensation Plan for aggregate net proceeds of CDN$387,804; and
(7) 1,078,522 shares of common stock pursuant to the Restated 1998
Employee Stock Purchase Plan for aggregate net proceeds of CDN$2,072,568.
PRIVATE PLACEMENT
On July 18, 2003, SR Telecom closed its previously announced private
placement of 5,280,000 units comprised of one share of SR Telecom common stock
and one half of one common stock purchase warrant, pursuant to the terms of an
agency agreement, dated as of July 18, 2003, by and between SR Telecom and the
agents named therein. The price for each unit was CDN$0.85, which reflected a
discount to the market price of one share of SR Telecom common stock at the time
of closing. Each whole warrant will entitle the holder to acquire one share of
SR Telecom common stock at an exercise price of CDN$1.00 per share for a period
ending on July 18, 2008. Because of the private placement of the units, Netro
stockholders will receive approximately 41% of the combined company, based on SR
Telecom's shares of common stock outstanding on July 31, 2003, not taking
account of the exercise of SR Telecom stock options or warrants.
The units, shares of SR Telecom common stock and warrants in the private
placement have not been and will not be registered under the Securities Act, and
may not be offered or sold within the U.S. or for the account or for the benefit
of a U.S. person except in certain transactions exempt from the registration
requirements of the Securities Act. None of the units, shares or warrants were
sold within the U.S. or for the account or for the benefit of a U.S. person.
197
SECURITIES HELD BY SR TELECOM
Pursuant to the Canada Business Corporations Act, a corporation is not
permitted to hold its own securities. Neither SR Telecom nor any of its
subsidiaries holds any shares of SR Telecom common stock.
OPTIONS AND CONVERTIBLE SECURITIES
SR Telecom has not issued any convertible securities, and, except as
described under the caption "SR Telecom Management -- Executive Compensation",
has not issued any options.
DESCRIPTION OF SR TELECOM INDEBTEDNESS
8.15% DEBENTURES
On April 22, 1998, SR Telecom entered into an indenture with Montreal Trust
Company, as trustee, providing for the issuance of CDN$75 million of its 8.15%
debentures due April 22, 2005. SR Telecom's debentures are unsecured and pay
interest semi-annually.
The indenture contains various negative covenants, limiting SR Telecom's
ability to incur additional indebtedness, make restricted payments, including
dividends, make restricted investments, create liens, engage in mergers and
acquisitions and sell assets. As of March 31, 2003, SR Telecom could not incur
any additional indebtedness under the most restrictive provisions in the
indenture.
The balance of the debentures is due in a bullet payment at maturity in
April 2005. SR Telecom intends to partially refinance this debt and expects to
generate sufficient cash flow by that time to repay a substantial portion of the
balance.
CTR PROJECT DEBT
SR Telecom's long-term project financing relates to outstanding notes with
Export Development Canada and the Inter-American Development Bank that are
obligations of CTR. As at June 16, 2003, there was US$38 million outstanding.
Payments of principal and interest are due in semi-annual installments until
maturity in 2007 and 2008. Currently, the lenders would have full recourse
against SR Telecom for the full amount of the loans, if performance, financial
performance and financial position covenants are not met. While CTR and SR
Telecom do not meet all of these covenants, default of the covenants has been
waived until February 13, 2004, in return for a fee paid by SR Telecom. These
covenants were waived in previous years and SR Telecom believes that these
covenants will continue to be waived on an annual basis until the balance of the
amounts outstanding are repaid or the debt is refinanced. However, there can be
no assurance of an additional waiver in February 2004 or after that date. If the
lenders decline to waive the defaults, all amounts due under the loans,
including principal and interest and other fees, could be declared due and
immediately payable. In addition, if Export Development Corporation and
Inter-American Development Bank accelerated the loans, a default would be
triggered under SR Telecom's public debentures and its bank indebtedness, which
means that all amounts due and payable under the debentures could also be
declared due and payable.
Counterparts for both long-term project financing facilities are
governmental export or development financing organizations. Both tranches rank
pari passu and are secured by a pledge of all of the assets of CTR and a pledge
of the shares in the share capital of CTR and intermediate holding companies. SR
Telecom has also agreed to support CTR until the completion of the network and
has agreed to maintain its initial equity investment in CTR.
BANK DEBT
SR Telecom has an unsecured operating line of credit from CIBC, bearing
interest at prime plus 4%. On February 14, 2003 the line of credit was renewed
for an amount of CDN$5 million.
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COMPARISON OF STOCKHOLDER RIGHTS AND
CORPORATE GOVERNANCE MATTERS
The rights of holders of Netro common stock are currently governed
principally by:
- the laws of the State of Delaware, particularly the Delaware General
Corporation Law of the State;
- Netro's restated certificate of incorporation, sometimes referred to as
the "Netro charter;"
- Netro's bylaws; and
- the United States securities laws.
When the merger becomes effective, Netro stockholders will become
shareholders of SR Telecom, a corporation organized under the Canada Business
Corporations Act. The rights of holders of shares of SR Telecom common stock are
currently governed principally by:
- the Canada Business Corporations Act;
- SR Telecom's amended articles of incorporation, sometimes referred to as
the "SR Telecom charter;"
- SR Telecom's bylaws; and
- the securities laws applicable in Canada and the United States.
While the rights and privileges of shareholders of a corporation
incorporated under the Canada Business Corporations Act such as SR Telecom are,
in many instances, comparable to those of stockholders of a Delaware corporation
such as Netro, there are material differences. The following is a summary of
material differences between the rights of holders of Netro common stock and the
holders of SR Telecom common stock. These differences arise from differences
between the Delaware General Corporation Law and the Canada Business
Corporations Act and between the charters and bylaws of Netro and SR Telecom.
This summary does not purport to be complete and is qualified in its
entirety by reference to the Delaware General Corporation Law and the Canada
Business Corporations Act, applicable provisions of United States and Canadian
securities law and the respective charters and bylaws of Netro and SR Telecom.
You should review this document and the other documents referred to in this
section for a more complete understanding of the differences between being a
Netro stockholder and a SR Telecom shareholder. Netro's and SR Telecom's current
charter and bylaws are each on file with the SEC, and upon request, Netro will
send you copies of the charters and bylaws of Netro and SR Telecom.
GENERAL PROVISIONS
AUTHORIZED CAPITAL
Netro. The authorized capital stock of Netro consists of:
- 100,000,000 shares of common stock, par value US$.001 per share, of which
there were 39,121,425 shares outstanding as of July 31, 2003; and
- 5,000,000 shares of preferred stock, par value US$.001 per share, of
which 800,000 shares are designated Series A Participating Cumulative
Preferred Stock; no shares of preferred stock were outstanding as of July
31, 2003.
SR Telecom. The authorized share capital of SR Telecom consists of:
- an unlimited number of shares of common stock, without nominal or par
value, of which there were 60,946,415 shares outstanding as of July 31,
2003; and
- an unlimited number of preferred shares, issuable in series without
nominal or par value, of which there are no shares issued or outstanding.
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DIRECTOR REQUIREMENTS
Netro. The Delaware General Corporation Law permits a corporation's
certificate of incorporation or bylaws to contain provisions governing the
number and terms of directors. Netro's charter does not fix the number of
directors. Netro's bylaws provide that the authorized number of directors shall
be no less than three and no more than nine, with the actual number to be
determined by the board of directors. Currently, the number of directors on the
Netro board is set at six.
SR Telecom. Under the Canada Business Corporations Act, a corporation
whose securities are publicly traded must have at least three directors,
including two who are not officers or employees of the corporation or any of its
affiliates, but the actual number of directors is governed by a corporation's
charter. SR Telecom's charter provides that the number of directors will consist
of a minimum of three and a maximum of twelve. SR Telecom's bylaws provide that
the actual number of directors will be determined from time to time by
resolution of the directors. Currently, the number of directors on the SR
Telecom board is set at nine. SR Telecom has agreed to appoint a director
nominated by Netro to SR Telecom's board of directors following the consummation
of the merger, which will increase the size of the board to ten.
DIRECTOR QUALIFICATIONS
Netro. Neither the Delaware General Corporation Law nor Netro's charter or
bylaws has any residency or other director qualification requirements.
SR Telecom. Under the Canada Business Corporations Act generally, 25% of
the directors of the corporation and 25% of the directors present at a meeting
must be Canadian residents. If a corporation has less than four directors, at
least one must be a Canadian resident. Certain individuals are disqualified by
the Canada Business Corporations Act from being directors, such as bankrupt
persons or persons under eighteen years of age or of unsound mind.
BOARD OF DIRECTORS CLASSIFICATION
Netro. Under the Netro charter, the board of directors is divided into
three classes, each as nearly equal in number as possible, with one class being
elected annually to a three-year term.
SR Telecom. The SR Telecom charter does not provide for multiple classes
of directors. Directors are elected annually for a one-year term.
VACANCY ON THE BOARD OF DIRECTORS
Netro. Under the Delaware General Corporation Law, vacancies and newly
created directorships may be filled by a majority of the remaining directors,
though less than a quorum, or by a sole remaining director unless otherwise
provided in the certificate of incorporation or the bylaws. However, the
Delaware General Corporation Law also provides that if the directors then in
office constitute less than a majority of the whole board, the Delaware Court of
Chancery may, upon application of any stockholder(s) holding at least 10% of the
total number of shares outstanding entitled to vote for directors, order an
election of directors to be held to fill any vacancies or to replace the
directors chosen by the remaining directors. Furthermore, if there are no
directors, then an election of directors may be held in accordance with Delaware
law. Because Netro's charter provides for a classified board, under the Delaware
General Corporation Law, any directors selected to fill a vacancy shall hold
office until the next election of the class for which such directors shall have
been chosen, or until their successors shall have been elected and qualified.
SR Telecom. Under the Canada Business Corporations Act, subject to the
articles of the corporation, a vacancy among the directors may be filled at a
meeting of shareholders, or by a quorum of directors except when the vacancy
results from an increase in the number or minimum or maximum number of directors
or from a failure to elect the appropriate number of directors required by the
articles. SR Telecom's bylaws provide that a majority of directors shall
constitute a quorum for the transaction of business. Each director appointed
holds office for the unexpired term of his or her predecessor unless his or her
office is vacated earlier. SR Telecom's charter provides that the board of
directors may appoint one or more directors for a term
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expiring not later than the close of the next annual meeting of shareholders
provided that the total number of directors so appointed may not exceed
one-third of the directors elected at the previous annual meeting of
shareholders.
REMOVAL OF DIRECTORS
Netro. Because Netro has a classified board with staggered terms and its
charter does not provide otherwise, stockholders may only remove directors for
cause. Furthermore, under Netro's bylaws, any director may be removed for cause,
and only for cause, with the approval of the holders of a majority of the
outstanding shares of Netro's common stock entitled to vote on the matter.
SR Telecom. Because the SR Telecom charter does not provide for cumulative
voting, shareholders of SR Telecom may, by ordinary resolution passed at a
special meeting, remove any director or directors from office. If holders of a
class or series of shares have the exclusive right to elect one or more
directors, a director elected by them may only he removed by an ordinary
resolution at a meeting of the shareholders of that class or series.
AMENDMENT TO GOVERNING DOCUMENTS
Netro. Netro's charter generally provides for amendment in accordance with
the Delaware General Corporation Law. The Delaware General Corporation Law
generally requires that a charter amendment be approved by a vote of the
corporation's board of directors and the affirmative vote of the holders of a
majority of the outstanding stock of each class entitled to vote for any
amendments to the certificate of incorporation.
In accordance with the Delaware General Corporation Law, the power to
adopt, amend, or repeal Netro's bylaws is vested with the stockholders entitled
to vote on such an amendment.
SR Telecom. Under the Canada Business Corporations Act, an amendment to a
corporation's articles generally requires shareholder approval by special
resolution. A "special resolution" is a resolution passed by at least two-thirds
of the votes cast by shareholders who voted on the resolution. In addition, if
an amendment to the articles of incorporation adversely affects the rights of a
particular class or series of shares, that class or series is entitled to vote
separately as a class, whether or not that class or series otherwise carries a
right to vote.
Under the Canada Business Corporations Act, unless the articles or bylaws
otherwise provide, the directors may, by resolution, make, amend, or repeal any
bylaw that regulates the business or affairs of a corporation. Where the
directors make, amend or repeal a bylaw, they are required to submit the bylaw,
amendment or repeal to the shareholders at the next shareholders meeting, and
the shareholders may, by an "ordinary resolution" confirm, reject or amend the
bylaw, amendment or repeal. An "ordinary resolution" is a resolution passed by a
majority of the votes cast by shareholders who voted on the resolution. If the
directors of a corporation do not submit a bylaw, an amendment or a repeal to
the shareholders at the next meeting of shareholders, the bylaw, amendment or
repeal will cease to be effective, and no subsequent resolution of the directors
to adopt, amend or repeal a bylaw having substantially the same purpose and
effect is effective until it is confirmed or confirmed as amended by the
shareholders.
QUORUM OF STOCKHOLDERS
Netro. Under the Delaware General Corporation Law and Netro's bylaws, a
majority of shares entitled to vote at a meeting, present in person or
represented by proxy, constitutes a quorum for the transaction of business,
unless the certificate of incorporation or bylaws provide otherwise. Netro's
charter and bylaws do not provide otherwise.
SR Telecom. Under the Canada Business Corporations Act, the holders of a
majority of the shares entitled to vote at a meeting, present in person or
represented by proxy, constitute a quorum for the transaction of business,
irrespective of the number of persons present at the meeting, unless the bylaws
provide otherwise. SR Telecom's bylaws provide that a quorum at any shareholder
meeting will be the holders present in person or represented by proxy of at
least 25% of the outstanding shares entitled to be voted at the meeting.
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ANNUAL MEETING OF STOCKHOLDERS/ACTION BY WRITTEN CONSENT
Netro. In accordance with the Delaware General Corporation Law, under
Netro's bylaws Netro must hold an annual meeting of stockholders for the
election of directors and other proper purposes on the date and at the time and
place fixed by Netro's board of directors. If Netro does not hold an annual
meeting for a period of 30 days after the date designated for the annual
meeting, or if no date has been designated for a period of 13 months after the
last annual meeting to elect directors, the Delaware Court of Chancery may order
a meeting to be held upon the application of a stockholder or director.
Netro's bylaws provide that Netro stockholders may not take action by
written consent in lieu of a meeting, but may act only at a duly called annual
or special meeting.
SR Telecom. Under the Canada Business Corporations Act, the directors of a
corporation must call an annual meeting not later than 18 months after the
corporation comes into existence and thereafter, not later than 15 months after
holding the last preceding annual meeting and no later than six months after the
end of the corporation's preceding financial year. SR Telecom's bylaws provide
that the meeting shall be held at such place within Canada as the board may
determine.
Under the Canada Business Corporations Act, shareholder action may be taken
without a meeting only by a written resolution signed by all shareholders who
would be entitled to vote on that action at a meeting.
CALL OF SPECIAL STOCKHOLDER MEETING
Netro. Under Netro's bylaws and the Delaware General Corporation Law,
written notice of any meeting of stockholders must be given to each stockholder
entitled to vote at the meeting between 10 and 60 days before the meeting date;
provided that for a merger or sale of substantially all the assets, a minimum of
20 days notice is required. Pursuant to Netro's bylaws, a majority of Netro's
board of directors or the chairman of the board may call special meetings of the
stockholders for any purpose, to be held at the place, on the date and at the
time as the board determines. Stockholders do not have the ability to make any
proposals at a special meeting that is called by the board or the chairman of
the board. Pursuant to Netro's bylaws, however, the Secretary of Netro shall
call a special meeting at the written request of the holders of a majority of
the outstanding stock entitled to vote. The request of the stockholders must
state the purpose of the proposed meeting and no business shall be brought
before the meeting by any stockholder other than the stockholder or stockholders
calling the meeting.
SR Telecom. The Canada Business Corporations Act provides that shareholder
meetings may be called by the board of directors, and must be called by the
board of directors when so requisitioned by holders of not less than 5% of the
issued shares of the corporation that carry the right to vote at the meeting
sought. Written notice of any meeting of shareholders must be given to each
shareholder entitled to vote at the meeting between 21 and 60 days before the
meeting date. A court may also order, in its discretion and in certain
circumstances, the calling of a meeting upon the application of a director or
shareholder entitled to vote at the meeting. Under SR Telecom's bylaws, the
board of directors has the power to call a special meeting at any time.
STOCKHOLDER PROPOSALS
Netro. In accordance with the Delaware General Corporation Law, Netro's
bylaws include specific requirements for stockholder proposals, including a
requirement that stockholders submit notice of their intent to bring business
before a meeting not later than the close of business on the 90th calendar day
prior to the first anniversary of the preceding year's annual meeting; provided
that in the event that the date of the annual meeting is more than 30 calendar
days before or after such anniversary date or that no annual meeting was held in
the prior year, for notice by the stockholder to be timely it must be delivered
not later than the close of business on the later of the 90th calendar day prior
to such annual meeting or the 10th calendar day following the calendar day on
which a public announcement of the date of such meeting is first made by Netro.
The stockholder's notice must also set forth certain information, including
information about the stockholder, the proposal and the stockholder's stock
ownership.
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Generally, under the U.S. securities laws, a Netro stockholder may submit a
proposal to be included in Netro's proxy statement if the stockholder:
- owns at least 1% or US$2,000 in market value of Netro's common stock;
- has owned such common stock for at least one year prior to the date the
proposal is submitted; and
- continues to own such common stock through the date of the meeting.
A Netro stockholder must also comply with procedural requirements described
in the Exchange Act.
Under the U.S. securities laws, Netro may generally exclude a stockholder
proposal from its proxy statement if:
- it is not a proper subject for stockholder action under Delaware law;
- it would, if implemented, cause Netro to violate a law;
- the proposal or supporting statement is contrary to any of the Securities
and Exchange Commission's proxy rules or is materially false or
misleading;
- it relates to a personal grievance or is designed to further a personal
interest not shared by other stockholders at large;
- it relates to operations of the company that are immaterial;
- Netro would lack the power or authority to implement it;
- it deals with a matter relating to Netro's ordinary business operations;
- it relates to an election for membership on Netro's board of directors;
- it conflicts with a proposal submitted by Netro at the same meeting;
- it has already been substantially implemented by Netro;
- it substantially duplicates a proposal of another proponent that Netro is
including in the proxy statement;
- it deals with substantially the same subject matter as another proposal
that was included in Netro's proxy statement for a recent previous
meeting and which did not receive the prescribed levels of support; or
- it relates to specific amounts of cash or stock dividends.
SR Telecom. Under the Canada Business Corporations Act, a shareholder
entitled to vote at an annual meeting of shareholders may submit to the
corporation a proposal with matters that the shareholder proposes to raise at
the next annual meeting. Upon receipt of a proposal, a corporation that solicits
proxies will include the proposal in the management proxy circular and, if
requested by the shareholder, include in the management proxy circular a
statement by the shareholder of not more than 500 words in support of the
proposal, and the name and address of the shareholder.
A corporation may, within 21 days after receiving a shareholder proposal,
notify the shareholder of its intention to omit the proposal from the management
proxy circular if:
- the proposal is not submitted at least 90 days before the anniversary
date of the notice of meeting that was sent to shareholders in connection
with the previous annual meeting;
- it clearly appears that the primary purpose of the proposal is to enforce
a personal claim or redress a personal grievance against the corporation
or its directors, officers or securityholders;
- it clearly appears that the proposal does not relate in a significant way
to the business or affairs of the corporation;
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- the corporation, in the previous two years, included a proposal at the
request of the shareholder and the shareholder failed to present the
proposal at the annual meeting; or
- a substantially similar proposal was submitted to shareholders within the
past two years and the proposal did not receive the prescribed level of
support.
APPRAISAL/DISSENT RIGHTS
Netro. Under the Delaware General Corporation Law, Netro's stockholders
have the right, in certain circumstances, to dissent from a merger or
consolidation by demanding payment in cash for the fair value of their shares,
as determined by the Delaware Court of Chancery. In accordance with the Delaware
General Corporation Law, Netro's stockholders are entitled to appraisal rights
only for certain mergers or consolidations and not for a sale or transfer of
assets or an amendment of Netro's charter. In addition, no appraisal rights
would be available to Netro's stockholders in a merger or consolidation, if as
of the record date for the special meeting, Netro's common stock was:
- listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.; or
- held by more than 2,000 stockholders, unless the transaction agreement
required the stockholders to accept anything other than:
- stock of the surviving corporation;
- securities of another corporation which as of the effective date of the
merger or consolidation would either be listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders;
- cash in lieu of fractional shares; or
- any combination of the above forms of merger consideration.
SR Telecom. The Canada Business Corporations Act provides that
shareholders entitled to vote on certain matters are entitled to exercise
dissent rights and to be paid the fair value of their shares. The Canada
Business Corporations Act does not distinguish for this purpose between listed
and unlisted shares. Such matters include the following:
- any amalgamation with a corporation, other than with, or between
subsidiary corporations;
- an amendment to the articles to add, change or remove any provisions
restricting the issue, transfer or ownership of shares;
- an amendment to the articles to add, change or remove any restriction
upon the business or businesses that the corporation may carry on;
- a continuance under the laws of another jurisdiction;
- a sale, lease or exchange of all or substantially all of the property of
the corporation other than in the ordinary course of business;
- a plan of arrangement proposed by the corporation where the court orders
that dissent rights be granted;
- amendments to the articles of a corporation which require a separate
class or series vote, provided that a shareholder is not entitled to
dissent if an amendment to the articles is effected by a court order made
in connection with an action for an oppression remedy; or
- carrying out a going private transaction or a squeeze out transaction.
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In addition, under the Canada Business Corporations Act, shareholders are
entitled to exercise dissent rights in a forced acquisition transaction
following a takeover bid that is accepted by holders of at least 90% of the
shares of the class to which the take over bid relates.
Under the Canada Business Corporations Act, a shareholder may, in addition
to exercising dissent rights, seek an oppression remedy for any act or omission
of a corporation which is oppressive, unfairly prejudicial to or that unfairly
disregards a shareholder's interest.
STOCKHOLDER DERIVATIVE ACTIONS
Netro. Derivative actions may be brought in Delaware by a stockholder on
behalf of, and for the benefit of, the corporation. The Delaware General
Corporation Law provides that a stockholder must state in the complaint that the
stockholder was a stockholder of the corporation at the time of the transaction
of which the stockholder complains or that such stockholder received such stock
in a merger or consolidation. A stockholder may not sue derivatively unless the
stockholder first makes demand on the board of directors of the corporation that
it bring suit and the demand has been refused, unless it is shown that the
demand would have been futile.
SR Telecom. Under the Canada Business Corporations Act, a complainant
(defined in the same manner as for the purposes of the oppression remedy, as set
forth below) may apply to the court for leave to bring an action in the name of,
and on behalf of, a corporation or any subsidiary, or to intervene in an
existing action to which any corporation is a party, for the purpose of
prosecuting, defending or discontinuing the action on behalf of the corporation.
Under the Canada Business Corporations Act, no action may be brought and no
intervention in an action may be made unless the court is satisfied that:
- the complainant has given not less than 14 days notice to the directors
of the corporation or its subsidiary of the complainant's intention to
apply to the court and the directors of the corporation or its subsidiary
do not bring, diligently prosecute or defend or discontinue the action;
- the complainant is acting in good faith; and
- it appears to be in the interests of the corporation or its subsidiary
that the action be brought, prosecuted, defended or discontinued.
Under the Canada Business Corporations Act, the court in a derivative
action may make any order it thinks fit including:
- an order authorizing the complainant or any other person to control the
conduct of the action;
- an order directing the conduct of the action;
- an order directing that any damages payable by a defendant in the action
will be paid, in whole or in part, directly to former and present
security holders of the corporation or its subsidiary instead of the
corporation or its subsidiary; and
- an order requiring the corporation or its subsidiary to pay reasonable
legal fees and any other costs reasonably incurred by the complainant in
connection with the action.
Additionally, under the Canada Business Corporations Act, a court may order
a corporation or its subsidiary to pay the complainant's interim costs,
including reasonable legal fees and disbursements. Although the complainant may
be held accountable for the interim costs on final disposition of the complaint,
the complainant is not required to give security for costs in a derivative
action.
OPPRESSION REMEDY
Netro. Although directors and officers of a Delaware corporation owe
fiduciary duties to the corporation and its stockholders, as described below,
the Delaware General Corporation Law does not provide for a statutory oppression
remedy.
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SR Telecom. The Canada Business Corporations Act provides a statutory
oppression remedy that enables a court to issue interim and final orders to
rectify the matters complained of, if the court is satisfied, upon application
of a complainant as defined below, that:
- any act or omission of the corporation or an affiliate effects a result;
- the business or affairs of the corporation or an affiliate are or have
been carried on or conducted in a manner; or
- the powers of the directors of the corporation or an affiliate are or
have been exercised in a manner;
that is oppressive or unfairly prejudicial to, or that unfairly disregards the
interests of, any security holder, creditor, director or officer of the
corporation.
A complainant includes:
- a present or former registered holder or beneficial owner of securities
of a corporation or any of its affiliates;
- a present or former officer or director of the corporation or any of its
affiliates;
- the director appointed under Section 260 of the Canada Business
Corporations Act; and
- any other person who in the discretion of the court is a proper person to
make a complaint.
The oppression remedy provides the court with extremely broad and flexible
jurisdiction to intervene in corporate affairs to protect shareholders and other
complainants. While conduct which is in breach of fiduciary duties of directors
or that is contrary to the legal right of a complainant will normally trigger
the court's jurisdiction under the oppression remedy, the exercise of that
jurisdiction does not depend on a finding of a breach of such legal and
equitable rights. Additionally, a court may order a corporation or its
subsidiary to pay the complainant's interim costs, including reasonable legal
fees and disbursements. Although the complainant may be held accountable for the
interim costs on final disposition, a complainant is not required to give
security for costs in an oppression action.
PAYMENT OF DIVIDENDS AND REPURCHASE OF SHARES
Netro. In accordance with the Delaware General Corporation Law, Netro's
board of directors may declare dividends out of surplus (defined as the excess,
if any, of total assets over capital), or if there is no surplus, out of the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Under the Delaware General Corporation Law, however, the
directors may not pay any dividends out of net profits if the capital of the
corporation has been diminished by depreciation in the value of its property, or
by losses, or otherwise, to an amount less than the aggregate amount of capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. Capital is determined by the board
of directors and shall not be less than the aggregate par value of the
outstanding capital stock of the corporation having par value. In addition,
under the Delaware General Corporation Law, Netro may redeem or repurchase its
shares only if its capital is not impaired and the redemption or repurchase
would not itself impair Netro's capital.
SR Telecom. Under the Canada Business Corporations Act, a corporation may
pay a dividend by issuing fully paid shares of the corporation. A corporation
may also pay a dividend in money or property unless there are reasonable grounds
for believing that (1) the corporation is, or would after the payment be, unable
to pay its liabilities as they become due; or (2) the realizable value of the
corporation's assets would be less than the aggregate of its liabilities and
stated capital of all classes. Under the Canada Business Corporations Act, a
purchase or other acquisition by a corporation of its shares is generally
subject to the solvency tests similar to those applicable to the payment of
dividends, as set out above.
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FIDUCIARY DUTIES OF DIRECTORS
Netro. Under the Delaware General Corporation Law, directors owe a duty of
care and a duty of loyalty to the corporation. The duty of care requires that
the directors act in an informed and deliberative manner and inform themselves,
prior to making a business decision, of all material information reasonably
available to them. The duty of care also requires that directors exercise care
in overseeing and investigating the conduct of corporate employees and agents.
The duty of loyalty may be summarized as the duty to act in good faith, not out
of self-interest, and in a manner that the directors reasonably believe to be in
the best interests of the stockholders.
Delaware law also imposes an enhanced duty on a director responding to a
takeover bid that involves or relates to a change or potential change of control
of the corporation. In these circumstances (and assuming no decision has been
made to sell the corporation), a director will be required to show that he or
she had reasonable grounds for believing that the bid posed a danger to
corporation policy and effectiveness and that any board action taken in response
was reasonable in relation to the danger posed.
SR Telecom. Pursuant to section 122 of the Canada Business Corporations
Act, the duty of loyalty requires directors of a corporation to act honestly and
in good faith with a view to the best interests of the corporation, and the duty
of care requires that the directors exercise the care, diligence and skill that
a reasonably prudent person would exercise in comparable circumstances.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Netro. The Delaware General Corporation Law provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding
(whether such action, suit or proceeding is by or in the right of the
corporation or by a third party), whether civil, criminal, administrative or
investigative, by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or enterprise. A corporation may indemnify these persons against all
reasonable expenses actually and reasonably incurred by such person, including
attorneys fees, judgments, fines and settlement amounts if the indemnified
person:
- acted in good faith;
- acted in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation; and
- in the case of a criminal action or proceeding, had no reasonable cause
to believe that his or her conduct was unlawful.
A corporation may not indemnify a person in connection with an action
initiated by or in the right of the corporation, for any expenses, fees,
judgments, fines or settlement amounts where the person is judged to be liable
to the corporation unless, and only to the extent that, the Delaware Court of
Chancery or the court in which the action was brought determines that the person
is entitled to indemnity. Expenses incurred by an officer, director, employee or
agent in defending any action, may be paid by the corporation in advance of the
final disposition of such action, upon receipt of an undertaking by or on behalf
of such director, officer, employee or agent to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
corporation.
Netro's certificate of incorporation and bylaws provide that Netro shall
indemnify its directors and officers for any liability incurred in their
official capacity to the fullest extent permissible under Delaware law. Netro's
charter and bylaws also permit, but do not require, Netro to, by action of its
board, provide indemnification to its employees and agents to the extent that
the board shall determine appropriate and authorized by Delaware law. Netro has
also entered into indemnification agreements with each of its directors and
officers providing such persons with indemnification in accordance with Netro's
charter and bylaws.
Netro's bylaws provide, in accordance with the Delaware General Corporation
Law, that expenses incurred by an individual entitled to indemnification in
defending any civil or criminal proceeding shall be paid
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by Netro in advance of the final disposition of the proceeding upon receipt of
an undertaking by or on behalf of such individual to repay the amount if it
shall ultimately be determined that he or she is not entitled to be indemnified.
Netro is not required to advance expenses to any director or officer in
connection with a proceeding initiated by such person unless such proceeding was
authorized in advance by the board of directors. In addition, no person shall be
indemnified by Netro for any expense or amounts paid in settlement with respect
to any action to recover short swing profits under Section 16(b) of the Exchange
Act.
SR Telecom has agreed to maintain the indemnification provisions in Netro's
certificate of incorporation and bylaws and the indemnification agreements with
Netro's officers and directors in respect of acts occurring prior to the
effective time of the merger for a period of six years following the merger. SR
Telecom has also agreed to cause Netro to maintain for a period of three years
directors' and officers' insurance that will cover Netro's officers and
directors on terms at least as favorable as the current directors' and officers'
insurance policy maintained by Netro, provided that the annual premiums are not
to exceed US$2.4 million.
SR Telecom. Under the Canada Business Corporations Act, a corporation may
indemnify a director or officer, a former director or officer or a person who
acts or acted at the corporation's request as a director or officer of another
entity referred to as an "indemnifiable person", against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal,
investigative or administrative action or proceeding in which the indemnifiable
person is involved because of their association with the corporation or such
body corporate, if he or she was not judged by the court or other competent
authority to have committed any fault or omitted to do anything that the
individual ought to have done and: (a) he or she acted honestly and in good
faith with a view to the best interests of such corporation; and (b) in the case
of a criminal or administrative action or proceeding that is enforced by a
monetary penalty, he or she had reasonable grounds for believing that his or her
conduct was lawful. An indemnifiable person is entitled under the Canada
Business Corporations Act to such indemnity from the corporation if he or she
was substantially successful on the merits in his or her defense of the action
or proceeding and fulfilled the conditions set out in (a) and (b) above.
A corporation may, with the approval of a court, also indemnify an
indemnifiable person in respect of an action by or on behalf of the corporation
or body corporate to procure a judgment in its favor, to which such person is
made a party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set forth in
(a) and (b), above.
The Canada Business Corporations Act provides that a corporation may
advance monies to a director, or officer or other individual for the costs,
charges and expenses of a proceeding for which the corporation is permitted to
indemnify such a person. The individual shall repay such monies if he or she
does not fulfill the conditions for indemnification.
The SR Telecom bylaws require SR Telecom to indemnify specified persons to
the fullest extent authorized by applicable law.
DIRECTOR LIABILITY
Netro. As permitted by the Delaware General Corporation Law, Netro's
charter contains a provision that eliminates the personal liability of directors
to the corporation or its stockholders for damages for breach of duty as a
director to the fullest extent permissible under Delaware Law. The Delaware
General Corporation Law prohibits the elimination of personal liability for:
- breach of the director's duty of loyalty;
- acts or omissions not in good faith or involving intentional misconduct
or knowing violation of the law;
- willful or negligent conduct in paying dividends or repurchasing stock
out of other than lawfully available funds; or
- any transaction from which the director derives an improper personal
benefit.
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SR Telecom. The Canada Business Corporations Act provides that no
provision in a contract, the articles, the bylaws or a resolution relieves a
director or officer from the duty to act in accordance with the Canada Business
Corporations Act or the regulations or relieves them from liability for a breach
thereof. The bylaws of SR Telecom provide certain protections from liability to
directors and officers of SR Telecom, as long as they have not breached their
duties under the Canada Business Corporations Act.
ACCESS TO CORPORATE RECORDS
Netro. Under the Delaware General Corporation Law, any Netro stockholder
is entitled to inspect and copy books and records, including Netro's stock
ledger and a list of its stockholders as long as the inspection is for a proper
purpose and during the usual hours of business.
SR Telecom. Under the Canada Business Corporations Act, SR Telecom's
shareholders, creditors, and their agents and legal representatives, after
giving the required notice, may examine the consolidated financial statements
and certain of the records of the corporation during usual business hours and
take copies of extracts free of charge.
PREEMPTIVE RIGHTS
Netro. Under the Delaware General Corporation Law, a stockholder does not
have preemptive rights unless they are specifically granted in the corporation's
certificate of incorporation. Netro's charter does not provide for preemptive
rights.
SR Telecom. Under the Canada Business Corporations Act, if provided in the
articles of a corporation, no shares of a class will be issued unless the shares
have first been offered to shareholders holding shares of that class, and those
shareholders have preemptive rights to acquire the offered shares in proportion
to their holdings of the shares of that class, at the price and on the terms
that those shares are to be offered to others. SR Telecom's charter does not
provide for preemptive rights.
TRANSACTIONS WITH INTERESTED DIRECTORS
Netro. Under the Delaware General Corporation Law, no contract or
transaction that is:
- between a corporation and one or more of its directors or officers;
- between a corporation and another firm in which one or more of the
corporation's directors or officers are directors or officers of the
other firm; or
- between a corporation and another firm in which one or more of the
corporation's directors or officers have a material financial interest;
is void or voidable solely because there is such a relationship or interest,
because the director or officer is present at or participates in the meeting of
the board or committee that authorizes the contract or transaction or because
the director's or officer's vote was counted for this purpose, if one or more of
the following is true:
- if the material facts of the contract or transaction and the director's
or officer's relationship or interest are disclosed to or known by the
board of directors or a committee of the board, and the board or the
committee authorizes the contract or transaction by an affirmative vote
of the majority of the disinterested directors (even though these
directors may be less than a quorum);
- if the material facts of the contract or transaction and the director's
or officer's relationship or interest are disclosed to or known by the
stockholders entitled to vote on the matter and they specifically approve
in good faith the contract or transaction; or
- if the contract or transaction is fair to the corporation.
SR Telecom. The Canada Business Corporations Act requires that a director
or officer of a corporation disclose to the corporation, in writing or by
requesting to have it entered in the minutes of meetings of
209
directors or of meetings of committees of directors, the nature and extent of
any interests in a material contract or material transaction, whether made or
proposed, with the corporation if the director or officer:
- is a party to the contract or transaction;
- is a director or an officer, or an individual acting in a similar
capacity, of a party to the contract or transaction; or
- has a material interest in a party to the contract or transaction.
An interested director is prohibited from voting on a resolution to approve
the contract or transaction except in certain circumstances, which include the
contract or transaction relating primarily to his or her remuneration, a
contract or transaction for indemnification or liability insurance of the
director, or a contract or transaction with an affiliate of the corporation. If
a director or officer has disclosed his or her interest in accordance with the
Canada Business Corporations Act, the directors approve the contract or
transaction and the contract or transaction was reasonable and fair to the
corporation when it was approved, the director or officer is not accountable to
the corporation or its shareholders for any profit realized from the contract or
transaction and the contract or transaction is not invalid. Even if the
foregoing conditions are not met, the Canada Business Corporations Act provides
that, a director or officer, acting honestly and in good faith, is not
accountable to the corporation or to its shareholders for any profit realized
from a contract or transaction for which disclosure is required under the Canada
Business Corporations Act and the contract or transaction is not invalid by
reason only of the interest of the director or officer in the contract or
transaction, if:
- the contract or transaction is approved or confirmed by a special
resolution at a meeting of shareholders;
- disclosure of the interest was made to the shareholders in a manner
sufficient to indicate its nature before the contract or transaction was
approved or confirmed; and
- the contract or transaction was reasonable and fair to the corporation
when it was approved or confirmed.
REQUIREMENTS FOR EXTRAORDINARY CORPORATE TRANSACTIONS
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS INCLUDING MERGER, CONSOLIDATION,
DISSOLUTION OR SALE OR LEASE OF SUBSTANTIALLY ALL ASSETS
Netro. Under the Delaware General Corporation Law, unless otherwise
provided in the certificate of incorporation, a sale or other disposition of all
or substantially all of the corporation's assets, or a merger or consolidation
of the corporation with another corporation requires the affirmative vote of a
majority of the board of directors (except in certain limited circumstances)
and, with certain exceptions, the affirmative vote of a majority of the
outstanding shares entitled to vote on the matter. Netro's certificate of
incorporation does not contain voting requirements for extraordinary corporate
transactions in addition to or different from the approvals mandated by law.
Approval by a parent corporation's stockholders is not required under the
Delaware General Corporation Law for any merger or consolidation of a subsidiary
with and into its parent corporation if the parent corporation owns at least 90%
of the outstanding shares of each class of stock of the subsidiary.
Furthermore, under the Delaware General Corporation Law, unless otherwise
provided in the corporation's certificate of incorporation, approval of the
stockholders of a surviving corporation in a merger is not required if:
- the plan of merger does not amend in any respect the certificate of
incorporation of the surviving corporation;
- the shares outstanding immediately before the effectiveness of the merger
are not changed by the merger; and
210
- either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into this stock are to be
issued or delivered under the plan of merger, or the authorized unissued
shares or the treasury shares of common stock of the surviving
corporation to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under the plan do not exceed 20% of
the shares of common stock of the surviving corporation outstanding
immediately prior to the merger.
Netro's charter does not provide otherwise.
Under the Delaware General Corporation Law, unless the board of directors
approves the proposal to dissolve, the dissolution must be unanimously approved
by all the stockholders entitled to vote thereon. Only if the dissolution is
initially approved by the board of directors may the dissolution be approved by
a simple majority of the outstanding shares of the corporation's stock entitled
to vote, unless the certificate of incorporation of the corporation requires a
greater vote. Netro's certificate of incorporation does not modify the
requirements for dissolution.
When a Delaware corporation is dissolved, such corporation shall
nevertheless be continued for at least three years from the date of dissolution
for the purpose of prosecuting or defending lawsuits, to settle and close its
business, to dispose of its property, to discharge its liabilities and to
distribute to it its stockholders any remaining assets. In the event of the
liquidation, dissolution or winding-up of the affairs of Netro, holders of
outstanding common stock would be entitled to share, ratably and equally with
all other common stockholders, in Netro's assets and funds remaining after the
payment, or provision for payment, of all debts and other liabilities of Netro.
SR Telecom. Under the Canada Business Corporations Act, extraordinary
corporate actions, such as certain amalgamations, continuances, sales, leases or
exchanges of all or substantially all of the property of a corporation other
than in the ordinary course of business, and other extraordinary actions such as
liquidations or dissolutions are required to be approved by special resolution.
A "special resolution" is a resolution passed by at least two-thirds of the
votes cast by shareholders who are entitled to vote on the resolution. For such
approvals, each share of the corporation carries the right to vote, whether or
not the shares are designated as voting shares in the corporation's articles. In
some cases the special resolution to approve an extraordinary corporate action
must also be approved separately by the holders of a class or series of shares,
including a class or series that does not otherwise have the right to vote.
A corporation may also apply to a court for an order approving an
arrangement which includes an amalgamation, a transfer of all or substantially
all the property of a corporation to another corporation in exchange for
property, money or securities of the corporation, or liquidation and dissolution
where it is not insolvent and where it is not practicable for the corporation to
make such fundamental change under other provisions of the Canada Business
Corporations Act. The court may make any interim or final order it thinks fit
with respect to the proposed arrangement.
Shareholder approval is not required for an amalgamation between a parent
corporation and one or more of its wholly-owned subsidiaries or between two or
more wholly-owned subsidiaries.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
Netro. The Delaware General Corporation Law generally provides that any
person who owns 15% or more of the corporation's voting stock is an "interested
stockholder" and may not engage in certain "business combinations" with the
corporation for a period of three years following the time the person became an
interested stockholder, unless:
- the corporation's board of directors has approved, before the time the
person became an interested stockholder, either the business combination
or the transaction that resulted in the person becoming an interested
stockholder;
211
- upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the stockholder owns at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors who are also officers and certain employee stock plans; or
- at or subsequent to the time that the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders
and not by written consent, by the affirmative vote of at least
two-thirds of the outstanding voting stock not owned by the interested
stockholder.
A Delaware corporation may elect not to be governed by these restrictions.
Netro has not so elected.
Netro is also a party to a stockholder rights agreement, which effectively
prohibits persons from acquiring more that 15% (other than Global Telecom) of
its common stock without the approval of its board of directors. Netro amended
its stockholder rights agreement on March 27, 2003 to exempt SR Telecom from the
definition of an "Acquiring Person" with respect to the proposed merger, the
merger agreement and the voting agreements.
SR Telecom. The Canada Business Corporations Act does not contain a
comparable provision with respect to business combinations. However, the
requirements of certain Canadian securities regulatory authorities, including
Rule 61-501 of the Ontario Securities Commission and Policy Statement Q-27 of
the Commission des valeurs mobiliers du Quebec, contain requirements in
connection with "related party transactions". A related party transaction means,
generally, any transaction by which an issuer, directly or indirectly, acquires
or transfers an asset or issues or subscribes to securities or assumes or
transfers a liability from or to, as the case may be, a related party by any
means in any one or any combination of transactions. "Related party" is defined
in Rule 61-501 and Policy Q-27 to include, in relation to the issuer or a
related party involved in the transaction, directors, senior officers and
holders of securities sufficient to materially affect control of the issuer or
of such other party, or persons beneficially owning or exercising control or
direction over more than 10% of the voting securities of the issuer or of such
other party.
Rule 61-501 and Policy Q-27 require more detailed disclosure in the proxy
material sent to securityholders in connection with a related party transaction,
and, subject to certain exceptions, the preparation by an independent valuer of
a formal valuation of the subject matter of the related party transaction and
any non-cash consideration offered therefor and the inclusion of a summary of
the valuation in the proxy material. Rule 61-501 and Policy Q-27 also require
that, subject to certain exceptions, the shareholders of the issuer, other than
related parties, separately approve the transaction, by a simple majority of the
votes cast.
These requirements of Canadian securities regulators provide, in addition
to specified exemptions in certain circumstances, for discretion to be exercised
by such regulators to exempt parties from some or all of such requirements, with
or without conditions, where such regulators consider it to be consistent with
the public interest to do so. In general, these requirements of Canadian
securities laws are administered and enforced by securities regulators rather
than by the courts and the basis upon which those regulators take jurisdiction
over a matter and the remedies that may be available differ significantly from
those applicable to the requirements of corporate law contained in the Canada
Business Corporations Act.
SR Telecom is not party to a shareholder rights agreement, "poison pill" or
other similar agreement.
212
LEGAL MATTERS
The validity of the shares of SR Telecom common stock offered by this proxy
statement/prospectus to be issued to holders of shares of Netro common stock in
the merger have been passed upon for SR Telecom by Fasken Martineau DuMoulin
LLP, Montreal, Quebec, Canada. Davis Polk & Wardwell is counsel to Netro.
EXPERTS
The consolidated financial statements of SR Telecom Inc. as of December 31,
2002 and 2001 and for each of the three years in the period ended December 31,
2002 that are included in this proxy statement/ prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in the reports appearing
herein, and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Netro Corporation as of December
31, 2002 and for the year then ended included in this proxy statement/prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. The financial statements of Netro as of December 31,
2001 and for each of the two years in the period ended December 31, 2001 were
audited by other independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on those financial
statements in their report dated January 21, 2002.
213
WHERE YOU CAN FIND MORE INFORMATION
Netro files reports, proxy statements and other information with the SEC as
required by the Exchange Act. You may read and copy reports, proxy statements
and other information filed by Netro with the SEC at the SEC's Public Reference
Room, Room 1024, 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the SEC's Public Reference Room by calling the
SEC at 1-800-SEC-0330. You may also obtain copies of the materials described
above at prescribed rates by writing to the Securities and Exchange Commission,
Public Reference Section, 450 Fifth Street, NW, Washington, DC 20549. Netro
files its reports, proxy statements and other information electronically with
the SEC. You may access information on Netro at the SEC web site containing
reports, proxy statements and other information at www.sec.gov.
SR Telecom is a Canadian corporation whose shares of common stock are
listed on the Toronto Stock Exchange. To date, SR Telecom has not been required
to file periodic reports, proxy statements or other information (other than the
registration statement of which this proxy statement/prospectus is a part) with
the SEC. SR Telecom files reports, statements and other information with the
Canadian provincial securities administrators, which are available at various of
the Canadian provinces' securities administrators' public reference sources. SR
Telecom filings are also electronically available to the public from the
Canadian System for Electronic Document Analysis and Retrieval, the Canadian
equivalent of the SEC's EDGAR system, at www.sedar.com.
Following the completion of the merger, SR Telecom will be required, under
Section 13(a) of the Exchange Act, to file periodic reports with the SEC.
However, as a "foreign private issuer," SR Telecom will be exempt from some
other requirements of the Exchange Act, including the proxy rules and
information requirements of Section 14 of the Exchange Act and the reporting and
short-swing profit recovery provisions applicable to officers, directors and
significant shareholders under Section 16 of the Exchange Act. As a holder of
shares of SR Telecom common stock, SR Telecom will furnish to you the same
periodic reports that it currently furnishes to all other SR Telecom
shareholders, including audited annual consolidated financial statements and
unaudited quarterly consolidated financial statements, unless you notify SR
Telecom of your desire not to receive these reports, as well as proxy circulars
and related materials for annual and special meetings of shareholders.
SR Telecom filed a registration statement on Form F-4 to register the
shares of SR Telecom common stock to be issued to holders of Netro common stock
in the merger. This document is a part of that registration statement and
constitutes the prospectus of SR Telecom in addition to being a proxy statement
to the Netro stockholders. As allowed by SEC rules, this document does not
contain all of the information you can find in the registration statement or the
exhibits to the registration statement. Please refer to the registration
statement for further information with respect to SR Telecom, Netro and the
shares of SR Telecom common stock to be issued in the merger.
Following the merger, SR Telecom expects to continue to be eligible to file
reports under the Exchange Act as a "foreign private issuer" and may become
eligible to use the multi-jurisdictional disclosure system 12 months after the
consummation of the merger if the value of its outstanding public equity held by
non-affiliates exceeds US$75 million. The multi-jurisdictional disclosure system
facilitates cross-border offerings of securities and continuous reporting by
specified Canadian issuers. The system permits eligible companies in the United
States and Canada to offer securities in the other country using the disclosure
documents meeting the regulatory requirements of their home country. As a
corporation governed by the Canada Business Corporations Act and subject to
reporting requirements of the various securities regulatory authorities in
Canada, SR Telecom is required to prepare and file financial information in
Canada under Canadian GAAP.
Following the merger, SR Telecom expects to file with the SEC and various
securities regulatory authorities in Canada annual reports, including
consolidated financial statements denominated in Canadian dollars and prepared
under Canadian GAAP, which will include a reconciliation to U.S. GAAP.
214
You may request a copy of SR Telecom's filings at no cost by writing or
telephoning:
SR TELECOM INC.
8150 Trans-Canada Highway
Montreal, Quebec H4S 1M5
Canada
Tel: (514) 335-1210
Attn: Investor Relations
email: investor@srtelecom.com
You may request a copy of Netro's filings at no cost by writing or
telephoning:
NETRO CORPORATION
3860 North First Street
San Jose, California 95134
Tel: (408) 216-1500
Attn: Investor Relations
email: investor-relations@netro-corp.com
To ensure timely delivery of the documents prior to the special meeting,
any requests should be received by August 18, 2003.
If you have additional questions about the merger or about the solicitation
of your proxy, you should contact Innisfree M&A Incorporated, at 1-888-750-5834.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, SHARES OF SR TELECOM COMMON STOCK OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION OR FROM ANY PERSON TO WHOM OR FROM
WHOM IT IS UNLAWFUL TO MAKE THE OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN THAT JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MEANS, UNDER ANY
CIRCUMSTANCES, THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS OR IN SR TELECOM'S OR NETRO'S AFFAIRS SINCE THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/ PROSPECTUS IN RESPECT OF NETRO AND ITS SUBSIDIARIES WAS PROVIDED BY
NETRO. THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN RESPECT
OF SR TELECOM AND ITS SUBSIDIARIES WAS PROVIDED BY SR TELECOM.
215
INDEX TO FINANCIAL STATEMENTS
PAGE
----
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF SR TELECOM:
Report of independent accountants........................... F-I-1
Consolidated balance sheets as at March 31, 2003 and
December 31, 2002 and 2001................................ F-I-2
Consolidated statements of operations for the three months
ended March 31, 2003 and 2002 and the years ended December
31, 2002, 2001 and 2000................................... F-I-3
Consolidated statements of (deficit) retained earnings for
the three months ended March 31, 2003 and 2002 and the
years ended December 31, 2002, 2001 and 2000.............. F-I-4
Consolidated statements of cash flows for the three months
ended March 31, 2003 and 2002 and the years ended December
31, 2002, 2001 and 2000................................... F-I-5
Notes to the consolidated financial statements.............. F-I-6
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF NETRO:
Unaudited condensed consolidated balance sheets as of March
31, 2003 and December 31, 2002............................ F-II-1
Unaudited condensed consolidated statements of operations
for the three months ended March 31, 2003 and 2002........ F-II-2
Unaudited condensed consolidated statements of cash flows
for the three months ended March 31, 2003 and 2002........ F-II-3
Notes to unaudited condensed consolidated financial
statements................................................ F-II-4
Report of independent auditors and independent public
accountants............................................... F-II-16
Consolidated balance sheets as of December 31, 2002 and
2001...................................................... F-II-18
Consolidated statements of operations for the years ended
December 31, 2002, 2001 and 2000.......................... F-II-19
Consolidated statements of stockholders' equity for the
years ended December 31, 2002, 2001 and 2000.............. F-II-20
Consolidated statements of cash flows for the years ended
December 31, 2002, 2001 and 2000.......................... F-II-21
Notes to consolidated financial statements.................. F-II-22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION:
Unaudited pro forma condensed consolidated
information -- Introduction............................... F-III-1
Unaudited pro forma condensed consolidated balance sheet as
at March 31, 2003......................................... F-III-2
Unaudited pro forma condensed consolidated statement of
operations for the three months ended March 31, 2003...... F-III-3
Unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 2002........... F-III-4
Notes to unaudited pro forma condensed consolidated
financial information..................................... F-III-5
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
SR Telecom Inc.
We have audited the accompanying consolidated balance sheets of SR Telecom
Inc. (the "Corporation") as at December 31, 2002 and 2001 and the related
consolidated statements of operations, retained earnings (deficit) and cash
flows for each of the years in the three-year period ended December 31, 2002.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and auditing standards generally accepted in the United
States of America. These standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Corporation as at December
31, 2002 and 2001 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
-s- Deloitte & Touche LLP
Montreal, Canada
February 7, 2003, except as to Notes 26 a), 26 b) and 26 c),
which are as of March 27, 2003, May 1, 2003 and July 18, 2003, respectively.
COMMENTS BY INDEPENDENT AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING
DIFFERENCES
In the United States of America, reporting standards for auditors require
the addition of an explanatory paragraph (following the opinion paragraph) when
there are changes in accounting principles that have a material effect on the
comparability of the Corporation's financial statements, such as the changes
described in Note 2(c) in the financial statements. Our report to the Board of
Directors, dated February 7, 2003, except as to Notes 26 a), 26 b) and 26 c),
which are as of March 27, 2003, May 1, 2003 and July 18, 2003, respectively, is
expressed in accordance with Canadian reporting standards which do not require a
reference to such changes in accounting principles in the auditors' report when
the change is properly accounted for and adequately disclosed in the financial
statements.
-s- Deloitte & Touche LLP
Montreal, Canada
July 18, 2003
F-I-1
SR TELECOM INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS)
AS AT AS AT DECEMBER 31,
MARCH 31, ----------------------
NOTES 2003 2002 2001
------- ----------- -------- -----------
(UNAUDITED) RESTATED
(NOTE 2(C))
ASSETS
Current assets
Cash and cash equivalents........................ $ 9,367 $ 20,309 $ 20,376
Short-term investments........................... 3 17,502 21,624 --
Accounts receivable.............................. 4 57,850 79,352 95,785
Current portion of long-term accounts
receivable.................................... 5 6,867 7,390 7,171
Income taxes receivable.......................... 2,156 1,645 1,983
Inventories...................................... 6 38,813 34,445 37,620
Prepaid expenses................................. 3,393 3,126 2,921
Investment tax credits........................... 2,400 2,400 2,400
-------- -------- --------
TOTAL CURRENT ASSETS............................... 138,348 170,291 168,256
Long-term investment tax credits................... 16,803 15,908 11,550
Long-term accounts receivable...................... 5, 26 b) 22,634 23,403 30,473
Property, plant and equipment, net................. 7 90,989 91,268 104,627
Future income taxes................................ 15 18,759 16,088 15,823
Other assets....................................... 8 3,388 3,847 5,641
-------- -------- --------
TOTAL ASSETS....................................... $290,921 $320,805 $336,370
======== ======== ========
LIABILITIES
Current liabilities
Bank indebtedness................................ 9 $ 5,000 $ 10,000 $ 10,000
Accounts payable and accrued liabilities......... 10 50,337 58,125 44,352
Customer advances................................ 7,003 10,054 10,123
Current portion of long-term debt................ 11 6,012 9,626 8,531
-------- -------- --------
TOTAL CURRENT LIABILITIES.......................... 68,352 87,805 73,006
Long-term debt..................................... 11 126,767 130,674 140,908
-------- -------- --------
TOTAL LIABILITIES.................................. 195,119 218,479 213,914
-------- -------- --------
Commitments and contingencies...................... 19
SHAREHOLDERS' EQUITY
Capital stock.................................... 12 148,142 147,985 147,230
Deficit.......................................... (52,340) (45,659) (24,774)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY......................... 95,802 102,326 122,456
-------- -------- --------
Total liabilities and shareholders' equity......... $290,921 $320,805 $336,370
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-I-2
SR TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------
NOTES 2003 2002 2002 2001 2000
----- ---------- ---------- ---------- ----------- -----------
RESTATED RESTATED
(UNAUDITED) (NOTE 2(C)) (NOTE 2(C))
REVENUE
Equipment............................... $ 16,549 $ 32,745 $ 146,118 $ 97,440 $ 134,584
Services................................ 9,415 7,814 34,911 44,157 34,826
Telecommunications...................... 3,637 4,905 15,874 19,890 22,102
---------- ---------- ---------- ---------- ----------
Total revenue........................... 29,601 45,464 196,903 161,487 191,512
---------- ---------- ---------- ---------- ----------
Cost of revenue
Equipment............................... 8,178 13,880 59,304 46,926 62,504
Services................................ 5,809 6,470 30,012 28,174 15,648
---------- ---------- ---------- ---------- ----------
Total cost of revenue................... 13,987 20,350 89,316 75,100 78,152
---------- ---------- ---------- ---------- ----------
Gross profit............................ 15,614 25,114 107,587 86,387 113,360
Agent commissions....................... 1,597 3,032 13,904 18,416 22,104
Selling, general and administrative
expenses.............................. 10,123 10,141 47,050 33,320 38,891
Research and development expenses,
net................................... 13 5,379 5,016 21,336 19,039 19,089
Telecommunications operating expenses... 5,515 6,179 22,510 23,812 22,281
Restructuring, asset impairment and
other charges......................... 16 -- -- 4,912 61,655 4,385
---------- ---------- ---------- ---------- ----------
Operating (loss) earnings............... (7,000) 746 (2,125) (69,855) 6,610
(Loss) gain on change in ownership in
subsidiary company.................... 18 -- -- (3,974) 9,393 --
Interest expense, net................... 14 (2,283) (2,580) (12,073) (13,199) (11,882)
Loss on foreign exchange................ 2(c) (357) (93) (2,461) (830) (2,330)
---------- ---------- ---------- ---------- ----------
Loss from continuing operations before
income tax and non-controlling
interest.............................. (9,640) (1,927) (20,633) (74,491) (7,602)
Income tax recovery (expense)........... 15 2,959 (681) (252) 6,426 1,680
Non-controlling interest................ 18 -- -- -- 5,141 --
---------- ---------- ---------- ---------- ----------
NET LOSS FROM CONTINUING OPERATIONS..... (6,681) (2,608) (20,885) (62,924) (5,922)
Earnings (loss) from discontinued
operations, net of tax................ 17 -- -- -- 46,859 (46,859)
---------- ---------- ---------- ---------- ----------
NET LOSS................................ $ (6,681) $ (2,608) $ (20,885) $ (16,065) $ (52,781)
========== ========== ========== ========== ==========
Basic and diluted....................... 12
Loss per share from continuing
operations.......................... $ (0.12) $ (0.05) $ (0.38) $ (1.25) $ (0.14)
Net loss per share.................... $ (0.12) $ (0.05) $ (0.38) $ (0.32) $ (1.25)
========== ========== ========== ========== ==========
Basic and diluted
Weighted average number of common
shares outstanding.................. 55,227,982 54,552,808 54,728,934 50,182,969 42,359,662
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-I-3
SR TELECOM INC.
CONSOLIDATED STATEMENTS OF (DEFICIT) RETAINED EARNINGS
(IN THOUSANDS OF CANADIAN DOLLARS)
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ------------------------------------
NOTES 2003 2002 2002 2001 2000
----- -------- -------- -------- ----------- -----------
(UNAUDITED) RESTATED RESTATED
(NOTE 2(C)) (NOTE 2(C))
(DEFICIT) RETAINED EARNINGS,
BEGINNING OF PERIOD, as
previously reported........... $(45,659) $(21,668) $(21,668) $ (2,903) $ 51,262
Cumulative effect of adoption of
new accounting policy......... 2(c) -- (3,106) (3,106) (711) 388
-------- -------- -------- -------- --------
(Deficit) retained earnings,
beginning of period, as
restated...................... (45,659) (24,774) (24,774) (3,614) 51,650
Change in accounting policy..... 2(c) -- -- -- (4,671) --
NET LOSS........................ (6,681) (2,608) (20,885) (16,065) (52,781)
Share issue costs (net of future
income taxes of $155,000 in
2001 and $1,223,000 in
2000)......................... 12 -- -- -- (424) (2,483)
-------- -------- -------- -------- --------
DEFICIT, END OF PERIOD.......... $(52,340) $(27,382) $(45,659) $(24,774) $ (3,614)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-I-4
SR TELECOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF CANADIAN DOLLARS)
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------ ------------------------------------
NOTES 2003 2002 2002 2001 2000
----- -------- ------- -------- ----------- -----------
(UNAUDITED) RESTATED RESTATED
(NOTE 2(C)) (NOTE 2(C))
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net loss............................................... $ (6,681) $(2,608) $(20,885) $(16,065) $ (52,781)
Adjustments to reconcile net loss to net cash from
(used in) operating activities:
Depreciation and amortization........................ 3,137 3,809 14,913 17,115 16,923
Asset impairment..................................... 16 -- -- -- 58,000 1,404
Loss (gain) on disposal of property, plant and
equipment.......................................... -- 29 324 -- (124)
Non-controlling interest............................. 18 -- -- -- (5,141) --
Loss (gain) on change in ownership of subsidiary
company............................................ 18 -- -- 3,974 (9,393) --
Future income taxes.................................. (2,671) 922 (265) (7,645) (2,327)
Change in operating assets and liabilities:
Decrease (increase) in long-term accounts
receivable....................................... 769 323 7,070 3,974 (650)
Decrease (increase) in non-cash working capital
items............................................ 20 5,145 (77) 28,868 16,078 (80,546)
Change in accounting policy........................ 2(c) -- -- -- (4,671) --
Unrealized foreign exchange........................ (4,428) 37 (694) 4,535 1,848
-------- ------- -------- -------- ---------
Net cash (used in) from operating activities............. (4,729) 2,435 33,305 56,787 (116,253)
-------- ------- -------- -------- ---------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES
(Repayment) increase in bank indebtedness.............. (5,000) -- -- -- 10,000
Increase in long-term debt............................. -- 1,105 -- 660 37,657
Repayment of long-term debt............................ (3,093) (2,554) (8,445) (7,385) (17,156)
Proceeds from issue of shares.......................... 12 157 141 755 13,885 72,635
Share issuance costs................................... 12 -- -- -- (424) (2,483)
-------- ------- -------- -------- ---------
Net cash (used in) from financing activities............. (7,936) (1,308) (7,690) 6,736 100,653
-------- ------- -------- -------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Sale (purchase) of short-term investments.............. 3 4,122 -- (21,624) -- --
Purchase of property, plant and equipment.............. (2,399) (665) (3,590) (9,498) (22,872)
Proceeds on disposal of property, plant and
equipment............................................ -- -- -- 221 1,070
Other assets........................................... 2(c) -- 6 (468) (1,538) 129
-------- ------- -------- -------- ---------
Net cash from (used in) investing activities............. 1,723 (659) (25,682) (10,815) (21,673)
-------- ------- -------- -------- ---------
Discontinued operations.................................. 17 -- -- -- (46,859) 46,859
-------- ------- -------- -------- ---------
(Decrease) increase in cash and cash equivalents......... (10,942) 468 (67) 5,849 9,586
Cash and cash equivalents, beginning of period........... 20,309 20,376 20,376 14,527 4,941
-------- ------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 9,367 $20,844 $ 20,309 $ 20,376 $ 14,527
======== ======= ======== ======== =========
See Note 20 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
F-I-5
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE
INFORMATION)
1. DESCRIPTION OF BUSINESS
SR Telecom Inc. ("SR Telecom" or the "Corporation") was created on February
17, 1981, under the Canada Business Corporations Act. SR Telecom provides fixed
wireless access solutions for voice, data and Internet access applications. SR
Telecom designs, markets and sells fixed wireless products to telecommunications
service providers, who in turn use the products to provide their subscribers
with a full range of telecommunications services. SR Telecom also provides full
turnkey services to its customers. Most of SR Telecom's sales are international,
with its fixed wireless systems currently being used by telecommunications
service providers in over 110 countries worldwide. These customers include large
incumbent local exchange carriers in the countries they serve, as well as
competitive local exchange carriers and private operators of telecommunications
systems. In addition, through its majority owned subsidiary, Communicacion y
Telefonia Rural S.A. ("CTR"), SR Telecom provides local telephone services to
residential, commercial and institutional customers as well as a network of
payphones in a large, predominantly rural area of Chile.
2. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
These consolidated financial statements include the accounts of SR Telecom
Inc. and its subsidiaries. All intercompany transactions and balances have been
eliminated on consolidation.
B) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented. Operating results for the three months ended March 31,
2003 and 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2003.
C) ADOPTION OF NEW ACCOUNTING POLICIES
Translation of foreign currencies
In December 2001, the Canadian Institute of Chartered Accountants ("CICA")
amended Section 1650, "Foreign Currency Translation." The amended recommendation
requires that, effective January 1, 2002, unrealized translation gains and
losses on foreign currency denominated monetary items that have a fixed or
ascertainable life which were previously deferred and amortized over the life of
the related items, be included in earnings of the year. This amendment was
applied retroactively, with restatement of prior periods. As a result, opening
deficit increased by $3,106,000 at January 1, 2002, $711,000 at January 1, 2001
and opening retained earnings at January 1, 2000 increased by $388,000. In 2001,
this restatement also resulted in a charge to earnings of $2,395,000 ($1,099,000
in 2000) and a reduction in other assets of $3,106,000.
Monetary assets and liabilities denominated in foreign currencies are
translated at exchange rates in effect at the balance sheet dates. Non-monetary
assets and liabilities are translated at historical rates. Translation gains and
losses are reflected in the statements of operations. Revenue and expenses are
translated at average exchange rates prevailing during the period.
Subsidiaries, which are financially or operationally dependent on the
parent Corporation, are accounted for under the temporal method of foreign
currency translation. Under this method, monetary assets and liabilities are
translated at exchange rates in effect at the balance sheet dates. Non-monetary
assets and liabilities are translated at historical rates. Revenue and expenses
are translated at average rates for the period. Translation exchange gains or
losses of such subsidiaries' accounts are reflected in the statements of
operations.
F-I-6
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C) ADOPTION OF NEW ACCOUNTING POLICIES
Stock-Based Compensation Plans
Effective January 1, 2002, the Corporation adopted the new CICA
recommendations relating to stock-based compensation and other stock-based
payments. The Corporation has applied this change prospectively for new awards
granted on or after January 1, 2002. The Corporation has chosen to recognize no
compensation when stock options are granted to employees and directors under the
stock option plans with no cash settlement features. However, direct awards of
stock to employees and stock or stock option awards granted to non-employees
will be accounted for in accordance with the fair value method of accounting for
stock-based compensation. Any consideration paid by employees on exercise of
stock options or purchase of stock is credited to share capital. If stock or
stock options are repurchased from employees, the excess of the consideration
paid over the carrying amount of the stock or stock option cancelled is charged
to deficit. The Corporation's Employee Stock Option Plan and other disclosures
are described in Note 12.
Warranty costs
In 2001, the Corporation retroactively adopted the accrual method of
accounting for warranty costs, a preferred method. Prior to 2001, these costs
were expensed as incurred, which is also acceptable. The financial statements of
prior years have not been restated. At January 1, 2001, the cumulative effect of
the change in accounting policy charged to opening deficit was $4,671,000 (net
of future income taxes of $2,198,000). Of this, $3,869,000 was applied against
inventories and $3,000,000 to accrued liabilities.
D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on-hand and balances with banks,
exclusive of bank advances, as well as all highly liquid short-term investments,
with original maturities of three months or less.
E) SHORT-TERM INVESTMENTS
Short-term investments include money market instruments and commercial
paper carried at the lower of cost and market value.
F) INVENTORIES
Inventories are valued at the lower of cost and net realizable value or
replacement cost, with cost computed at standard, which approximates actual cost
computed on a first-in, first-out basis. Inventories are comprised of raw
materials, work-in-process and finished goods.
G) FUTURE INCOME TAXES
Future income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the substantively enacted tax rates which
will be in effect when the differences are expected to reverse. A valuation
allowance is provided for the amount of future income tax assets which are not
considered more likely than not to be realized.
F-I-7
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H) PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS
Property, plant and equipment and other assets are recorded at cost and are
depreciated or amortized over their estimated useful lives on the following
bases:
Telecommunication network equipment...... straight-line over 20 years
Building and improvements................ straight-line over 20 and 10 years
Leasehold improvements................... straight-line over term of lease
Machinery, equipment and fixtures........ 20% diminishing balance
Computer equipment and licenses.......... 30% diminishing balance and
straight-line over 5 years
Construction in progress represents direct costs, and capitalized interest
of nil in 2002 (2001-$474,000) related to the installation of a local fixed
wireless telecommunication network in rural Chile by CTR.
I) BID COSTS
Capitalized bid costs represent fees incurred for external services. Bid
costs are amortized over the proportion of revenue recognized on the contract to
which they relate.
J) DEFERRED CHARGES AND START-UP COSTS
Deferred start-up costs represent costs incurred in the successful bid for
telephony concessions, securing carrier agreements and obtaining financing for a
local fixed wireless telecommunication network in rural Chile. These costs are
amortized over a five-year period from the beginning of commercial operations in
each concession.
Start-up costs related to certain asset purchases have been deferred and
are amortized over a five-year period.
Costs incurred to issue debentures are deferred and amortized over the term
of the debentures.
K) REVENUE
Revenue is recognized when persuasive evidence of an agreement exists,
delivery has occurred or the service has been performed, the fee is fixed or
determinable, and collection of the resulting receivable is reasonably assured.
The principal revenue recognition guidance used by SR Telecom is Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101").
More specifically, revenue for hardware sold on a stand alone basis is
recognized upon delivery, when all significant contractual obligations have been
satisfied and collection is reasonably assured. For contracts involving multiple
elements, the Corporation determines if the arrangement can be separated using
the criteria set out in SAB 101. That is 1) the product or service represents a
separate earnings process; 2) objective, reliable and verifiable evidence of
fair value exists and 3) the undelivered elements are not essential to the
functionality of the delivered elements. Under this guidance, the Corporation
will recognize revenue for each element based on relative fair values.
Telecommunication service revenue is recognized as the services are rendered.
The Corporation's products and services are generally sold as part of
contracts or purchase orders which generally extend beyond one year. Revenue is
recognized in the same manner as when the products and services are sold
separately. Hardware revenue is recognized upon delivery and service revenue is
recognized as the services are performed. In order to determine if there is a
loss on services in a contract, estimates of the
F-I-8
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs to complete these services are updated on a monthly basis and are based on
actual costs to date. These costs are analyzed against the expected remaining
services revenue. If the remaining cost exceeds the remaining revenue a loss is
immediately recognized in the financial statements.
The Corporation's customary trade terms include holdbacks on contracts
(retainages on contracts) which are due for periods extending beyond a year and
are included in long-term accounts receivable (Note 5). Performance of the
Corporation's obligations under the contracts is independent of the payment
terms. Revenue associated with holdbacks are recorded in the same manner
described above.
The Corporation ensures collectibility of its revenue through the use of
Government of Canada export credit agency, letters of credit and through the
analysis of the credit worthiness of its customers.
The Corporation's products are not sold through resellers and distributors.
Accruals for warranty costs, sales returns, and other allowances at the
time of shipment are based on contract terms and experience from prior claims.
L) RESEARCH AND DEVELOPMENT
The Corporation incurs costs relating to the research and development of
new products. Such costs, net of government grants and investment tax credits,
are expensed as incurred. Research and development costs are not considered
deferrable.
M) IMPAIRMENT OF LONG-LIVED ASSETS
The Corporation evaluates the carrying value of its long-lived assets on an
ongoing basis. In order to determine whether an impairment exists, management
considers the undiscounted cash flows estimated to be generated by those assets
as well as other indicators. Any permanent impairment in the carrying value of
assets is charged against earnings in the period an impairment is determined.
N) LOSS PER SHARE
The Corporation adopted the recommendations of the CICA Handbook Section
3500, "Earnings per Share" ("EPS"), effective January 1, 2001. The revised
section requires the presentation of both basic and diluted EPS on the face of
the statements of operation regardless of the materiality of the difference
between them and requires the use of the treasury stock method to compute the
dilutive effect of options as opposed to the former imputed earnings approach.
The adoption of this revised section had no impact on the computations of loss
per share.
O) NEW ACCOUNTING RECOMMENDATIONS
Disclosure of Guarantees
Accounting Guideline 14: "Disclosure of Guarantees": The disclosure
requirements of Accounting Guideline 14 have been applied in the presentation of
the accompanying consolidated financial statements.
Impairment of Long-Lived Assets
CICA Handbook Section 3063, "Impairment of Long-Lived Assets": This
recommendation establishes the standards for the recognition, measurement and
disclosure of the impairment of long-lived assets held for use, which include
property, plant and equipment, intangible assets with finite useful lives and
deferred start-up costs. In accordance with these recommendations, an impairment
loss is recognized when the carrying amount of the long-lived asset is not
recoverable and exceeds its fair value, and is measured as the amount by which
the carrying amount of the long-lived asset exceeds its fair value. These
recommendations are to be
F-I-9
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applied prospectively for years beginning on or after April 1, 2003, however
earlier adoption is permitted. The Corporation has not yet assessed the impact
these recommendations will have on its results of operation and financial
position.
P) USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and disclosure of contingent liabilities in these financial
statements. Actual results could differ from those estimates. Estimates are used
when accounting for items and matters such as long-term contracts, allowance for
doubtful accounts receivable and inventory obsolescence, product warranty,
amortization, asset valuations, impairment assessments, taxes, restructuring and
other provisions and contingencies.
3. SHORT-TERM INVESTMENTS
During the year ended December 31, 2002, the Corporation purchased
high-quality investment grade floating rate notes in the amount of $20,000,000
plus accrued interest of $5,000. The notes mature on November 1, 2006. The
Corporation does not plan to hold the notes to maturity. The notes pay interest
quarterly based on a market spread over Bankers' Acceptance rates. As of
December 31, 2002, the interest rate on the notes was 2.9%. The Corporation also
purchased a 120-day Guaranteed Investment Certificate from a Canadian commercial
bank in the amount of $1,619,000 bearing interest at 2.8%.
4. ACCOUNTS RECEIVABLE
DECEMBER 31,
-----------------
2002 2001
------- -------
Trade....................................................... $80,999 $94,409
Other....................................................... 2,793 4,015
Allowance for doubtful accounts............................. (4,440) (2,639)
------- -------
$79,352 $95,785
======= =======
5. LONG-TERM ACCOUNTS RECEIVABLE
DECEMBER 31,
-----------------
2002 2001
------- -------
Holdbacks(i)................................................ $21,845 $27,999
Long-term receivable (US$4,678,000)(ii)..................... 7,390 7,171
Balance of sale(iii)........................................ 2,850 3,606
Allowance for doubtful accounts............................. (1,292) (1,132)
------- -------
30,793 37,644
Current portion............................................. 7,390 7,171
------- -------
$23,403 $30,473
======= =======
F-I-10
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
---------------
(i) Holdbacks (retainages) on contracts that are not receivable within one year
are classified as long-term. The expected collection date of the holdbacks
is as follows:
2004........................................................ $10,552
2005........................................................ 11,293
-------
$21,845
=======
(ii) The original terms of repayment for this long-term receivable were blended
monthly payments of $423,300 (US$268,000). Payments have not been received
since October 2000. The Corporation initiated arbitration proceedings to
enforce its rights under the loan agreement. The arbitration tribunal has
concluded its hearings and its ruling is expected in 2003 (see Note 26
b)--Subsequent events). The results of the arbitration are undeterminable
at this time.
(iii)The balance of sale relates to the disposal, in 1999, of Apollo Microwaves
Inc. ("Apollo"), due in variable semi-annual installments based on
purchases by the Corporation from Apollo, with full and final payment due
no later than December 31, 2004. The principal amount is secured by a
moveable hypothec. Annual interest of 9% is payable quarterly.
6. INVENTORIES
DECEMBER 31,
-----------------
2002 2001
------- -------
Raw materials............................................... $31,337 $28,333
Work-in-process............................................. 2,720 8,045
Finished goods.............................................. 388 1,242
------- -------
$34,445 $37,620
======= =======
7. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
---------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
ACCUMULATED NET ACCUMULATED NET
COST DEPRECIATION BOOK VALUE COST DEPRECIATION BOOK VALUE
-------- ------------ ---------- -------- ------------ ----------
Land............................ $ 1,479 $ -- $ 1,479 $ 1,434 $ -- $ 1,434
Telecommunication network
equipment..................... 94,279 28,202 66,077 98,675 21,559 77,116
Construction in progress........ 4,376 -- 4,376 3,803 -- 3,803
Building, improvements and
fixtures...................... 20,159 14,410 5,749 19,345 13,022 6,323
Machinery and equipment......... 34,009 23,266 10,743 33,492 21,349 12,143
Computer equipment and
licenses...................... 16,616 13,772 2,844 16,204 12,396 3,808
-------- ------- ------- -------- ------- --------
$170,918 $79,650 $91,268 $172,953 $68,326 $104,627
======== ======= ======= ======== ======= ========
Property, plant and equipment includes building and machinery assets held
under capital leases of $1,053,000 ($1,110,000 in 2001) and accumulated
depreciation of $532,000 ($343,000 in 2001). Computer equipment and licenses
include software licenses of $4,991,000 ($4,181,000 in 2001) and accumulated
depreciation of $3,153,000 ($2,651,000 in 2001).
F-I-11
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. OTHER ASSETS
DECEMBER 31,
-------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
ACCUMULATED NET ACCUMULATED NET
COST AMORTIZATION BOOK VALUE COST AMORTIZATION BOOK VALUE
------- ------------ ---------- ------- ------------ ----------
Deferred charges and
start-up costs........... $13,394 $ 9,774 $3,620 $12,410 $7,050 $5,360
Deferred bid costs......... 368 271 97 623 499 124
Other...................... 157 27 130 157 -- 157
------- ------- ------ ------- ------ ------
$13,919 $10,072 $3,847 $13,190 $7,549 $5,641
======= ======= ====== ======= ====== ======
9. BANK INDEBTEDNESS
The Corporation has an unsecured operating line of credit from a Canadian
chartered bank totaling $10,000,000 ($10,000,000 in 2001), bearing interest at
prime plus 4%. The line of credit was scheduled for review on December 31, 2002.
On February 14, 2003, the line of credit was renewed under similar terms and
conditions, but for an amount of $5,000,000.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31,
-----------------
2002 2001
------- -------
Trade accounts payable...................................... $25,810 $18,486
Commissions payable......................................... 16,610 11,377
Accrued payroll and vacation payable........................ 6,853 6,673
Accrued warranty............................................ 2,794 1,857
Accrued interest............................................ 1,761 2,139
Other....................................................... 4,297 3,820
------- -------
$58,125 $44,352
======= =======
F-I-12
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT
DECEMBER 31,
-------------------
2002 2001
-------- --------
Senior unsecured debentures issued by the Corporation, due
April 2005, bearing interest at 8.15% payable
semi-annually, redeemable at the option of the Corporation
at a price equal to the greater of i) 100% of the
principal amount and ii) the Canadian yield price (as
defined in the trust indenture), together in each case
with accrued interest, if any, to the date fixed for
redemption................................................ $ 75,000 $ 75,000
Notes payable (US$20,090,908, US$23,500,000 in 2001) issued
by CTR, under a term loan facility due November 2007,
bearing interest at LIBOR plus 4.50%, repayable in
payments of US$1,090,908, US $538,462 and US$1,615,385 in
2003, payments of US$3,096,153 and US$1,750,000 in 2004,
and semi-annual installments of US$2,000,000 in 2005 to
2007.(i).................................................. 31,734 37,426
Notes payable (US$20,909,092, US$22,500,000 in 2001) issued
by CTR, under a term loan facility due November 2008,
bearing interest at LIBOR plus 4.50%, repayable in
payments of US$909,092, US $461,538 and US$1,384,615 in
2003, payments of US$2,653,847 and US$1,500,000 in 2004,
and semi-annual installments of US$1,750,000 in 2005 to
2008.(i).................................................. 33,026 35,834
Notes payable (US$160,935 in 2001) issued by CTR, bearing
interest at LIBOR plus 1.20%, repaid in May 2002.......... -- 256
Obligations under capital leases, bearing interest rates
averaging 10.50%, repayable at various dates to April
2009...................................................... 540 923
-------- --------
140,300 149,439
Current portion............................................. 9,626 8,531
-------- --------
$130,674 $140,908
======== ========
---------------
(i) These notes are secured by a pledge of all the assets of CTR and a pledge
of the shares of intermediate holding companies. The Corporation has agreed
to support CTR, including the completion of the network and the maintenance
of the Corporation's initial equity investment in CTR which means SR
Telecom has agreed to provide to CTR the appropriate funds and resources
required to complete the construction of the network as originally
contemplated at the time of the signing of the loan agreements in 1999.
Equally, SR Telecom cannot repatriate its equity funds from Chile to Canada
over and above the amount of the initial equity, and SR Telecom's loans to
CTR are subordinated to the notes payable. As at December 31, 2002, CTR had
net liabilities of $39,474,000. Certain guarantees have been provided by
the Corporation, which in certain circumstances are limited to an amount of
US$12,000,000. Additional credit enhancements by the Corporation may be
required, subject to approval by the lenders.
In certain circumstances, such as non-completion of the project and failure
by the Corporation to complete the project, full recourse to the
Corporation may be available.
These notes are subject to a number of performance, financial performance
and financial position covenants, essentially all of which have been waived
until February 13, 2004.
In the event that these covenants do not continue to be waived, all amounts
due under the notes would be declared due and immediately payable. In
addition, a default would be triggered under SR Telecom's unsecured
debentures whereby all amounts due under the debentures could also be
declared due and immediately payable.
F-I-13
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As at December 31, 2002, the capital repayments required in each of the
next five years and thereafter are as follows:
2003........................................................ $ 9,626
2004........................................................ 14,300
2005........................................................ 86,930
2006........................................................ 11,922
2007........................................................ 11,922
Thereafter.................................................. 5,600
--------
$140,300
========
12. CAPITAL STOCK
AUTHORIZED
An unlimited number of common shares
An unlimited number of preferred shares issuable in series
DECEMBER 31,
MARCH 31, -------------------
2003 2002 2001
----------- -------- --------
(UNAUDITED)
Issued and outstanding
55,472,380 common shares (55,227,982 in 2002,
54,552,808 in 2001)............................ $148,142 $147,985 $147,230
During the three months ended March 31, 2003 and 2002 the following
transactions took place in capital stock account:
- Common shares totaling 244,398 were issued during the three months ended
March 31, 2003 under the Employee Stock Purchase Plan and the Directors'
Share Compensation Plan for cash consideration of $156,724. During the
three months ended March 31, 2002, 72,277 shares were issued for cash
consideration of $140,940.
During the years 2002, 2001 and 2000, the following transactions took place
in the capital stock account:
- Common shares totaling 554,428, 385,603 and 138,491 were issued under the
Employee Stock Purchase Plan for cash consideration of $615,312, $672,469
and $784,787 in 2002, 2001 and 2000, respectively.
- Common shares totaling 120,746, 82,748 and 17,252 were issued under the
Directors' Share Compensation Plan for cash consideration of $139,160,
$142,976 and $105,668 in 2002, 2001 and 2000, respectively.
- In July 2001, the Corporation completed a share rights offering which
resulted in the issuance of 8,168,988 common shares for gross proceeds of
$13,070,000. The net proceeds to the Corporation amounted to $12,491,000
after deducting share issue costs of $424,000 (net of future income taxes
of $155,000);
- In 2000, options in respect of 143,000 common shares were exercised for
cash consideration of $840,600;
- In February 2000, the Corporation completed a public offering of
4,000,000 common shares for gross cash proceeds of $22,000,000. The net
proceeds to the Corporation amounted to $20,680,000 after
F-I-14
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deducting underwriting commissions and other expenses of $884,280 (net of
future income taxes of $435,720);
- In July 2000, the Corporation completed a public offering of 6,037,500
common shares for gross cash proceeds of $48,903,750. The net proceeds to
the Corporation amounted to $46,517,899 after deducting underwriting
commissions and other expenses of $1,598,305 (net of future income taxes
of $787,546).
STOCK-BASED COMPENSATION PLAN
Stock options under the Employee Stock Option Plan may be granted to
officers and other key employees of the Corporation to purchase common shares of
the Corporation at a subscription price equal to the weighted-average trading
price of all common shares five days preceding the grant date. The options are
exercisable during a period not to exceed ten years. The right to exercise
options generally vests over a period of four to five years.
The following table summarizes the outstanding stock options at December
31, 2002.
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS REMAINING EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICES
------------------------ ----------- ---------------- ---------
($)
1 to 3............................................ 2,065,500 9.0 years $1.68
4 to 6............................................ 938,800 7.2 years 5.09
7 and over........................................ 283,000 6.5 years 9.30
--------- --------- -----
3,287,300 8.3 years $3.31
========= ========= =====
The following table summarizes activity in the Employee Stock Option Plan:
YEARS ENDED DECEMBER 31,
THREE MONTHS ENDED ---------------------------------------------------------------------
MARCH 31, 2003 2002 2001 2000
----------------------- --------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
----------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
Outstanding, beginning of
period........................ 3,287,300 $3.31 2,709,300 $4.70 1,997,800 $6.20 821,500 $4.98
Granted......................... -- -- 1,030,000 1.55 1,362,500 1.77 1,438,000 5.71
Exercised....................... -- -- -- -- -- -- (143,000) 5.88
Forfeited/expired............... (3,200) 1.94 (452,000) 3.92 (651,000) 5.62 (118,700) 8.03
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding, end of period...... 3,284,100 $3.32 3,287,300 $3.31 2,709,300 $4.70 1,997,800 $6.20
========= ===== ========= ===== ========= ===== ========= =====
Options exercisable, end of
period........................ 921,220 $5.16 846,340 $5.20 483,680 $6.81 393,920 $8.65
========= ===== ========= ===== ========= ===== ========= =====
The fair value of direct awards of stock are determined based on the quoted
market price of the Corporation's stock, and the fair value of stock options are
determined using the Black-Scholes option pricing model. In periods prior to
January 1, 2002, the Corporation recognized no compensation when stock options
were issued to employees. Pro-forma information regarding net loss is determined
as if the Corporation had accounted for its employee stock options granted after
December 31, 2001 under the fair value method. The fair value of these options
is estimated at the date of grant using a Black-Scholes Option Pricing Model
with assumptions for the weighted-average risk-free interest rates, dividend
yields, weighted-average volatility factors of the expected market price of the
Corporation's common shares and a weighted-average expected life of the options
in years. For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods.
F-I-15
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost been determined using the fair value based method at
the date of grant for awards granted in 2002, the Corporation's pro-forma net
loss and net loss per share would have been $20,998,000 and $0.38 respectively
for the year ended December 31, 2002. For the three-months ended March 31, 2003,
the pro-forma net loss and net loss per share would have been $6,729,000 and
$(0.12), respectively. For the three-month period ended March 31, 2002, the
pro-forma net loss would be nominally different. These pro-forma amounts include
a compensation cost based on weighted-average grant date fair value of $0.91 per
stock option for the 1,030,000 stock options granted during 2002, as calculated
using the Black-Scholes option pricing model, assuming a weighted-average
risk-free rate of 4.7%, a dividend yield of 0%, an expected volatility of 65%
and expected lives of the stock options of five years. The pro-forma disclosure
omits the effect of awards granted before January 1, 2002.
LOSS PER SHARE
For the periods presented, the Corporation had outstanding options that
could potentially dilute the earnings per outstanding share in the future, but
were excluded from the calculation of the diluted net loss per share for the
periods presented, as they would have been anti-dilutive.
13. RESEARCH AND DEVELOPMENT EXPENSES, NET
Investment tax credits netted against research and development expenses
amounted to approximately $7,219,000 ($7,009,000 in 2001, $9,166,000 in 2000).
The Canadian Federal government offers a tax incentive to companies
performing research and development (R&D) activities in the country. This tax
incentive is calculated based on pre-determined formulas and rates, which
consider eligible R&D expenditures and can be used to reduce taxable income in
Canada otherwise payable. The Quebec Provincial government offers a similar
incentive, except that it is receivable in cash, instead of a credit used to
reduce taxes otherwise payable. The cash credit is awarded regardless of whether
there are or are no Quebec Provincial taxes payable. The Federal credit is
recognized on the Balance Sheet as investment tax credits to be carried over to
future periods. The Provincial credit is recorded in income taxes receivable
until the payment is received.
14. INTEREST EXPENSE
DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
Interest on long-term debt.............................. $12,038 $13,852 $13,244
Other interest.......................................... 1,025 722 304
Interest income......................................... (990) (1,375) (1,666)
------- ------- -------
$12,073 $13,199 $11,882
======= ======= =======
F-I-16
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
DECEMBER 31,
---------------------------
2002 2001 2000
------- -------- ------
Income tax recovery at statutory rates.................. $ 6,616 $ 23,474 $2,074
Decrease due to non-taxable write-down of assets........ -- (18,560) --
(Decrease) increase due to non-taxable loss/gain on
increase/ reduction in ownership in subsidiary
company............................................... (618) 1,550 --
(Decrease) increase relating to non-deductible items.... (50) 131 175
Decrease due to non-recognition of losses carried
forward............................................... (5,518) -- --
Other................................................... (682) (169) (569)
------- -------- ------
Income tax (expense) recovery........................... $ (252) $ 6,426 $1,680
======= ======== ======
Future income taxes consist of the following temporary differences:
DECEMBER 31,
-----------------
2002 2001
------- -------
Investment tax credits...................................... $(5,864) $(4,468)
Excess of tax value over book value of property, plant and
equipment................................................. 6,570 6,719
Holdbacks................................................... (2,586) (2,745)
Unclaimed research and development expenditures............. 10,751 11,557
Losses carried forward...................................... 11,417 6,051
Other....................................................... 1,318 (1,291)
Valuation allowance......................................... (5,518) --
------- -------
$16,088 $15,823
======= =======
The timing difference arising from investment tax credits is due to the
recognition of these tax credits for accounting purposes vs. the non-recognition
for tax purposes, resulting in future income taxes, since in the year that
investment tax credits are used, they are subject to income taxes. The average
remaining life of the investment tax credit assets is approximately 7 years.
Certain research and development expenditures incurred in Canada can be
carried forward indefinitely to periods where there exists taxable income. The
timing difference arising from unclaimed research and development expenditures
is the amount which has not yet been claimed for tax purposes and can be carried
forward indefinitely.
The timing difference arising from losses carried forward is mainly due to
CTR losses carried forward. These losses can be carried forward indefinitely.
In 2001, management determined, based on its business plan, that it was
more likely than not that the future income tax assets related to CTR losses
carried forward would be realized in the foreseeable future.
In 2002, management's business plan for CTR supported the realization of
future income tax assets only to the extent of those recorded in prior years. As
a result in 2002, management determined that it was not more likely than not
that the benefits of losses carried forward, incurred in 2002, relating to CTR
would be realized in the foreseeable future. Accordingly, a valuation allowance
was recorded for the additional benefits of losses carried forward.
F-I-17
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax (expense) recovery are as follows:
DECEMBER 31,
-----------------------
2002 2001 2000
----- ------ ------
Current..................................................... $(517) $ 979 $ (647)
Future...................................................... 265 5,447 2,327
----- ------ ------
$(252) $6,426 $1,680
===== ====== ======
16. RESTRUCTURING CHARGES, ASSET IMPAIRMENT AND OTHER CHARGES
2002 RESTRUCTURING AND OTHER CHARGES
In November 2002, restructuring charges of $4,912,000 were accrued. These
charges were undertaken by the Corporation to reduce its cost structure, and
comprised primarily of severance and termination benefits, as well as the
elimination of inventory balances in certain specified locations. An amount for
lease termination costs relating to the closure of a research and development
site in Montreal has also been included.
In total, approximately 90 employees were terminated including 39 research
and development employees, 31 project management employees, 8 sales and
marketing employees and 12 general and administrative employees. The inventory
write-down relates to the Corporation's offices in Asia, where existing repair
service centers are being reorganized.
The following table summarizes the activity related to the fourth quarter
restructuring charges:
REMAINING REMAINING
LIABILITY AT LIABILITY AT
RESTRUCTURING AMOUNTS PAID/ DECEMBER 31, MARCH 31,
CHARGES WRITTEN OFF 2002 2003
------------- ------------- ------------ ------------
(UNAUDITED)
Severance and termination.......... $2,564 $ (865) $1,699 $816
Lease termination costs............ 135 -- 135 --
Inventory write-down............... 2,213 (2,213) -- --
------ ------- ------ ----
$4,912 $(3,078) $1,834 $816
====== ======= ====== ====
The remaining liabilities are expected to be settled by the end of the
third quarter of 2003.
2001 ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
As of December 2001, the Corporation determined that the estimated future
undiscounted cash flows from the long-lived assets of CTR were insufficient to
recover their carrying amount, and as a result, wrote down the carrying value of
the telecommunication networks by $58 million to their estimated recoverable
amounts.
In June 2001, restructuring charges of $3,655,000 were accrued. This amount
consisted primarily of severance and related costs resulting from cost reduction
initiatives and the rationalization of international operations.
Approximately 35 employees were terminated including 12 project management
employees, 12 sales and marketing employees and 11 general and administrative
employees.
F-I-18
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity related to restructuring
charges incurred in the second quarter of the year ended December 31, 2001.
REMAINING
LIABILITY AT
RESTRUCTURING AMOUNTS PAID/ DECEMBER 31,
CHARGES WRITTEN OFF 2001
------------- ------------- ------------
Severance and termination...................... $3,655 $(1,355) $2,300
The remaining liabilities were settled during the first and second quarters
of 2002.
2000 RESTRUCTURING AND ASSET IMPAIRMENT
In December 2000, the Corporation decided to consolidate all research and
development programs in Montreal and reduce its personnel requirements in most
other areas of its operations. This resulted in a restructuring charge of
$4,385,000 consisting of severance payments and associated costs, write-down of
related property, plant and equipment and lease termination payments.
In total, approximately 110 employees were terminated including 48 research
and development employees, 16 project management employees, 6 sales and
marketing employees, 29 factory employees and 11 general and administrative
employees. The fixed asset write-down and lease termination payments relate to
the closure of the Kanata research and technology site.
The following table summarizes the activity related to the fourth quarter
restructuring charges for the year ended December 31, 2000:
REMAINING
LIABILITY AT
RESTRUCTURING AMOUNTS PAID/ DECEMBER 31,
CHARGES WRITTEN OFF 2000
------------- ------------- ------------
Severance and termination...................... $2,441 $ -- $2,441
Lease termination costs........................ 540 -- 540
Asset impairment............................... 1,404 (1,404) --
------ ------- ------
$4,385 $(1,404) $2,981
====== ======= ======
The remaining liabilities were settled during the second and third quarters
of 2001.
17. DISCONTINUED OPERATIONS
In December 2001, the Corporation reversed its treatment of CTR as a
discontinued operation. The financial uncertainty surrounding the South American
market coupled with a continuing weakness in the telecommunications industry
made the sale of CTR unlikely in the near term. Consequently, the consolidated
statements of loss for the year ended December 31, 2001, as reclassified,
present the results of operations of CTR as part of continuing operations.
The $46,859,000 (net of future income taxes of $8,550,000) of earnings from
discontinued operations reflects the reversal of the provision recorded at the
end of December 31, 2000. The estimated loss on the disposal of CTR in 2000 was
based on management's best estimate of the impact of the prevailing market
conditions.
F-I-19
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 2000
-------- --------
CTR's total assets.......................................... $180,147 $220,092
CTR's total liabilities..................................... 133,730 132,542
CTR's revenue............................................... 19,890 22,102
CTR's operating losses before foreign exchange, interest and
taxes..................................................... 61,921 179
Elements of loss (earnings) on discontinued operations
(Gain) loss on disposal of CTR (net of future income taxes
of $8,250,000)......................................... (46,859) 44,847
Expected operating losses until date of disposal (net of
future income taxes of $300,000)....................... -- 2,012
18. LOSS/GAIN ON CHANGE IN OWNERSHIP IN SUBSIDIARY COMPANY
On June 30, 2001, an indirect wholly-owned subsidiary of CTR acquired
telecommunication network assets from another Chilean telecommunication service
provider in exchange for 13% of its total issued and outstanding common shares.
The transaction was measured using the estimated fair value of the assets
received of $14,546,000. The reduction in the direct and indirect ownership in
CTR resulted in a dilution gain of $9,393,000. The consolidated statements of
operations includes revenue and expenses related to the acquired network assets
from July 1, 2001. In 2001, the resulting non-controlling interest was allocated
losses to the extent of their equity.
On December 31, 2002, the Corporation's shareholding in CTR increased by
8.9% to 95.9%. The increase resulted from certain performance requirements
contained within the asset purchase agreement not being met with respect to the
acquired assets. The increase in the direct and indirect ownership in CTR
resulted in an estimated charge to earnings of $3,974,000, subject to final
negotiations. There were no income tax effects on these transactions.
19. COMMITMENTS AND CONTINGENCIES
a) In the ordinary course of business, Canadian chartered banks have
issued letters of guarantee on behalf of the Corporation in the amount of
$4,668,206 of which $1,679,825 is insured by an export credit agency. These
letters of guarantee expire at various dates between 2003 and 2004.
b) The Corporation leases land, buildings and equipment under
non-cancelable operating leases. Future minimum lease payments for the next
five years are as follows:
2003........................................................ $4,717
2004........................................................ 1,685
2005........................................................ 490
2006........................................................ 184
2007........................................................ 20
------
TOTAL FUTURE MINIMUM PAYMENTS............................... $7,096
======
c) In the normal course of business, the Corporation is involved in
various claims. Though the outcome of these various pending claims as at
March 31, 2003 and December 31, 2002, cannot be determined precisely, the
Corporation believes that their outcome will have no adverse impact on its
financial position nor on its operating results. Any loss arising from the
outcome of the claims would be charged to earnings in the period in which
the amount would be known.
F-I-20
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. STATEMENTS OF CASH FLOWS
NON-CASH WORKING CAPITAL ITEMS
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- -----------------------------
2003 2002 2002 2001 2000
-------- -------- ------- -------- --------
(UNAUDITED)
Decrease (increase) in accounts
receivable............................... $22,025 $ 3,282 $16,214 $ 19,621 $(18,927)
(Increase) decrease in income taxes
receivable............................... (511) (624) 338 197 (1,392)
(Increase) decrease in inventories......... (4,368) (2,552) 3,175 14,134 (16,316)
(Increase) decrease in prepaid expenses.... (267) (939) (205) 43 (245)
Increase in investment tax credits......... (895) (914) (4,358) (4,225) (6,623)
(Decrease) increase in accounts payable and
accrued liabilities...................... (7,788) 1,670 13,773 (1,661) (27,141)
Decrease in customer advances.............. (3,051) -- (69) (12,031) (9,902)
------- ------- ------- -------- --------
$ 5,145 $ (77) $28,868 $ 16,078 $(80,546)
======= ======= ======= ======== ========
Supplementary cash flow information
Non-cash investing activities
Provision for disposal of discontinued
operations............................... $ -- $ -- $ -- $(46,859) $ 46,859
Acquisition of assets under capital
leases................................... -- -- -- -- (536)
------- ------- ------- -------- --------
$ -- $ -- $ -- $(46,859) $ 46,323
======= ======= ======= ======== ========
Cash paid for:
Interest................................. $ 123 $ 686 $12,012 $ 14,794 $ 14,464
Taxes.................................... -- -- 323 412 3,069
21. RELATED PARTY TRANSACTIONS
The following transactions and balances with a shareholder company
exercising significant influence and companies under common influence were in
the normal course of business and measured at the exchange amount:
2002 2001 2000
---- ---- ----
Sales....................................................... $101 $642 $175
Purchases................................................... 448 56 376
Accounts payable............................................ 20 -- --
22. BUSINESS SEGMENTS AND CONCENTRATIONS
The Corporation operates in two business segments. The first is the
engineering, marketing and manufacturing of wireless telecommunication products
and the installation of related turnkey systems. These products are used to
provide and upgrade Internet, data and voice telecommunications systems for
carriers in urban, rural and remote areas. The products are also used to provide
data, voice and telecommunications systems for industrial use.
The second business segment, carried out by Comunicacion y Telefonia Rural
S.A., provides telecommunication services to end-users.
F-I-21
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The inter-segment eliminations for the balance sheet represent primarily
the elimination of investments in subsidiaries and inter-segment amounts
receivable.
WIRELESS TELECOMMUNICATIONS TELECOMMUNICATIONS SERVICE
PRODUCTS PROVIDER INTER-SEGMENT ELIMINATIONS
------------------------------ ------------------------------ -------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------- --------- -------
BALANCE SHEETS
Property, plant and
equipment.............. $ 18,721 $ 20,801 $ 92,052 $100,310 $ (19,505) $ (16,484)
Other assets............ 1,830 1,930 6,542 7,293 (4,525) (3,582)
Total assets............ 291,401 343,998 227,830 180,147 (198,426) (187,775)
STATEMENTS OF OPERATIONS
External revenue........ 181,029 141,597 $169,410 15,874 19,890 $ 22,102 -- -- $ --
Intersegment revenue.... -- 1,886 5,885 -- -- -- -- (1,886) (5,885)
Gross margin............ 91,713 66,497 91,258 15,874 19,890 22,102 -- -- --
Interest expense, net... 6,153 5,448 4,740 5,920 7,751 7,142 -- -- --
Depreciation of
property, plant and
equipment.............. 4,888 4,907 5,926 8,716 10,683 9,147 (953) (897) (915)
Amortization of other
assets................. 568 824 470 751 675 996 943 923 1,299
Write-down of assets.... -- -- 1,404 -- 58,000 -- -- -- --
(Loss) gain on change in
ownership in
subsidiary............. -- -- -- (3,974) 9,393 -- -- -- --
Income tax (expense)
recovery............... (252) 2,550 (754) -- 3,876 2,434 -- -- --
Discontinued
operations............. -- -- -- -- 46,859 (46,859) -- -- --
Net (loss) earnings..... (3,885) (6,347) 1,799 (17,000) (9,718) (54,580) -- -- --
CONSOLIDATED
------------------------------
2002 2001 2000
-------- -------- --------
BALANCE SHEETS
Property, plant and
equipment.............. $ 91,268 $104,627
Other assets............ 3,847 5,641
Total assets............ 320,805 336,370
STATEMENTS OF OPERATIONS
External revenue........ 196,903 161,487 $191,512
Intersegment revenue.... -- -- --
Gross margin............ 107,587 86,387 113,360
Interest expense, net... 12,073 13,199 11,882
Depreciation of
property, plant and
equipment.............. 12,651 14,693 14,158
Amortization of other
assets................. 2,262 2,422 2,765
Write-down of assets.... -- 58,000 1,404
(Loss) gain on change in
ownership in
subsidiary............. (3,974) 9,393 --
Income tax (expense)
recovery............... (252) 6,426 1,680
Discontinued
operations............. -- 46,859 (46,859)
Net (loss) earnings..... (20,885) (16,065) (52,781)
Export sales represented 98% of revenue in 2002, 2001 and 2000, and
substantially all of the Corporation's capital assets are located in Canada and
Chile. Telecommunication service revenue is generated entirely in Chile.
In 2002, two customers of the Corporation represented approximately 33.9%
of revenue. In 2001, three customers represented 34.5% of revenue. In 2000, two
customers of the Corporation represented 45% of revenue.
F-I-22
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WIRELESS TELECOMMUNICATIONS
TELECOMMUNICATIONS SERVICE PROVIDER INTER-SEGMENT CONSOLIDATED
PRODUCTS MARCH 31, MARCH 31, ELIMINATIONS MARCH 31, MARCH 31,
------------------- ------------------- ----------------------- -------------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- ---------- ---------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEETS
Property, plant and
equipment.................. $ 20,010 $ 20,128 $ 90,246 $ 98,094 $ (19,267) $ (16,246) $ 90,989 $101,976
Other assets................. 1,733 1,840 6,385 7,091 (4,730) (3,818) 3,388 5,113
Total assets................. 267,664 290,414 225,230 236,902 (201,973) (194,156) 290,921 333,160
STATEMENTS OF OPERATIONS
External revenue............. 25,964 40,559 3,637 4,905 -- -- 29,601 45,464
Intersegment revenue
Gross margin................. 11,977 20,209 3,637 4,905 -- -- 15,614 25,114
Interest expense, net........ 1,323 1,201 960 1,379 -- -- 2,283 2,580
Depreciation of property,
plant and equipment........ 965 1,131 1,951 2,394 (238) (238) 2,678 3,287
Amortization of other
assets..................... 97 125 157 161 205 236 459 522
Income tax recovery
(expense).................. 2,959 (270) -- (411) -- -- 2,959 (681)
Discontinued operations
Net loss..................... (7,869) 176 1,188 (2,784) -- -- (6,681) (2,608)
Export sales represented 98% and 100% of revenue in the three months ended
March 31, 2003 and 2002, respectively, and substantially all of the
Corporation's capital assets are located in Canada and Chile. Telecommunication
service revenue is generated entirely in Chile.
As at March 31, 2003, two customers of the Corporation represented
approximately 32.1% of revenue. In 2002, two customers represented 32.5% of
revenue.
23. FINANCIAL INSTRUMENTS
The Corporation operates internationally, giving rise to significant
exposure to market risks from changes in interest rates and foreign exchange
rates. The Corporation may use derivative financial instruments to reduce these
risks but does not hold or issue financial instruments for trading purposes.
These financial instruments are subject to normal credit standards, financial
controls, risk management and monitoring procedures.
INTEREST RATE RISK
The Corporation has exposure to interest rate risk for both fixed interest
rate and floating interest rate instruments. Fluctuations in interest rates will
have an effect on the valuation and collection or repayment of these
instruments.
CURRENCY RISK
The Corporation has currency exposure arising from significant operations
and contracts in multiple jurisdictions. The Corporation has limited currency
exposure to freely-tradable and liquid currencies of first world countries.
Where practical, the net exposure is reduced through operational hedging
practices.
CREDIT RISK
The Corporation has credit risk exposure equal to the carrying amount of
financial assets. Wherever practicable, the Corporation requires accounts
receivable to be insured by an export credit agency, by
F-I-23
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
confirmed irrevocable letters of credit or by a security interest on the
customer's assets. Amounts due from three customers represent 35% of the total
trade receivables (2001 -- three customers represented 54%).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions have been used to estimate the fair
value of the financial instruments:
- Current financial assets and liabilities, balance of sale receivable and
capital leases approximate their fair values.
- The fair value of contract holdbacks are impractical to determine due to
the uncertainty as to the date on which they will be collected.
- Long-term receivable fair value is undeterminable based on the evaluation
of counsel as part of the arbitration proceedings currently underway to
effect collection from the customer. If the award is positive, collection
risk is minimal, as the customer is a governmental agency of a Caribbean
nation.
- Debentures and notes payable are valued by discounting future contractual
cash flows at discount rates similar to those available to the
Corporation for instruments with similar terms and conditions.
The fair value and carrying amount of these financial instruments as at
December 31, is as follows:
2002 2001
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Debentures..................................... $75,000 $39,750 $75,000 $45,000
Notes payable.................................. 64,761 61,468 73,260 73,260
24. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with
the presentation adopted in the current year.
25. RECONCILIATION OF RESULTS REPORTED IN ACCORDANCE WITH CANADIAN GAAP TO
UNITED STATES GAAP AND OTHER SUPPLEMENTARY UNITED STATES GAAP DISCLOSURES
These consolidated financial statements are prepared in accordance with
Canadian GAAP which differs in certain material respects from United States GAAP
("U.S. GAAP"). While the information presented below is not a comprehensive
summary of all differences between Canadian and U.S. GAAP, other differences are
considered unlikely to have a significant impact on the consolidated net loss
and shareholders' equity of the Corporation.
F-I-24
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All material differences between Canadian GAAP and U.S. GAAP and the effect
on net loss and shareholders' equity are presented in the following table with
an explanation of the adjustments.
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -------------------
2003 2002 2002 2001
-------- -------- -------- --------
(UNAUDITED)
Net loss -- Canadian GAAP............................ $(6,681) $(2,608) $(20,885) $(16,065)
Adjustments
Asset impairment (i)............................... 417 417 1,666 (24,058)
Bid costs (ii)..................................... 9 14 27 520
Deferred charges and start-up costs (ii)........... 450 514 1,767 352
Derivative instruments (iii)....................... (1,728) -- 2,900 --
Loss (gain) on change in ownership in subsidiary
company (iv).................................... -- -- 3,974 (9,393)
Change in accounting policy (v).................... -- -- -- (6,869)
Restructuring charges (vi)......................... -- -- -- (2,441)
Tax effect of above adjustments.................... (147) (169) (574) 2,700
------- ------- -------- --------
Net loss -- U.S. GAAP................................ $(7,680) $(1,832) $(11,125) $(55,254)
======= ======= ======== ========
Basic and diluted loss per share -- U.S. GAAP........ $ (0.14) $ (0.03) $ (0.20) $ (1.10)
======= ======= ======== ========
RECONCILIATION OF SHAREHOLDERS' EQUITY
YEARS ENDED
AS AT MARCH 31, DECEMBER 31,
------------------- -------------------
2003 2002 2002 2001
-------- -------- -------- --------
(UNAUDITED)
Shareholders' equity -- Canadian GAAP.............. $ 95,802 $119,989 $102,326 $122,456
Adjustments
Asset impairment (i)............................. (21,975) (23,641) (22,392) (24,058)
Bid costs (ii)................................... (88) (110) (97) (124)
Deferred charges and start-up costs (ii)......... (3,300) (5,003) (3,750) (5,517)
Derivative instruments (iii)..................... 1,172 -- 2,900 --
Tax effect of above adjustments.................. 1,084 1,636 1,231 1,805
-------- -------- -------- --------
Shareholders' equity -- U.S. GAAP.................. $ 72,695 $ 92,871 $ 80,218 $ 94,562
======== ======== ======== ========
(I) ASSET IMPAIRMENT
Under Canadian GAAP, the impairment loss is calculated as the difference
between the carrying value of the asset and the undiscounted future net cash
flows. Under U.S. GAAP, if the undiscounted future net cash flows are less than
the carrying value of the asset, the impairment loss is calculated as the amount
by which the carrying value of the asset exceeds their fair value. Fair value
has been calculated as the present value of estimated future net cash flows. The
resulting adjustment is net of the impact of depreciation.
F-I-25
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(II) BID COSTS, DEFERRED CHARGES AND START-UP COSTS
Under Canadian GAAP, bid costs, deferred charges and start-up costs that
satisfy specified criteria for recoverability are deferred and amortized. Under
U.S. GAAP, such costs are expensed as incurred. The resulting adjustments are
net of the amounts amortized under Canadian GAAP.
(III) DERIVATIVE INSTRUMENTS
Under U.S. GAAP, all derivative instruments, including those embedded in
contracts, are recorded in the balance sheet at fair value with gains or losses
recognized in earnings. The estimated fair value of embedded derivatives is
$1,172,000 at March 31, 2003 and $2,900,000 at December 31, 2002. Under Canadian
GAAP, there are no such requirements.
(IV) LOSS/GAIN ON CHANGE IN OWNERSHIP IN SUBSIDIARY COMPANY
Under U.S. GAAP, gain recognition upon the issuance of shares by a
subsidiary is not appropriate where, amongst other considerations, a subsequent
repurchase of shares is contemplated. As a result, the dilution gain recorded in
2001 and the loss on share repurchase in 2002 under Canadian GAAP is accounted
for as an equity transaction under U.S. GAAP. Accordingly, there is no impact in
the reconciliation of shareholders' equity from Canadian GAAP to U.S. GAAP.
(V) CHANGE IN ACCOUNTING POLICY
In 2001, the Corporation adopted the accrual method of accounting for
warranty costs, a preferred method, see Note 2 c) "Warranty costs". Under U.S.
GAAP, the cumulative effect of changes in accounting policy are a component in
the determination of net income. Under Canadian GAAP, changes in accounting
policy are applied on a retroactive basis with restatement of prior periods. In
circumstances such as those of the Corporation, where the restatement of the
prior periods is not reasonably determinable at reasonable cost, the cumulative
effect on prior years of the change may be charged to the opening deficit in the
year the new accounting policy is adopted. The effect of the change in 2001 was
to decrease net loss by approximately $777,000 or $0.02 per share. The
adjustment of $6,869,000 less income taxes of $2,198,000 ($4,671,000) to apply
retroactively the new accounting policy is included in net loss of 2001, as
follows:
2001
--------
Loss before cumulative effect of change in accounting
policy -- U.S. GAAP....................................... $(50,583)
Cumulative effect on prior years (to December 31, 2000) of
changing to the accrual method for warranty costs......... (6,869)
Income tax effect of change in accounting policy............ 2,198 (4,671)
------ --------
Net loss.................................................... $(55,254)
========
Per share amounts
Basic and diluted loss per share:
Loss before cumulative effect of change in accounting
policy................................................. $ (1.01)
Cumulative effect on prior years (to December 31, 2000) of
changing to the accrual method for warranty costs...... (0.09)
--------
Net loss.................................................... $ (1.10)
========
The pro forma effect of applying this change retroactively is not
determinable at reasonable cost, and as a result, is not presented.
F-I-26
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(VI) RESTRUCTURING CHARGES
Under U.S. GAAP, provisions taken for severance and related payments are
accrued when the terminated employees have been advised. Under Canadian GAAP, a
provision for severance and related costs is accrued upon the adoption of a
formal plan outlining expected employee terminations. The restructuring charge
of December 2000 included a provision for severance for which terminated
employees were advised in January 2001.
In addition, for U.S. reporting purposes, inventory write-downs in the
nature described in note 16 would be included as a component of cost of revenue
and not included in restructuring charges.
(VII) NET UNREALIZED HOLDING GAINS (LOSSES)
Under SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities," the Corporation's investments in securities would be classified as
available-for-sale securities and carried at fair value. Unrealized holding
gains and losses on available-for-sale securities are excluded from earnings
under U.S. GAAP and reported as a net amount in accumulated other comprehensive
income (loss), which is a separate component of shareholders' equity until
realized. On realization, comprehensive income would be adjusted to reflect the
reclassification of the gains or losses into income. As at March 31, 2003 and
December 31, 2002, the carrying value of the investments approximated market
value.
(VIII) SHARE ISSUE COSTS
Under Canadian GAAP, share issue costs may be charged to retained earnings.
Under U.S. GAAP, share issue costs must be deducted from the proceeds of issue.
In 2001, share issue costs deducted from retained earnings amounted to $424,000.
Accordingly, there is no impact in the reconciliation of shareholder's equity
from Canadian GAAP to U.S. GAAP.
(IX) STATEMENT OF CASH FLOWS
Under Canadian GAAP, cash position, in certain circumstances, can be
defined as cash and cash equivalents less bank indebtedness. Under U.S. GAAP,
cash position is defined as cash and cash equivalents. As at December 31, 2002,
there was $364,000 in temporary bank indebtedness included in cash and cash
equivalents (2001 -- nil)
(X) RESEARCH AND DEVELOPMENT
Under Canadian GAAP, investment tax credits on research and development are
deducted from research and development expense. Under U.S. GAAP, Canadian
federal investment tax credits are included in the provision for income taxes.
Accordingly, $4,361,000 (2001 -- $4,069,000; 2000 -- $6,325,000) of federal
investment tax credits recorded as a reduction of research and development
expense under Canadian GAAP would have been reclassified as a reduction of
income tax expense for U.S. GAAP purposes. The average remaining life of the
investment tax credit assets is approximately 7 years. The cost reduction method
is used to account for investment tax credits.
(XI) GROSS PROFIT RELATING TO CTR
Under Canadian reporting, telecommunications operating expenses have not
been included in the determination of gross profit. Under U.S. reporting all
operating costs related to the telecommunication service provider must be
included in the determination of gross profit. The resulting gross profit
(including the impact described in note 25(vi)) under U.S. GAAP for the year
ended 2002, 2001 and 2000, respectively, is $82,864,000, $62,575,000 and
$91,079,000. The resulting gross profit under U.S. GAAP for the three months
ended March 31, 2003 and 2002, respectively, is $10,099,000 and $18,935,000.
F-I-27
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(XII) STATEMENT OF COMPREHENSIVE INCOME
Comprehensive income (loss) is the same as net income (loss) accordingly, a
statement of comprehensive income is not presented.
(XIII) DEBT CLASSIFICATION
Under U.S. GAAP, the long-term debt of $51,372,000 at March 31, 2003, would
be classified as short-term debt.
(XIV) RECENT PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation ("FIN") No. 46
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin No. 51 -- Consolidated Financial Statements to
those entities defined as "Variable Interest Entities" (more commonly referred
to as special purpose entities) in which equity investors do not have the
characteristics of a "controlling financial interest" or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
all Variable Interest Entities created after January 31, 2003, and by the
beginning of the first interim or annual reporting period commencing after June
15, 2003 for Variable Interest Entities created prior to February 1, 2003. The
adoption of FIN 46 did not have an impact on the Corporation's business, results
of operations or financial condition.
In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure," an amendment of FASB Statement No.
123 which amended the transitional provisions of SFAS 123 for entities choosing
to recognize stock-based compensation under the fair value based method of SFAS
123, rather than electing to continue to follow the intrinsic value method of
APB 25. Under SFAS 148, the Corporation may adopt the recommendations of SFAS
123 either (1) prospectively to awards granted or modified after the beginning
of the year of adoption, (2) retroactively with restatement for awards granted
or modified since January 1, 1995, or (3) prospectively to awards granted or
modified since January 1, 1995. SFAS 148 is effective for years ending after
December 15, 2002. The Corporation did not adopt the fair value based method
under SFAS 123.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which requires elaborating on the disclosures that must
be made by a guarantor in financial statements about its obligations under
certain guarantees. It also requires that a guarantor recognize, at the
inception of certain types of guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements of
FIN 45 are effective for financial statements issued after December 15, 2002,
and have been applied in the presentation of the accompanying consolidated
financial statements. The recognition requirements of FIN 45 are applicable for
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have an impact on the results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. SFAS 146 supercedes Emerging
Issues Task Force ("EITF") Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in Restructuring)" ("EITF 94-3"). SFAS 146 requires that
costs associated with an exit or disposal activity be recognized when the
liability is incurred, whereas EITF 94-3 required recognition of a liability
when an entity committed to an exit plan. Therefore, the effect of SFAS 146 will
be to change the timing of recognition of certain liabilities and no material
valuation differences are expected. Plans initiated before December 31, 2002
continue to be accounted for under EITF 94-3. The adoption of SFAS 146 did not
have an impact on the Corporation's business, results of operations or financial
condition.
F-I-28
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which is effective for financial
statements issued for fiscal years beginning after June 15, 2002. SFAS 143
addresses the recognition and measurement of obligations associated with the
retirement of tangible long-lived assets. The adoption of SFAS 143 did not have
an impact on the Corporation's business, results of operations or financial
condition.
The following items present other supplementary U.S. GAAP disclosures:
FAIR VALUE OF STOCK OPTIONS
The fair value of each option is estimated at the date of grant using the
Black-Scholes option pricing model, regarding the Corporation's stock option
plan. The following assumptions were used for grants:
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -----------------
2003 2002 2002 2001
-------- -------- ------- -------
(UNAUDITED)
Dividend yield........................................... 0.0% 0.0% 0.0% 0.0%
Expected volatility...................................... 65.0% 65.2% 65.0% 71.0%
Risk-free interest rates................................. 4.7% 4.7% 4.7% 5.2%
Expected life............................................ 5 years 5 years 5 years 5 years
Under U.S. GAAP, the Corporation accounts for its stock-based compensation
plans using the intrinsic value method prescribed in Accounting Principles Board
("APB") No. 25 "Accounting for Stock Issued to Employees." Compensation cost for
stock options, if any, is measured by the excess of the quoted market price of
the Company's stock at the grant date over the exercise price. Had costs for the
stock-based compensation plans been determined based on the fair value at the
grant dates for awards consistent with SFAS 123, the Corporation's pro-forma net
loss and loss per share would have been as follows:
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -------------------
2003 2002 2002 2001
-------- -------- -------- --------
(UNAUDITED)
Net loss -- U.S. GAAP
As reported........................................ $(7,680) $(1,832) $(11,125) $(55,254)
Fair value of stock-based compensation............. (249) (63) (352) (676)
------- ------- -------- --------
Pro forma.......................................... $(7,929) $(1,895) $(11,477) $(55,930)
======= ======= ======== ========
Basic and diluted earnings per share -- U.S. GAAP
As reported........................................ $ (0.14) $ (0.03) $ (0.20) $ (1.10)
Pro forma.......................................... (0.14) (0.03) (0.21) (1.11)
Stock-based compensation included in net loss as
reported........................................... -- -- -- --
Weighted average fair value of options granted by the
Corporation........................................ -- 1.34 0.91 1.12
GUARANTEES
The Corporation has entered into agreements that contain features which
meet the definition of a guarantee under FIN 45. FIN 45 defines a guarantee to
be a contract that contingently requires the Corporation to make payments
(either in cash, financial instruments, other assets, common shares of the
Corporation or through the provision of services) to a third party based on
changes in an underlying economic
F-I-29
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
characteristic (such as interest rates or market value) that is related to an
asset, a liability or an equity security of the other party. The Corporation has
the following major types of guarantees that are subject to the disclosure
requirements of FIN 45:
Product warranties
As part of the normal sale of product, the Corporation has provided its
customers with product warranties. These warranties generally extend for one
year. The following summarizes the accrual of product warranties that is
recorded as part of accounts payable and accrued liabilities in the accompanying
consolidated balance sheet as at December 31, 2002.
Balance, beginning of year.................................. $1,857
Payments made during the year............................. (913)
Warranties issued during the year......................... 1,272
------
Balance, end of year........................................ $2,216
======
The Corporation also indemnifies its customers against any actions from
third parties related to intellectual property claims arising from use of the
Corporation's products. In the Corporation's experience, claims under such
indemnifications are rare, and the associated fair value of the liability is not
material.
26. SUBSEQUENT EVENTS
a) On March 27, 2003, the Corporation announced that it entered into a
definitive agreement and plan of merger with Netro Corporation ("Netro")
pursuant to which it will acquire Netro. Pursuant to the merger, the Corporation
will issue 41,500,000 common shares, in exchange for all the issued and
outstanding common shares of Netro. As part of the merger and immediately prior
to the closing of the merger, Netro will issue a cash dividend of US$100 million
to its shareholders. Estimated acquisition, integration and restructuring costs
amount to approximately $34,600,000 and will be included in the total purchase
consideration.
The transaction will be accounted for using the purchase method and the
expected excess of estimated fair value of the net assets acquired over the
total purchase consideration will be accounted for as negative goodwill, which
will reduce the fair value of the acquired fixed, other and intangible assets.
The transaction is subject to certain conditions, including regulatory and
Netro shareholders' approval.
b) In December 2001, SR Telecom filed a statement of claim in New York for
US$4.86 million against MCI International and Telecommunications d'Haiti,
S.A.M., or Teleco de Haiti. The claim was filed pursuant to a clause mandating
three party arbitration before the International Court of Arbitration in respect
of funds which ceased flowing to SR Telecom under a Tripartite Agreement between
Teleco de Haiti, MCI International and SR Telecom. The agreement provides for
the financing of a contract between SR Telecom and Teleco de Haiti pursuant to
which SR Telecom was to supply and install certain telecommunications equipment
for Teleco de Haiti for approximately US$12.88 million. In July 2002, MCI
International filed for bankruptcy and the United States Bankruptcy Court issued
an order staying all collateral litigation against MCI International, including
this arbitration. As a result, MCI International continued in the proceeding as
an observer. In February 2002, Teleco de Haiti filed a counter-claim for US$1.2
million in respect of funds transferred to SR Telecom since the execution of a
Termination Agreement between SR Telecom and Teleco de Haiti, alleging that such
Termination Agreement ended their obligations under the Tripartite Agreement.
On April 24, 2003, the arbitration tribunal rendered a decision, received
by SR Telecom on May 1, 2003, denying both the claim by SR Telecom against
Teleco de Haiti and the counterclaim by Teleco de Haiti against SR Telecom,
however the arbitration tribunal also held that the Termination Agreement
preserved and did not extinguish SR Telecom's right to continue to receive
payments from MCI under the Tripartite
F-I-30
SR TELECOM INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement. Prior to the decision, SR Telecom filed a claim for US$4.86 million
against MCI International with the United States Bankruptcy Court and SR Telecom
cannot determine what amount, if any, it may recover from MCI International. As
a result, no provision for loss has been recorded in these financial statements.
If SR Telecom cannot recover a substantial amount from MCI International, it
will have a material impact on SR Telecom's results of operations and financial
position. SR Telecom management is currently assessing the amount of provision
for loss and will record, based on their best judgment, such amount, if any, as
a charge in the statement of operations during the three month period ended June
30, 2003.
c) Private placement
On July 18, 2003, SR Telecom issued 5,280,000 Units by way of a private
placement for gross proceeds of $4,488,000.
Each Unit is comprised of one common share and one-half of one common share
purchase warrant. Each whole purchase warrant is exercisable for one common
share at a price of $1.00 per share, expiring in 2008.
F-I-31
NETRO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 32,025 $ 43,455
Short-term marketable securities.......................... 64,548 57,603
Trade accounts receivable, net............................ 1,840 3,136
Inventory................................................. 6,333 6,227
Prepaid expenses and other................................ 5,009 3,367
-------- --------
Total current assets................................... 109,755 113,788
Equipment and leasehold improvements, net................... 8,908 9,635
Long-term marketable securities............................. 44,080 57,335
Restricted cash deposits.................................... 6,427 --
Acquired intangible assets.................................. 17,985 20,331
Other assets................................................ 2,164 2,164
-------- --------
Total assets........................................... $189,319 $203,253
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital leases......................... $ -- $ 64
Trade accounts payable.................................... 1,346 2,040
Accrued liabilities....................................... 20,606 22,359
-------- --------
Total current liabilities.............................. 21,952 24,463
Deferred facilities rent.................................... 300 269
-------- --------
Total liabilities...................................... 22,252 24,732
-------- --------
Commitments and contingencies (Note 4)
Stockholders' Equity:
Common stock.............................................. 455,142 454,780
Deferred stock compensation............................... -- (84)
Accumulated other comprehensive income.................... 297 421
Accumulated deficit....................................... (288,372) (276,596)
-------- --------
Total stockholders' equity............................. 167,067 178,521
-------- --------
Total liabilities and stockholders' equity............. $189,319 $203,253
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-II-1
NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Revenues.................................................... $ 2,205 $ 5,008
Cost of revenues............................................ 1,723 4,395
-------- --------
Gross profit................................................ 482 613
-------- --------
Operating expenses:
Research and development.................................. 4,403 7,223
Sales and marketing....................................... 1,831 3,691
General and administrative................................ 4,391 4,459
Amortization of deferred stock compensation............... 84 180
Amortization of acquired intangible assets................ 2,346 385
Acquired in-process research and development.............. -- 17,600
Restructuring and asset impairment charges................ -- 1,825
-------- --------
Total operating expenses............................... 13,055 35,363
-------- --------
Loss from operations........................................ (12,573) (34,750)
Other income, net........................................... 803 2,355
-------- --------
Net loss before provision for income taxes.................. (11,770) (32,395)
Provision for income taxes.................................. 6 36
-------- --------
Net loss.................................................... $(11,776) $(32,431)
======== ========
Basic and diluted net loss per share........................ $ (0.31) $ (0.57)
======== ========
Weighted-average shares used to compute basic and diluted
net loss per share........................................ 38,606 56,997
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-II-2
NETRO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(11,776) $(32,431)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 975 1,116
Amortization of deferred stock compensation............ 84 180
Amortization of acquired intangible assets............. 2,346 385
Acquired in-process research and development........... -- 17,600
Write-down of impaired assets.......................... -- 797
Loss on disposal of fixed assets....................... -- 41
Changes in operating assets and liabilities, net of
acquisition of assets:
Trade accounts receivable............................ 1,296 (1,810)
Inventory............................................ (106) 1,077
Prepaid expenses and other........................... (1,349) (445)
Trade accounts payable and accrued liabilities....... (2,460) 563
-------- --------
Net cash used in operating activities................ (10,990) (12,927)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements......... (248) (795)
Payment for acquisition of assets......................... -- (16,009)
Purchases of marketable securities........................ (43,056) (48,958)
Maturities of marketable securities....................... 48,892 81,606
Increase in restricted cash deposits...................... (6,427) --
-------- --------
Net cash provided by (used in) investing
activities.......................................... (839) 15,844
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases................................ (64) (380)
Proceeds from issuance of common stock, net of issuance
costs.................................................. 406 577
-------- --------
Net cash provided by financing activities............ 342 197
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... 57 (43)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (11,430) 3,071
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 43,455 90,494
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 32,025 $ 93,565
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................... $ 25 $ 49
Issuance of common stock related to acquisition of
assets................................................. $ -- $ 29,520
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-II-3
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Netro Corporation (collectively, with its subsidiaries, the "Company" or
"Netro") was incorporated in California on November 14, 1994 and reincorporated
in Delaware on June 19, 2001. Netro designs, markets and sells broadband,
point-to-multipoint fixed wireless equipment. Telecommunications service
providers use Netro's equipment as an alternative to using wired connectivity or
point-to-point fixed wireless equipment. The Company operates in one business
segment.
In November 2002, the Company announced plans to evaluate strategic
alternatives that could include a possible sale, merger or liquidation.
Following a review of various alternatives, negotiations with several parties
and extensive due diligence, the Company entered into an agreement and plan of
merger with SR Telecom Inc. on March 27, 2003, pursuant to which the Company
will, subject to the conditions in the merger agreement, (1) declare and pay a
cash dividend of $100 million, to be distributed on a pro-rata basis to the
holders of Netro's common stock just prior to the effective time of the merger
and (2) merge with Norway Acquisition Corporation, a wholly-owned subsidiary of
SR Telecom, whereby Netro will survive the merger as a wholly-owned subsidiary
of SR Telecom. If the merger is consummated as proposed, Netro stockholders at
the effective time of the merger will also receive an aggregate of 41.5 million
shares of SR Telecom common stock, which will also be distributed among Netro's
stockholders on a pro rata basis. The transaction is subject to certain
conditions, including approval by Netro's stockholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Company has prepared the accompanying condensed consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America, and in accordance with the rules and regulations of
Form 10-Q and Article 10 of Regulation S-X of the United States Securities and
Exchange Commission. These condensed consolidated financial statements are
unaudited but reflect all adjustments (consisting of normal recurring
adjustments) that are necessary in the opinion of management for a fair
presentation of the Company's financial position at March 31, 2003, results of
operations for the three months ended March 31, 2003 and 2002, and cash flows
for the three months ended March 31, 2003 and 2002. The condensed consolidated
balance sheet at December 31, 2002 is derived from the Company's audited
financial statements as of that date.
The unaudited condensed consolidated financial statements include the
accounts of Netro Corporation and its subsidiaries in Germany, France, Mexico
and Israel. All material intercompany accounts and transactions have been
eliminated in consolidation.
Results of operations for the three months ended March 31, 2003 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2003. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and the accompanying notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, which was previously
filed with the Securities and Exchange Commission.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of short-term, highly liquid investments
with maturities at the time of purchase of three months or less. Investments
with maturities greater than three months and less than or equal to one year are
classified as short-term marketable securities. Investments with maturities
greater than one year are classified as long-term marketable securities. The
Company's investments, which mature at various dates through June 2004, consist
of government and corporate debt securities and are classified as either
"available-for-sale" or "held-to-maturity." "Available-for-sale" investments are
stated at fair value, with
F-II-4
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
unrealized gains and losses recorded in "Accumulated other comprehensive income"
on the balance sheets. Unrealized gains at March 31, 2003 were $0.4 million.
Unrealized gains at December 31, 2002 were $0.5 million. "Held-to-maturity"
investments are stated at amortized cost. Realized gains or losses from sales of
marketable securities are based on the specific identification method. Certain
investments at March 31, 2003 are pledged to secure certain letters of credit
and are thus classified as restricted cash deposits.
INVENTORY
Inventory, which includes material and labor costs, is valued at standard
cost, which approximates actual cost computed on a first-in, first-out basis,
not in excess of market value. The Company provides for estimated excess or
obsolete inventory based upon assumptions about future demand for products and
the conditions of the markets in which the products are sold. This reserve is
reflected as a reduction to inventory in the accompanying condensed consolidated
balance sheets. Significant management judgment and estimates must be made and
used in connection with establishing this provision. Inventory consists of the
following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Raw materials............................................... $ 9,622 $ 9,726
Work-in-process............................................. 176 359
Finished goods.............................................. 17,530 17,309
-------- --------
27,328 27,394
Less: inventory reserve..................................... (20,995) (21,167)
-------- --------
$ 6,333 $ 6,227
======== ========
ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates whether events and circumstances have
occurred which indicate that the carrying value of its long-lived assets may not
be recoverable. If the Company determines an asset has been impaired, the
impairment charge is recorded based on the excess of the carrying value over the
fair value of the impaired asset, with the reduction in value charged to
expense. As of March 31, 2003, long-lived assets included $18.0 million of
intangible assets related to the Company's acquisition of Project Angel and $8.9
million of fixed assets and tenant improvements.
REVENUE RECOGNITION
Revenues consist of sales made directly to end users and indirectly through
original equipment manufacturers ("OEM"s) and local resellers. Revenues from
product sales are recognized when all of the following conditions are met:
delivery has occurred and title has passed to the customer, an arrangement
exists with the customer and the Company has the right to invoice the customer,
collection of the receivable is reasonably assured and the Company has fulfilled
all of its material contractual obligations to the customer. In cases where one
of the above factors has not been met, the Company defers the associated revenue
until all conditions have been met. Provisions are made at the time of revenue
recognition for estimated warranty costs.
DEFERRED REVENUE
From time to time, the Company enters into agreements to sell products to
customers on open credit terms or may agree in writing to the delivery of
product subject to installation or formal customer acceptance
F-II-5
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
criteria. In such cases, if management believes that the Company has not
fulfilled all of its material contractual obligations to the customer (such as
when it has primary responsibility for installation or if there are acceptance
criteria,) or if the collectability of the associated receivable is not
reasonably assured, revenue recognition is deferred until such time as the
Company's obligations are fulfilled and/or the amounts due have been collected.
Some of the factors used in evaluating whether or not to defer revenue from a
particular customer include:
- any material contractual obligations not fulfilled,
- acceptance criteria not yet met,
- the customer's liquid assets,
- actual and projected cash flows for the customer, and
- the political and economic environment in the country in which the
customer operates.
At March 31, 2003, the outstanding deferred revenue balance was $1.5
million.
Warranty Obligations
The Company evaluates its obligations related to product warranties on a
quarterly basis. Netro offers a standard one-year warranty on all products
shipped. The Company monitors historical warranty rates and tracks costs
incurred to repair units under warranty. These costs include labor, replacement
parts and certain freight costs. This information is then used to calculate the
accrual needed based on actual sales and remaining warranty periods. For new
product introductions, estimates are made based on test and manufacturing data
as well as the Company's historical experience on similar products. If
circumstances change, or if the Company experiences a significant change in its
failure rates, the Company's warranty accrual estimate could change
significantly.
The following is a reconciliation of the changes in the warranty liability
for the three months ended March 31, 2003 (in thousands):
Warranty accrual at December 31, 2002....................... $620
Warranty expenses incurred.................................. (15)
Warranty accrual for shipments during the period............ 61
----
Warranty accrual at March 31, 2003.......................... $666
====
The Company also indemnifies its customers against any actions from third
parties related to intellectual property claims arising from use of the
Company's product. In the Company's experience, claims made under such
indemnifications are rare and the associated fair value of the liability is not
material.
The by-laws of Netro Corporation require that, except to the extent
expressly prohibited by law, the Company must indemnify its officers and
directors against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement (if such settlement is approved in advance by the
Company) actually and reasonably incurred in connection with civil, criminal,
administrative or investigative actions or proceedings as it relates to their
services to Netro. The by-laws provide no limit on the amount of
indemnification. The Company has purchased directors and officers insurance
coverage to cover claims made against the directors and officers during the
applicable policy periods. The current policy provides $5 million of coverage
and has no deductible. Any indemnification in excess of that amount may not be
covered under the current policy. In the Company's experience, its directors and
officers insurance has been adequate to cover any and all claims, and the fair
value of any additional liability is not material.
F-II-6
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of payroll costs, other direct expenses and overhead.
STOCK-BASED COMPENSATION
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock Based Compensation -- Transition and Disclosure," which amends SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148, which the
Company adopted for the year ended December 31, 2002, requires more prominent
and frequent disclosures about the effects of stock-based compensation. The
Company accounts for its stock-based compensation plans using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost for stock options,
if any, is measured by the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. SFAS No. 123 established accounting and disclosure requirements using a
fair-value based method of accounting for stock-based employee compensation
plans. Had compensation expense for the Plans been determined consistent with
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have increased to the following pro forma amounts (dollars, in thousands,
except per share amounts):
2003 2002
-------- --------
Net loss, as reported....................................... $(11,776) $(32,431)
Fair value of stock-based compensation...................... (8,490) (8,654)
-------- --------
Net loss, pro forma......................................... $(20,266) $(41,085)
======== ========
Basic and diluted net loss per share, as reported........... $ (0.31) $ (0.57)
Basic and diluted net loss per share, pro forma............. $ (0.52) $ (0.72)
Stock-based compensation included in net loss, as
reported.................................................. $ 84 $ 180
The value of options granted and employee stock purchases in the first
quarter of 2003 and 2002 was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions (the Company had no option grants in the first quarter of 2003):
EMPLOYEE STOCK
OPTIONS EMPLOYEE STOCK PURCHASE PLAN
-------------- -------------------------------
MARCH 31, 2002 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- --------------
Risk-free interest rate....................... 4.30% - 4.33% 1.69% - 2.33% 3.47%
Average Expected Life of Option............... 4 years 0.5 years 0.5 years
Dividend Yield................................ 0% 0% 0%
Volatility of Common Stock.................... 42.1 43.2 42.1%
Weighted average fair value of options granted
during the quarter.......................... $1.96 $1.17 $1.36
F-II-7
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation results from the granting of
stock options to employees with exercise prices per share determined to be below
the estimated fair values per share of the Company's common stock at dates of
grant. For the periods presented, amortization related to employees associated
with the following operational functions (in thousands):
THREE MONTHS
ENDED
MARCH 31,
-------------
2003 2002
----- -----
Research and development.................................... $41 $105
Sales and marketing......................................... 3 32
General and administrative.................................. 40 43
--- ----
Amortization of deferred stock compensation................. $84 $180
=== ====
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding. Potential common
shares from the exercise of stock options and warrants are excluded from diluted
net loss per share because they would be antidilutive. The total number of
shares excluded from diluted net loss per share relating to these securities was
as follows (in thousands):
MARCH 31, MARCH 31,
2003 2002
--------- ---------
Options..................................................... 8,507 10,805
Warrants.................................................... 19 57
----- ------
8,526 10,862
===== ======
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Net loss.................................................... $(11,776) $(32,431)
======== ========
Weighted average shares of common stock outstanding used to
compute basic and diluted net loss per share.............. 38,606 56,997
======== ========
Basic and diluted net loss per share........................ $ (0.31) $ (0.57)
======== ========
F-II-8
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
COMPREHENSIVE LOSS
Comprehensive loss includes unrealized gains and losses on
available-for-sale equity securities and foreign currency translation gains and
losses that have been excluded from net loss and reflected instead in
stockholders' equity. For the periods presented, comprehensive loss is
calculated as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Net loss.................................................... $(11,776) $(32,431)
Change in net unrealized holding gain on marketable
securities................................................ 181 (1,158)
Foreign currency translation adjustments.................... (57) (50)
-------- --------
Comprehensive loss.......................................... $(11,652) $(33,639)
======== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses the financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
associated retirement costs. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company has adopted SFAS No. 143 for fiscal 2003. The adoption of SFAS No. 143
did not have a material effect on the Company's results of operations or
condensed consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 replaces EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Management does not expect this statement to have a material impact on the
Company's results of operations or consolidated financial statements, although
SFAS No. 146 may impact the timing of recognition of costs associated with
future restructuring, exit or disposal activities.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. These condensed consolidated financial
statements comply with the recognition and disclosure requirements of this
interpretation.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure that amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of
F-II-9
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for employee stock options using the fair value
method. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. These condensed consolidated financial statements comply with the
requirements of SFAS No. 148.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by
business enterprises of variable interest entities. Under that interpretation,
certain entities known as Variable Interest Entities ("VIEs") must be
consolidated by the primary beneficiary of the entity. The primary beneficiary
is generally defined as having the majority of the risks and rewards arising
from the VIE. For VIEs in which a significant (but not majority) variable
interest is held, certain disclosures are required. It applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company does not have any interest in a VIE and, as
a result, the adoption of this interpretation will not affect the Company's
results of operations and condensed consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group ("DIG") process that effectively required
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company does
not believe the adoption of SFAS No. 149 will have a material impact on its
results of operations and condensed consolidated financial statements.
In the first quarter of 2003, the Emerging Issues Task Force ("EITF")
reached a consensus on EITF Issue 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"), which requires companies to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. In applying EITF 00-21, revenue arrangements with multiple
deliverables should be divided into separate units of accounting if the
deliverables in the arrangement meet certain criteria. Arrangement consideration
should be allocated among the separate units of accounting based on their
relative fair values. This issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company does not
expect the adoption of EITF 00-21 to have a material impact on its results of
operations or consolidated financial statements.
3. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash
equivalents, and marketable securities. With respect to trade receivables, the
Company performs ongoing credit evaluations of its customers' financial
condition. Additionally, the Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk and collection
experience of specific customers, historical trends and other available
information. At March 31, 2003, two customers represented 34 percent and 12
percent, respectively of the Company's trade accounts receivable balance.
F-II-10
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Although the Company does not require collateral on certain accounts
receivable on sales to large, well-established companies, it does require
standby letters of credit or prepayments on certain sales to foreign and smaller
companies. As of March 31, 2003, the Company had a note receivable of $1.2
million due from a company in Argentina, which was fully reserved.
With respect to cash equivalents and marketable securities, the Company has
cash investment policies that limit the amount of credit exposure to any one
issuer and restrict placement of these investments to issuers evaluated as
creditworthy.
4. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
In July 2001, the Company issued a letter of credit for approximately $1.6
million as a security deposit for the Company's San Jose, California office
space. This letter of credit expires in September 2006. In February 2002, the
Company issued a letter of credit for approximately $4.2 million as a security
deposit for the Company's Redmond, Washington office space. This letter of
credit expires in July 2006. These letters of credit are secured by certificates
of deposit and are subject to draw if the Company fails to meet its obligations
under the facilities leases. The associated certificates of deposit totaling
$6.4 million at March 31, 2003 are classified as restricted cash on the
accompanying condensed consolidated balance sheet.
CONTINGENCIES
COATES LITIGATION. On or about December 10, 2001, C. Robert Coates, a
holder of shares of the Company's common stock, commenced an action in the
Delaware Chancery Court that names as defendants Netro and certain members of
its board of directors, styled Coates v. Netro Corp., et al., C.A. No. 19309.
Mr. Coates filed an amended complaint in that action in October 2002. In the
amended complaint, Mr. Coates challenges a stock option cancellation and regrant
program for employees that was adopted by Netro's board of directors in 2001. He
also challenges an award of options to Netro's outside directors in July 2001.
The complaint seeks an order declaring the options at issue to be invalid and
void, rescinding those options, preliminarily and permanently enjoining the
exercise of those options, imposing a constructive trust on any such options
that were granted to defendants, and awarding monetary damages in an unspecified
amount as well as plaintiffs' attorneys fees and expenses. Defendants filed a
motion to dismiss the amended complaint on October 18, 2002. During the period
for briefing of that motion, the parties reached an agreement in principle to
settle the action. Under the proposed settlement: (i) each of Netro's outside
directors (other than Ms. Young, who is not named as a defendant) would agree to
forego any award of Netro's options in calendar year 2003; (ii) Netro's
governing documents will be amended to reflect that any future option awards to
directors must be made by the Compensation Committee of Netro's board of
directors; and (iii) Netro and its directors will agree that any future grant of
options made to Netro's directors will be publicly disclosed within 30 days
after such a grant.
The proposed settlement is subject to approval by the Delaware Court of
Chancery. In connection with such court approval, plaintiff's counsel intends to
make an application for an award of fees and expenses, which the Company and
other defendants have agreed not to oppose up to $40,000.
IPO ALLOCATION LITIGATION. On or around August 23, 2001, Ramiro
Soto-Gonzalez, who alleges that he is a former shareholder of the Company's
common stock, commenced a purported class action lawsuit in the U.S. District
Court for the Southern District of New York against the Company, Richard Moley,
Gideon Ben-Efraim and Michael T. Everett ("Individual Defendants"), as well as
against Dain Rauscher, Inc., FleetBoston Robertson Stephens, Inc., and Merrill
Lynch, Pierce, Fenner and Smith, Inc. ("Underwriter Defendants"). The action is
styled Soto-Gonzalez v. Netro Corporation, Inc., et al., No. 01 Civ. 7993
F-II-11
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(S.D.N.Y.). On or around December 6, 2001, Zion Badichi, who alleges that he is
a former shareholder of the Company's common stock, commenced a purported class
action lawsuit in the U.S. District Court for the Southern District of New York
against the Company, the Individual Defendants (except Mr. Moley) and the
Underwriter Defendants. The action is styled Badichi v. Netro Corporation, Inc.,
et al., No. 01 Civ. 8348 (S.D.N.Y.).
The Soto-Gonzalez and Badichi actions are two of more than 1,000 lawsuits
filed in the U.S. District Court for the Southern District of New York against
more than 300 different issuers, certain officers and directors of these issuers
and more than 45 different underwriters arising out of initial public offerings
occurring between December 1997 and December 2000 (collectively "IPO Allocation
Litigation"). By Order dated August 9, 2001, Chief Judge Michael B. Mukasey
assigned the IPO Allocation Litigation, including the Soto-Gonzalez and Badichi
actions, to the Honorable Shira A. Scheindlin for all pre-trial purposes. On
September 7, 2001, Judge Scheindlin adjourned the time for all defendants in the
IPO Allocation Litigation, including the Company and the Individual Defendants,
to answer, move or otherwise respond to current and future complaints
indefinitely pending further instruction from the court. On or about March 2002,
the Soto-Gonzalez and Badichi actions were consolidated into a single action
styled In re Netro Corp. Initial Public Offering Securities Litigation, No. 01
Civ. 7035, 21 MC 92 (SAS) ("Netro Litigation"). Other lawsuits alleging similar
claims arising out of the Company's August 1999 initial public offering against
the Underwriter Defendants -- but not against the Company or the Individual
Defendants -- were also consolidated into the Netro Litigation. Those actions
are styled Gutner v. Merrill Lynch, Pierce, Fenner & Smith Incorporated et al.,
No. 01 Civ. 7035 (S.D.N.Y.) and Bryant v. Merrill Lynch, Pierce, Fenner & Smith
Incorporated et al., No. 01 Civ. 9184 (S.D.N.Y.).
On April 19, 2002, plaintiffs filed a consolidated amended class action
complaint in the Netro Litigation ("Complaint"). The Complaint alleges claims
against the Company arising under Section 11 of the Securities Act of 1933 ("33
Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"),
and Rule 10b-5 promulgated thereunder, and against the Individual Defendants
under Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act, and
Section 15 of the "33 Act. The claims allege various misconduct arising from the
Company's August 1999 initial public offering and March 2000 follow-on offering
of its common stock, including, among other things, that the disclosures made in
connection with the offerings were incomplete or misleading in various respects.
The allegations include, among other things, that the Company and the Individual
Defendants failed to disclose that the Underwriter Defendants: (1) charged the
Company excessive commissions and inflated transaction fees in violation of the
securities laws and regulations; and (2) allowed certain investors to take part
in the Company's initial public offering in exchange for promises that these
investors would purchase additional shares in the after-market for the purpose
of inflating and maintaining the market price of the Company's common stock. The
Complaint seeks to certify a class of shareholders who purchased the Company's
common stock between August 18, 1999 and December 6, 2000, and to recover
monetary damages from defendants in an unspecified amount, as well as
plaintiff's attorneys' fees and expenses in bringing the action.
On October 9, 2002, the claims against the Individual Defendants were
dismissed without prejudice on consent of the parties. In addition, counsel for
the plaintiffs, liaison counsel for the issuer defendants and counsel for
insurers of the issuer defendants have taken part in continuing discussions
mediated by a former federal district court judge to explore a possible
settlement of the claims against all of the issuer defendants in the IPO
Allocation Litigation, including the Company.
The IPO Allocation Litigation in general, and the Netro Litigation in
particular, are in an early phase, and no date has yet been set by the court for
completion of pre-trial discovery or trial. The Company believes the claims
asserted against it in the Netro Litigation are without merit, and Netro intends
vigorously to defend itself against those claims.
F-II-12
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FUTURE COMMUNICATIONS COMPANY ("FCC") KUWAIT LITIGATION. This matter
involves a dispute regarding the alleged improper draw down by the Company of a
letter of credit opened by FCC with the Bank of Kuwait and the Middle East in
Kuwait, and the alleged refusal by the Company to accept return by FCC of
certain equipment provided to FCC by the Company. At the January 15, 2003,
hearing, the Court ruled that Netro had not yet been properly served. The case
has been adjourned until May 28, 2003. The amount in dispute is approximately
$1,013,000 plus interest from December 31, 1999.
SOLECTRON ARBITRATION. On or around December 19, 2002, Solectron
California Corporation ("Solectron") demanded arbitration to resolve disputes
arising under its May 31, 1998 "Manufacturing Agreement" with the Company.
Solectron's principal claim is that during the third quarter of 2000, it
purchased materials on the basis of Netro's forecasts which were not followed by
corresponding orders. Solectron claims that as a result it now has an excess
inventory of materials which it cannot sell. Netro vigorously disputes the
claims on the ground that the acquisition of material had not been approved by
Netro as required by the agreement. The total claim, including the cost of
materials and asserted carrying charges, is approximately $14.5 million. The
matter is set for mediation which is scheduled to commence in the second quarter
of 2003. Unless the matter is resolved, arbitration will proceed thereafter
before the American Arbitration Association.
MERGER-RELATED LITIGATION. On April 8, 2003, a purported class action
styled Fuller & Thaler Asset Management, Inc. v. Netro Corp. et al., Case No.
CV816170 (Cal. Super. Ct.) was filed in the California Superior Court for Santa
Clara County by an entity claiming to be a Netro shareholder against Netro and
its current and certain former directors. The complaint asserts claims for
breach of fiduciary duty against the current and former directors who are named
as defendants based on allegations that Netro's directors, among other things,
breached their fiduciary duties to Netro allegedly by failing to properly value
and obtain the highest price reasonably available for Netro, by favoring SR
Telecom over competing potential acquirers and by engaging in self-dealing in
connection with the merger. The complaint seeks certain injunctive relief
including, among other things, an injunction prohibiting Netro from completing
the merger and rescission of the individual defendants' receipt of stock options
and other benefits they may have received, as well as attorneys' fees and costs
of suit.
OTHER MATTERS. From time to time, the Company is involved in various legal
proceedings in the ordinary course of business. The Company is not currently
involved in any additional litigation which, in management's opinion, would have
a material adverse effect on its business, cash flows, operating results or
financial condition; however, there can be no assurance that any such proceeding
will not escalate or otherwise become material to the Company's business in the
future.
5. RESTRUCTURING AND ASSET IMPAIRMENT:
FIRST QUARTER 2002 RESTRUCTURING AND ASSET IMPAIRMENT
In the first quarter of 2002, the Company incurred $1.8 million in
restructuring charges related to various initiatives undertaken by the Company
to reduce its cost structure. The Company closed Bungee Communications, Inc.,
the Company's Israeli engineering entity, and reduced its workforce in its San
Jose, California headquarters location. The charges included the termination of
approximately 54 employees (50 research and development employees, 3 sales and
marketing employees and 1 general and administrative employee), the termination
of the Bungee office lease and the write-down of assets associated with the
Bungee operations. All
F-II-13
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
significant actions relating to this plan were completed in 2002. The following
table summarizes the components of the charge for the quarter ended March 31,
2002 (in thousands):
LIABILITY AT LIABILITY AT
RESTRUCTURING AMOUNTS PAID/ DECEMBER 31, AMOUNTS PAID/ MARCH 31,
CHARGES WRITTEN OFF 2002 WRITTEN OFF 2002
------------- ------------- ------------ ------------- ------------
Impairment of assets.......... $ 154 $ (154) $ -- $ -- $--
Severance..................... 4,100 (3,429) 671 (644) 27
------ ------- ---- ----- ---
Total......................... $4,254 $(3,583) $671 $(644) $27
====== ======= ==== ===== ===
FOURTH QUARTER 2002 RESTRUCTURING.
In the fourth quarter of 2002, the Company incurred $4.3 million in
restructuring charges to further reduce its cost structure. The Company reduced
its worldwide workforce by approximately 110 employees (80 research and
development employees, 21 sales and marketing employees and 9 general and
administrative employees), closed two sales offices and wrote down certain fixed
assets. The following table summarizes the activity related to the fourth
quarter restructuring charges for the year ended December 31, 2002 (in
thousands):
LIABILITY AT
RESTRUCTURING AMOUNTS PAID/ DECEMBER 31,
CHARGES WRITTEN OFF 2002
------------- ------------- ------------
Impairment of assets.......................... $ 797 $ (797) $ --
Severance..................................... 763 (763) --
------ ------- ----
Lease and other expense....................... 265 (265) --
------ ------- ----
Total......................................... $1,825 $(1,825) $ --
====== ======= ====
The remaining liability relates to severance charges and is expected to be
paid in the second quarter of 2003.
6. ACQUISITION OF ASSETS:
On February 12, 2002, the Company acquired AT&T Wireless' fixed wireless
development team, a license to intellectual property, inventory, equipment and
proprietary software assets. The technology was originally developed under the
code name "Project Angel." The acquisition was accounted for as a purchase of
assets. The purchase price was allocated based on the estimated fair values of
the assets acquired. The purchase consideration was approximately $48.8 million,
consisting of 8.2 million shares of the Company's common stock, valued at
approximately $29.5 million, approximately $16.0 million in cash and transaction
costs of approximately $3.3 million.
A total of $45.7 million of the purchase consideration was allocated to
intangible assets, including $24.9 million of developed and core technology,
$17.6 million of in-process research and development costs, and $3.2 million of
other intangibles, which include the acquired workforce. The remaining $3.1
million of purchase consideration was allocated to fixed assets ($2.5 million)
and inventory ($0.6 million). Acquired in-process research and development costs
represent research and development projects relating to expanding product
capacity. These projects had not yet reached technological feasibility and,
accordingly, this amount was expensed in the first quarter of 2002. The value of
acquired in-process technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related product revenues. This
analysis was conducted by an independent appraisal firm based on management's
forecast of future revenues, cost of
F-II-14
NETRO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
revenues, and operating expenses related to the purchased technologies. The
intangible assets are being amortized over a three-year estimated useful life
based on the product life cycle of the acquired technology.
7. SEGMENT REPORTING:
The Company is organized and operates as one operating segment: the design,
development, manufacturing, marketing and selling of broadband wireless
point-to-multipoint access systems.
The Company sells its products indirectly through OEMs and local resellers
in addition to through a direct sales force. Netro generally offers installation
and maintenance services through its system integration partners and third-party
installation and support organizations. Revenues by geography based on sales to
original customers were as follows:
% OF TOTAL
REVENUES REVENUES
------------------- ---------------
THREE MONTHS ENDED THREE MONTHS
MARCH 31, ENDED MARCH 31,
------------------- ---------------
2003 2002 2003 2002
-------- -------- ------ ------
Latin America........................................ $ 38 $ 686 2% 14%
Europe............................................... 1,875 3,998 85 80
Middle East.......................................... 190 15 9 --
Asia................................................. 102 13 4 --
------ ------ ----- -----
International........................................ 2,205 4,712 100 94
United States........................................ -- 296 -- 6
------ ------ ----- -----
$2,205 $5,008 100% 100%
====== ====== ===== =====
Substantially all of the Company's U.S. revenues for the three months ended
March 31, 2002 were related to products sold through systems integrators and
local resellers who resold the products to end customers located outside of the
United States.
Countries that accounted for more than 10 percent of revenues based on to
the location of our original customers were as follows:
% OF TOTAL
REVENUES REVENUES
------------------- ---------------
THREE MONTHS ENDED THREE MONTHS
MARCH 31, ENDED MARCH 31,
------------------- ---------------
2003 2002 2003 2002
-------- -------- ------ ------
Spain................................................ $ 812 $1,056 37% 21%
Germany.............................................. $ 468 * 21% *
France............................................... * $1,514 * 30%
---------------
* Revenues less than 10 percent for period
F-II-15
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Netro Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Netro
Corporation and its subsidiaries (the "Company") at December 31, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of December 31, 2001 and for each of the two years in the period
ended December 31, 2001 were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated January 21, 2002.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 6, 2003
F-II-16
THIS REPORT IS A CONFORMED COPY OF THE
REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
AND HAS NOT BEEN REISSUED BY THAT FIRM.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Netro Corporation:
We have audited the accompanying consolidated balance sheets of Netro
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Netro
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed under
Item 14(a) is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 21, 2002
ARTHUR ANDERSEN LLP WERE THE INDEPENDENT ACCOUNTANTS FOR NETRO CORPORATION UNTIL
MAY 24, 2002. REPRESENTATIVES OF ARTHUR ANDERSEN LLP ARE NOT AVAILABLE TO
PROVIDE THE CONSENT REQUIRED FOR THE INCLUSION OF THEIR REPORT ON THE FINANCIAL
STATEMENTS OF NETRO CORPORATION APPEARING IN THIS REGISTRATION STATEMENT ON FORM
F-4. THEREFORE, IN ACCORDANCE WITH SEC REGULATIONS, A CONFORMED COPY OF THEIR
PREVIOUS OPINION IS INCLUDED.
F-II-17
NETRO CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 43,455 $ 90,494
Short-term marketable securities.......................... 57,603 115,950
Trade accounts receivable, net of allowance of $583 and
$1,500, respectively................................... 3,136 3,683
Inventory................................................. 6,227 6,874
Prepaid expenses and other................................ 3,367 2,832
--------- ---------
Total current assets................................... 113,788 219,833
Equipment and leasehold improvements, net................... 9,635 7,796
Long-term marketable securities............................. 57,335 119,858
Acquired intangible assets.................................. 20,331 --
Other assets................................................ 2,164 2,234
--------- ---------
Total assets........................................... $ 203,253 $ 349,721
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital leases......................... $ 64 $ 1,272
Trade accounts payable.................................... 2,040 1,649
Accrued liabilities....................................... 22,359 25,789
--------- ---------
Total current liabilities.............................. 24,463 28,710
Capital leases, net of current portion...................... -- 64
Deferred facilities rent.................................... 269 71
--------- ---------
Total liabilities...................................... 24,732 28,845
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized -- 5,000,000 shares Outstanding -- no
shares................................................ -- --
Common stock, $.001 par value:
Authorized -- 100,000,000 shares
Outstanding -- 38,521,554 and 52,481,253 shares at
December 31, 2002 and 2001, respectively.............. 454,780 506,329
Deferred stock compensation............................... (84) (831)
Accumulated other comprehensive income.................... 421 1,264
Accumulated deficit....................................... (276,596) (185,886)
--------- ---------
Total stockholders' equity............................. 178,521 320,876
--------- ---------
Total liabilities and stockholders' equity............. $ 203,253 $ 349,721
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-II-18
NETRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues.................................................... $ 17,107 $ 23,659 $ 68,527
Cost of revenues.......................................... 12,456 20,125 52,096
Provision for excess and obsolete inventory............... 4,203 26,387 --
Provision for material-related commitments................ 508 16,000 --
-------- -------- --------
Total cost of revenues...................................... 17,167 62,512 52,096
-------- -------- --------
Gross profit (loss)......................................... (60) (38,853) 16,431
-------- -------- --------
Operating expenses:
Research and development.................................. 27,973 25,782 24,265
Sales and marketing....................................... 13,877 13,281 10,455
General and administrative................................ 21,210 16,996 9,812
Amortization of deferred stock compensation............... 612 857 1,064
Amortization of acquired intangibles...................... 7,820 -- --
Acquired in-process research and development.............. 17,600 -- --
Restructuring and asset impairment charges................ 8,079 -- --
-------- -------- --------
Total operating expenses............................... 97,171 56,916 45,596
-------- -------- --------
Loss from operations........................................ (97,231) (95,769) (29,165)
Other income, net
Interest income and realized gains on sales of marketable
securities............................................. 7,127 17,154 20,112
Interest expense.......................................... (503) (613) (1,125)
-------- -------- --------
Total other income, net................................ 6,624 16,541 18,987
-------- -------- --------
Net loss before provision for income taxes.................. (90,607) (79,228) (10,178)
Provision for income taxes.................................. 103 76 --
-------- -------- --------
Net loss.................................................... $(90,710) $(79,304) $(10,178)
======== ======== ========
Basic and diluted net loss per share........................ $ (1.76) $ (1.52) $ (0.21)
======== ======== ========
Weighted-average shares used to compute basic and diluted
net loss per share........................................ 51,521 52,196 49,639
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-II-19
NETRO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE ACCUMULATED
COMMON STOCK RECEIVABLE DEFERRED OTHER
---------------------- FROM STOCK COMPREHENSIVE ACCUMULATED
SHARES AMOUNT STOCKHOLDER COMPENSATION INCOME DEFICIT
----------- -------- ----------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 1999......... 44,912,773 $146,490 $(800) $(3,730) $ -- $ (96,404)
Net loss........................... -- -- -- -- -- (10,178)
Change in net unrealized holding
gain on securities............... -- -- -- -- 823 --
Comprehensive loss.............
Repayment of note from
stockholder...................... -- -- 800 -- -- --
Exercise of stock options for
cash............................. 1,905,062 3,953 -- -- -- --
Shares issued under ESPP Plan...... 240,092 1,664 -- -- -- --
Repurchase of Common Stock for
cash............................. (15,626) (31) -- -- -- --
Issuance of Common Stock in public
offering, net of issuance
costs............................ 4,504,111 352,324 -- -- -- --
Amortization of deferred stock
compensation..................... -- (733) -- 1,797 -- --
----------- -------- ----- ------- ------ ---------
BALANCE, DECEMBER 31, 2000......... 51,546,412 503,667 -- (1,933) 823 (106,582)
Net loss........................... -- -- -- -- -- (79,304)
Change in net unrealized holding
gain on securities............... -- -- -- -- 547 --
Foreign currency translation
adjustments...................... -- -- -- -- (106) --
Comprehensive loss.............
Exercise of stock options for
cash............................. 599,575 1,373 -- -- -- --
Shares issued under ESPP Plan...... 335,266 1,534 -- -- -- --
Amortization of deferred stock
compensation..................... -- (245) -- 1,102 -- --
----------- -------- ----- ------- ------ ---------
BALANCE, DECEMBER 31, 2001......... 52,481,253 506,329 -- (831) 1,264 (185,886)
Net Loss........................... -- -- -- -- -- (90,710)
Change in net unrealized holding
gain on securities............... -- -- -- -- (824) --
Foreign currency translation
adjustments...................... -- -- -- -- (19) --
Comprehensive loss.............
Exercise of stock options for
cash............................. 380,070 634 -- -- -- --
Shares issued under ESPP Plan...... 438,831 1,165 -- -- -- --
Issuance of stock awards to
employees........................ 21,400 67 -- -- -- --
Issuance of stock for asset
acquisition...................... 8,200,000 29,520 -- -- -- --
Repurchase and cancellation of
stock............................ (23,000,000) (82,800) -- -- -- --
Amortization of deferred stock
compensation..................... -- (135) -- 747 -- --
----------- -------- ----- ------- ------ ---------
BALANCE, DECEMBER 31, 2002......... 38,521,554 $454,780 $ -- $ (84) $ 421 $(276,596)
=========== ======== ===== ======= ====== =========
TOTAL
COMPREHENSIVE STOCKHOLDERS'
LOSS EQUITY
------------- -------------
BALANCE, DECEMBER 31, 1999......... $ 45,556
Net loss........................... $(10,178) (10,178)
Change in net unrealized holding
gain on securities............... 823 823
--------
Comprehensive loss............. $ (9,355)
========
Repayment of note from
stockholder...................... 800
Exercise of stock options for
cash............................. 3,953
Shares issued under ESPP Plan...... 1,664
Repurchase of Common Stock for
cash............................. (31)
Issuance of Common Stock in public
offering, net of issuance
costs............................ 352,324
Amortization of deferred stock
compensation..................... 1,064
--------
BALANCE, DECEMBER 31, 2000......... 395,975
Net loss........................... $(79,304) (79,304)
Change in net unrealized holding
gain on securities............... 547 547
Foreign currency translation
adjustments...................... (106) (106)
--------
Comprehensive loss............. $(78,863)
========
Exercise of stock options for
cash............................. 1,373
Shares issued under ESPP Plan...... 1,534
Amortization of deferred stock
compensation..................... 857
--------
BALANCE, DECEMBER 31, 2001......... 320,876
Net Loss........................... $(90,710) (90,710)
Change in net unrealized holding
gain on securities............... (824) (824)
Foreign currency translation
adjustments...................... (19) (19)
--------
Comprehensive loss............. $(91,553)
========
Exercise of stock options for
cash............................. 634
Shares issued under ESPP Plan...... 1,165
Issuance of stock awards to
employees........................ 67
Issuance of stock for asset
acquisition...................... 29,520
Repurchase and cancellation of
stock............................ (82,800)
Amortization of deferred stock
compensation..................... 612
--------
BALANCE, DECEMBER 31, 2002......... $178,521
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-II-20
NETRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (90,710) $ (79,304) $ (10,178)
Adjustments to reconcile net loss to net cash used in
operating activities:
Acquired in process research and development........... 17,600 -- --
Write-down of impaired assets.......................... 1,068 -- --
Depreciation........................................... 4,208 4,081 2,383
Amortization of acquired intangible assets............. 7,820 -- --
Amortization of deferred stock compensation............ 612 857 1,064
Provision for excess and obsolete inventory............ 4,203 25,700 1,214
Provision for doubtful accounts........................ (900) 1,315 800
Provision for material-related commitments............. 508 16,000 --
Loss on disposal of fixed assets....................... 202 802 90
Issuance of employee stock awards...................... 67 -- --
Changes in operating assets and liabilities:
Trade accounts receivable............................ 1,447 8,534 (7,407)
Inventory............................................ (2,988) (4,580) (21,299)
Prepaid expenses and other........................... 1,668 5,023 (8,147)
Trade accounts payable, accrued liabilities and
other............................................. (6,673) (6,746) 8,454
--------- --------- ---------
Net cash used in operating activities................ (61,868) (28,318) (33,026)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements......... (4,678) (5,830) (4,800)
Acquisition of assets..................................... (16,009) -- --
Purchase of equity investment............................. -- (1,500) (450)
Purchases of marketable securities........................ (196,461) (357,893) (406,960)
Maturities of marketable securities....................... 314,208 395,668 173,670
--------- --------- ---------
Net cash provided by (used in) investing
activities........................................ 97,060 30,445 (238,540)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................... -- 121 1,083
Payments on notes payable and capital leases.............. (1,272) (6,248) (4,017)
Repurchase of common stock through tender offer........... (82,800) -- --
Proceeds from issuance of common stock, net of issuance
costs.................................................. 1,799 2,907 357,941
Repayments of notes receivable from stockholder........... -- -- 800
Repurchase of common stock................................ -- -- (31)
--------- --------- ---------
Net cash provided by (used in) financing
activities........................................ (82,273) (3,220) 355,776
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... 42 (73) --
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (47,039) (1,166) 84,210
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 90,494 91,660 7,450
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 43,455 $ 90,494 $ 91,660
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Value of common stock issued for acquisition of assets.... $ 29,520 -- --
Cash paid for interest.................................... $ 503 $ 722 $ 1,045
The accompanying notes are an integral part of these consolidated financial
statements.
F-II-21
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Netro Corporation (collectively, with its subsidiaries, "Netro" or the
"Company") was incorporated in California on November 14, 1994 and
reincorporated in Delaware on June 19, 2001. Netro designs, markets and sells
broadband, point-to-multipoint fixed wireless equipment. Telecommunications
service providers use Netro's equipment as an alternative to using wired
connectivity or point-to-point fixed wireless equipment. The Company operates in
one business segment.
The Company believes that its cash and cash equivalents balances,
short-term and long-term marketable securities and funds available under the
existing line of credit will be sufficient to satisfy its cash requirements for
at least the next twelve months. However, the Company announced in November 2002
its plans to evaluate strategic alternatives which could include a possible
sale, merger or liquidation of the Company. The accompanying consolidated
financial statements have been prepared on the basis that the Company continues
to pursue its ongoing operating objectives and do not reflect the impact of any
of these potential courses of action.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries in Germany, France, Israel and Mexico. All intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
from prior years have been reclassified to conform to the current year
presentation.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the local
currency. Accordingly, all assets and liabilities are translated into United
States dollars at the current exchange rate as of the applicable balance sheet
date. Revenues and expenses are translated at the average exchange rate
prevailing during the period. Gains and losses resulting from the translation of
the financial statements are included in accumulated other comprehensive income
in the accompanying consolidated statements of stockholders' equity. Foreign
exchange gains and losses resulting from foreign currency transactions were not
material in any of the periods presented. Currently, the Company does not employ
a foreign currency hedge program as the foreign currency transactions and risks
to date have not been significant.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term, highly liquid investments
with original maturities of less than three months.
MARKETABLE SECURITIES
The Company classifies its marketable securities as either
"available-for-sale" or "held-to-maturity." "Available-for-sale" securities are
stated at fair value, with unrealized gains and losses recorded as
F-II-22
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated other comprehensive income, while "held-to-maturity" securities are
stated at amortized cost. Realized gains or losses from the sales of marketable
securities are based on the specific identification method.
At December 31, 2002 and 2001, marketable securities consisted of the
following (in thousands):
UNREALIZED
---------------
COST GAINS LOSSES FAIR VALUE
-------- ------ ------ ----------
2002
AVAILABLE-FOR-SALE:
Commercial Paper............................. $ 12,377 $ 3 $ -- $ 12,380
Corporate Bonds.............................. 43,332 249 (2) 43,579
Government Securities........................ 81,718 298 (13) 82,003
Time Deposits and Other Bank Obligations..... 14,688 11 -- 14,699
-------- ------ ----- --------
TOTAL AVAILABLE-FOR-SALE....................... $152,115 $ 561 $ (15) $152,661
======== ====== ===== ========
2001
AVAILABLE-FOR-SALE:
Commercial Paper............................. $ 48,057 $ 80 $ -- $ 48,137
Corporate Bonds.............................. 73,236 981 (12) 74,205
Government Securities........................ 136,998 506 (188) 137,316
Time Deposits and Other Bank Obligations..... 52,834 7 (4) 52,837
-------- ------ ----- --------
TOTAL AVAILABLE-FOR-SALE....................... $311,125 $1,574 $(204) $312,495
======== ====== ===== ========
The contractual maturities of "available-for-sale" marketable securities at
December 31, 2002 are as follows:
FAIR VALUE
----------
Matures in less than 1 year................................. $134,767
Matures in 1 to 2 years..................................... 17,894
--------
$152,661
========
Approximately $38,755,000 and $79,073,000 of the total marketable
securities were included in cash and cash equivalents at December 31, 2002 and
2001, respectively. The remainder was classified as short-term marketable
securities or long-term marketable securities. Approximately $1,032,000 and
$2,386,000 of accrued interest was also included in short-term and long-term
marketable securities at December 31, 2002 and 2001, respectively.
INVENTORY
Inventory, which includes material and labor costs, is valued at standard
cost, which approximates actual cost computed on a first-in, first-out basis,
not in excess of market value. The Company provides for estimated excess or
obsolete inventory based upon assumptions about future demand for products and
the conditions of the markets in which the products are sold. This reserve is
reflected as a reduction to inventory in the accompanying consolidated balance
sheets. In 2002 and 2001, the Company provided $4.2 million and $25.7 million,
respectively, for excess and obsolete inventory. Significant management judgment
and estimates
F-II-23
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
must be made and used in connection with establishing this provision. Inventory
consists of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Raw materials............................................... $2,180 $2,534
Work-in-process............................................. 359 219
Finished goods.............................................. 3,688 4,121
------ ------
$6,227 $6,874
====== ======
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. Leasehold improvements are recorded at cost and are amortized over
the estimated lives of the improvements or the term of the lease, whichever is
shorter. Maintenance and repairs that do not improve or extend the life of
assets are expensed as incurred.
ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates whether events and circumstances have
occurred which indicate that the carrying value of its long-lived assets may not
be recoverable. In the recent past, many telecommunications equipment companies
with significant long-lived intangible assets resulting from acquisition
activity have recorded significant charges associated with the write off of
those long-lived assets. If the Company determines an asset has been impaired,
the impairment charge is recorded based on the excess of the carrying value over
the fair value of the impaired asset, with the reduction in value charged to
expense. As of December 31, 2002, long-lived assets included $20.3 million of
intangible assets related to the Company's acquisition of Project Angel and $9.6
million of fixed assets and tenant improvements.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income includes unrealized holding gains and losses and other
items that have previously been excluded from net loss and reflected instead in
stockholders' equity. Comprehensive income for the Company consists of net loss
plus the effect of unrealized holding gains and losses on investments classified
as available-for-sale and foreign currency translation adjustments. Accumulated
other comprehensive income consists of the following (in thousands):
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Unrealized holding gain on available-for-sale securities.... $546 $1,370
Cumulative translation adjustment........................... (125) (106)
---- ------
$421 $1,264
==== ======
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs when the technological
feasibility of the product is established. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amounts qualifying for capitalization under this statement after
consideration of the
F-II-24
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
above factors were immaterial and, therefore, no software development costs have
been capitalized by the Company to date.
REVENUE RECOGNITION
Revenues consist of sales made directly to end users and indirectly through
original equipment manufacturers ("OEM"s) and local resellers. Revenues from
product sales are recognized when all of the following conditions are met:
delivery has occurred and title has passed to the customer, an arrangement
exists with the customer and the Company has the right to invoice the customer,
collection of the receivable is reasonably assured and the Company has fulfilled
all of its material contractual obligations to the customer. In cases where one
of the above factors has not been met, the Company defers the associated revenue
until all conditions have been met. Provisions are made at the time of revenue
recognition for estimated warranty costs.
DEFERRED REVENUE
From time to time, the Company enters into agreements to sell products to
customers on open credit terms or may agree in writing to the delivery of
product subject to installation or formal customer acceptance criteria. In such
cases, if management believes that the Company has not fulfilled all of its
material contractual obligations to the customer (such as when it has primary
responsibility for installation or if there are acceptance criteria), or if the
collectibility of the associated receivable is not reasonably assured, revenue
recognition is deferred until such time as the Company's obligations are
fulfilled and/or the amounts due have been collected. Some of the factors used
in evaluating whether or not to defer revenue from a particular customer
include:
- any material contractual obligations not fulfilled,
- acceptance criteria not yet met,
- the customer's liquid assets,
- actual and projected cash flows for the customer, and
- the political and economic environment in the country in which the
customer operates, and
Deferred revenue was $1.8 million at December 31, 2002 and $1.9 million at
December 31, 2001.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers' financial
condition and establishes an allowance for doubtful accounts based upon factors
surrounding the financial position of specific customers, historical trends and
other available information.
WARRANTY OBLIGATIONS
The Company evaluates its obligations related to product warranties on a
quarterly basis. Netro offers a standard one-year warranty on all products
shipped. The Company monitors historical warranty rates and tracks costs
incurred to repair units under warranty. These costs include labor, replacement
parts and certain freight costs. This information is then used to calculate the
accrual needed based on actual sales and remaining warranty periods. For new
product introductions, estimates are made based on test and manufacturing data
as well as the Company's historical experience on similar products. If
circumstances change, or if the Company experiences a significant change in its
failure rates, the Company's warranty accrual estimate could change
significantly.
F-II-25
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the changes in the warranty liability
for the year ended December 31, 2002 (in thousands):
Warranty accrual at December 31, 2001....................... $2,174
Warranty expenses incurred.................................. (310)
Warranty accrual for 2002 revenues.......................... 756
Change in warranty estimate................................. (2,000)
------
Warranty accrual at December 31, 2002....................... $ 620
======
The Company also indemnifies its customers against any actions from third
parties related to intellectual property claims arising from use of the
Company's product. In the Company's experience, claims made under such
indemnifications are rare and the associated fair value of the liability is not
material.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of payroll costs, other direct expenses and overhead.
STOCK-BASED COMPENSATION
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock Based Compensation -- Transition and Disclosure," which amends SFAS
No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the
effects of stock-based compensation, which the Company has adopted for the year
ended December 31, 2002. The Company accounts for its stock-based compensation
plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost
for stock options, if any, is measured by the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation plans. Had
compensation expense for the Plans been determined consistent with SFAS No. 123,
the Company's net loss and basic and diluted net loss per share would have
increased to the following pro forma amounts (dollars, in thousands, except per
share amounts):
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------- --------- --------
Net loss, as reported.............................. $ (90,710) $ (79,304) $(10,178)
Fair value of stock-based compensation............. (30,739) (24,841) (16,822)
--------- --------- --------
Net loss, pro forma................................ $(121,449) $(104,145) $(27,000)
========= ========= ========
Basic and diluted net loss per share, as
reported......................................... $ (1.76) $ (1.52) $ (0.21)
Basic and diluted net loss per share, pro forma.... $ (2.36) $ (2.00) $ (0.54)
Stock-based compensation included in net loss, as
reported......................................... $ 679 $ 857 $ 1,064
F-II-26
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation results from the granting of
stock options to employees with exercise prices per share determined to be below
the estimated fair values per share of the Company's common stock at dates of
grant. For the periods presented, amortization is classified as follows (in
thousands):
2002 2001 2000
---- ---- ------
Research and development.................................... $360 $452 $ 497
Sales and marketing......................................... 83 231 284
General and administrative.................................. 169 174 283
---- ---- ------
Amortization of deferred stock compensation................. $612 $857 $1,064
==== ==== ======
COMPUTATION OF NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding. Potential common shares from the
exercise of stock options and warrants are excluded from diluted net loss per
share because they would be antidilutive. The total number of shares excluded
from diluted net loss per share relating to these securities was as follows (in
thousands):
YEARS ENDED DECEMBER 31,
-------------------------
2002 2001 2000
------- ------ ------
Options..................................................... 10,277 8,193 4,894
Warrants.................................................... 28 57 57
------ ----- -----
10,305 8,250 4,951
====== ===== =====
The following table presents the calculation of net loss per share (in
thousands, except per share data):
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Net loss............................................. $(90,710) $(79,304) $(10,178)
======== ======== ========
Weighted average shares of common stock used to
compute basic and diluted net loss per share....... 51,521 52,196 49,639
======== ======== ========
Basic and diluted net loss per share................. $ (1.76) $ (1.52) $ (0.21)
======== ======== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated retirement costs. SFAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 143 is not anticipated
to have a material effect on the Company's results of operations or consolidated
financial statements.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS
F-II-27
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 146 replaces EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Management does not expect this statement to have a material impact on the
Company's results of operations or consolidated financial statements, although
SFAS No. 146 may impact the timing of recognition of costs associated with
future restructuring, exit or disposal activities.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. These consolidated financial statements comply
with the disclosure requirements of this interpretation.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure that amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to
account for employee stock options using the fair value method. SFAS No. 148 is
effective for fiscal years ending after December 15, 2002. These consolidated
financial statements comply with the requirements of SFAS No. 148.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by
business enterprises of variable interest entities. Under that interpretation,
certain entities known as Variable Interest Entities ("VIEs") must be
consolidated by the primary beneficiary of the entity. The primary beneficiary
is generally defined as having the majority of the risks and rewards arising
from the VIE. For VIEs in which a significant (but not majority) variable
interest is held, certain disclosures are required. It applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company does not have any interest in a VIE and, as
a result, the adoption of this interpretation will not affect the Company's
results of operations or consolidated financial statements.
In the first quarter of 2003, the Emerging Issues Task Force ("EITF")
reached a consensus on EITF Issue 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF 00-21"), which requires companies to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. In applying EITF 00-21, revenue arrangements with multiple
deliverables should be divided into separate units of accounting if the
deliverables in the arrangement meet certain criteria. Arrangement consideration
should be allocated among the separate units of accounting based on their
relative fair values. This issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company does not
expect the adoption of EITF 00-21 to have a material impact on its results of
operations or consolidated financial statements.
3. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash
equivalents, short-term marketable securities and long-term marketable
F-II-28
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities. With respect to trade receivables, the Company performs ongoing
credit evaluations of its customers' financial condition. Additionally, the
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
available information. At December 31, 2002, approximately 61 percent of the
Company's trade accounts receivable balance was represented by three customers.
At December 31, 2001, approximately 81 percent of the Company's trade accounts
receivable balance was represented by four customers. Although the Company does
not require collateral on certain accounts receivable on sales to large,
well-established companies, it does require standby letters of credit or
prepayments on certain sales to foreign and smaller companies.
With respect to cash equivalents, short-term marketable securities and
long-term marketable securities, the Company has cash investment policies that
limit the amount of credit exposure to any one issuer and restrict placement of
these investments to issuers evaluated as creditworthy.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements consisted of the following (in
thousands):
DECEMBER 31,
-----------------
2002 2001
------- -------
Engineering and test equipment.............................. $16,509 $14,236
Office and computer equipment............................... 7,157 5,201
Furniture and fixtures...................................... 586 573
Leasehold improvements...................................... 709 593
------- -------
24,961 20,603
Less: Accumulated depreciation and amortization............. (15,326) (12,807)
------- -------
Equipment and leasehold improvements, net................... $ 9,635 $ 7,796
======= =======
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31,
-----------------
2002 2001
------- -------
Accrued payroll and related benefits........................ $ 1,690 $ 1,995
Warranty reserve............................................ 620 2,174
Customer deposits and deferred revenue...................... 2,204 2,306
Material-related commitments to contract manufacturers (Note
7)........................................................ 14,000 15,723
Other....................................................... 3,845 3,591
------- -------
Total..................................................... $22,359 $25,789
======= =======
F-II-29
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LINES OF CREDIT AND CAPITAL LEASES:
The following table summarizes obligations under capital leases (in
thousands):
DECEMBER 31,
---------------
2002 2001
---- -------
Capital leases, due through 2003............................ $ 64 $ 1,336
Less: current portion....................................... (64) (1,272)
---- -------
$ -- $ 64
==== =======
In January 1998, the Company entered into a bank line of credit under which
up to $10,000,000 is available for borrowings and letters of credit and which
expires in March 2003. Borrowings are limited to an aggregate amount equaling
approximately 80 percent of eligible domestic trade accounts receivable, 90
percent of eligible foreign trade accounts receivable and 50 percent of eligible
inventories destined for foreign markets. The line of credit is secured by the
Company's trade accounts receivable and inventory. The borrowings under the line
accrue interest at the 30-day LIBOR rate plus 1.5 percent or the bank's prime
rate, at the Company's option. Under the agreement, the Company must comply with
certain financial and other covenants. At December 31, 2002, the Company was in
compliance with all covenants. As of December 31, 2002, there were no borrowings
outstanding under this agreement and amounts utilized for outstanding letters of
credit were $6.1 million.
A portion of the Company's machinery and equipment is leased under
agreements accounted for as capital leases. The cost of equipment under capital
leases included in property and equipment at December 31, 2002 and 2001 was
approximately $399,000 and $5,793,000, respectively. Associated accumulated
depreciation was approximately $355,000 at December 31, 2002 and $5,292,000 at
December 31, 2001.
Future minimum lease payments under all noncancelable capital lease
agreements as of December 31, 2002, are summarized as follows (in thousands):
2003........................................................ $65
Less: amount representing interest at 13.8%................. (1)
---
Present value of lease payments............................. $64
===
7. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating lease agreements expiring at various dates through 2006. Future
minimum lease payments under all noncancelable operating lease agreements as of
December 31, 2002, are summarized as follows (in thousands):
2003........................................................ $ 5,124
2004........................................................ 5,220
2005........................................................ 5,186
2006........................................................ 3,227
-------
$18,757
=======
Rent expense for all operating leases was approximately $5,723,000,
$2,757,000 and $1,401,000 in 2002, 2001 and 2000, respectively.
F-II-30
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2002, the Company had outstanding a standby letter of
credit for $240,000 to secure the Company's warranty obligations to one customer
relating to a discontinued product. The letter of credit is secured by a
certificate of deposit for $80,000. The letter of credit is subject to draw if
the Company fails to meet its obligation for liquidated damages to the customer
for downtime.
In July 2001, the Company issued a letter of credit as a security deposit
for the Company's San Jose, California office space. The amount of the letter of
credit is approximately $1.6 million and expires in September 2006. In February
2002, the Company issued a letter of credit for $4.2 million ultimately expiring
July 2006 as a security deposit for the Company's Redmond, Washington office
space. These letters of credit are subject to draw if the Company fails to meet
its obligations under the facilities leases.
The capital required for volume manufacturing is being committed by the
Company's contract manufacturers. The Company provides six or twelve month
forecasts to its contract manufacturers. The Company generally commits to
purchase products to be delivered within the most recent 60 days covered by
these forecasts with cancellation fees. In specific instances Netro may agree to
assume liability for limited quantities of specialized components with lead
times beyond this 60-day period. In addition, from time to time in the past, the
Company has committed to purchase minimum volumes of products from certain of
its contract manufacturers. In the year ended December 31, 2001, the Company
recorded an approximately US$16.0 million charge related to estimated losses
("Provision for material-related commitments" in the consolidated statements of
operations) on non-cancelable, minimum purchase commitments with certain
contract manufacturers due to a significant decline in forecasted demand. These
losses represented primarily the value of inventory that Netro had committed to
purchase. In the year ended December 31, 2002, the Company resolved its
commitment with one of the contract manufacturers and increased its estimate of
the cost to resolve the commitment with another of the contract manufacturers
that resulted in a net additional US$0.5 million charge in the consolidated
statement of operations. As of December 31, 2002, Netro had committed to make
purchases totaling $2.7 million from these manufacturers in the next 60 days, of
which $1.1 million was related to non-cancelable, minimum purchase commitments.
At December 31, 2002, Netro had $14.0 million accrued related to estimated
losses arising from non-cancelable minimum purchase commitments (see Note 5).
Netro believes that its currently forecasted demand for products, after
considering its reserves for inventory and material-related commitments will be
sufficient to meet these commitments in the future.
CONTINGENCIES
COATES LITIGATION. On or around October 5, 2001, C. Robert Coates, a
holder of shares of the Company's common stock, commenced an action in the
Delaware Chancery Court against the Company, the former Netro Corporation, which
was incorporated in California ("Netro California"), and the members of the
Company's board of directors, styled Coates v. Netro Corp., et al., C.A. No.
19154 ("Coates I"). The complaint in Coates I made a number of allegations
relating to the approval by the shareholders of Netro California of the merger
transaction by which the Company's state of incorporation was changed from
California to Delaware and also claimed that the adoption by the Company's board
of directors of a stockholder rights plan sometime after that merger transaction
was in violation of Delaware law. On November 30, 2001, defendants filed a
motion to dismiss the complaint in Coates I for failure to state a claim. In a
decision issued on September 11, 2002, the Delaware Court of Chancery granted
defendants' motion to dismiss. Mr. Coates did not appeal from that decision.
Separately, on or about December 10, 2001, Mr. Coates filed a complaint in
a second action that names as defendants the Company and certain members of the
Company's board of directors, styled Coates v. Netro Corp., et al., C.A. No.
19309 ("Coates II"). Mr. Coates filed an amended complaint in that action in
October 2002. In the amended complaint, Mr. Coates challenges a stock option
cancellation and regrant program for employees that was adopted by the Company's
board of directors in 2001. He also challenges an award of
F-II-31
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options to the Company's outside directors in July 2001. The complaint seeks an
order declaring the options at issue to be invalid and void, rescinding those
options, preliminarily and permanently enjoining the exercise of those options,
imposing a constructive trust on any such options that were granted to
defendants, and awarding monetary damages in an unspecified amount as well as
plaintiffs' attorneys fees and expenses. Defendants filed a motion to dismiss
the amended complaint on October 18, 2002. During the period for briefing of
that motion, the parties reached an agreement in principle to settle the action.
Under the proposed settlement: (i) Each of the Company's outside directors
(other than Ms. Young, who is not named as a defendant) would agree to forego
any award of the Company's options in calendar year 2003; (ii) the Company's
governing documents will be amended to reflect that any future option awards to
directors must be made by the Compensation Committee of the Company's board of
directors; and (iii) the Company and the Company's directors will agree that any
future grant of options made to the Company's directors will be publicly
disclosed within 30 days after such a grant. The proposed settlement is subject
to approval by the Delaware Court of Chancery. In connection with such court
approval, plaintiff's counsel intends to make an application for an award of
fees and expenses, which the Company and other defendants have agreed not to
oppose up to $40,000.
IPO ALLOCATION LITIGATION. On or around August 23, 2001, Ramiro
Soto-Gonzalez, who alleges that he is a former shareholder of the Company's
common stock, commenced a purported class action lawsuit in the U.S. District
Court for the Southern District of New York against the Company, Richard Moley,
Gideon Ben-Efraim and Michael T. Everett ("Individual Defendants"), as well as
against Dain Rauscher, Inc., FleetBoston Robertson Stephens, Inc., and Merrill
Lynch, Pierce, Fenner and Smith, Inc. ("Underwriter Defendants"). The action is
styled Soto-Gonzalez v. Netro Corporation, Inc., et al., No. 01 Civ. 7993
(S.D.N.Y.). On or around December 6, 2001, Zion Badichi, who alleges that he is
a former shareholder of the Company's common stock, commenced a purported class
action lawsuit in the U.S. District Court for the Southern District of New York
against the Company, the Individual Defendants (except Mr. Moley) and the
Underwriter Defendants. The action is styled Badichi v. Netro Corporation, Inc.,
et al., No. 01 Civ. 8348 (S.D.N.Y.).
The Soto-Gonzalez and Badichi actions are two of more than 1,000 lawsuits
filed in the U.S. District Court for the Southern District of New York against
more than 300 different issuers, certain officers and directors of these issuers
and more than 45 different underwriters arising out of initial public offerings
occurring between December 1997 and December 2000 (collectively "IPO Allocation
Litigation"). By Order dated August 9, 2001, Chief Judge Michael B. Mukasey
assigned the IPO Allocation Litigation, including the Soto-Gonzalez and Badichi
actions, to the Honorable Shira A. Scheindlin for all pre-trial purposes. On
September 7, 2001, Judge Scheindlin adjourned the time for all defendants in the
IPO Allocation Litigation, including the Company and the Individual Defendants,
to answer, move or otherwise respond to current and future complaints
indefinitely pending further instruction from the court. On or about March 2002,
the Soto-Gonzalez and Badichi actions were consolidated into a single action
styled In re Netro Corp. Initial Public Offering Securities Litigation, No. 01
Civ. 7035, 21 MC 92 (SAS) ("Netro Litigation"). Other lawsuits alleging similar
claims arising out of the Company's August 1999 initial public offering against
the Underwriter Defendants -- but not against the Company or the Individual
Defendants -- were also consolidated into the Netro Litigation. Those actions
are styled Gutner v. Merrill Lynch, Pierce, Fenner & Smith Incorporated et al.,
No. 01 Civ. 7035 (S.D.N.Y.) and Bryant v. Merrill Lynch, Pierce, Fenner & Smith
Incorporated et al., No. 01 Civ. 9184 (S.D.N.Y.).
On April 19, 2002, plaintiffs filed a consolidated amended class action
complaint in the Netro Litigation ("Complaint"). The Complaint alleges claims
against the Company arising under Section 11 of the Securities Act of 1933 ("33
Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"),
and Rule 10b-5 promulgated thereunder, and against the Individual Defendants
under Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act, and
Section 15 of the "33 Act. The claims allege various misconduct arising from the
Company's August 1999 initial public offering and March 2000 follow-on offering
of its
F-II-32
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock, including, among other things, that the disclosures made in
connection with the offerings were incomplete or misleading in various respects.
The allegations include, among other things, that the Company and the Individual
Defendants failed to disclose that the Underwriter Defendants: (1) charged the
Company excessive commissions and inflated transaction fees in violation of the
securities laws and regulations; and (2) allowed certain investors to take part
in the Company's initial public offering in exchange for promises that these
investors would purchase additional shares in the after-market for the purpose
of inflating and maintaining the market price of the Company's common stock. The
Complaint seeks to certify a class of shareholders who purchased the Company's
common stock between August 18, 1999 and December 6, 2000, and to recover
monetary damages from defendants in an unspecified amount, as well as
plaintiff's attorneys' fees and expenses in bringing the action.
On October 9, 2002, the claims against the Individual Defendants were
dismissed without prejudice on consent of the parties. In addition, counsel for
the plaintiffs, liaison counsel for the issuer defendants and counsel for
insurers of the issuer defendants have taken part in continuing discussions
mediated by a former federal district court judge to explore a possible
settlement of the claims against all of the issuer defendants in the IPO
Allocation Litigation, including the Company.
The IPO Allocation Litigation in general, and the Netro Litigation in
particular, are in an early phase, and no date has yet been set by the court for
completion of pre-trial discovery or trial. The Company believes the claims
asserted against it in the Netro Litigation are without merit, and Netro intends
vigorously to defend itself against those claims.
FCC KUWAIT LITIGATION. This matter involves a dispute regarding the
alleged improper draw down by the Company of a letter of credit opened by Future
Communications Company ("FCC") with the Bank of Kuwait and the Middle East in
Kuwait, and the alleged refusal by the Company to accept return by FCC of
certain equipment provided to FCC by the Company. At the January 15, 2003,
hearing, the Court ruled that Netro Corporation had not yet been properly
served. The case has been adjourned until May 2, 2003, at which time FCC will be
required to prove completed service of process or risk dismissal. The amount in
dispute is approximately $1,013,000 plus interest from December 31, 1999.
SOLECTRON ARBITRATION. On or around December 19, 2002, Solectron
California Corporation ("Solectron") demanded arbitration to resolve disputes
arising under its May 31, 1998 "Manufacturing Agreement" with Netro. Solectron's
principal claim is that during the third quarter of 2000, it purchased materials
on the basis of Netro's forecasts which were not followed by corresponding
orders. Solectron claims that as a result it now has an excess inventory of
materials which it cannot sell. Netro vigorously disputes the claims on the
ground that the acquisition of material had not been approved by Netro as
required by the agreement. The total claim, including the cost of materials and
asserted carrying charges, is approximately $14.5 million. The matter is set for
mediation which is scheduled to commence in the second quarter of 2003. Unless
the matter is resolved, arbitration will proceed thereafter before the American
Arbitration Association.
From time to time, the Company is involved in various legal proceedings in
the ordinary course of business. The Company is not currently involved in any
additional litigation which, in management's opinion, would have a material
adverse effect on its business, operating results, cash flows or financial
condition; however, there can be no assurance that any such proceeding will not
escalate or otherwise become material to the Company's business in the future.
8. EMPLOYEE BENEFIT PLAN:
The Company maintains an employee savings plan for all of its full-time
employees. This plan qualifies under Section 401(k) of the Internal Revenue Code
(the "Code"). The plan allows employees to make pre-tax contributions in
specified percentages up to the maximum dollar limitations prescribed by the
Code. The
F-II-33
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has the option to contribute to the plan, but has not made contributions
to date and, accordingly, has not recorded any expense in the consolidated
statement of operations related to the plan.
9. CAPITAL STOCK:
PUBLIC OFFERING
On March 17, 2000, the Company completed a public offering for the sale of
6,000,000 shares of common stock at a price of $82.50 per share. Of the
6,000,000 shares offered, the Company sold 4,504,111 shares and selling
shareholders sold 1,495,889 shares. The offering resulted in net proceeds to the
Company of $352.3 million.
TENDER OFFER
In August 2002, the Company purchased 23,000,000 shares or approximately 38
percent of its then outstanding common stock at $3.50 per share pursuant to
terms and subject to the conditions set forth in the Offer to Purchase, dated
July 19, 2002, and the related letter of transmittal. The Company conducted the
tender offer through a procedure commonly referred to as a "Dutch auction." This
procedure allowed each stockholder to select the price within a per-share price
range of $4.00 to $3.50 at which such stockholder was willing to sell shares to
the Company. Stockholders alternatively could tender shares at the price
determined in the tender offer. The purchase price paid by the Company for each
share was determined in accordance with the Dutch auction procedures to be the
lowest price at which, based on the number of shares tendered and the prices
specified by the tendering stockholders, the Company could purchase 23,000,000
shares, or such lesser number of shares as were properly tendered. All shares
purchased under the tender offer received the same purchase price. Due to over
subscription of the tender offer, shares tendered at $3.50 per share and shares
tendered by stockholders who indicated that they were willing to accept whatever
price was determined in the offer were accepted for purchase on a pro-rata basis
using a pro-ration factor of approximately 73.9 percent. The aggregate purchase
price paid was $80.5 million. In addition, fees and expenses related to the
tender offer totaled approximately $2.3 million and were recorded as a reduction
of stockholders' equity.
CAPITAL STOCK
The Company's capital stock is divided into two classes: Common Stock and
Preferred Stock.
At December 31, 2002, 4,668,447 shares of Common Stock were reserved for
issuance, including 4,154,576 shares for issuance under the Company's stock
option plans, 28,278 shares issuable upon the exercise of warrants to purchase
Common Stock and 485,593 shares issuable under the Company's employee stock
purchase plan.
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock. The Board of Directors will have the authority, without any
further vote or action by the stockholders:
- to issue the undesignated preferred stock in one or more series.
- to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly
unissued series of undesignated preferred stock; and
- to fix the number of shares constituting any series and the designation
of that series.
The rights of the holders of the common stock are subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future.
F-II-34
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCKHOLDER RIGHTS PLAN
In July 2001, the Company adopted a stockholder rights plan. This plan was
amended and restated in July 2002. As a part of the plan, the Company declared a
dividend distribution of one right for each outstanding share of common stock to
stockholders of record as of August 16, 2001. Each right entitles the holder to
purchase one unit consisting of one one-hundredth of a share of a new series of
participating preferred stock at an initial purchase price of $20.00 per unit.
If a person or group acquires 15 percent or more of the Company's outstanding
common stock, holders of the rights (other than the person or group triggering
their exercise) will be able to purchase, in exchange for the $20.00 exercise
price, shares of the Company's common stock having twice the value of the
exercise price. If, following an acquisition of 15 percent or more of the
Company's common stock by a stockholder, the Company is involved in certain
mergers or other business combinations each right will entitle the holder to
purchase, in exchange for the exercise price, common stock of the other party to
such transaction having twice the value of the exercise price. Holders who, as
of the date of adoption of the plan, already held more than 15 percent of the
Company's common stock will not trigger any rights under the plan so long as
neither they nor their affiliates or associates acquire more than 19.9 percent
of the Company's common stock. The rights expire on July 23, 2011 unless
extended by the Company's Board of Directors.
The Carso Global Group is specifically excluded from the definition of an
"Acquiring Person" in the plan in cases in which, as a result of any acquisition
of shares of common stock by the Company which, by reducing the number of shares
of common stock outstanding, increase the proportionate number of shares of
common stock beneficially owned by the Carso Global Group to 19.9 percent or
more of the shares of common stock then outstanding. If, however, the Carso
Global Group shall thereafter become the beneficial owner of any additional
shares of common stock (other than pursuant to a dividend or distribution paid
or made by the Company on the outstanding common stock, or pursuant to a split
or subdivision of the outstanding common stock,) then the Carso Global Group
shall be deemed to be an "Acquiring Person" unless, upon becoming the beneficial
owner of such additional shares of common stock, the Carso Global Group does not
beneficially own 19.9 percent or more of the shares of common stock then
outstanding.
STOCK OPTION PLANS
2000 Non-Executive Stock Incentive Plan
The 2000 Non-executive Stock Incentive Plan (the "2000 Plan") was adopted
by the Board of Directors in January 2000 and, unless terminated earlier by the
Board of Directors, will terminate in January 2010. It did not require
stockholder approval. The 2000 Plan provides for the grant of nonstatutory stock
options and restricted stock to non-executive employees and consultants of the
Company. The purposes of the 2000 Plan are: to attract and retain the best
available personnel; to provide additional incentives to non-executive employees
and consultants; and to promote the success of the Company. The Company has
reserved 5,700,000 shares for issuance under the 2000 Plan, of which 1,746,436
shares remained available for future grants as of December 31, 2002. To date, no
options have been granted to non-employees under this plan.
The compensation committee currently administers the 2000 Plan. The
administrator of the plan determines the terms of the awards, including: the
number of shares subject to options or restricted stock grants, provided that no
individual employee may receive option grants for more than 1,000,000 shares in
any fiscal year; vesting schedules, which are typically 1/4 after one year and
1/48 per month thereafter; exercise prices, which must be at least 85 percent of
the fair market value of Netro's common stock; the term of the options, which
may not exceed ten years; and the transferability of the options, which are
generally non-transferable other than by will or the laws of descent or
distribution, unless otherwise determined by the administrator. Only
nonstatutory stock options are granted under the 2000 Plan. Executive officers
of the Company may not receive grants under the plan.
F-II-35
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event of a change of control of the Company, outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The Company's Board of Directors
may amend, modify or terminate the 2000 Plan if the amendment, modification or
termination does not impair vesting rights of the plan participants.
1999 Executive Stock Plan
The 1999 Executive Stock Plan (the "1999 Plan") was adopted by the Board of
Directors in April 1999 and approved by the stockholders in May 1999. A total of
1,195,000 shares of common stock has been reserved for issuance under the 1999
Plan, of which 288,022 shares remained available for future option grants as of
December 31, 2002. Unless terminated earlier, the 1999 Plan will terminate in
April 2009. The 1999 Plan does not impose an annual limitation on the number of
shares subject to options that may be issued to any individual employee.
The terms of options issued under the 1999 Plan are generally the same as
those that may be issued under the 1996 Stock Option Plan. However, all options
granted under the 1999 Plan may be exercised immediately after the grant date,
subject to the Company's right to repurchase at cost any shares that remain
unvested at the time of the optionee's termination of employment. Options
granted under the 1999 Plan generally vest at the rate of 1/4 of the total
number of shares subject to the options twelve months after the date of grant
and 1/48 of the total number of shares subject to the options each month
thereafter.
In the event of a change of control of the Company, outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The Company's Board of Directors
may amend, modify or terminate the 1999 Plan if the amendment, modification or
termination does not impair vesting rights of the plan participants.
1997 Directors' Stock Option Plan
The 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted
by the Board of Directors in December 1997, amended in June 1999, and further
amended in May 2000. A total of 300,000 shares of common stock has been reserved
for issuance under the Directors' Plan, of which options to purchase 13,750
shares remained available for future option grant as of December 31, 2002. Under
the Directors' Plan, as amended, each individual who first becomes a
non-employee director after the effective date of the amendment will receive an
automatic initial grant of an option to purchase 50,000 shares of common stock
upon appointment or election. Initial grants to non-employee directors will vest
in four equal annual installments. The Directors' Plan also provides for annual
grants of options to purchase 12,500 shares of common stock on the first day of
each fiscal year to each non-employee director who has served on the Board of
Directors for at least six months. The annual grants to non-employee directors
will vest in full on the fourth anniversary of the date of grant. The per share
exercise price of all stock options granted under the Directors' Plan must be
equal to the fair market value of a share of the Company's common stock on the
date of grant of the option. Options granted under the Directors' Plan have a
term of ten years. However, unvested options will terminate when the optionee
ceases to serve as a director and vested options will terminate if they are not
exercised within six months after the director's death or disability or within
90 days after the director ceases to serve as a director for any other reason.
In the event of a change of control of the Company, all options outstanding
under the Directors' Plan become vested and exercisable.
F-II-36
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 and 1996 Stock Option Plans
In December 1996, the Company established the 1996 Stock Option Plan (the
"1996 Plan"). All shares previously available for issuance under the Company's
1995 Stock Option Plan are reserved for issuance under the 1996 Plan. As of
December 31, 2002, 12,550,000 shares of Common Stock had been authorized for
issuance under the 1995 and 1996 Plan, of which 2,106,368 shares remained
available for future option grants. Under the 1996 Plan, the Company may grant
incentive stock options or nonstatutory stock options to employees, officers,
employee directors and consultants at an exercise price of not less than 100
percent of the fair market value of the Common Stock on the date of grant,
except that nonstatutory stock options may be granted at 85 percent of such fair
market value. As is the case with options granted under the 1999 Plan, the terms
of the options granted under the 1996 Plan are as determined by the
administrator and reflected in the option agreement. Options granted generally
become exercisable at a rate of 1/4 of the shares subject to the option at the
end of the first year and 1/48 of the shares subject to the option at the end of
each calendar month thereafter. However, at the discretion of the administrator,
the optionee may have the immediate right to exercise the option subject to a
restricted stock agreement that gives the Company the right to repurchase
unvested shares at the original issuance price in the event of termination of
employment. The maximum term of a stock option under the plans is ten years, but
if the optionee at the time of grant has voting power of more than 10 percent of
the Company's outstanding capital stock, the maximum term is five years. The
number of shares reserved for issuance under the 1996 Plan will be subject to an
automatic annual increase on the first day of each year beginning from 2001
through 2006 equal to the least of: (1) 1,500,000 shares, (2) 3 percent of
Netro's outstanding common stock on the last day of the immediately preceding
fiscal year, or (3) a lesser number of shares determined by the administrator.
In the event of a change of control of the Company, outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The Company's Board of Directors
may amend, modify or terminate the 1996 Plan if the amendment, modification or
termination does not impair vesting rights of the plan participants.
Cancel and Re-grant Program
In March 2001, the Company effected a plan, under which employees holding
options to purchase the Company's common stock with exercise prices in excess of
$34.00 per share could choose to cancel those stock option grants in exchange
for a commitment that options to purchase the same number of common shares would
be granted in October 2001, provided that the participant has not terminated
employment prior to such time (the "Cancel and Re-grant Program"). Options
granted under the Cancel and Re-grant Program have an exercise price equal to
the fair value of the Company's common stock on the date of the new grant, and
vest according to the original vesting terms, typically 1/4 after one year and
1/48 per month thereafter, beginning at the date of cancellation. All other
terms of options granted under the Cancel and Re-grant Program are substantially
the same as the cancelled options. On October 26, 2001, the Company granted
1,209,584 options to purchase the Company's common stock at the fair market
value of $3.07 per share in accordance with the Cancel and Re-grant Program.
F-II-37
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plan Summary
The following table summarizes option activity under the 2000 Plan, the
1999 Plan, the Directors' Plan and the 1995 and 1996 Stock Option Plans (the
"Plans"):
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
---------- ---------- --------------
Balance at December 31, 1999.................... 1,005,981 6,844,460 $ 7.178
Authorized...................................... 2,000,000 -- $ --
Granted......................................... (3,182,668) 3,182,668 $37.025
Exercised....................................... -- (1,905,062) $ 2.073
Terminated...................................... 771,848 (771,848) $18.347
Unvested shares repurchased..................... 15,626 -- --
---------- ----------
Balance at December 31, 2000.................... 610,787 7,350,218 $20.424
Authorized...................................... 3,750,000 -- $ --
Granted......................................... (4,590,782) 4,590,782 $ 5.210
Exercised....................................... -- (599,575) $ 2.293
Terminated...................................... 3,148,663 (3,148,663) $31.577
---------- ----------
Balance at December 31, 2001.................... 2,918,668 8,192,762 $ 8.945
Authorized...................................... 3,700,000 -- $ --
Granted......................................... (4,829,956) 4,829,956 $ 3.174
Exercised....................................... -- (380,070) $ 1.668
Terminated...................................... 2,365,864 (2,365,864) $ 7.140
---------- ----------
Balance at December 31, 2002.................... 4,154,576 10,276,784 $ 6.924
========== ==========
Shares of common stock issued pursuant to options granted under the 1995
and 1996 stock option plans that had not vested at the date of employee
termination were repurchased by the Company at cost, as reflected in the table
above as "unvested shares repurchased." The repurchased shares were cancelled
and returned to the pool of options available for grant.
F-II-38
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ----------------------------
REMAINING WEIGHTED NUMBER WEIGHTED
CONTRACTUAL AVERAGE VESTED AND AVERAGE
EXERCISE PRICES NUMBER LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ---------- ----------- -------------- ----------- --------------
$0.20 14,200 3.6 years $ 0.20 14,200 $ 0.20
$1.00-$1.50 34,105 4.0 years $ 1.47 34,105 $ 1.47
$1.85-$2.77 820,523 5.7 years $ 2.00 749,643 $ 2.00
$2.80-$3.84 6,292,922 8.6 years $ 3.20 1,470,894 $ 3.29
$4.50-$6.50 301,866 8.2 years $ 5.01 109,651 $ 4.71
$6.97-$8.00 1,502,855 7.1 years $ 7.67 891,045 $ 7.63
$14.50-$19.56 520,969 7.4 years $17.54 285,712 $17.54
$21.81-$28.00 218,450 7.4 years $24.91 146,289 $24.86
$34.31-$49.88 570,894 6.9 years $38.01 398,927 $37.68
---------- ---------
10,276,784 4,100,466
========== =========
SFAS NO. 123
The Company accounts for the Plans under APB No. 25; however, the Company
has computed, for pro forma disclosure purposes, the fair value of each option
grant on the date of grant using the Black-Scholes option valuation model with
the following assumptions:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Risk-free interest rate............. 2.96% - 4.64% 4.57% - 4.89% 5.72% - 6.68%
Average Expected Life of Option..... 4 years 4 years 4 years
Dividend Yield...................... 0% 0% 0%
Volatility of Common Stock.......... 67.1% 75.5% 157.5%
Weighted average fair value of
options granted during the year... $1.95 $8.72 $69.45
1999 EMPLOYEE STOCK PURCHASE PLAN
In June 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan was intended to qualify
under Section 423 of the Internal Revenue Code. A total of 1,500,000 shares of
common stock have been reserved for issuance under the Purchase Plan, of which
485,593 shares remained available for issuance at December 31, 2002. The number
of shares reserved for issuance under the Purchase Plan is subject to an
automatic annual increase on the first day of each of 2002 through 2005 equal to
the least of: (1) 250,000 shares, (2) 1 percent of the outstanding common stock
on the last day of the immediately preceding fiscal year, or (3) a lesser number
of shares determined by the administrator. The price of shares purchased under
the plan will be equal to 85 percent of the fair market value of the Common
Stock on the first day of the offering period or the last day of the purchase
period, whichever is lower.
In the event of certain corporate transactions, if the surviving
corporation does not agree to assume the plan, the offering period will be
shortened and employees will be entitled to purchase the number of shares then
allowable under the Purchase Plan.
F-II-39
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of purchase rights granted under the Employee Stock Purchase
Plan is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Risk-free interest rate............. 1.69% - 2.33% 3.47% - 5.01% 5.89% - 6.31%
Average expected life of option..... 0.5 years 0.5 years 0.5 years
Dividend yield...................... 0% 0% 0%
Volatility of Common Stock.......... 67.1% 75.5% 157.5%
Weighted average fair value of
purchase rights granted during the
year under the Purchase Plan...... $1.00 $5.19 $21.55
DEFERRED STOCK COMPENSATION
In connection with the grant of stock options to purchase 2,338,550 shares
of common stock with a weighted average exercise price of $2.84 per share to
employees during 1998 and 1999, the Company recorded deferred compensation of
$4,834,000, representing the difference between the estimated fair value of the
common stock and the aggregate option exercise price of such options at the date
of grant. This amount was presented as a reduction of stockholders' equity and
is being amortized ratably over the vesting period of the applicable options
(generally four years). Amortization expense related to deferred stock
compensation was $612,000, $857,000 and $1,064,000 in 2002, 2001 and 2000,
respectively. Compensation expense is decreased in the period of forfeiture for
any accrued but unvested compensation arising from the early termination of an
option holder's services.
WARRANTS
In connection with the Company's capital lease financing arrangements, the
Company issued warrants to its lessors as follows:
YEAR SHARE EXERCISE
CLASS OF STOCK GRANTED AMOUNT PRICE
-------------- ------- ------ --------
Series C Preferred Stock................................... 1997 28,750 $7.00
Series D Preferred Stock................................... 1998 8,997 $7.78
Series D Preferred Stock................................... 1999 19,281 $7.78
Warrants to purchase 23,750 shares at $7.00 per share expired in June 2002.
Warrants to purchase 5,000 shares at $7.00 per share expired in September 2002.
Warrants to purchase 8,997 shares at $7.78 per share will expire in February
2003. Warrants to purchase 19,281 shares at $7.78 per share will expire in March
2006. The fair value of the warrants was estimated at the date of grant using
the Black-Scholes model and the value was determined to be immaterial.
All of the outstanding warrants to purchase Preferred Stock were converted
upon completion of the Company's initial public offering into warrants to
purchase shares of Common Stock on a one for one basis. As of December 31, 2002,
none of these warrants had been exercised.
10. INCOME TAXES:
The Company uses an asset and liability based approach in accounting for
income taxes. Deferred income tax assets and liabilities are recorded to reflect
the tax consequences on future years of temporary differences of revenue and
expense items for financial statement and income tax purposes. Valuation
allowances are provided against assets that are not likely to be realized.
F-II-40
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Netro has incurred a net loss for each period since inception. Recorded
income taxes for 2002 and 2001 represent taxes paid by the Company's foreign
subsidiaries. The provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate of 35
percent to loss before income taxes as follows:
YEARS ENDED
DECEMBER 31,
--------------------
2002 2001 2000
---- ---- ----
Federal statutory rate...................................... (35)% (35)% (35)%
State taxes, net of federal benefit......................... (6) (6) (6)
Foreign taxes............................................... (0) (0) (0)
Change in valuation allowance............................... 41 41 41
--- --- ---
--% --% --%
=== === ===
The major components of the net deferred tax asset were as follows (in
thousands):
DECEMBER 31,
-------------------
2002 2001
--------- -------
Net operating losses:
Federal................................................... $ 86,955 $60,542
State..................................................... 6,186 3,779
Tax credit carryforwards.................................... 9,358 9,186
Cumulative temporary differences:
Reserves.................................................. 9,723 13,590
Research and development costs............................ 5,745 3,915
Start-up costs............................................ 508 508
Acquired intangibles...................................... 9,276 --
Other..................................................... 8,718 4,943
--------- -------
Total deferred tax asset............................... 136,469 96,463
Valuation allowance......................................... (136,469) (96,463)
--------- -------
Net deferred tax asset................................. $ -- $ --
========= =======
The Company has established a valuation allowance for the total deferred
tax asset because, given the Company's limited operating history and accumulated
deficit, it is uncertain that the deferred tax asset will be realized.
As of December 31, 2002, the Company had Federal and state net operating
loss carry forwards of approximately $248,444,000 and $103,102,000,
respectively. The Company's net operating loss carry forwards expire at various
dates through 2023. Under current tax law, the net operating loss and tax credit
carry forwards available for use in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interest.
11. SEGMENT REPORTING:
The Company is organized and operates as one operating segment: the design,
development, manufacturing, marketing and selling of broadband wireless
point-to-multipoint access systems.
The Company sells its products indirectly through OEMs and local resellers
in addition to through a direct sales force. Netro generally offers installation
and maintenance services through its system integration
F-II-41
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
partners and third-party installation and support organizations. Revenue by
geography based on sales to original customers was as follows:
PERCENTAGE OF
REVENUES TOTAL REVENUES
--------------------------- ------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ---- ---- ----
Latin America................................. $ 1,815 $ 9,872 $ 6,661 11% 42% 10%
Europe........................................ 12,998 6,028 1,447 76 25 2
Middle East................................... 471 482 40 3 2 --
Asia.......................................... 910 468 192 5 2 --
------- ------- ------- --- --- ---
International................................. 16,194 16,850 8,340 95 71 12
United States................................. 913 6,809 60,187 5 29 88
------- ------- ------- --- --- ---
$17,107 $23,659 $68,527 100% 100% 100%
======= ======= ======= === === ===
Substantially all of the Company's domestic revenues are related to
products sold to OEMs. In the past, these OEMs have typically resold these
products to end users in international locations. However, for the year ended
December 31, 2002, a significant portion of Netro's domestic revenues were
related to products sold to end users in the United States.
Countries that accounted for more than 10 percent of revenues during 2002
based on to the location of our original customers were as follows:
REVENUES PERCENT
-------- -------
Poland...................................................... $4,143 24%
France...................................................... $2,039 12%
Spain....................................................... $1,711 10%
12. RESTRUCTURING AND ASSET IMPAIRMENT:
FIRST QUARTER 2002 RESTRUCTURING AND ASSET IMPAIRMENT
In the first quarter of 2002, the Company incurred $1.8 million in
restructuring charges related to various initiatives undertaken by the Company
to reduce its cost structure. The Company closed Bungee Communications, Inc.,
the Company's Israeli engineering entity, and reduced its workforce in its San
Jose, California headquarters location. The charges included the termination of
approximately 54 employees (50 research and development employees, 3 sales and
marketing employees and 1 general and administrative employee), the termination
of the Bungee office lease and the write down of assets associated with the
Bungee operations. The following table summarizes the activity related to the
first quarter restructuring charges for the year ended December 31, 2002 (in
thousands):
REMAINING
RESTRUCTURING AMOUNTS PAID/ LIABILITY AT
CHARGES WRITTEN-OFF DECEMBER 31, 2002
------------- ------------- -----------------
Impairment of assets....................... $ 797 $ (797) --
Severance.................................. 763 (763) --
Lease and other expense.................... 265 (265) --
------ ------- ----
Total...................................... $1,825 $(1,825) --
====== ======= ====
F-II-42
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THIRD QUARTER 2002 RESTRUCTURING AND ASSET IMPAIRMENT
In the third quarter of 2002, the Company incurred $2.0 million in
restructuring charges to further reduce its cost structure. The Company reduced
its worldwide workforce by approximately 68 employees (43 research and
development employees, 13 sales and marketing employees and 12 general and
administrative employees) and wrote down certain fixed assets. The following
table summarizes the activity related to the third quarter restructuring charges
for the year ended December 31, 2002 (in thousands):
REMAINING
RESTRUCTURING AMOUNTS PAID/ LIABILITY AT
CHARGES WRITTEN-OFF DECEMBER 31, 2002
------------- ------------- -----------------
Impairment of assets....................... $ 117 $ (117) --
Severance.................................. 1,883 (1,883) --
------ ------- ----
Total...................................... $2,000 $(2,000) --
====== ======= ====
FOURTH QUARTER 2002 RESTRUCTURING
In the fourth quarter of 2002, the Company incurred $4.3 million in
restructuring charges to further reduce its cost structure. The Company reduced
its worldwide workforce by approximately 110 employees (80 research and
development employees, 21 sales and marketing employees and 9 general and
administrative employees), closed two sales offices and wrote down certain fixed
assets. The following table summarizes the activity related to the fourth
quarter restructuring charges for the year ended December 31, 2002 (in
thousands):
REMAINING
RESTRUCTURING AMOUNTS PAID/ LIABILITY AT
CHARGES WRITTEN-OFF DECEMBER 31,2002
------------- ------------- -----------------
Impairment of assets....................... $ 154 $ (154) --
Severance.................................. 4,100 (3,429) $671
------ ------- ----
Total...................................... $4,254 $(3,583) $671
====== ======= ====
The remaining liability relates to severance charges and is expected to be
paid in the first quarter of 2003.
13. ACQUISITION OF ASSETS:
On February 12, 2002, the Company acquired AT&T Wireless' fixed wireless
development team, a license to intellectual property, inventory, equipment and
proprietary software assets. The technology was originally developed under the
code name "Project Angel". The acquisition was accounted for as a purchase of
assets. The purchase price was allocated based on the estimated fair value of
the assets acquired. The purchase consideration was approximately $48.8 million,
consisting of 8.2 million shares of the Company's common stock, valued at
approximately $29.5 million, approximately $16.0 million in cash and transaction
costs of approximately $3.3 million.
A total of $45.7 million of the purchase consideration was allocated to
intangible assets, including $24.9 million of developed and core technology,
$17.6 million of in-process research and development costs, and $3.2 million of
other intangibles, which include the acquired workforce. The remaining $3.1
million of purchase consideration was allocated to fixed assets ($2.5 million)
and inventory ($0.6 million). Acquired in-process research and development costs
represent research and development projects relating to expanding product
capacity. These projects had not yet reached technological feasibility and,
accordingly, this amount was expensed in the first quarter of 2002. The value of
acquired in-process technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related product revenues. This
analysis was conducted by an independent appraisal firm based on management's
forecast of future revenues, cost of
F-II-43
NETRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues, and operating expenses related to the purchased technologies. The
intangible assets are being amortized over an estimated useful life of three
years based on the product life cycle of the acquired technology.
14. SUBSEQUENT EVENT (UNAUDITED):
On March 27, 2003, Netro Corporation entered into a merger agreement with
SR Telecom Inc. Under the merger agreement, and subject to the conditions
therein (1) Netro will declare and pay a dividend of $100 million, to be
distributed among its stockholders on a pro rata basis and (2) a subsidiary of
SR Telecom will merge with and into Netro and Netro will become a wholly-owned
subsidiary of SR Telecom, in exchange for an aggregate of 41.5 million shares of
SR Telecom common stock, which will be distributed among Netro's stockholders on
a pro rata basis. The transaction is subject to certain conditions, including
approval by Netro's stockholders.
F-II-44
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma condensed consolidated financial
information gives pro forma effect to an agreement and plan of merger of Norway
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
SR Telecom Inc. ("SR Telecom"), with and into Netro Corporation ("Netro"),
pursuant to which SR Telecom will acquire Netro. This financial information was
prepared from, and should be read in conjunction with, the historical
consolidated financial statements, including applicable notes thereto included
elsewhere in this proxy statement/prospectus of SR Telecom and of Netro.
The unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 2002 and three months ended March 31, 2003,
respectively, give effect to the transaction as if it had occurred on January 1,
2002.
The unaudited pro forma condensed consolidated balance sheet as at March
31, 2003 gives effect to the transaction as if it had occurred on that date.
The unaudited pro forma condensed consolidated financial information was
prepared for illustrative purposes only. This information does not purport to
represent what the actual results of operations or financial position of SR
Telecom would have been if the merger had actually occurred on the dates assumed
and does not necessarily indicate what SR Telecom's future operating results or
consolidated financial position will be.
The unaudited pro forma condensed consolidated financial information was
prepared in accordance with Canadian generally accepted accounting principles
(GAAP), which differs in certain material respects from U.S. GAAP. Note 25 to
the SR Telecom consolidated financial statements for the three months ended
March 31, 2003 and for the year ended December 31, 2002, included elsewhere in
this proxy statement/ prospectus describe the principal differences between
Canadian GAAP and U.S. GAAP as they relate to SR Telecom. The notes to the
unaudited pro forma condensed consolidated financial information present
material adjustments to pro forma consolidated net loss and pro forma
consolidated shareholders' equity which would be required if U.S. GAAP had been
applied.
The merger will be accounted for using the purchase method of accounting
under both Canadian and U.S. GAAP.
The historical financial statements of Netro were prepared in accordance
with U.S. GAAP. For purposes of presenting the unaudited pro forma condensed
consolidated financial information, the historical financial information
relating to Netro was adjusted to include unaudited adjustments to conform
Netro's historical financial information with SR Telecom's disclosed accounting
policies under Canadian GAAP as described in the notes to the unaudited pro
forma condensed consolidated financial information.
The pro forma adjustments presented in the unaudited pro forma condensed
consolidated financial information give effect to estimates made by SR Telecom's
management and assumptions that it believes to be reasonable. The unaudited pro
forma condensed consolidated financial information does not take into account
any synergies or cost savings which may or are expected to occur as a result of
the merger. [See "The Merger--SR Telecom's reasons for the Merger" and "Netro's
reasons for the Merger."]
F-III-1
SR TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2003
(UNAUDITED)
NETRO PRO FORMA PRO FORMA
SR TELECOM CORPORATION PRO FORMA ADJUSTMENTS SR TELECOM SR TELECOM
---------- ----------- ------------------------ ---------- -------------
(NOTE 3) (NOTE 2(IV)) (NOTE 2(IV))
$ (CDN) $ (CDN) $ (CDN) $ (CDN) $ (US)
(TABULAR AMOUNTS IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents...... 9,367 47,060 -- -- 56,427 38,399
Marketable securities.......... 17,502 94,778 (82,635) -- 29,645 20,174
Accounts receivable............ 64,717 2,704 -- -- 67,421 45,880
Inventories.................... 38,813 9,306 833 -- 48,952 33,312
Prepaid expenses and other
current assets............... 7,949 7,361 -- -- 15,310 10,418
------- ------- -------- -------- ------- -------
138,348 161,209 (81,802) -- 217,755 148,183
Long-term marketable
securities..................... -- 64,315 (64,315) -- -- --
Restricted cash deposits......... -- 9,445 -- -- 9,445 6,427
Long-term accounts receivable.... 22,634 -- -- -- 22,634 15,402
Fixed assets..................... 90,989 13,090 (7,208) (743) 96,128 65,415
Other assets..................... 38,950 3,180 -- (877) 41,253 28,073
Intangible assets................ -- 42,953 (33,653) (2,565) 6,735 4,584
------- ------- -------- -------- ------- -------
290,921 294,192 (186,978) (4,185) 393,950 268,084
======= ======= ======== ======== ======= =======
LIABILITIES
Current liabilities
Bank indebtedness.............. 5,000 -- -- -- 5,000 3,402
Accounts payable............... 19,177 1,978 -- -- 21,155 14,396
Accrued liabilities and other
current liabilities.......... 38,163 30,280 42,317 -- 110,760 75,373
Current portion of long-term
debt and capital leases...... 6,012 -- -- -- 6,012 4,091
------- ------- -------- -------- ------- -------
68,352 32,258 42,317 -- 142,927 97,262
Long-term debt and other
long-term liabilities.......... 126,767 441 -- -- 127,208 86,566
------- ------- -------- -------- ------- -------
195,119 32,699 42,317 -- 270,135 183,828
Shareholders' equity............. 95,802 261,493 28,013 (261,493) 123,815 84,256
------- ------- -------- -------- ------- -------
290,921 294,192 70,330 (261,493) 393,950 268,084
======= ======= ======== ======== ======= =======
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
F-III-2
SR TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
NETRO PRO FORMA PRO FORMA
SR TELECOM CORPORATION PRO FORMA ADJUSTMENTS SR TELECOM SR TELECOM
---------- ----------- ----------------------- ---------- -------------
(NOTE 3) (NOTE 2 (IV))
$ (CDN) $ (CDN) $ (CDN) (NOTE) $ (CDN) $ (US)
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUE....................... 29,601 3,240 -- 32,841 22,348
Cost of revenue............... 13,987 2,532 (136) 2 (iv)(6) 16,383 11,148
------ ------- ------ ------- -------
Gross profit.................. 15,614 708 136 16,458 11,200
------ ------- ------ ------- -------
Operating expenses
Research and development,
net...................... 5,379 6,470 (652) 2 (iv)(6) 11,197 7,620
Selling, general and
administrative........... 17,235 9,144 (305) 2 (iv)(6) 26,074 17,743
Amortization of acquired
intangibles.............. -- 5,602 (5,041) 2 (iv)(6) 561 382
------ ------- ------ ------- -------
Total operating expenses...... 22,614 21,216 (5,998) 37,832 25,745
------ ------- ------ ------- -------
Loss from operations.......... (7,000) (20,508) 6,134 (21,374) (14,545)
Other (expense) income, net... (2,640) 1,180 (551) 2 (iv)(2) (2,011) (1,368)
------ ------- ------ ------- -------
Loss before income tax........ (9,640) (19,328) 5,583 (23,385) (15,913)
Income tax recovery
(expense)................... 2,959 (9) -- 2,950 2,007
------ ------- ------ ------- -------
NET LOSS...................... (6,681) (19,337) 5,583 (20,435) (13,906)
====== ======= ====== ======= =======
Basic and diluted loss per
share....................... (0.12) (0.21) (0.14)
====== ======= =======
Basic and diluted weighted
average number of common
shares outstanding.......... 55,228 41,500 96,728 96,728
====== ====== ======= =======
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
F-III-3
SR TELECOM INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(UNAUDITED)
NETRO PRO FORMA PRO FORMA
SR TELECOM CORPORATION PRO FORMA ADJUSTMENTS SR TELECOM SR TELECOM
---------- ----------- ----------------------- ---------- -------------
(NOTE 3) (NOTE) (NOTE 2 (IV))
$ (CDN) $ (CDN) $ (CDN) $ (CDN) $ (US)
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUE......................... 196,903 25,139 -- 222,042 151,100
Cost of revenue................. 89,316 25,227 (583) 2 (iv)(6) 113,960 77,550
------- -------- ------- -------- -------
Gross profit.................... 107,587 (88) 583 108,082 73,550
------- -------- ------- -------- -------
Operating expenses
Research and development,
net......................... 21,336 41,106 (3,048) 2 (iv)(6) 59,394 40,417
Selling, general and
administrative.............. 83,464 51,560 (1,012) 2 (iv)(6) 134,012 91,196
Amortization of acquired
intangibles................. -- 18,675 (16,432) 2 (iv)(6) 2,243 1,526
Restructuring and asset
impairment charges.......... 4,912 11,872 -- 16,784 11,422
------- -------- ------- -------- -------
Total operating expenses........ 109,712 123,213 (20,492) 212,433 144,561
------- -------- ------- -------- -------
Loss from operations............ (2,125) (123,301) 21,075 (104,351) (71,011)
------- -------- ------- -------- -------
Other income, net
Loss on change in ownership in
subsidiary company.......... (3,974) -- -- (3,974) (2,704)
Other income (expense)........ (14,534) 9,734 (2,204) 2 (iv)(2) (7,004) (4,766)
------- -------- ------- -------- -------
Total other income (expense),
net........................... (18,508) 9,734 (2,204) (10,978) (7,470)
------- -------- ------- -------- -------
Loss before income tax.......... (20,633) (113,567) 18,871 (115,329) (78,481)
Income tax expense.............. (252) (151) -- (403) (274)
------- -------- ------- -------- -------
Net loss........................ (20,885) (113,718) 18,871 (115,732) (78,755)
======= ======== ======= ======== =======
Basic and diluted loss per
share......................... (0.38) (1.20) (0.82)
======= ======== =======
Basic and diluted weighted
average number of common
shares outstanding............ 54,729 41,500 96,229 96,229
======= ======= ======== =======
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
F-III-4
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated balance sheet and condensed
consolidated statement of operations have been prepared to give effect to the
proposed merger between Netro and SR Telecom, through a wholly owned subsidiary
of SR Telecom.
SR Telecom will account for the merger as a purchase under both Canadian
and U.S. GAAP. The unaudited pro forma condensed consolidated financial
statements have been prepared on this basis.
The unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 2002 has been prepared by management of SR Telecom
from the audited consolidated financial statements of SR Telecom for the year
ended December 31, 2002 and of Netro for the year ended December 31, 2002,
included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed consolidated balance sheet and statement
of operations as at and for the three-months ended March 31, 2003 have been
prepared by SR Telecom management from the unaudited consolidated financial
statements of SR Telecom for the three months ended March 31, 2003, and of Netro
for the three months ended March 31, 2003, included elsewhere in this proxy
statement/prospectus.
This unaudited pro forma condensed consolidated financial information and
notes thereto do not purport to represent what SR Telecom's results of
operations or financial condition would actually have been had this transaction
in fact occurred on such dates or to project SR Telecom's results of operations
or financial condition for any future date or period. This unaudited pro forma
condensed consolidated financial information should be read in conjunction with
the historical consolidated financial statements and notes thereto of SR Telecom
and Netro included elsewhere in this proxy statement/prospectus.
2. SIGNIFICANT ASSUMPTIONS AND ADJUSTMENTS
In the preparation of the unaudited pro forma condensed consolidated
financial information, the following significant assumptions and adjustments
have been made:
(i) The unaudited pro forma condensed consolidated balance sheet at
March 31, 2003, gives effect to the transaction discussed in Note 1 above
as if it had occurred on March 31, 2003. The unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 2002
and three months ended March 31, 2003, give effect to the transaction as if
it had occurred on January 1, 2002.
(ii) Netro presents its financial statements in U.S. dollars and U.S.
GAAP. Solely for convenience, the financial statement information of Netro,
as adjusted and restated to conform with SR Telecom's accounting policies
applied under Canadian GAAP (see Note 3), has been translated into Canadian
dollars. This was done using a rate of $(Cdn) 1.4695 to $(US) 1.00 for
purposes of the translation of the December 31, 2002 and March 31, 2003,
unaudited pro forma condensed consolidated financial information, which was
the noon buying rate in New York City on March 31, 2003.
These translations should not be construed as a representation that the
U.S. dollar amounts actually represent, or could be converted into Canadian
dollars at the rates indicated.
(iii) The unaudited pro forma condensed consolidated financial
information records the merger using the purchase method, with the excess
of the estimated fair value of net assets acquired over the fair value of
the consideration as a reduction of fixed, other and intangible assets.
The unaudited pro forma condensed financial information assumes that SR
Telecom will issue 41,500,000 common shares of SR Telecom, in exchange for
all of the issued and outstanding common stock of Netro. The purchase price
assumed of $0.68 per common share, is based upon SR Telecom's
F-III-5
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
common shares weighted average trading price on the TSE for the two days
before and two days after the announcement date of March 27, 2003.
Pursuant to the merger, each outstanding option to purchase shares of Netro
under any stock option plan or arrangement of Netro, whether or not vested,
shall be terminated.
The total purchase consideration for purposes of the unaudited pro forma
condensed consolidated financial information includes professional fees,
integration and restructuring costs related to the acquisition of
approximately Cdn$33,110,000. Integration and restructuring costs are
comprised of Netro employee termination and lease cancellation payments
aggregating approximately Cdn$29,892,000. In addition, SR Telecom is
indemnifying and holding harmless the directors and officers of Netro for a
period of six years. Also, as part of the merger, immediately prior to the
closing of the proposed merger, Netro will issue a cash dividend of US$100
million to its shareholders.
(iv) SR Telecom presents its financial statements in Canadian dollars.
Solely for convenience, the pro forma consolidated financial information of
SR Telecom has been translated into U.S. dollars. This was done using a
rate of $(Cdn) 1.4695 to $(US) 1.00 for purposes of the translation of the
December 31, 2002 and March 31, 2003, unaudited pro forma condensed
consolidated financial information, which was the noon buying rate in New
York City on March 31, 2003.
These translations should not be construed as a representation that the
Canadian dollar amounts actually represent, or could be converted into U.S.
dollars at the rates indicated.
The merger is accounted for using the purchase method of accounting
under both Canadian and U.S. GAAP. SR Telecom has been identified as the
acquiring entity as a result of the following:
- SR Telecom will be issuing common shares to effect the acquisition,
- Following the merger, no shareholders of Netro will hold a minority
interest larger than the most significant shareholder of SR Telecom prior
to the merger,
- Following the merger, Netro will be a wholly-owned subsidiary of SR
Telecom,
- The shareholders of SR Telecom prior to merger will have the majority of
the voting common shares of the merged company,
- The majority of the board of director will be representatives of SR
Telecom shareholders prior to the merger, and
- Following the merger, SR Telecom senior management will dominate.
A preliminary allocation of the purchase price to the estimated fair value
of net assets acquired has been performed for purposes of the unaudited pro
forma condensed consolidated financial information based on initial appraisal
estimates and other valuation studies which are in process and which SR Telecom
believes are reasonable. The final allocation is subject to completion of these
studies, which is expected to be within the next twelve months and may result in
the purchase price being allocated to other identifiable intangible assets.
F-III-6
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
A summary of the preliminary allocation of the total purchase consideration, in
accordance with Canadian GAAP, is presented below:
$ (CDN)
--------------
(IN THOUSANDS)
Purchase consideration:
Share consideration (Note 2 (iii))........................ 28,013
Acquisition costs (net of income taxes of $1,514,000)
(Note 2 (iii))......................................... 3,218
Integration and restructuring costs (Note 2 (iii))........ 29,892
Fair value of guarantee(1)................................ 4,400
--------
65,523
--------
Estimated fair value of net assets acquired:
Book value of net assets acquired (Note 3)................ 261,493
Dividend to be paid prior to closing(2)................... (146,950)
Estimated Netro acquisition costs(3)...................... (4,807)
Fair value adjustments to Netro net book value for:
Inventory................................................. 833
Fixed assets.............................................. (7,208)
Intangible assets......................................... (33,653)
--------
69,708
--------
Excess of estimated fair value of net assets acquired over
purchase consideration (negative goodwill)(4)............. (4,185)
========
---------------
(1) Fair value of guarantee
Pursuant to the merger agreement, the Corporation has agreed to indemnify
and hold harmless each present and former director of Netro for a period of
six years after the date of closing of the transaction. As a result, the
fair value of this guarantee is a component of the total purchase
consideration.
(2) It was assumed that the funds required for the payment of the $146,950,000
dividend (US$100 million) (see Note 2 (iii)) would be generated from the
liquidation of marketable securities and long-term marketable securities.
Accordingly, the marketable securities and long-term marketable securities
have been reduced by $82,635,000 and $64,315,000, respectively, for a total
of $146,950,000. The estimated impact of the reduced marketable securities,
as a result of the cash dividend to be paid by Netro prior to the closing of
the transaction, has been reflected as a decrease to other income, as of
January 1, 2002.
(3) In connection with the proposed merger, Netro is expecting to incur
incremental costs directly related to the transaction in the estimated
amount of $4,807,000. Such costs are comprised of professional fees to be
paid to financial advisors, accountants and lawyers, and other professionals
in the amounts of $3,669,000, $881,000 and $257,000, respectively.
(4) The negative goodwill is recorded as a reduction of fixed assets not to be
disposed of by sale, other assets and intangible assets, on a pro rata
basis. As part of the integration and restructuring of Netro, fixed assets
with an estimated fair value of $3,187,000 will be disposed of by sale after
the close of the transaction.
F-III-7
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(5) The following table presents the summary of pro forma adjustments described
above to the condensed consolidated balance sheet:
$ (CDN)
--------------
(IN THOUSANDS)
Reduction in current marketable securities.................. (82,635)
Increase the fair value of Netro inventory.................. 833
Reduction in long-term marketable securities................ (64,315)
Reduction in fair value of Netro fixed assets............... (7,208)
Reduction in fair value of Netro intangible assets.......... (33,653)
SR Telecom acquisition costs (net of income taxes of
$1,514,000)............................................... (3,218)
SR Telecom integration and restructuring costs.............. (29,892)
Fair value of guarantee..................................... (4,400)
Estimated Netro acquisition costs........................... (4,807) (42,317)
-------
Allocation of negative goodwill
Fixed assets.............................................. (743)
Other assets.............................................. (877)
Intangible assets......................................... (2,565) (4,185)
-------
SR Telecom share consideration.............................. (28,013)
--------
(261,493)
========
(6) As described above, the carrying value of the fixed assets, other assets and
intangible assets have been decreased for the fair value adjustments and
allocation of negative goodwill. Accordingly, because the carrying value of
the fixed assets, other assets and intangible assets has been decreased, the
related depreciation and amortization of these assets is also adjusted. The
resulting decrease in depreciation and amortization is allocated to the
various costs and expenses in the pro forma condensed consolidated statement
of operations as follows:
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
$ (CDN)
(IN THOUSANDS)
Cost of revenue............................................. 136 583
Research and development, net............................... 652 3,048
Selling, general and administrative......................... 305 1,012
Amortization of acquired intangibles........................ 5,041 16,432
Netro presents its financial statements in U.S. dollars and U.S. GAAP.
Solely for convenience, for purposes of the financial information of Netro, as
adjusted and restated to conform with SR Telecom's accounting policies applied
under Canadian GAAP and used in the preparation of the unaudited pro forma
condensed consolidated financial information for the year ended December 31,
2002 and as at and for the three-month period ended March 31, 2003, have been
translated into Canadian dollars. This was done using a rate of $(Cdn) 1.4695 to
$(US) 1.00, the noon buying rate in New York City on March 31, 2003.
The following tables present the reconciliation of the Netro consolidated
statements of operations for the year ended December 31, 2002 and the three
months ended March 31, 2003 and consolidated balance sheet as
F-III-8
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
at March 31, 2003, prepared under U.S. GAAP and as conformed to SR Telecom's
presentation and accounting policies under Canadian GAAP.
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
-------------------------------------------------------------------
NETRO IN NETRO IN
ACCORDANCE WITH ADJUSTMENTS TO ACCORDANCE WITH
U.S. GAAP CANADIAN GAAP NOTES CANADIAN GAAP
------------------ ---------------- -------- ----------------
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Revenue................................... $ 3,240 $ -- $ 3,240
Cost of revenue........................... 2,532 -- 2,532
-------- ------- --------
Gross profit.............................. 708 -- 708
-------- ------- --------
Operating expenses:
Research and development, net........... 6,470 -- 6,470
Selling, general and administrative..... 9,144 -- 9,144
Amortization of deferred stock
compensation......................... 123 (123) 3(b) --
Amortization of acquired intangibles.... 3,447 -- 3,447
Acquired in-process research and
development.......................... -- 2,155 3(c) 2,155
Restructuring and asset impairment
charges.............................. -- -- --
-------- ------- --------
Total operating expenses.................. 19,184 2,032 21,216
-------- ------- --------
Loss from operations...................... (18,476) (2,032) (20,508)
Other income, net......................... 1,180 -- 1,180
-------- ------- --------
LOSS BEFORE INCOME TAX.................... (17,296) (2,032) (19,328)
Income tax expense........................ (9) -- (9)
-------- ------- --------
NET LOSS.................................. $(17,305) $(2,032) $(19,337)
======== ======= ========
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------
NETRO IN NETRO IN
ACCORDANCE WITH ADJUSTMENTS TO ACCORDANCE WITH
U.S. GAAP CANADIAN GAAP NOTES CANADIAN GAAP
----------------- --------------- ------- ---------------
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Revenue.................................... $ 25,139 $ -- $ 25,139
Cost of revenue............................ 25,227 -- 25,227
--------- -------- ---------
Gross profit............................... (88) -- (88)
--------- -------- ---------
Operating expenses:
Research and development, net............ 41,106 -- 41,106
Selling, general and administrative...... 51,560 -- 51,560
Amortization of deferred stock
compensation.......................... 899 (899) 3(b) --
Amortization of acquired intangibles..... 11,491 -- 11,491
Acquired in-process research and
development........................... 25,863 (18,679) 3(c) 7,184
Restructuring and asset impairment
charges............................... 11,872 -- 11,872
--------- -------- ---------
Total operating expenses................... 142,791 (19,578) 123,213
--------- -------- ---------
Loss from operations....................... (142,879) 19,578 (123,301)
Other income, net.......................... 9,734 -- 9,734
--------- -------- ---------
LOSS BEFORE INCOME TAX..................... (133,145) 19,578 (113,567)
Income tax expense......................... (151) -- (151)
--------- -------- ---------
NET LOSS................................... $(133,296) $ 19,578 $(113,718)
========= ======== =========
F-III-9
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
BALANCE SHEET AS AT MARCH 31, 2003
-----------------------------------------------------------
NETRO IN NETRO IN
ACCORDANCE WITH ADJUSTMENTS TO ACCORDANCE WITH
U.S. GAAP CANADIAN GAAP NOTES CANADIAN GAAP
--------------- -------------- ------ ---------------
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
ASSETS
Current assets
Cash and cash equivalents.............. $ 47,060 $ -- $ 47,060
Marketable securities.................. 94,853 (75) 3(a) 94,778
Accounts receivable.................... 2,704 -- 2,704
Inventories............................ 9,306 -- 9,306
Prepaid expenses and other current
assets.............................. 7,361 -- 7,361
-------- ------- --------
161,284 (75) 161,209
Long-term marketable securities.......... 64,776 (461) 3(a) 64,315
Restricted cash deposits................. 9,445 -- 9,445
Fixed assets............................. 13,090 -- 13,090
Other assets............................. 3,180 -- 3,180
Intangible assets........................ 26,429 16,524 3(c) 42,953
-------- ------- --------
$278,204 $15,988 $294,192
======== ======= ========
LIABILITIES
Current liabilities
Accounts payable....................... $ 1,978 $ -- $ 1,978
Accrued liabilities and other current
liabilities......................... 30,280 -- 30,280
-------- ------- --------
32,258 -- 32,258
Long-term debt and other long-term
liabilities............................ 441 -- 441
-------- ------- --------
32,699 -- 32,699
-------- ------- --------
Shareholders' equity..................... 245,505 15,988 3(a)(c) 261,493
-------- ------- --------
$278,204 $15,988 $294,192
======== ======= ========
Accounting principles generally accepted in Canada differ in certain
material respects from those generally accepted in the U.S. The differences
which are material to restating the consolidated financial statements of Netro
as at and for the three-month period ended March 31, 2003 and for the year ended
December 31, 2002, to comply with SR Telecom's accounting policies under
Canadian GAAP are described below.
(A) NET UNREALIZED HOLDING GAINS (LOSSES)
Under U.S. GAAP, unrealized holding gains and losses on available-for-sale
securities are included as a component of comprehensive income. The concept of
comprehensive income does not exist under Canadian GAAP. The adjustment reflects
the reversal of the amount in comprehensive income and marketable securities.
F-III-10
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(B) DEFERRED COMPENSATION
Under U.S. GAAP, deferred compensation resulting from the granting of stock
options to employees with exercise prices below the estimated fair values per
share of the Company's common stock at the grant date is recorded using the
intrinsic value method. Under Canadian GAAP, SR Telecom has chosen not to record
any compensation expense upon the granting of options to employees, and as a
result, the adjustment reflects the reversal of the amortization of deferred
stock compensation as well as the deferred compensation amount on the balance
sheet.
(C) INTANGIBLE ASSETS
Under U.S. GAAP, as a result of the acquisition of certain assets, amounts
allocated to in-process research and development were expensed. Under Canadian
GAAP, these costs would have been recorded as an intangible asset and amortized
over its estimated useful life. As a result, the adjustment reflects the
reversal of the expense, net of the amortization of the intangible asset which
is provided for using the straight-line method over three years. The adjustment
on the balance is presented net of amortization.
4. RECONCILIATION OF UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION FROM CANADIAN GAAP TO U.S. GAAP
The tables below set out the principal adjustments to pro forma
consolidated net loss and shareholders' equity reflected in the unaudited pro
forma condensed consolidated financial information which would be required if
U.S. GAAP had been applied. These tables should be read in conjunction with Note
25 to SR Telecom's consolidated financial statements included elsewhere in this
proxy statement/prospectus and with Note 3 above.
Solely for convenience, the following tables have been translated into U.S.
dollars using a rate of $(Cdn) 1.4695 to $(US) 1.00, which was the noon buying
rate in New York City on March 31, 2003, for purposes of the December 31, 2002
and March 31, 2003 unaudited pro forma reconciliation from Canadian to U.S. GAAP
of pro forma consolidated net loss and shareholders' equity.
F-III-11
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
RECONCILIATION OF PRO FORMA CONSOLIDATED NET LOSS
MARCH 31, 2003 DECEMBER 31, 2002
----------------- ------------------
$ (CDN) $ (US) $ (CDN) $ (US)
(TABULAR AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
Reconciliation of net loss
Net loss -- Canadian GAAP............................. (20,435) (13,906) (115,732) (78,755)
Adjustments
Asset impairment (i)................................ 417 284 1,666 1,134
Bid costs (ii)...................................... 9 6 27 18
Deferred charges and start-up costs (ii)............ 450 306 1,767 1,202
Derivative instruments (iii)........................ (1,728) (1,176) 2,900 1,973
Loss on change in ownership in subsidiary company
(iv)............................................. -- -- 3,974 2,704
Acquired in-process research and development (vi)... -- -- (25,863) (17,600)
Deferred compensation (vii)......................... (123) (84) (899) (612)
Depreciation of fixed assets to be disposed of by
sale (viii)...................................... 239 163 956 651
Tax effect of above adjustments..................... (147) (100) (574) (391)
------- ------- -------- -------
Net loss -- U.S. GAAP................................. (21,318) (14,507) (131,778) (89,676)
======= ======= ======== =======
Basic and diluted loss per share -- U.S. GAAP......... (0.22) (0.15) (1.37) (0.93)
======= ======= ======== =======
RECONCILIATION OF SHAREHOLDERS' EQUITY
MARCH 31, 2003
-----------------
$ (CDN) $ (US)
(TABULAR AMOUNTS
IN THOUSANDS)
Shareholders' equity -- Canadian GAAP....................... 123,815 84,256
Adjustments
Asset impairment(i)....................................... (21,975) (14,954)
Bid costs(ii)............................................. (88) (60)
Deferred charges and start-up costs(ii)................... (3,300) (2,246)
Derivative instruments(iii)............................... 1,172 798
Net unrealized holding gains on investments, net of
tax(v)................................................. 536 365
Tax effect of above adjustments........................... 1,084 738
------- -------
Shareholders' equity -- U.S. GAAP........................... 101,244 68,897
======= =======
(I) ASSET IMPAIRMENT
Under U.S. GAAP, impairment of long-lived assets is recorded as the amount
by which the carrying value of the assets exceeds fair value whereas under
Canadian GAAP, the impairment is recorded as the amount by which the carrying
value of the assets exceeds its recoverable amount. The adjustment to the net
loss represents the effect on depreciation in 2002 of conforming SR Telecom's
asset write-down in 2001 to U.S. GAAP.
F-III-12
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(II) BID COSTS, DEFERRED CHARGES AND START-UP COSTS
Under Canadian GAAP, bid costs, deferred charges and start-up costs that
satisfy specified criteria for recoverability are deferred and amortized. Under
U.S. GAAP, bid costs, deferred charges and start-up costs are expensed as
incurred. The resulting differences are net of the amount amortized under
Canadian GAAP.
(III) DERIVATIVE INSTRUMENTS
Under U.S. GAAP, all derivative instruments, including those embedded in
contracts, are recorded in the balance sheet at fair value with gains or losses
recognized in earnings. The fair value of embedded derivatives is $1,172,000 at
March 31, 2003 and $2,900,000 at December 31, 2002.
(IV) LOSS/GAIN ON CHANGE IN OWNERSHIP IN SUBSIDIARY COMPANY
Under U.S. GAAP, gain recognition upon the issuance of shares by a
subsidiary is not appropriate where, amongst other considerations, a subsequent
repurchase of shares is contemplated. A share repurchase within one year of the
issuance of shares is presumed to have been contemplated at the date of
issuance. As a result, the dilution gain recorded in 2001 and the loss on share
repurchase in 2002 under Canadian GAAP in the unaudited pro forma condensed
consolidated statement of operations is reversed and accounted for as an equity
transaction. There is no impact on the shareholders' equity under U.S. GAAP,
because the dilution gain/loss which is a component of the net loss is included
in the deficit under Canadian GAAP.
(V) NET UNREALIZED HOLDING GAINS
Under SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities", the Corporation's investments in securities would be classified as
available-for-sale securities and carried at fair value. Unrealized holding
gains and losses on available-for-sale securities are excluded from earnings
under U.S. GAAP and reported as a net amount in accumulated other comprehensive
income (loss), which is a separate component of shareholders' equity until
realized. On realization, comprehensive income would be adjusted to reflect the
reclassification of the gains or losses into income.
(VI) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
As described in Note 3 (c), under U.S. GAAP, amounts allocated to acquired
in-process research and development are expensed. Under Canadian GAAP, such
costs are recorded as an intangible asset and amortized. Under Canadian GAAP, as
a result of the reduction in fair value of the intangible assets, the
amortization was reduced to nil. Accordingly, for purposes of the reconciliation
of net loss from Canadian GAAP to U.S. GAAP, the acquired in-process research
and development incurred by Netro are expensed.
For purposes of the reconciliation of the shareholders' equity from
Canadian to U.S. GAAP, no adjustment is required because the fair value to the
acquired in-process research and development, recorded as non-intangible asset,
has been reduced to nil.
(VII) DEFERRED COMPENSATION
This adjustment reverses the adjustment made for Canadian GAAP purposes
described in Note 3(b) above.
(VIII) FIXED ASSETS TO BE DISPOSED OF BY SALE
Under U.S. GAAP, in accordance with SFAS 144, the depreciation related to
long-lived assets to be disposed of is ceased. Accordingly, the adjustment
reflects the reversal of depreciation provided for under Canadian GAAP on those
assets the Corporation intends to sell.
F-III-13
SR TELECOM INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(IX) DEBT CLASSIFICATION
Under U.S. GAAP, the long-term debt of $51,372,000 at March 31, 2003, would
be classified as short-term debt.
F-III-14
ANNEX A
MERGER AGREEMENT
A-1
AGREEMENT AND PLAN OF MERGER
DATED AS OF
MARCH 27, 2003
BY AND AMONG
NETRO CORPORATION,
SR TELECOM INC.
AND
NORWAY ACQUISITION CORPORATION
A-2
TABLE OF CONTENTS(1)
PAGE
----
ARTICLE 1
DEFINITIONS
Section 1.01 Definitions................................................. A-6
ARTICLE 2
THE MERGER
Section 2.01 The Merger.................................................. A-10
Section 2.02 Conversion of Shares........................................ A-11
Section 2.03 Surrender and Payment....................................... A-11
Section 2.04 Stock Options............................................... A-12
Section 2.05 Adjustments................................................. A-12
Section 2.06 [Reserved].................................................. A-13
Section 2.07 Withholding Rights.......................................... A-13
Section 2.08 Lost Certificates........................................... A-13
ARTICLE 3
THE SURVIVING CORPORATION
Section 3.01 Certificate of Incorporation................................ A-13
Section 3.02 Bylaws...................................................... A-13
Section 3.03 Directors and Officers...................................... A-13
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.01 Corporate Existence and Power............................... A-14
Section 4.02 Corporate Authorization..................................... A-14
Section 4.03 Governmental Authorization.................................. A-14
Section 4.04 Non-contravention........................................... A-14
Section 4.05 Capitalization.............................................. A-15
Section 4.06 Subsidiaries................................................ A-16
Section 4.07 SEC Filings................................................. A-16
Section 4.08 Financial Statements........................................ A-17
Section 4.09 Disclosure Documents........................................ A-17
Section 4.10 Absence of Certain Changes.................................. A-18
Section 4.11 No Undisclosed Material Liabilities......................... A-19
Section 4.12 Compliance with Laws and Court Orders....................... A-19
Section 4.13 Litigation.................................................. A-19
Section 4.14 Finders' Fees............................................... A-19
Section 4.15 Opinion of Financial Advisor................................ A-19
Section 4.16 Taxes....................................................... A-19
Section 4.17 [Reserved].................................................. A-20
Section 4.18 Employee Benefit Plans...................................... A-20
Section 4.19 Environmental Matters....................................... A-22
Section 4.20 Antitakeover Statutes and Rights Agreement.................. A-22
Section 4.21 Intellectual Property....................................... A-22
Section 4.22 Labor Relations............................................. A-23
Section 4.23 Employment.................................................. A-24
---------------
(1) The Table of Contents is not a part of this Agreement.
A-3
PAGE
----
Section 4.24 WARN Act.................................................... A-24
Section 4.25 Restrictions on Business Activities......................... A-24
Section 4.26 Agreements, Contracts and Commitments....................... A-24
Section 4.27 Insurance................................................... A-24
Section 4.28 Change of Control Payments.................................. A-25
Section 4.29 No Existing Discussions..................................... A-25
Section 4.30 Canadian Operations......................................... A-25
Section 4.31 Cash Dividend............................................... A-25
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Section 5.01 Corporate Existence and Power............................... A-25
Section 5.02 Corporate Authorization..................................... A-26
Section 5.03 Governmental Authorization.................................. A-26
Section 5.04 Non-contravention........................................... A-26
Section 5.05 Capitalization.............................................. A-27
Section 5.06 Subsidiaries................................................ A-27
Section 5.07 CSA Filings................................................. A-28
Section 5.08 Financial Statements........................................ A-28
Section 5.09 Disclosure Documents........................................ A-28
Section 5.10 Absence of Certain Changes.................................. A-29
Section 5.11 No Undisclosed Material Liabilities......................... A-29
Section 5.12 Compliance with Laws and Court Orders....................... A-30
Section 5.13 Litigation.................................................. A-30
Section 5.14 Finders' Fees............................................... A-30
Section 5.15 Taxes....................................................... A-30
Section 5.16 [Reserved].................................................. A-31
Section 5.17 Environmental Matters....................................... A-31
Section 5.18 Intellectual Property....................................... A-31
Section 5.19 Antitakeover Statutes and Rights Agreement.................. A-32
Section 5.20 Restrictions on Business Activities......................... A-32
ARTICLE 6
COVENANTS OF THE COMPANY
Section 6.01 Conduct of the Company...................................... A-32
Section 6.02 Stockholder Meeting......................................... A-34
Section 6.03 No Solicitation; Other Offers............................... A-35
Section 6.04 Tax Matters................................................. A-36
Section 6.05 WARN Covenant............................................... A-37
Section 6.06 Termination of Company 401(k) Plan.......................... A-37
ARTICLE 7
COVENANTS OF PARENT AND MERGER SUB
Section 7.01 Conduct of Parent........................................... A-37
Section 7.02 Voting of Shares............................................ A-37
Section 7.03 Director and Officer Liability.............................. A-37
Section 7.04 Stock Exchange Listing...................................... A-38
Section 7.05 Employee Matters............................................ A-38
Section 7.06 Tax Matters................................................. A-39
A-4
PAGE
----
ARTICLE 8
COVENANTS OF PARENT, MERGER SUB AND THE COMPANY
Section 8.01 Commercially Reasonable Efforts............................. A-40
Section 8.02 Certain Filings............................................. A-40
Section 8.03 Public Announcements........................................ A-40
Section 8.04 Further Assurances.......................................... A-41
Section 8.05 Access to Information....................................... A-41
Section 8.06 Notices of Certain Events................................... A-41
Section 8.07 [Reserved].................................................. A-42
Section 8.08 Affiliates.................................................. A-42
Section 8.09 Section 16 Matters.......................................... A-42
Section 8.10 Proxy Statement; Registration Statement..................... A-42
Section 8.11 Board of Directors of Parent................................ A-43
ARTICLE 9
CONDITIONS TO THE MERGER
Section 9.01 Conditions to Obligations of Each Party..................... A-43
Section 9.02 Conditions to the Obligations of Parent and Merger Sub...... A-44
Section 9.03 Conditions to the Obligations of the Company................ A-44
ARTICLE 10
TERMINATION
Section 10.01 Termination................................................. A-45
Section 10.02 Effect of Termination....................................... A-46
ARTICLE 11
MISCELLANEOUS
Section 11.01 Notices..................................................... A-47
Section 11.02 Survival of Representations and Warranties.................. A-48
Section 11.03 Amendments; Waivers......................................... A-48
Section 11.04 Fees; Expenses.............................................. A-48
Section 11.05 Right of First Negotiation and First Refusal................ A-49
Section 11.06 Binding Effect; Benefit; Assignment......................... A-50
Section 11.07 Governing Law............................................... A-50
Section 11.08 Jurisdiction................................................ A-50
Section 11.09 WAIVER OF JURY TRIAL........................................ A-50
Section 11.10 Counterparts; Effectiveness................................. A-50
Section 11.11 Entire Agreement............................................ A-50
Section 11.12 Captions.................................................... A-51
Section 11.13 Severability................................................ A-51
Section 11.14 Specific Performance........................................ A-51
EXHIBITS
--------
Exhibit A Form of Company Affiliate Agreement
Exhibit B Form of Company Certificate that it is not a "United States
Real Property Holding Corporation"
Exhibit C Company Disclosure Schedule
Exhibit D Parent Disclosure Schedule
Exhibit E Form of Company Voting Agreement
Exhibit F List of Directors and Officers Subject to Company Voting
Agreement
A-5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (together with all exhibits and schedules
hereto, this "AGREEMENT") is dated as of March 27, 2003 by and among Netro
Corporation, a Delaware corporation (the "COMPANY"), SR Telecom Inc. ("PARENT"),
a corporation organized under the Canada Business Corporations Act (the "CBCA"),
and Norway Acquisition Corporation, a Delaware corporation and a wholly owned
Subsidiary of Parent ("MERGER SUB").
RECITALS
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company have approved this Agreement, and declared advisable the Merger (as
defined herein) of Merger Sub with and into the Company upon the terms and
subject to the conditions of this Agreement and in accordance with Delaware Law
(as defined herein), and the Board of Directors of the Company has determined to
recommend that the stockholders of the Company approve and adopt this Agreement
and approve the Merger.
WHEREAS, concurrently with the execution of this Agreement, and as a
condition to and as an inducement to Parent's willingness to enter into this
Agreement, the directors and officers of the Company listed on Exhibit F hereto
are entering into Voting Agreements in substantially the form attached hereto as
Exhibit E (the "COMPANY VOTING AGREEMENTS").
WHEREAS, pursuant to the Merger, all of the issued and outstanding shares
of Company Stock (as defined herein) shall be converted into the right to
receive consideration consisting of ADSs (as defined herein).
WHEREAS, contingent upon approval of the Merger by the stockholders of the
Company and to the extent permissible under applicable law, the Board of
Directors of the Company will approve and will declare advisable the declaration
of the Cash Dividend (as defined herein) with respect to each outstanding share
of Company Stock upon the terms and subject to the conditions of this Agreement
and in accordance with Delaware Law.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.01 DEFINITIONS.
(a) The following terms, as used herein, have the following meanings:
"ACQUISITION PROPOSAL" means, other than the transactions contemplated by
this Agreement (including the Cash Dividend), any Third-Party offer, proposal or
inquiry relating to, or any Third-Party indication of interest in, (i) any
acquisition or purchase, direct or indirect, of 15% or more of the consolidated
assets of the Company and its Subsidiaries or beneficial ownership of securities
representing 15% or more of the outstanding securities of any class of equity or
voting securities of the Company or of any of its Subsidiaries whose assets,
individually or in the aggregate, constitute more than 15% of the consolidated
assets of the Company, (ii) any tender offer (including a self-tender offer) or
exchange offer that, if consummated, would result in any Third Party's
beneficially owning 15% or more of the outstanding securities of any class of
equity or voting securities of the Company or of any of its Subsidiaries whose
assets, individually or in the aggregate, constitute more than 15% of the
consolidated assets of the Company, (iii) a merger, consolidation, share
exchange, business combination, sale or transfer of all or substantially all the
assets, exclusive license, reorganization, recapitalization, liquidation,
dissolution, extraordinary dividend (other than a Liquidation Alternative or the
Cash Dividend) or other similar transaction involving the Company or any of its
Subsidiaries whose assets, individually or in the aggregate, constitute more
than 15% of the consolidated assets of the Company, (iv) the sale or transfer of
all or substantially all of the Technology or the exclusive license thereof
(other than a Liquidation Alternative) or (v) any other transaction (other than
a Liquidation
A-6
Alternative) the consummation of which could reasonably be expected to impede,
interfere with, prevent or materially delay the Merger or that could reasonably
be expected to dilute materially the benefits to Parent of the transactions
contemplated hereby.
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such Person.
"BUSINESS DAY" means a day, other than Saturday, Sunday or other day on
which commercial banks in New York, New York, San Francisco, California or
Montreal, Quebec, Canada are authorized or required by law to close.
"C$" means Canadian dollars.
"CANADIAN SECURITIES LAWS" means the Securities Act (Quebec) and the
equivalent legislation in the other provinces and territories of Canada and the
applicable rules and regulations made or promulgated under such statutes,
including all published instruments of the CSA as well as the rules and
regulations of the TSX.
"CODE" means the Internal Revenue Code of 1986.
"COMPANY BALANCE SHEET" means the consolidated balance sheet of the Company
as of December 31, 2002 and the footnotes thereto set forth in the Company 10-K.
"COMPANY BALANCE SHEET DATE" means December 31, 2002.
"COMPANY STOCK" means the common stock, $.001 par value, of the Company.
"COMPANY 10-K" means the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2002.
"COMPETITION ACT" means the Competition Act (Canada).
"CSA" means the Canadian securities regulatory authorities.
"DELAWARE LAW" means the General Corporation Law of the State of Delaware.
"ENVIRONMENTAL PERMITS" means all permits, licenses, franchises,
certificates, approvals and other similar authorizations of governmental
authorities relating to or required by Environmental Laws and affecting, or
relating in any way to, the business of the Company or any of its Subsidiaries
as currently conducted.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA AFFILIATE" of any entity means any other entity that, together with
such entity, would be treated as a single employer under Section 414 of the
Code.
"GOVERNMENTAL ENTITY" means any government or governmental or regulatory
body, agency, authority thereof, or political subdivision thereof, or any
agency, commission or instrumentality thereof, or any court or arbitrator, or
any quasi-governmental or private body exercising any regulatory, taxing,
importing or other governmental or quasi-governmental authority, whether
federal, state, local, municipal, foreign, supranational or otherwise.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
"INTELLECTUAL PROPERTY RIGHT" means any trademark, trademark application,
service mark, trade name, domain name, slogans, invention, patent, patent
application, trade secret, know-how, show-how, customer lists, business
information, copyright (registered or unregistered), software program, technical
information, or any other similar type of proprietary intellectual property
right.
"KNOWLEDGE" of any Person that is not an individual means (i) in the case
of the Company or any of its Subsidiaries, the actual knowledge after reasonable
inquiry of Gideon Ben-Efraim (President and Chief Executive Officer), Sanjay
Khare (Chief Financial Officer), Shlomo Yariv (Chief Operating Officer) or Peter
Carson (Senior Vice President, Worldwide Sales) or (ii) in the case of Parent or
Merger Sub, the actual knowledge after reasonable inquiry of Pierre St-Arnaud
(Chief Executive Officer), David Adams (Chief
A-7
Financial Officer), Benoit Pinsonnault (Senior Vice President Customer Service
and Operations) or Gerald LaCroix (Managing Director, Comunicacion y Telefonica
Rural S.A.).
"LIEN" means, with respect to any property or asset, any mortgage, lien,
pledge, charge, security interest, encumbrance or other adverse claim of any
kind in respect of such property or asset. For purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any property or asset that it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such property or asset.
"LIQUIDATION ALTERNATIVE" means any proposal or inquiry involving the
liquidation, dissolution or winding up of the Company that is not initiated by
and (prior to the time of the determination that a Superior Alternative exists)
does not involve, a Third Party (other than the Company and its officers and
directors in their capacity as such).
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, a material
adverse effect on (x) the business, assets, liabilities, operations, financial
condition or results of operations of such Person and its Subsidiaries, taken as
a whole, or (y) such Person's ability to perform its obligations under or to
consummate the transactions contemplated by this Agreement, it being understood
that none of the following shall be deemed, in and of itself, to constitute a
Material Adverse Effect: (i) changes attributable to this Agreement or the
transactions contemplated hereby or the announcement hereof, (ii) changes or
conditions affecting the U.S., Canadian or any foreign telecommunications or
data networking industry generally, (iii) changes in U.S., Canadian or any
foreign economic, regulatory or political conditions generally or in U.S.,
Canadian or any foreign financial markets, (iv) changes attributable to any
attack on, outbreak or escalation of hostilities or act of terrorism in the
United States, Canada or abroad, any declaration of war or any other national or
foreign calamity, (v) the failure of such Person to meet published revenue or
earnings projections (including with respect to the quarter ended March 31,
2003) or (vi) any change in such Person's stock price or trading volume.
"MERGER SUB STOCK" means the common stock, $.01 par value, of Merger Sub.
"NASDAQ" means the Nasdaq National Market.
"1933 ACT" means the Securities Act of 1933.
"1934 ACT" means the Securities Exchange Act of 1934.
"PARENT ANNUAL REPORT" means Parent's annual report, including Parent's
audited consolidated financial statements and Management's Discussion and
Analysis, filed with the CSA for the fiscal year ended December 31, 2002.
"PARENT BALANCE SHEET" means the audited consolidated balance sheet of
Parent as of December 31, 2002 and the footnotes therein as provided to the
Company prior to the date hereof.
"PARENT BALANCE SHEET DATE" means December 31, 2002.
"PARENT STOCK" means the common shares, without par value, of Parent.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
Governmental Entity.
"SEC" means the U.S. Securities and Exchange Commission.
"SHARES" means the shares of common stock, $.001 par value, of the Company.
"SUBSIDIARY" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at any time directly or indirectly owned by such Person.
"SUPERIOR ALTERNATIVE" means a determination by the Board of Directors of
the Company in its reasonable judgment by a majority vote, after considering the
advice of its financial and legal advisors, including Goldman, Sachs & Co. and
Davis Polk & Wardwell, that a Liquidation Alternative would be more
A-8
favorable to the stockholders of the Company from a financial point of view than
the terms of the Merger (including the Cash Dividend) or that consummation of
the transactions contemplated by this Agreement (including the Cash Dividend and
the Merger) are unlawful under applicable law.
"SUPERIOR PROPOSAL" means any bona fide, unsolicited written Acquisition
Proposal for at least 80% of the outstanding Shares on terms that the Board of
Directors of the Company determines in its reasonable judgment by a majority
vote, after considering the advice of Goldman, Sachs & Co., its financial
advisor, to be more favorable to the stockholders of the Company from a
financial point of view than the terms of the Merger (taking into account all
the terms and conditions of the Acquisition Proposal, including any break-up
fees, expense reimbursement provisions, conditions to consummation, the timing
of the consummation, the risk of nonconsummation and the need for any required
governmental consents, filings and approvals).
"SURVIVING CORPORATION STOCK" means the common stock, $.001 par value, of
Surviving Corporation.
"TECHNOLOGY" means all Company Intellectual Property Rights relating to the
Company's AirStar and Angel products and platforms, including any related
hardware and software.
"THIRD PARTY" means any Person as defined in this Agreement or in Section
13(d) of the 1934 Act, other than Parent or any of its Affiliates.
"TSX" means the Toronto Stock Exchange.
Any reference in this Agreement to a statute shall be to such statute, as
amended from time to time, and to the rules and regulations promulgated
thereunder.
All dollar amounts in this Agreement shall mean United States dollars
unless a different currency is specifically indicated.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
TERM SECTION
---- --------
1934 Act Registration Statement............................. 5.03
ADSs........................................................ 2.02
ADS Registration Statement.................................. 5.09
Agreement................................................... Preamble
Business Plan............................................... 6.01
Canadian GAAP............................................... 5.08
Cash Dividend............................................... 6.01
CBCA........................................................ Preamble
Certificates................................................ 2.03
Change of Recommendation.................................... 6.03
Change of Recommendation Notice............................. 6.03
Closing Date................................................ 2.01
Company..................................................... Preamble
Company Disclosure Schedule................................. Article
4
Company Employee............................................ 7.05
Company Intellectual Property Rights........................ 4.21
Company Option.............................................. 2.04
Company Proxy Statement..................................... 4.09
Company SEC Documents....................................... 4.07
Company Securities.......................................... 4.05
Company Stockholder Meeting................................. 6.02
Company Subsidiary Securities............................... 4.06
Company Voting Agreements................................... Recitals
Confidentiality Agreement................................... 8.05
Effective Time.............................................. 2.01
Employee Plans.............................................. 4.18
A-9
TERM SECTION
---- --------
Environmental Laws.......................................... 4.19
Expiration Date............................................. 11.05
ESPP........................................................ 7.05
Exchange Agent.............................................. 2.03
Indemnified Person.......................................... 7.03
Insurance Policies.......................................... 4.27
Merger...................................................... 2.01
Merger Consideration........................................ 2.02
Merger Sub.................................................. Preamble
Parent...................................................... Preamble
Parent Disclosure Schedule.................................. Article
5
Parent CSA Documents........................................ 5.07
Parent Intellectual Property Rights......................... 5.18
Parent Preferred Shares..................................... 5.05
Parent Stock Registration Statement......................... 5.09
Payment Events.............................................. 11.04
Preferred Stock............................................. 4.05
PTO......................................................... 4.21
Registration Statements..................................... 5.09
Qualifying Transaction...................................... 11.04
Right(s).................................................... 4.05
Rights Agreement............................................ 4.05
Series A Preferred Stock.................................... 4.05
Surviving Corporation....................................... 2.01
Tax......................................................... 4.16
Tax Return.................................................. 4.16
Taxing Authority............................................ 4.16
Uncertificated Shares....................................... 2.03
U.S. GAAP................................................... 4.08
WARN Act.................................................... 4.24
ARTICLE 2
THE MERGER
Section 2.01 THE MERGER.
(a) At the Effective Time and subject to and upon the terms and conditions
of this Agreement and the applicable provisions of Delaware Law, Merger Sub
shall be merged with and into the Company (the "MERGER"), whereupon the separate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation. The Company as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "SURVIVING CORPORATION." The closing
of the Merger shall take place at the offices of Pillsbury Winthrop LLP, Palo
Alto, California, at a time and date to be specified by the parties, which shall
be no later than the third Business Day after the satisfaction or, to the extent
permitted hereunder, waiver of the conditions set forth in Article 9, or at such
other time, date and location as the parties hereto agree in writing (the
"CLOSING DATE").
(b) As soon as practicable on the Closing Date, the Company and Parent
shall file a certificate of merger with the Delaware Secretary of State and make
all other filings or recordings required by Delaware Law in connection with the
Merger. The Merger shall become effective at such time (the "EFFECTIVE TIME") as
the certificate of merger is duly filed with the Delaware Secretary of State (or
at such later time as may be specified in the certificate of merger).
A-10
(c) From and after the Effective Time, the effect of the Merger shall be as
provided in this Agreement and the applicable provisions of Delaware Law. At
such time, the Surviving Corporation shall possess all the rights, powers,
privileges and franchises and be subject to all of the obligations, liabilities,
restrictions and disabilities of the Company and Merger Sub, all as provided
under Delaware Law.
Section 2.02 CONVERSION OF SHARES.
At the Effective Time, by virtue of the Merger and without any action on
the part of the holder of any Shares or any shares of capital stock of Parent or
Merger Sub:
(a) except as otherwise provided in Sections 2.02(b) and 2.05, each share
of Company Stock (along with each Right attached thereto) outstanding
immediately prior to the Effective Time, shall be automatically converted into
the right to receive the number of American Depositary Shares ("ADSS")
representing shares of Parent Stock equal to a fraction (rounded to the nearest
whole number, with any fraction equal to or higher than one-half rounded up to
the next succeeding whole number), the numerator of which is 41,500,000 and the
denominator of which is the number of shares of Company Stock outstanding
immediately prior to the Effective Time (the "MERGER CONSIDERATION");
(b) each share of Company Stock held by the Company as treasury stock
(other than shares in an Employee Plan of the Company) or owned by Merger Sub,
Parent or any of its Subsidiaries immediately prior to the Effective Time (other
than shares held for the account of clients, customers or other Persons) shall
be canceled, and no payment shall be made with respect thereto;
(c) each share of Merger Sub Stock issued and outstanding immediately prior
to the Effective Time shall be converted into one validly issued, fully paid and
nonassessable share of Surviving Corporation Stock. Each certificate evidencing
ownership of shares of Merger Sub Stock shall evidence ownership of such shares
of capital stock of the Surviving Corporation; and
(d) the Surviving Corporation shall issue shares of Surviving Corporation
Stock to Parent in consideration for Parent issuing Parent Stock in respect of
the ADSs to former stockholders of the Company pursuant to Section 2.02(a), the
number of shares of Surviving Corporation Stock issued to Parent pursuant to
this Section 2.02(d) to be equal to the number of shares of Company Stock
outstanding immediately prior to the Effective Time (other than shares of
Company Stock to which Section 2.02(b) applies).
Section 2.03 SURRENDER AND PAYMENT.
(a) Prior to the Effective Time, Parent shall appoint an agent (the
"EXCHANGE AGENT") reasonably acceptable to the Company for the purpose of
exchanging for the Merger Consideration (i) certificates representing shares of
Company Stock and the Rights attached thereto (the "CERTIFICATES") or (ii)
uncertificated shares of Company Stock and the Rights attached thereto (the
"UNCERTIFICATED SHARES"). Parent shall make available to the Exchange Agent, as
needed, the Merger Consideration to be paid in respect of the Certificates and
the Uncertificated Shares. Promptly after the Effective Time, Parent shall send,
or shall cause the Exchange Agent to send, to each holder of shares of Company
Stock at the Effective Time a letter of transmittal and instructions (which
shall specify that the delivery shall be effected, and risk of loss and title
shall pass, only upon proper delivery of the Certificates or transfer of the
Uncertificated Shares to the Exchange Agent) for use in such exchange.
(b) Each holder of shares of Company Stock that have been converted into
the right to receive the Merger Consideration shall be entitled to receive, upon
(i) surrender to the Exchange Agent of a Certificate, together with a properly
completed letter of transmittal, or (ii) receipt of an "agent's message" by the
Exchange Agent (or such other evidence, if any, of transfer as the Exchange
Agent may reasonably request) in the case of a book-entry transfer of
Uncertificated Shares, the Merger Consideration in respect of the Company Stock
represented by a Certificate or Uncertificated Share. The ADSs constituting part
of such Merger Consideration, at Parent's option, shall be in uncertificated
book-entry form, unless a physical certificate is requested by a holder of
shares of Company Stock or is otherwise required under applicable law. Until so
surrendered or transferred, as the case may be, each such Certificate or
Uncertificated Share shall
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represent after the Effective Time for all purposes only the right to receive
such Merger Consideration. No interest shall be paid or will accrue on any cash
payable to holders of Certificates pursuant to the provisions of this Article 2.
(c) If any portion of the Merger Consideration is to be paid to a Person
other than the Person in whose name the surrendered Certificate or the
transferred Uncertificated Share is registered, it shall be a condition to such
payment that (i) either such Certificate shall be properly endorsed or shall
otherwise be in proper form for transfer or such Uncertificated Share shall be
properly transferred and (ii) the Person requesting such payment shall pay to
the Exchange Agent any transfer or other taxes required as a result of such
payment to a Person other than the registered holder of such Certificate or
Uncertificated Share or establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Company Stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates or Uncertificated Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for the Merger
Consideration provided for, and in accordance with the procedures set forth, in
this Article 2.
(e) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 2.03(a) that remains unclaimed by the holders of
shares of Company Stock one year after the Effective Time shall be returned to
Parent, upon demand, and any such holder who has not exchanged shares of Company
Stock for the Merger Consideration in accordance with this Section 2.03 prior to
that time shall thereafter look only to Parent for payment of the Merger
Consideration, and any dividends and distributions with respect thereto, in
respect of such shares without any interest thereon. Notwithstanding the
foregoing, Parent, Merger Sub, the Company, the Surviving Corporation and the
Exchange Agent shall not be liable to any holder of ADSs or shares of Parent
Stock or Company Stock for any amounts paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. Any amounts remaining
unclaimed by holders of shares of Company Stock two years after the Effective
Time (or such earlier date, immediately prior to such time when the amounts
would otherwise escheat to or become property of any governmental authority)
shall become, to the extent permitted by applicable law, the property of Parent
free and clear of any claims or interest of any Person previously entitled
thereto.
(f) No dividends or other distributions with respect to securities of
Parent constituting part of the Merger Consideration, shall be paid to the
holder of any Certificates not surrendered or of any Uncertificated Shares not
transferred until such Certificates or Uncertificated Shares are surrendered or
transferred, as the case may be, as provided in this Section 2.03. Following
such surrender or transfer, there shall be paid, without interest, to the Person
in whose name the securities of Parent have been registered, (i) at the time of
such surrender or transfer, the amount of all dividends or other distributions
with a record date after the Effective Time previously paid or payable on the
date of such surrender with respect to such securities, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time and prior to surrender or transfer and with
a payment date subsequent to surrender or transfer payable with respect to such
securities.
Section 2.04 STOCK OPTIONS.
As of the Effective Time, each outstanding option to purchase shares of
Company Stock under any stock option or compensation plan or arrangement of the
Company (a "COMPANY OPTION"), whether or not exercised or vested, shall be
terminated and no consent of any holder of any stock option or any employee
shall be required under any Company stock option or compensation plan or other
arrangement of the Company for such termination.
Section 2.05 ADJUSTMENTS.
If, during the period between the date of this Agreement and the Effective
Time, any reclassification, recapitalization, stock split or combination,
exchange or readjustment of shares, any stock dividend thereon or other like
change occurs with respect to Parent Stock or the Company Stock having a record
date during such
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period, the Merger Consideration and any other amounts payable pursuant to this
Agreement shall be appropriately adjusted.
Section 2.06 [RESERVED].
Section 2.07 WITHHOLDING RIGHTS.
Each of the Surviving Corporation, Parent and the Exchange Agent shall be
entitled to deduct and withhold from the consideration payable to any Person
pursuant to this Article 2 such amounts as it is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. If the Surviving Corporation, Parent or the
Exchange Agent, as the case may be, so withholds such amounts, such withheld
amounts shall be treated for all purposes of this Agreement as having been paid
to the holder of the shares of Company Stock in respect of which the Surviving
Corporation, Parent or the Exchange Agent, as the case may be, made such
deduction and withholding. Parent and Merger Sub represent, warrant and agree
that no amount will be withheld or deducted from the Merger Consideration
payable to any Person in respect of Canadian withholding taxes.
Section 2.08 LOST CERTIFICATES.
If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed and, if required by Parent, the posting by such
Person of a bond, in such reasonable amount as Parent may direct, as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue, in exchange for such lost, stolen or destroyed
Certificate, the Merger Consideration to be paid in respect of the shares of
Company Stock represented by such Certificate, as contemplated by this Article
2.
ARTICLE 3
THE SURVIVING CORPORATION
Section 3.01 CERTIFICATE OF INCORPORATION.
The certificate of incorporation of the Company as in effect at the
Effective Time shall be amended in the Merger to be the same as the certificate
of incorporation of Merger Sub, except that the name of the Surviving
Corporation shall be Netro Corporation, and as so amended, shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with applicable law.
Section 3.02 BYLAWS.
The bylaws of Merger Sub as in effect at the Effective Time shall be the
bylaws of the Surviving Corporation until amended in accordance with applicable
law.
Section 3.03 DIRECTORS AND OFFICERS.
From and after the Effective Time, until successors are duly elected or
appointed and qualified in accordance with applicable law, (i) the directors of
Merger Sub at the Effective Time shall be the directors of the Surviving
Corporation and (ii) the officers of Merger Sub at the Effective Time shall be
the officers of the Surviving Corporation.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered by the Company to
Parent and Merger Sub prior to the execution of this Agreement, which disclosure
schedule shall specifically identify by section the
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representations and warranties of the Company qualified by such disclosure (the
"COMPANY DISCLOSURE SCHEDULE"), the Company represents and warrants to Parent
and Merger Sub that:
Section 4.01 CORPORATE EXISTENCE AND POWER.
The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware and has all corporate
powers and all governmental licenses, authorizations, permits, consents and
approvals required to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted, except for those licenses,
authorizations, permits, consents and approvals the absence of which would not
have, individually or in the aggregate, a Material Adverse Effect on the
Company. The Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where such qualification is
necessary, except for those jurisdictions where failure to be so qualified would
not have, individually or in the aggregate, a Material Adverse Effect on the
Company. The Company has heretofore delivered to Parent true and complete copies
of the certificate of incorporation and bylaws of the Company as currently in
effect. The Company is not in violation of any of the provisions of its
certificate of incorporation or bylaws.
Section 4.02 CORPORATE AUTHORIZATION.
(a) The execution, delivery and performance by the Company of this
Agreement and the consummation by the Company of the transactions contemplated
hereby (including the Merger) are within the Company's corporate powers and,
except for the required approval of the Company's stockholders in connection
with the consummation of the Merger, have been duly authorized by all necessary
corporate action on the part of the Company. The affirmative vote of the holders
of a majority of the outstanding shares of Company Stock is the only vote of the
holders of any of the Company's capital stock necessary in connection with the
consummation of the Merger. This Agreement has been duly and validly executed
and delivered by the Company and constitutes a valid and binding agreement of
the Company.
(b) At a meeting duly called and held, the Company's Board of Directors (i)
unanimously determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of the Company's stockholders, (ii)
unanimously approved and adopted this Agreement and the transactions
contemplated hereby and (iii) unanimously resolved (subject to Section 6.03) to
recommend approval and adoption of this Agreement, the Merger and the Cash
Dividend by its stockholders, in each case with Gideon Ben-Efraim abstaining.
Section 4.03 GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by the Company of this Agreement
and the consummation by the Company of the transactions contemplated hereby
require no action by or in respect of, or filing with, any Governmental Entity,
other than (i) the filing of a certificate of merger with respect to the Merger
with the Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(ii) compliance with any applicable requirements of the HSR Act, of the
Competition Act and of laws, rules and regulations analogous to the HSR Act
existing in foreign jurisdictions, (iii) compliance with any applicable
requirements of the 1933 Act, the 1934 Act and any other applicable securities
or takeover laws, whether state or non-U.S., and (iv) any actions or filings the
absence of which would not be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect on the Company (or after the Effective
Time, Parent).
Section 4.04 NON-CONTRAVENTION.
The execution, delivery and performance by the Company of this Agreement,
and the consummation by the Company of the transactions contemplated hereby, do
not and will not (i) contravene, conflict with, or result in any violation or
breach of any provision of the certificate of incorporation or bylaws of the
Company or any of its Subsidiaries, (ii) assuming compliance with the matters
referred to in Section 4.03, contravene, conflict with or result in a violation
or breach of any provision of any applicable law, statute, ordinance, rule,
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regulation, judgment, injunction, order, or decree, (iii) require any consent or
other action by any Person under, constitute a default (or an event that with
notice or lapse of time, or both, would become a default) under, or cause or
permit the termination, cancellation, acceleration or other change of any right
or obligation or the loss of any benefit to which the Company or any of its
Subsidiaries is entitled under any provision of any agreement or other
instrument binding upon the Company or any of its Subsidiaries or any license,
franchise, permit, certificate, approval or other similar authorization
affecting, or relating in any way to, the assets or business of the Company and
its Subsidiaries or (iv) result in the creation or imposition of any Lien on any
asset of the Company or any of its Subsidiaries, except for such contraventions,
conflicts and violations referred to in clause (ii) and for such failures to
obtain any such consent or other action, defaults, terminations, cancellations,
accelerations, changes, losses or Liens referred to in clauses (iii) and (iv)
that would not be reasonably expected to have, individually or in the aggregate,
a Material Adverse Effect on the Company.
Section 4.05 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 105,000,000
shares consisting of 100,000,000 shares of Company Stock and 5,000,000 shares of
preferred stock, par value $.001 per share (the "PREFERRED STOCK"), of which
800,000 shares are designated Series A Participating Cumulative Preferred Stock
(the "SERIES A PREFERRED STOCK"). Each share of Company Stock has attached
thereto a right (each, a "RIGHT" and collectively, the "RIGHTS") to purchase one
one-hundredth of a share of Series A Preferred Stock at a price of $20 per one
one-hundredth of a share, subject to adjustment. The Rights were issued pursuant
to an Amended and Restated Rights Agreement dated as of July 31, 2002, between
the Company and American Stock Transfer & Trust Company, as Rights Agent (the
"RIGHTS AGREEMENT"). As of the close of business on March 24, 2003, there were
outstanding 38,700,354 shares of Company Stock and no shares of Preferred Stock
and stock options to purchase an aggregate of 8,597,988 shares (of which options
to purchase an aggregate of 4,792,206 shares were exercisable). All outstanding
shares of capital stock of the Company have been, and all shares that may be
issued pursuant to the Employee Plans will be, when issued in accordance with
the respective terms thereof, duly authorized and validly issued and are fully
paid and nonassessable and are not subject to preemptive rights created under
Delaware Law, the certificate of incorporation or bylaws of the Company or any
agreement or document to which the Company is a party or by which it or its
assets are bound. All outstanding shares of capital stock of the Company, and
Company Options have been issued and granted in compliance with all applicable
securities law and other legal requirements and all requirements set forth in
applicable agreements or instruments. None of the outstanding Shares is unvested
or is subject to a repurchase option, risk of forfeiture or other condition
providing that such Shares may be forfeited or repurchased by the Company or
otherwise vest upon termination of stockholder's or grantee's employment,
directorship or other relationship with the Company or any of its Subsidiaries
under the terms of any restricted stock agreement or other agreement with the
Company.
(b) Except for changes since the close of business on March 24, 2003,
resulting from the issuance of shares of Company Stock pursuant to the ESPP and
from the exercise of Company Options outstanding on such date, there are no (i)
shares of capital stock of or other voting securities or ownership interests in
the Company, (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or other voting securities or ownership interests in the
Company or (iii) options or other rights (including preemptive rights) to
acquire from the Company, or other obligation of the Company to issue, deliver
or sell, or cause to be issued, delivered or sold, any capital stock or other
voting securities or ownership interests in or any securities convertible into
or exchangeable for capital stock or other voting securities or ownership
interests in the Company (the items in clauses (i), (ii) and (iii) being
referred to collectively as the "COMPANY SECURITIES"). There are no registration
rights and, except for the Rights Agreement, there is no voting trust, proxy,
rights plan, antitakeover plan or other agreement or understanding to which the
Company or any of its Subsidiaries is a party or by which it is bound with
respect to any Company Securities. Assuming that ADSs are quoted on Nasdaq at
the Effective Time, stockholders of the Company will not be entitled to
dissenters' or appraisal rights under applicable state law in connection with
the Merger. There are no outstanding obligations of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any of the Company
Securities.
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(c) No shares of Company Stock are owned by any Subsidiary of the Company.
Section 4.06 SUBSIDIARIES.
(a) Schedule 4.06(a) contains a correct and complete list identifying each
of the Company's Subsidiaries, together with a list of each other entity in
which the Company holds (directly or indirectly, other than through an interest
in a mutual fund) an equity interest, whether voting or otherwise, indicating
the name and the Company's equity interest in such entity. Each Subsidiary of
the Company is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, has all corporate
powers and all governmental licenses, authorizations, permits, consents and
approvals required to own, lease and operate its assets and properties and to
carry on its business as it is now being conducted, except for those licenses,
authorizations, permits, consents and approvals the absence of which would not
have, individually or in the aggregate, a Material Adverse Effect on the
Company. Each such Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for those jurisdictions where failure to be
so qualified would not have, individually or in the aggregate, a Material
Adverse Effect on the Company.
(b) All of the outstanding capital stock of or other voting securities or
ownership interests in each Subsidiary of the Company is owned by the Company,
directly or indirectly, free and clear of any Lien and free of any other
limitation or restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other voting securities or
ownership interests). There are no outstanding (i) securities of the Company or
any of its Subsidiaries convertible into or exchangeable for shares of capital
stock of or other voting securities or ownership interests in any Subsidiary of
the Company or (ii) options or other rights (including preemptive rights) to
acquire from the Company or any of its Subsidiaries, or other obligation of the
Company or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, any capital stock of or other voting securities or
ownership interests in, or any securities convertible into or exchangeable for
any capital stock of or other voting securities or ownership interests in, any
Subsidiary of the Company (the items in clauses (i) and (ii) being referred to
collectively as the "COMPANY SUBSIDIARY SECURITIES"). There are no registration
rights and there is no voting trust, proxy, rights plan, antitakeover plan or
other agreement or understanding to which any Subsidiary is a party or by which
it is bound with respect to any Company Subsidiary Securities. There are no
outstanding obligations of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any of the Company Subsidiary Securities.
Section 4.07 SEC FILINGS.
(a) The Company has made available to Parent (i) the Company's annual
reports on Form 10-K for its fiscal years ended December 31, 2002, 2001 and
2000, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended
March 31, 2002, June 30, 2002 and September 30, 2002, (iii) its proxy or
information statements relating to meetings of the stockholders of the Company
held (or actions taken without a meeting by such stockholders) since December
31, 2000, (iv) all of its other reports, statements, schedules and registration
statements filed with the SEC since its initial public offering (the documents
referred to in this Section 4.07(a), collectively, the "COMPANY SEC DOCUMENTS"),
which are all the reports, statements, schedules and registration statements
required to be filed by the Company with the SEC since its initial public
offering and (v) complete and correct copies of any correspondence with, and
inquiries from the SEC since January 1, 2001 with respect to the Company SEC
Documents.
(b) As of its filing date, each Company SEC Document complied as to form in
all material respects with the applicable requirements of the 1933 Act and the
1934 Act, as the case may be.
(c) As of its filing date (and, if amended or superseded by a filing prior
to the date hereof, on the date of such filing), each Company SEC Document filed
pursuant to the 1934 Act did not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading.
(d) Each Company SEC Document that is a registration statement, as amended
or supplemented, if applicable, filed pursuant to the 1933 Act, as of the date
such registration statement or amendment became
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effective, did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(e) The Company has in place the "disclosure controls and procedures" (as
defined in Rules 13a-14(c) and 15d-14(c) of the 1934 Act) required in order for
the principal executive officer and principal financial and accounting officer
of the Company to engage in the review and evaluation process mandated by the
1934 Act. The Company's "disclosure controls and procedures" are reasonably
designed to ensure that all information (both financial and non-financial)
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC, and that all such
information is accumulated and communicated to the Company's management as
appropriate to allow timely decisions regarding required disclosure and to make
the certifications of the principal executive officer and principal financial
and accounting officer of the Company required under the 1934 Act with respect
to such reports.
Section 4.08 FINANCIAL STATEMENTS.
The audited consolidated financial statements and unaudited consolidated
interim financial statements of the Company included in the Company SEC
Documents (i) were prepared in accordance with and accurately reflect in all
material respects, the Company's books and records as of the times and for the
periods referred to therein, (ii) complied in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto in effect during the periods included and (iii)
fairly present in all material respects, in conformity with United States
generally accepted accounting principles ("U.S. GAAP") applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto and except in the unaudited financial statements as may be permitted by
Form 10-Q), the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and their consolidated results
of operations and cash flows for the periods then ended (subject to normal year
end adjustments in the case of any unaudited interim financial statements which
were not and are not expected to have a Material Adverse Effect on the Company).
Section 4.09 DISCLOSURE DOCUMENTS.
(a) The proxy statement/prospectus to be filed with the SEC in connection
with the Merger (the "COMPANY PROXY STATEMENT") and any amendments or
supplements thereto will, when filed, comply as to form in all material respects
with the applicable requirements of the 1934 Act. At the time the Company Proxy
Statement or any amendment or supplement thereto is first mailed to stockholders
of the Company, at the time such stockholders vote on adoption of this Agreement
and as of the Effective Time, the Company Proxy Statement, as supplemented or
amended, if applicable, will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties contained in this Section 4.09(a)
will not apply to statements or omissions included in the Company Proxy
Statement based upon information furnished by Parent.
(b) None of the information provided or to be provided by the Company for
inclusion or incorporation by reference in the Registration Statements or any
amendment or supplement thereto, at the time each Registration Statement or any
amendment or supplement becomes effective, and at the Effective Time, will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading.
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Section 4.10 ABSENCE OF CERTAIN CHANGES.
Since the Company Balance Sheet Date, the business of the Company and its
Subsidiaries has been conducted in the ordinary course consistent with past
practices and, except as disclosed in the Company SEC Documents filed prior to
the date hereof and as contemplated by this Agreement, there has not been:
(a) any event, occurrence, development or state of circumstances or facts
that has had or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company;
(b) any declaration, setting aside or payment of any dividend (other than
the Cash Dividend) or other distribution with respect to any shares of capital
stock of the Company, or any repurchase, redemption or other acquisition by the
Company or any of its Subsidiaries of any outstanding shares of capital stock or
other securities of, or other ownership interests in, the Company or any of its
Subsidiaries, or any options, warrants, calls or rights to acquire any such
stock or other securities;
(c) any amendment of any material term of any outstanding security of the
Company or any of its Subsidiaries;
(d) any incurrence, assumption or guarantee by the Company or any of its
Subsidiaries of any indebtedness for borrowed money other than (i) borrowings
under existing credit facilities (or any renewals, replacements or extensions
that do not increase the aggregate commitments thereunder) and (ii) in the
ordinary course of business and in amounts and on terms consistent with past
practices;
(e) any making of any material loan, advance or capital contributions to or
investment in any Person other than loans, advances or capital contributions to
or investments in its wholly owned Subsidiaries made in the ordinary course of
business consistent with past practices;
(f) any transaction or commitment made, or any contract or agreement
entered into, by the Company or any of its Subsidiaries relating to its assets
or business (including the acquisition or disposition of any assets) or any
relinquishment by the Company or any of its Subsidiaries of any contract or
other right, in either case, material to the Company and its Subsidiaries, taken
as a whole, other than transactions and commitments in the ordinary course of
business consistent with past practices and those contemplated by this Agreement
or the Business Plan;
(g) any change in any method of accounting or accounting principles or
practice by the Company or any of its Subsidiaries materially affecting the
assets, liabilities or business of the Company and its Subsidiaries, except for
any such change required by reason of a concurrent change in U.S. GAAP or
Regulation S-X under the 1934 Act;
(h) any (i) grant of any material severance or termination pay to (or
amendment to any existing arrangement with) any director, officer or employee of
the Company or any of its Subsidiaries, (ii) material increase in benefits
payable under any existing severance or termination pay policies or employment
agreements, (iii) any entering into any employment, deferred compensation or
other similar agreement (or any amendment to any such existing agreement) with
any director, officer or employee of the Company or any of its Subsidiaries,
(iv) establishment, adoption or amendment (except as required by applicable law)
of any collective bargaining, bonus, profit-sharing, thrift, pension,
retirement, deferred compensation, compensation, stock option, restricted stock
or other benefit plan or arrangement covering any director, officer or employee
of the Company or any of its Subsidiaries or (v) material increase in
compensation, bonus or other benefits payable to any director, officer or
employee of the Company or any of its Subsidiaries, other than in the ordinary
course of business consistent with past practice;
(i) entry by the Company or any of its Subsidiaries into any licensing or
other agreement with regard to the acquisition or disposition of any Company
Intellectual Property Rights other than licenses in the ordinary course of
business consistent with past practice or any amendment or consent with respect
to any licensing agreement filed or required to be filed by the Company with the
SEC; or
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(j) any revaluation by the Company or any of its Subsidiaries of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable or any sale of assets of
the Company or any of its Subsidiaries other than in the ordinary course of
business.
Section 4.11 NO UNDISCLOSED MATERIAL LIABILITIES.
There are no liabilities or obligations of the Company or any of its
Subsidiaries of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, other than:
(a) liabilities or obligations disclosed and provided for in the Company
Balance Sheet or in the notes thereto or in the Company SEC Documents filed
prior to the date hereof; and
(b) liabilities or obligations incurred in the ordinary course of business
consistent with past practices since the Company Balance Sheet Date that would
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on the Company.
Section 4.12 COMPLIANCE WITH LAWS AND COURT ORDERS.
The Company and each of its Subsidiaries is and, since January 1, 2001, has
been in compliance with, and to the Knowledge of the Company is not under
investigation with respect to and has not been threatened to be charged with or
given notice of any violation of, any applicable law, statute, ordinance, rule,
regulation, judgment, injunction, order or decree, except for failures to comply
or violations that have not had and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company.
Section 4.13 LITIGATION.
Except as set forth in the Company SEC Documents filed prior to the date
hereof, there is no action, suit, investigation or proceeding pending against,
or, to the Knowledge of the Company, threatened against or affecting, the
Company, any of its Subsidiaries, any of their respective officers or directors
in their capacity as officers or directors of the Company or any of its
Subsidiaries or any of their respective properties before any court or
arbitrator or before or by any Governmental Entity, that, if determined or
resolved adversely in accordance with the plaintiff's demands, would reasonably
be expected to have, individually or in the aggregate, a Material Adverse Effect
on the Company, or that in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the Merger or any of the other transactions
contemplated hereby.
Section 4.14 FINDERS' FEES.
Except for Goldman, Sachs & Co., a complete copy of whose engagement
agreement (including all schedules and fee information) has been provided to
Parent, the Company has not incurred (directly or indirectly), nor will it
incur, directly or indirectly, any liability for any broker's, finder's,
financial advisor's or other similar fee, charge or commission in connection
with this Agreement or the transactions contemplated by this Agreement.
Section 4.15 OPINION OF FINANCIAL ADVISOR.
The Company has received the opinion of Goldman, Sachs & Co., financial
advisor to the Company, to the effect that, as of the date of this Agreement,
the Merger Consideration and the Dividend, in the aggregate, are fair to the
Company's stockholders from a financial point of view.
Section 4.16 TAXES.
(a) All material Tax Returns required by applicable law to be filed with
any Taxing Authority by, or on behalf of, the Company or any of its Subsidiaries
have been filed when due in accordance with all applicable laws, and all such
material Tax Returns are, or shall be at the time of filing, true and complete
in all material respects.
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(b) The Company and each of its Subsidiaries has paid (or has had paid on
its behalf) or has withheld and remitted to the appropriate Taxing Authority all
Taxes due and payable, or, where payment is not yet due, has established (or has
had established on its behalf and for its sole benefit and recourse) in
accordance with U.S. GAAP an adequate reserve for all Taxes, whether or not
shown as being due on any Tax Return, through the end of the last period for
which the Company and its Subsidiaries ordinarily record items on their
respective books except to the extent any failure to pay or reserve would not,
individually or in the aggregate, have a Material Adverse Effect.
(c) The income and franchise Tax Returns of the Company and its
Subsidiaries through the Tax year ended December 31, 1997 have been examined and
closed or are Tax Returns with respect to which the applicable period for
assessment under applicable law, after giving effect to extensions or waivers,
has expired. No extension of the statute of limitations on the assessment of any
Taxes has been granted by the Company or any of its Subsidiaries and is
currently in effect.
(d) There is no claim, audit, action, suit, proceeding or investigation now
pending or threatened in writing against or with respect to the Company or its
Subsidiaries in respect of any Tax or Tax asset. No Liens for Taxes exist with
respect to any of the assets of the Company or any of its Subsidiaries that are
currently in effect.
(e) During the five-year period ending on the date hereof, neither the
Company nor any of its Subsidiaries was a distributing corporation or a
controlled corporation in a transaction intended to be governed by Section 355
of the Code.
(f) Schedule 4.16(f) contains a list of all jurisdictions (whether foreign
or domestic) in which the Company or any of its Subsidiaries currently files Tax
Returns.
(g) "TAX" means any tax, governmental fee or other like assessment or
charge of any kind whatsoever (including, but not limited to, withholding on
amounts paid to or by any Person), together with any interest, penalty, addition
to tax or additional amount imposed by any governmental authority (a "TAXING
AUTHORITY") responsible for the imposition of any such tax (domestic or
foreign), and any liability for any of the foregoing as transferee. "TAX RETURN"
means any report, return, document, declaration or other information or filing
required to be supplied to any Taxing Authority with respect to Taxes, including
information returns, any documents with respect to or accompanying payments of
estimated Taxes, or with respect to or accompanying requests for the extension
of time in which to file any such report, return, document, declaration or other
information.
(h) Neither the Company nor any of its Subsidiaries is or may be liable for
the Taxes of any other Person under U.S. Treasury Regulation 1.1502-6 or similar
provision of state, local, provincial or foreign law, as a transferee or
successor, by contract or otherwise except for agreements applicable to members
of the affiliated group of which the Company is the common parent and for
liability for Taxes under U.S. Treasury Regulation Section 1.1502-6 for the
affiliated group of which the Company is the common parent.
Section 4.17 [RESERVED].
Section 4.18 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.18(a) contains a correct and complete list identifying each
"employee benefit plan," as defined in Section 3(3) of ERISA, each employment,
change of control severance or similar contract, plan, arrangement or policy and
each other plan or arrangement (written or oral) providing for compensation,
bonuses, profit-sharing, stock option or other stock related rights or other
forms of incentive or deferred compensation, vacation benefits, insurance
(including any self-insured arrangements), health or medical benefits, employee
assistance program, disability or sick leave benefits, workers' compensation,
supplemental unemployment benefits, severance benefits and post-employment or
retirement benefits (including compensation, pension, health, medical or life
insurance benefits) which is maintained, administered or contributed to by the
Company or any ERISA Affiliate and covers any employee or former employee of the
Company or any of its Subsidiaries, or with respect to which the Company or any
of its Subsidiaries has any liability; and form
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of employee confidentiality or other agreement protecting Company Intellectual
Property Rights. Copies of such plans (including the plan document, any trust
agreement and any other funding or insurance instruments relating thereto) have
been furnished or made available to Parent together with annual reports (Form
5500 including, if applicable, Schedule B thereto) for the most recent two years
prepared in connection with any such plan and, to the extent applicable, copies
of the most recent determination or opinion letter (and any outstanding request
for a determination or opinion letter). Such plans are referred to collectively
herein as the "EMPLOYEE PLANS." None of the Employee Plans is a plan described
in Section 201(2) of ERISA. The Company has separately provided or made
available to Parent a correct and complete list identifying the current annual
compensation rate (including bonus), current base salary rate, accrued bonus,
accrued sick leave, accrued severance pay and accrued vacation benefits of each
present employee of the Company or any of its Subsidiaries without identifying
such employees by name.
(b) Neither the Company nor any ERISA Affiliate nor any predecessor thereof
sponsors, maintains or contributes to, or has in the past six years sponsored,
maintained or contributed to, any Employee Plan subject to Title IV of ERISA or
to the minimum funding requirement of Section 412 of the Code or Part 3 of Title
I of ERISA.
(c) Neither the Company nor any ERISA Affiliate nor any predecessor thereof
contributes to, or has in the past six years contributed to, any multiemployer
plan, as defined in Section 3(37) of ERISA.
(d) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code has received a favorable determination or opinion letter, and
no event has occurred since the date of such determination or opinion letter
that could reasonably be expected to adversely affect such qualification. Each
Employee Plan has been maintained in material compliance with its terms and with
the requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which are
applicable to such Employee Plan. No events have occurred with respect to any
Employee Plan that could result in payment or assessment by or against the
Company of any material fine under ERISA or material excise taxes under Sections
4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E or 5000 of the Code.
(e) Neither the Company nor any of its Subsidiaries has any liability in
respect of post-retirement health, medical or life insurance benefits for
retired, former or current employees of the Company or its Subsidiaries except
as required to avoid excise tax under Section 4980B of the Code.
(f) There is no action, suit, investigation, audit or proceeding pending
against or involving or, to the Knowledge of the Company, threatened against or
involving, any Employee Plan before any court or arbitrator or any state,
federal or local governmental body, agency or official which would reasonably be
expected to result in a material liability.
(g) With respect to each Employee Plan, all forms, documents and other
materials have been filed with the SEC or otherwise distributed, in each case,
as required by the 1933 Act or the 1934 Act.
(h) The execution of this Agreement and the transaction contemplated herein
(whether alone of in connection with any other event) could not, pursuant to the
terms of the Employee Plans, result in the payment of cash or property to any
employee or the increase, acceleration or provision of any payments, other
rights or benefits to any employee, whether or not any such payment, right or
benefit would constitute a parachute payment within the meaning of Section 280G
of the Code.
(i) Each individual who is treated by the Company or any of its
Subsidiaries as an independent contractor is properly so treated under
applicable law, except as would not result in a material liability to the
Company.
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Section 4.19 ENVIRONMENTAL MATTERS.
(a) Except as set forth in the Company SEC Documents filed prior to the
date hereof and except as would not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on the Company:
(i) no written notice, order, complaint or penalty has been received by
the Company or any of its Subsidiaries arising out of any statute, law,
regulation or rule, in each case as in effect on the date hereof, relating to
pollution or protection of the environment or human health or safety
("ENVIRONMENTAL LAWS"), and there are no judicial, administrative or other
actions, suits or proceedings pending or, to the Company's Knowledge, threatened
which allege a violation by the Company or any of its Subsidiaries of any
Environmental Laws;
(ii) the Company and each of its Subsidiaries have all Environmental
Permits necessary for their operations to comply with all applicable
Environmental Laws and are in compliance with the terms of such Environmental
Permits; and
(iii) the operations of the Company and each of its Subsidiaries are in
compliance with the terms of applicable Environmental Laws.
(b) Except as set forth in this Section 4.19, no representations or
warranties are being made with respect to matters arising under or relating to
environmental matters.
Section 4.20 ANTITAKEOVER STATUTES AND RIGHTS AGREEMENT.
(a) The Company has taken all action necessary to exempt the Merger, the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby from the provisions of Section 203 of Delaware Law and any
other state takeover statute or similar law or regulations or any antitakeover
provision in the Company's certificate of incorporation or bylaws that otherwise
would be applicable, and, accordingly, no such Section applies or purports to
apply to any such transactions.
(b) The Company has taken all action necessary to render the Rights
Agreement inapplicable to the Merger, the execution, delivery and performance of
this Agreement and the transactions contemplated hereby. Without limiting the
generality of the foregoing, the Company has taken all action so that none of
the foregoing will result in the grant of any Rights to any Person under the
Rights Agreement or enable or require the Rights to be exercised, distributed or
triggered, and Parent will not be an "Acquiring Person" under the Rights
Agreement.
Section 4.21 INTELLECTUAL PROPERTY.
(a) Schedule 4.21 contains a list of all material patents, patent
applications, invention disclosures, registered trademarks, trademark
applications for registration, common law trademarks, domain names, software
programs and registered copyrights, and any material Intellectual Property
Rights owned or licensed and used or held for use by the Company or any
Subsidiary ("COMPANY INTELLECTUAL PROPERTY RIGHTS"). The Company is duly listed
(without break in title) in the records of the United States Patent and
Trademark Office ("PTO") as the holder of record of each of the patents, patent
applications, trademark registrations, trademark applications for registration
and registered copyrights for which it is delineated as holder on Schedule 4.21,
and the Company is duly listed (without break in title) in the records of the
appropriate foreign intellectual office as holder of record with respect to the
same. To the Knowledge of the Company, all of the issued and registered Company
Intellectual Property Rights were obtained in material compliance with all
applicable rules, policies, and procedures of the PTO or applicable foreign
intellectual property agency.
(b) With respect to licensed Company Intellectual Property Rights, to the
Knowledge of the Company, each material license agreement is duly executed,
valid, and binding on all parties thereto and enforceable in accordance with its
terms, and the Company has no Knowledge suggesting other than that all parties
to each material license agreement is in compliance with, and have not breached
any term of any such license agreements in such a manner that would give rise to
a termination right. With respect to each material license
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affecting Company Intellectual Property Rights, acquisition of the same through
Merger will not affect the exercise of the rights provided thereunder to the
Company or its Subsidiaries that would be available had the Merger not occurred,
and the acquisition through Merger does not result in payment of any additional
material amounts or consideration other than ongoing fees, royalties or payments
which the Company or its Subsidiaries would otherwise be required to be paid.
(c) No Company Intellectual Property Right is subject to any outstanding
judgment, injunction, lien, security interest, forebearance to sue, order,
decree or agreement restricting the use thereof by the Company or any Subsidiary
or restricting the licensing thereof by the Company or any Subsidiary to any
Person, except for any judgment, injunction, lien, security interest,
forebearance to sue, order, decree or agreement which would not reasonably be
expected to have a Material Adverse Effect.
(d) To the Knowledge of the Company, none of the Company's (or any of its
Subsidiaries') products or processes infringe or otherwise violate the
Intellectual Property Rights of any third party and the Company is not aware of
any pending intellectual property applications for registration or issuance that
would, if granted, limit or prohibit the business of the Company.
(e) The Company has no Knowledge which would form a basis for a finding
that any of the patents or patent applications owned or licensed by the Company
is unpatentable, unenforceable or invalid, or any of its registered or common
law trademarks or copyrights are unenforceable or invalid. To the Company's
Knowledge, all registered or issued Company Intellectual Property Rights on
Schedule 4.21(a) are subsisting, in full force and effect, have not been
cancelled or abandoned, and have not expired. All maintenance and renewal fees
presently due, or due in the past, with respect to the Company Intellectual
Property Rights have been paid, as well as have any registration, filing, or
other governmental fees. The Company and its Subsidiaries have taken all
commercially reasonable steps to protect their respective trade secrets, and
have entered into confidentiality agreements with employees and consultants to
protect such trade secrets. To the Knowledge of the Company, except pursuant to
such confidentiality agreements, there has been no disclosure by the Company or
any of its Subsidiaries of any such trade secrets. Any confidentiality
agreements executed by employees, consultants or other advisors of the Company,
or any of its Subsidiaries, are valid binding and enforceable in accordance with
their terms.
(f) To the Knowledge of the Company, there is no action, suit, allegation
claim or proceeding relating to the Company Intellectual Property Rights.
Neither the Company nor any of its Subsidiaries has received any communications
from a third party alleging or suggesting past, present or future infringement,
or proferring a license to intellectual property that the third party suggests
might be necessary for the Company or any of its Subsidiaries to conduct
business. Neither the Company nor any of its Subsidiaries has obtained written
opinions or memoranda of counsel relating to actual or potential third party
claims relating to third party Intellectual Property Rights.
(g) To the Knowledge of the Company, all of the Company Intellectual
Property Rights were duly obtained, and there are no ownership or right-to-use
disputes with respect thereto. To the Knowledge of the Company, no government
funding, facilities of a university, college or other education institution or
research center, or funding from third parties, was used in the development of
Company Intellectual Property Rights. No current or former stockholder,
director, officer or employee of the Company or any of its Subsidiaries will,
after the consummation of the Merger, own or retain any rights in, to or under
any of the Company Intellectual Property Rights.
Section 4.22 LABOR RELATIONS.
Neither the Company nor any of its Subsidiaries is party to any collective
bargaining agreement or any work rules or practices agreed to with any labor
union, employee association or similar organization, nor do the Company nor any
of its Subsidiaries have Knowledge of any such union, employee association or
similar organization that represents or claims to represent any of their
employees or intends to organize any of their employees; (ii) there is no labor
strike, dispute, slowdown, stoppage or lockout actually pending, or to the
Knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company or any of its Subsidiaries and, during the past five
years, there has not been any such action; (iii) neither the Company
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nor any of its Subsidiaries is engaged in any unfair labor practices as defined
in the National Labor Relations Act or other applicable law, ordinance or
regulation; (iv) there is no unfair labor practice charge or complaint against
the Company or any of its Subsidiaries pending or, to the Knowledge of the
Company and each of its Subsidiaries, threatened before the National Labor
Relations Board or any similar state agency; and (v) there is no grievance
arising out of any collective bargaining agreement or other grievance procedure.
Section 4.23 EMPLOYMENT.
(i) There are no written personnel policies, rules or procedures applicable
to employees of the Company or any of its Subsidiaries, other than those which
would not result in a material liability to the Company and those set forth in
Schedule 4.23, true and correct copies of which have heretofore been delivered
to Parent; (ii) the Company and each of its Subsidiaries is, and at all times
has been, in material compliance with all applicable laws respecting employment
and employment practices, terms and conditions of employment, wages, hours of
work and occupational safety and health and no complaints, lawsuits or other
proceedings are pending by or on behalf of any present or former employee of the
Company or any of its Subsidiaries, or any applicant for employment, alleging
breach of any such law, breach of any contract for employment or other
discriminatory or tortious conduct in connection with the employment
relationship other than (A) those which would not result in a material liability
to the Company and (B) lawsuits against the Company related to, arising out of
or resulting from the transactions contemplated hereby; provided that, such
lawsuits in the case of (B), will be promptly disclosed to Parent; and (iii) no
charges with respect to or relating to the Company or any of its Subsidiaries
are pending before any federal, state or local agency responsible for the
enforcement of labor or employment laws, neither the Company nor any of its
Subsidiaries has received notice from any such agency of the intent to conduct
an investigation with respect to or relating to the Company or any of its
Subsidiaries, and no such investigation is in progress, in each case other than
those which would not result in a material liability to the Company.
Section 4.24 WARN ACT.
The Company has complied in all material respects with the requirements of
the Workers Adjustment and Retraining Notification Act ("WARN ACT") with respect
to its employees. None of the Company's or any of its Subsidiaries' employees
has suffered an "employment loss" (as defined in the WARN Act) since six months
prior to the date hereof.
Section 4.25 RESTRICTIONS ON BUSINESS ACTIVITIES.
There is no agreement, commitment, judgment, injunction, order or decree
binding upon the Company or any of its Subsidiaries or to which the Company or
any of its Subsidiaries is a party which limits in any material respect the
right of the Company or any of its Subsidiaries (i) to engage in any line of
business, (ii) to develop, market or distribute products or services or (iii) to
compete with any Person, or granting any exclusive distribution rights.
Section 4.26 AGREEMENTS, CONTRACTS AND COMMITMENTS.
Neither the Company nor any of its Subsidiaries has breached, or received
in writing any claim or notice that it has breached, any of the terms or
conditions of any agreement, contract or commitment to which it is a party or by
which it is bound in such a manner as, individually or in the aggregate, are
reasonably likely to have a Material Adverse Effect on the Company. Each
agreement, contract or commitment to which the Company or any of its
Subsidiaries is a party or by which it is bound that has not expired by its
terms is in full force and effect, except where such failure to be in full force
and effect is not reasonably likely to have a Material Adverse Effect on the
Company.
Section 4.27 INSURANCE.
The Company maintains the insurance policies and fidelity bonds covering
the assets, business, equipment, properties, operations, employees, officers and
directors of the Company and its Subsidiaries as set
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forth in Section 4.27 of the Company Disclosure Schedule (collectively, the
"INSURANCE POLICIES"). There is no claim pending under any of the Insurance
Policies as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and the Company and its Subsidiaries are
otherwise in compliance in all material respects with the terms of such policies
and bonds.
Section 4.28 CHANGE OF CONTROL PAYMENTS.
Section 4.28 of the Company Disclosure Schedule sets forth each plan or
agreement pursuant to which any amounts may become payable (whether currently or
in the future) to current or former employees, officers and directors of the
Company or any of its Subsidiaries as a result of or in connection with the
Merger.
Section 4.29 NO EXISTING DISCUSSIONS.
Neither the Company nor any of its Subsidiaries is engaged, directly or
indirectly, in any discussions or negotiations with any Third Party with respect
to an Acquisition Proposal.
Section 4.30 CANADIAN OPERATIONS.
The aggregate gross book value of the assets in Canada of the Company and
its "affiliates" (within the meaning of Section (2) of the Competition Act) and
the gross revenues from sales in or from Canada generated from those assets
determined in each case as prescribed in Part IX of the Competition Act and the
regulations thereunder do not exceed C$35 million. The Company is not a
reporting issuer or equivalent for the purposes of any Canadian Securities Laws.
The Company has not made a prospectus offering or a distribution exempt from the
prospectus requirements under Canadian Securities Laws in any jurisdiction in
Canada.
Section 4.31 CASH DIVIDEND.
As of the date of this Agreement, after giving effect to the transactions
contemplated hereby (including, without limitation, the Merger) the Board of
Directors of the Company, after considering the advice of its advisors and after
reviewing other alternatives available to the Company (including liquidation,
dissolution or winding up of the Company), has determined that the Cash Dividend
and the Merger are in the best interests of the Company's stockholders and that,
based on the information available to the Company as of the date of this
Agreement and on reasonable assumptions based on such information and after
consultation with its advisors, the declaration and payment of the Cash Dividend
as of the date of this Agreement would not be illegal under applicable law.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure schedule delivered by Parent to the
Company prior to the execution of this Agreement, which disclosure schedule
shall specifically identify by section the representations and warranties of
Parent and the Merger Sub qualified by such disclosure (the "PARENT DISCLOSURE
SCHEDULE"), Parent and Merger Sub jointly and severally represent and warrant to
the Company that:
Section 5.01 CORPORATE EXISTENCE AND POWER.
Each of Parent and Merger Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all corporate powers and all governmental licenses,
authorizations, permits, consents and approvals required to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted, except for those licenses, authorizations, permits, consents
and approvals the absence of which would not have, individually or in the
aggregate, a Material Adverse Effect on Parent. Each of Parent and Merger Sub is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where such qualification is necessary, except for those
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jurisdictions where failure to be so qualified would not have, individually or
in the aggregate, a Material Adverse Effect on the Parent and its Subsidiaries,
taken as a whole. Parent has heretofore delivered to the Company true and
complete copies of the certificate of incorporation and bylaws of Parent and
Merger Sub as currently in effect. Neither Parent nor Merger Sub is in violation
of any of the provisions of its certificate of incorporation or bylaws.
Section 5.02 CORPORATE AUTHORIZATION.
(a) The execution, delivery and performance by each of Parent and Merger
Sub of this Agreement and the consummation by each of Parent and Merger Sub of
the transactions contemplated hereby (including the Merger) are within the
corporate powers of Parent and Merger Sub and have been duly authorized by all
necessary corporate action, and no other corporate proceedings on the part of
Parent or Merger Sub are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Parent and Merger Sub and constitutes a valid and
binding agreement of Parent and Merger Sub.
(b) At a meeting duly called and held, Parent's Board of Directors has (i)
unanimously determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of Parent's stockholders and (ii)
unanimously approved and adopted this Agreement and the transactions
contemplated hereby.
Section 5.03 GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by Parent and Merger Sub of this
Agreement and the Company Voting Agreements and the consummation by Parent and
Merger Sub of the transactions contemplated hereby require no action by or in
respect of, or filing with, any Governmental Entity, other than (i) the filing
of a certificate of merger with respect to the Merger with the Delaware
Secretary of State and appropriate documents with the relevant authorities of
other jurisdictions in which Parent or Merger Sub is qualified to do business,
(ii) compliance with any applicable requirements of the HSR Act, the Competition
Act and of laws, rules and regulations analogous to the HSR Act existing in
foreign jurisdictions, (iii) the filing and effectiveness of the Registration
Statements and of a registration statement on Form 8-A with respect to the ADSs
and the underlying Parent Stock under the 1934 Act (the "1934 ACT REGISTRATION
STATEMENT") and compliance with any other applicable requirements of the 1933
Act, the 1934 Act, the Canadian Securities Laws and any other applicable
securities laws or takeover laws, whether state or foreign, (iv) compliance with
the requirements of the TSX and Nasdaq, (v) any actions or filings the absence
of which would not be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent and (vi) filings and notices not
required to be made or given until after the Effective Time.
Section 5.04 NON-CONTRAVENTION.
The execution, delivery and performance by Parent and Merger Sub of this
Agreement and the Company Voting Agreements and the consummation by Parent and
Merger Sub of the transactions contemplated hereby do not and will not (i)
contravene, conflict with, or result in any violation or breach of any provision
of the certificate of incorporation or bylaws of Parent or Merger Sub or the
equivalent organizational documents of any of Parent's Subsidiaries, (ii)
assuming compliance with the matters referred to in Section 5.03, contravene,
conflict with or result in a violation or breach of any provision of any
applicable law, statute, ordinance, rule, regulation, judgment, injunction,
order or decree, (iii) require any consent or other action by any Person under,
constitute a default (or an event that with notice or lapse of time, or both,
would become a default) under, or cause or permit the termination, cancellation,
acceleration or other change of any right or obligation or the loss of any
benefit to which Parent or any of its Subsidiaries is entitled under any
provision of any agreement or other instrument binding upon Parent or any of its
Subsidiaries or any license, franchise, permit, certificate, approval or other
similar authorization affecting, or relating in any way to, the assets or
business of Parent and its Subsidiaries or (iv) result in the creation or
imposition of any Lien on any asset of Parent or any of its Subsidiaries, except
for such contraventions, conflicts and violations referred to in clause (ii) and
for such failures to obtain any such consent or other action, defaults,
terminations, cancellations,
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accelerations, changes, losses or Liens referred to in clauses (iii) and (iv)
that would not be reasonably expected to have, individually or in the aggregate,
a Material Adverse Effect on Parent.
Section 5.05 CAPITALIZATION.
(a) The authorized capital stock of Parent consists of an unlimited number
of shares of Parent Stock and an unlimited number of preferred shares, without
par value, of Parent ("PARENT PREFERRED SHARES"). As of March 24, 2003, there
were 55,227,982 outstanding shares of Parent Stock and no Parent Preferred
Shares and employee stock options to purchase an aggregate of 3,287,300 shares
of Parent Stock (of which options to purchase an aggregate of 846,340 shares of
Parent Stock were exercisable). All outstanding shares of capital stock of
Parent have been duly authorized and validly issued and are fully paid and
nonassessable and are not subject to preemptive rights created under the CBCA,
the certificate of incorporation or bylaws of Parent or any agreement or
document to which Parent is a party or by which it or its assets are bound.
(b) Except for changes since the close of business on March 24, 2003
resulting from the exercise of stock options or the grant of stock based
compensation to directors or employees, there are no outstanding (i) shares of
capital stock or voting securities of Parent, (ii) securities of Parent
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in Parent or (iii) options or other rights
(including preemptive rights) to acquire from Parent or other obligation of
Parent to issue, deliver, or sell or cause to be issued, delivered or sold, any
capital stock or other voting securities or ownership interests in or any
securities convertible into or exchangeable for capital stock or other voting
securities or ownership interests in Parent. There are no outstanding
obligations of Parent or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any of the securities referred to in clause (i), (ii) or (iii)
above. There are no registration rights and there is no voting trust or other
similar agreement or understanding to which Parent or any of its Subsidiaries is
a party with respect to any securities referred to in clause (i), (ii) or (iii)
above.
(c) The shares of Parent Stock to be issued as part of the Merger
Consideration have been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will have been validly issued and
will be fully paid and nonassessable and the issuance thereof is not subject to
any preemptive or other similar right; Parent will use commercially reasonable
efforts to cause any such shares issued to Canadian residents to be freely
tradable under applicable Canadian Securities Laws (subject to the filing by
Parent of all required documents and notices with the appropriate Governmental
Entities in Canada and to the extent that such shares are not holdings of a
"control block" as defined under applicable Canadian Securities Laws and the
other conditions set forth in applicable Canadian Securities Laws).
Section 5.06 SUBSIDIARIES.
(a) Schedule 5.06(a) contains a correct and complete list identifying each
Subsidiary of Parent. Each Subsidiary of Parent is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has all corporate powers and all governmental
licenses, authorizations, permits, consents and approvals required to carry on
its business as now conducted, except for those licenses, authorizations,
permits, consents and approvals the absence of which would not have,
individually or in the aggregate, a Material Adverse Effect on Parent. Each
Subsidiary of Parent is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where such qualification is
necessary, except for those jurisdictions where failure to be so qualified would
not have, individually or in the aggregate, a Material Adverse Effect on Parent.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, each Subsidiary of Parent, is owned by Parent, directly
or indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests). There are no outstanding (i) securities of Parent or any of its
Subsidiaries convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any of its Subsidiaries or
(ii) options or other rights to acquire from Parent or any of its Subsidiaries,
or other obligation of Parent or any of its Subsidiaries to issue, any capital
stock or other voting securities or ownership interests in, or any securities
convertible into or exchangeable for any capital stock or
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other voting securities or ownership interests in, any Subsidiary of Parent.
There are no outstanding obligations of Parent or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any of the securities referred to in
clauses (i) or (ii) above.
(c) Merger Sub was formed solely for the purpose of engaging in the
transactions contemplated hereby, has engaged in no other business activities
and has conducted its operations only as contemplated hereby.
Section 5.07 CSA FILINGS.
(a) Parent has made available to the Company (i) Parent's annual reports
for its fiscal years ended December 31, 2000, 2001 and 2002, (ii) annual
information forms for the fiscal years ended December 31, 1999, 2000 and 2001,
(iii) its quarterly reports for its fiscal quarters ended March 31, 2002, June
30, 2002 and September 30, 2002, (iv) its proxy or information statements
relating to meetings of or actions taken without a meeting by Parent's
stockholders held since December 31, 1999, and (v) all of its other reports,
statements, schedules, prospectuses and registration statements filed with the
CSA since December 31, 1999 (the documents referred to in this Section 5.07(a),
collectively, the "PARENT CSA DOCUMENTS"), which are all the reports, statements
and prospectuses required to be filed by Parent with the CSA since December 31,
1999.
(b) As of its filing date, each Parent CSA Document complied as to form in
all material respects with the applicable requirements of the Canadian
Securities Laws.
(c) As of its filing date, each Parent CSA Document did not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(d) Each Parent CSA Document that is a prospectus, as amended or
supplemented, if applicable, filed pursuant to the Canadian Securities Laws, as
of the date of such prospectus or amendment, contained full, true and plain
disclosure of all material facts, did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
Section 5.08 FINANCIAL STATEMENTS.
The audited consolidated financial statements and unaudited consolidated
interim financial statements of Parent included in the Parent CSA Documents (i)
were prepared in accordance with and accurately reflect in all material
respects, Parent's books and records as of the times and for the periods
referred to therein, (ii) complied in all material respects with applicable
accounting requirements and the published rules and regulations of the CSA with
respect thereto in effect during the periods included and (iii) fairly present
in all material respects, in conformity with Canadian generally accepted
accounting principles ("CANADIAN GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto and except
that the unaudited financial statements may not contain footnotes as permitted
by Canadian Securities Laws), the consolidated financial position of Parent and
its consolidated Subsidiaries as of the dates thereof and their consolidated
results of operations and cash flows for the periods then ended (subject to
normal year end adjustments in the case of any unaudited interim financial
statements which were not and are not expected to have a Material Adverse Effect
on Parent).
Section 5.09 DISCLOSURE DOCUMENTS.
(a) None of the information provided or to be provided by Parent for
inclusion in the Company Proxy Statement or any amendment or supplement thereto,
at the time the Company Proxy Statement or any amendment or supplement thereto
is first mailed to stockholders of the Company, at the time the stockholders
vote on adoption of this Agreement and the Merger and at the Effective Time,
will contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
(b) The Registration Statement of Parent on Form F-4 to be filed with the
SEC with respect to the offering of Parent Stock in connection with the Merger
(the "PARENT STOCK REGISTRATION STATEMENT") and the
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Registration Statement on Form F-6 relating to the ADSs (the "ADS REGISTRATION
STATEMENT" and, together with the Parent Stock Registration Statement, the
"REGISTRATION STATEMENTS") and any amendments or supplements thereto, when
filed, will comply as to form in all material respects with the requirements of
the 1933 Act. At the time each Registration Statement or any amendment or
supplement thereto becomes effective and at the Effective Time, such
Registration Statement, as amended or supplemented, will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The representations and warranties contained in this Section 5.09
will not apply to statements or omissions in the Registration Statements or any
amendment or supplement thereto based upon information furnished by the Company.
Section 5.10 ABSENCE OF CERTAIN CHANGES.
Since the Parent Balance Sheet Date, the business of Parent and its
Subsidiaries has been conducted in the ordinary course consistent with past
practice and, except as disclosed in the Parent CSA Documents filed prior to the
date hereof and as contemplated by this Agreement, there has not been:
(a) any event, occurrence, development or state of circumstances or facts
that has had or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Parent;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Parent, or any
repurchase, redemption or other acquisition by Parent or any of its Subsidiaries
of any outstanding shares of capital stock or other securities of, or other
ownership interests in, Parent or any of its Subsidiaries, or any options,
warrants, calls or rights to acquire any such stock or other securities;
(c) any amendment of any material term of any outstanding security of
Parent or any of its Subsidiaries;
(d) any incurrence, assumption or guarantee by Parent or any of its
Subsidiaries of any indebtedness for borrowed money other than borrowings under
existing credit facilities (or any renewals, replacements or extensions that do
not increase the aggregate commitments thereunder) and in the ordinary course of
business and in amounts and on terms consistent with past practices;
(e) any making of any material loan, advance or capital contributions to or
investment in any Person other than loans, advances or capital contributions to
or investments in its wholly-owned Subsidiaries made in the ordinary course of
business consistent with past practices;
(f) any change in any method of accounting or accounting principles or
practice by Parent or any of its Subsidiaries materially affecting the assets,
liabilities or business of Parent and its Subsidiaries, except for any such
change required by reason of a concurrent change in Canadian GAAP;
(g) entry by Parent or any of its Subsidiaries into any licensing or other
agreement with regard to the acquisition or disposition of any Intellectual
Property Right of Parent other than licenses in the ordinary course of business
consistent with past practice; or
(h) any revaluation by the Parent of any of its assets, including, without
limitation, writing down the value of capitalized inventory or writing off notes
or accounts receivable or any sale of assets of Parent or any of its
Subsidiaries other than in the ordinary course of business.
Section 5.11 NO UNDISCLOSED MATERIAL LIABILITIES.
There are no liabilities or obligations of Parent or any of its
Subsidiaries of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances that would reasonably be expected to result in
such a liability, other than:
(a) liabilities or obligations disclosed and provided for in the Parent
Balance Sheet or in the notes thereto or in the Parent CSA Documents filed prior
to the date hereof; and
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(b) liabilities or obligations incurred in the ordinary course of business
consistent with past practices since the Parent Balance Sheet Date that would
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent.
Section 5.12 COMPLIANCE WITH LAWS AND COURT ORDERS.
Parent and each of its Subsidiaries is and, since January 1, 2000, has been
in compliance with, and to the Knowledge of Parent is not under investigation
with respect to and has not been threatened to be charged with or given notice
of any violation of, any applicable law, rule, regulation, judgment, injunction,
order or decree, except for failures to comply or violations that have not had
and would not reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect on Parent.
Section 5.13 LITIGATION.
Except as set forth in the Parent CSA Documents prior to the date hereof,
there is no action, suit, investigation or proceeding (or any basis therefor)
pending against, or, to the Knowledge of Parent, threatened against or
affecting, Parent, any of its Subsidiaries, any of their respective officers or
directors in their capacity as officers or directors of Parent or any of its
Subsidiaries or any of their respective properties before any court or
arbitrator or any Governmental Entity, that, if determined or resolved adversely
in accordance with the plaintiff's demands, would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Parent or
that in any manner challenges or seeks to prevent, enjoin, alter or materially
delay the Merger or any of the other transactions contemplated hereby.
Section 5.14 FINDERS' FEES.
Except for TD Securities Inc., a complete copy of whose engagement
agreement (including all schedules and fee information) has been provided to the
Company, Parent has not incurred (directly or indirectly), nor will it incur
(directly or indirectly) any liability for any broker's, finder's, financial
advisor's or other similar fee, charge or commission in connection with this
Agreement or the transactions contemplated by this Agreement.
Section 5.15 TAXES.
(a) All material Tax Returns required by applicable law to be filed with
any Taxing Authority by, or on behalf of, Parent or any of its Subsidiaries have
been filed when due in accordance with all applicable laws, and all such
material Tax Returns are, or shall be at the time of filing, true and complete
in all material respects.
(b) Parent and each of its Subsidiaries has paid (or has had paid on its
behalf) or has withheld and remitted to the appropriate Taxing Authority all
Taxes due and payable, or, where payment is not yet due, has established (or has
had established on its behalf and for its sole benefit and recourse) in
accordance with Canadian GAAP an adequate reserve for all Taxes, whether or not
being shown as due on any Tax Return, through the end of the last period for
which Parent and its Subsidiaries ordinarily record items on their respective
books except to the extent any failure to pay or reserve would not, individually
or in the aggregate, have a Material Adverse Effect.
(c) The income and franchise Tax Returns of Parent and its material
Subsidiaries through the Tax year ended December 31, 1997 have been examined and
closed or are Tax Returns with respect to which the applicable period for
assessment under applicable law, after giving effect to extensions or waivers,
has expired.
(d) There is no claim, audit, action, suit, proceeding or investigation now
pending or threatened in writing against or with respect to Parent or its
material Subsidiaries in respect of any Tax or Tax asset. No lien for Taxes
exists with respect to any of the assets of Parent or any of its Subsidiaries
that are currently in effect.
(e) During the five-year period ending on the date hereof, neither Parent
nor any of its Subsidiaries was a distributing corporation or a controlled
corporation in a transaction intended to be governed by Section 355 of the Code.
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(f) Schedule 5.15(f) contains a list of all jurisdictions (whether foreign
or domestic) in which Parent or any of its material Subsidiaries currently files
Tax Returns.
(g) Neither Parent nor any of its Subsidiaries is or may be liable for the
Taxes of any other Person.
Section 5.16 [RESERVED].
Section 5.17 ENVIRONMENTAL MATTERS.
(a) Except as set forth in the Parent Annual Report filed prior to the date
hereof and except as would not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on Parent:
(i) no written notice, order, complaint or penalty has been received by
Parent or any of its Subsidiaries arising out of any Environmental Laws, and
there are no judicial, administrative or other actions, suits or proceedings
pending or, to Parent's Knowledge, threatened which allege a violation by Parent
or any of its Subsidiaries of any Environmental Laws;
(ii) Parent and each of its Subsidiaries have all Environmental Permits
necessary for their operations to comply with all applicable Environmental Laws
and are in compliance with the terms of such Environmental Permits; and
(iii) the operations of Parent and each of its Subsidiaries are in
compliance with the terms of applicable Environmental Laws.
(b) Except as set forth in this Section 5.17, no representations or
warranties are being made with respect to matters arising under or relating to
environmental matters.
Section 5.18 INTELLECTUAL PROPERTY.
(a) To the Knowledge of Parent, all of the patents, patent applications,
invention disclosures, registered trademarks, trademark applications for
registration, common law trademarks, domain names, software programs and
registered copyrights, and any material Intellectual Property Rights owned or
licensed and used or held for use by Parent or any Subsidiary ("PARENT
INTELLECTUAL PROPERTY RIGHTS") were obtained in material compliance with all
applicable rules, policies, and procedures of the PTO or applicable foreign
intellectual property agency.
(b) No Parent Intellectual Property Right is subject to any outstanding
judgment, injunction, lien, security interest, forebearance to sue, order,
decree or agreement restricting the use thereof by Parent or any Subsidiary or
restricting the licensing thereof by Parent or any Subsidiary to any Person,
except for any judgment, injunction, lien, security interest, forebearance to
sue, order, decree or agreement which would not reasonably be expected to have a
Material Adverse Effect.
(c) To the Knowledge of Parent, none of Parent's (or any of its
Subsidiaries') products or processes infringe or otherwise violate the
Intellectual Property Rights of any third party and Parent is not aware of any
pending intellectual property applications for registration or issuance that
would, if granted, limit or prohibit the business of Parent.
(d) Parent has no Knowledge which would form a basis for a finding that any
of the patents or patent applications owned or licensed by Parent is
unpatentable, unenforceable or invalid, or any of its registered or common law
trademarks or copyrights are unenforceable or invalid. Parent and its
Subsidiaries have taken all commercially reasonable steps to protect their
respective trade secrets, and have entered into confidentiality agreements with
employees and consultants to protect such trade secrets. To the Knowledge of
Parent, except pursuant to such confidentiality agreements, there has been no
disclosure by Parent or any of its Subsidiaries of any such trade secrets. Any
confidentiality agreements executed by employees, consultants or other advisors
of Parent, or any of its Subsidiaries, are valid binding and enforceable in
accordance with their terms.
(e) To the Knowledge of Parent, there is no action, suit, allegation claim
or proceeding relating to Parent Intellectual Property Rights. Neither Parent or
any of its Subsidiaries has received any communications from
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a third party alleging or suggesting past, present or future infringement, or
proferring a license to intellectual property that the third party suggests
might be necessary for Parent or any of its Subsidiaries to conduct business.
Neither Parent nor any of its Subsidiaries has obtained written opinions or
memoranda of counsel relating to actual or potential third party claims relating
to third party Intellectual Property Rights.
(f) To the knowledge of Parent, all of the Parent Intellectual Property
Rights were duly obtained, and there are no ownership or right to use disputes
with respect thereto.
Section 5.19 ANTITAKEOVER STATUTES AND RIGHTS AGREEMENT.
The execution and delivery of this Agreement by Parent and the consummation
of the transactions contemplated hereby will not constitute a takeover bid under
applicable Canadian Securities Laws or, based on the information contained in
the Company SEC documents and on filings made pursuant to Canadian Securities
Laws, be subject to Policy Q-27 of the Quebec Securities Commission. Parent's
certificate of incorporation and bylaws do not create, and Parent is not a party
to, any shareholder rights plan, poison pill, rights agreement or other similar
plan or agreement.
Section 5.20 RESTRICTIONS ON BUSINESS ACTIVITIES.
There is no agreement, commitment, judgment, injunction, order or decree
binding upon Parent or any of its Subsidiaries or to which Parent or any of its
Subsidiaries is a party which limits in any material respect the right of the
Company or any of its Subsidiaries (i) to engage in any line of business, (ii)
to develop, market or distribute products or services or (iii) to compete with
any Person, or granting any exclusive distribution rights.
ARTICLE 6
COVENANTS OF THE COMPANY
The Company agrees that:
Section 6.01 CONDUCT OF THE COMPANY.
Prior to the date hereof, the Company has furnished Parent with the
previously prepared budget for operating expenses of the Company, which has been
approved by the Company's Board of Directors (the "BUSINESS PLAN"). During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement pursuant to its terms and the Effective Time,
unless Parent shall have otherwise consented in writing, the Company and each of
its Subsidiaries shall conduct their respective business operations in the
ordinary course consistent with past practice (to the extent contemplated by the
Business Plan) and in accordance with all applicable laws and regulations and
pay or provide for all of their liabilities and obligations (including, without
limitation, all customers, suppliers, licensors, and licensees), in each case,
in accordance with the Business Plan, in an orderly fashion, so as to reasonably
maximize the cash and cash equivalents available to the Surviving Corporation
and, to the extent contemplated by the Business Plan, shall use their
commercially reasonably efforts to preserve intact the Company's and each of its
Subsidiaries' business organizations and relationships. The Company agrees not
to materially deviate from the Business Plan without Parent's advance written
approval, including incurring or paying any expense or liability the amount of
which exceeds by more than $75,000, the amount therefor reflected in the
Business Plan, or expenses or liabilities the aggregate amount of which exceeds
by more than $250,000, the respective amounts therefor reflected in the Business
Plan. The Company agrees to promptly advise Parent in writing of all material
developments relating to the conduct of the business of the Company and its
Subsidiaries, including resolution of litigation, disposition of tangible and
intangible assets and satisfaction of liabilities. If Parent requests the
written consent of the Company under Section 7.01 prior to taking any action for
which such consent is required thereunder, the Company shall respond to such
request as promptly as practicable and shall not unreasonably withhold such
consent. Without limiting the generality of the foregoing, without the
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prior written consent of Parent, from the date hereof until the Effective Time,
the Company shall not, and shall not permit any of its Subsidiaries, to:
(a) adopt or propose any change to its certificate of incorporation or
bylaws;
(b) merge or consolidate with any other Person or acquire a material amount
of stock or assets of any other Person;
(c) incur or pay any fees and expenses of counsel and accountants in
amounts in excess of the sum of (1) $600,000 plus (2) the excess (if any) of
budgeted operating expenses under the Business Plan over actual operating
expenses, to the extent the Company reasonably expects (and the Chief Financial
Officer of the Company certifies) that such excess will exist throughout the
period reflected in the Business Plan and on the Closing Date, in the aggregate,
arising out of, or in connection with or related to, the transactions
contemplated by this Agreement;
(d) sell, lease, license or otherwise dispose of any material Subsidiary or
material amount of assets, securities or property except (i) pursuant to
existing contracts or commitments and (ii) in the ordinary course consistent
with past practice or in accordance with the Business Plan;
(e) (i) take any action that would make any representation and warranty of
the Company hereunder inaccurate in any material respect at, or as of any time
prior to, the Effective Time or (ii) omit to take any action reasonably
necessary to prevent any such representation or warranty from being inaccurate
in any material respect at any such time;
(f) other than as disclosed on the Company Disclosure Schedule, waive any
stock repurchase rights, accelerate, amend or change the period of
exercisability of options or restricted stock, or reprice options granted under
any employee, consultant, director or other stock plans or authorize cash
payments in exchange for any options granted under any of such plans;
(g) purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of the Company or any of its Subsidiaries, except
repurchases of unvested shares at cost in connection with the termination of the
employment relationship with any employee pursuant to stock option or purchase
agreements in effect on the date hereof;
(h) issue, deliver, sell, authorize, pledge or otherwise encumber, or agree
to any of the foregoing with respect to, any shares of capital stock or any
securities convertible into or exchangeable for shares of capital stock, or
subscriptions, rights, warrants or options to acquire any shares of capital
stock or any securities convertible into or exchangeable for shares of capital
stock, or enter into other agreements or commitments of any character obligating
it to issue any such shares or convertible or exchangeable securities, other
than (i) the issuance, delivery, sale of shares of Company Stock pursuant to the
exercise of stock options therefor outstanding as of the date of this Agreement
and (ii) the granting of stock options (and the issuance of Company Stock upon
exercise thereof), in the ordinary course of business and consistent with past
practices, in an amount not to exceed options to purchase (and the issuance of
Company Stock upon exercise thereof) 100,000 shares in the aggregate (provided
that, the vesting of these options shall not accelerate (and these options shall
terminate) upon the closing of the Merger);
(i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of the Company or
any of its Subsidiaries, enter into any "keep well" or other agreements to
maintain any financial statement condition or enter into any arrangement having
the economic effect of any of the foregoing;
(j) (a) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), or litigation (whether or not commenced prior to the date of this
Agreement) in an amount that exceeds $75,000 individually or $250,000 in the
aggregate, other than the payment, discharge, settlement or satisfaction, in the
ordinary course of business consistent with past practices or in accordance with
their terms, of liabilities recognized or disclosed in the most recent
consolidated financial statements (or the notes thereto) of the Company included
in Company SEC Documents or in accordance with the Business Plan, or (b) waive
the benefits of, agree to modify in any manner, terminate,
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release any Person from, or knowingly fail to enforce any confidentiality or
similar agreement to which the Company or any of its Subsidiaries is a party or
of which the Company or any of its Subsidiaries is a beneficiary;
(k) incur or enter into any agreement, contract or commitment requiring the
Company to pay in excess of $75,000 individually or $250,000 in the aggregate in
any 12 month period other than in the ordinary course of business or in
accordance with the Business Plan;
(l) grant any severance or termination pay to any employee, except as
required by applicable law or as described on the Company Disclosure Schedule or
pursuant to written agreements in effect or policies existing on the date hereof
and as previously disclosed in writing to Parent or except to non-executive
employees in the ordinary course consistent with past practice, or adopt any new
severance, retention or change in control plan;
(m) declare, set aside, or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock; and
(n) except as set forth in Section 4.20, the Company shall not redeem the
Rights or terminate the Rights Agreement prior to the Effective Time;
provided, however, that nothing in this Agreement shall prohibit the Board
of Directors of the Company from declaring and paying, and the Company hereby
agrees to declare and pay (subject to permissibility under applicable law) a
cash dividend (the "CASH DIVIDEND") in respect of each outstanding share of
Company Stock in an amount equal to a fraction (rounded to the nearest whole
cent), the numerator of which shall be $100,000,000 and the denominator of which
shall be the number of outstanding shares of Company Stock outstanding
immediately prior to the Effective Time, such dividend to be segregated and set
aside immediately prior to the Effective Time with respect to each share of
Company Stock outstanding on the record date for such dividend (which shall be
the Closing Date) and distributed to the holders of such shares promptly
following the Effective Time.
Section 6.02 STOCKHOLDER MEETING.
The Company shall cause a meeting of its stockholders (the "COMPANY
STOCKHOLDER MEETING") to be duly called and held as soon as reasonably
practicable for the purpose of voting on the approval and adoption of this
Agreement and the Merger. Except as permitted by Section 6.03(b), the Company
will use its commercially reasonable efforts to solicit from its stockholders
proxies in favor of the approval and adoption of this Agreement and approval of
the transactions contemplated by this Agreement and will take all other action
reasonably necessary or advisable to secure the vote or consent of its
stockholders required by the rules of Nasdaq or Delaware Law to obtain such
approvals. Notwithstanding anything to the contrary contained in this Agreement,
the Company may adjourn or postpone the Company Stockholder Meeting to the
extent necessary to ensure that any necessary supplement or amendment to the
Company Proxy Statement is provided to the Company's stockholders in advance of
a vote on the Merger and this Agreement or, if as of the time for which the
Company Stockholder Meeting is originally scheduled (as set forth in the Company
Proxy Statement), there are insufficient shares of Company Stock represented
(either in person or by proxy) to constitute a quorum necessary to conduct the
business of the Company Stockholder Meeting. The Company shall ensure that the
Company Stockholder Meeting is called, noticed, convened, held and conducted,
and that all proxies solicited by the Company in connection with the Company
Stockholder Meeting are solicited, in compliance with Delaware Law, the
Company's certificate of incorporation and bylaws, the rules of Nasdaq and all
other applicable legal requirements. Notwithstanding anything in this Agreement
to the contrary, the Company's obligation to call, give notice of, convene and
hold the Company Stockholder Meeting in accordance with this Section 6.02 shall
not be limited to or otherwise affected by the commencement, disclosure,
announcement or submission to the Company of any Acquisition Proposal or of any
Change of Recommendation (as defined herein) and the Company shall not submit to
the vote of its stockholders any Acquisition Proposal, or propose to do so.
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Section 6.03 NO SOLICITATION; OTHER OFFERS.
(a) Until the earlier of the Effective Time and termination of this
Agreement pursuant to Article 10, neither the Company nor any of its
Subsidiaries shall, nor shall the Company or any of its Subsidiaries authorize
or permit any of its or their officers, directors, employees, investment
bankers, attorneys, accountants, consultants or other agents or advisors to,
directly or indirectly, (i) solicit, initiate, induce or take any action to
facilitate or encourage any inquiry with respect to, or the making, submission
or announcement of, any Acquisition Proposal, (ii) enter into, continue or
otherwise participate in any discussions or negotiations with, furnish any
information relating to the Company or any of its Subsidiaries or afford access
to the business, properties, assets, books or records of the Company or any of
its Subsidiaries to, otherwise cooperate in any way with, or knowingly assist,
participate in, facilitate or encourage any inquiries or effort by any Third
Party that is seeking to make, or has made, or that may reasonably be expected
to lead to, an Acquisition Proposal, (iii) grant any waiver or release under any
standstill or similar agreement with respect to any class of equity securities
of the Company or any of its Subsidiaries, (iv) authorize, approve or recommend
any Acquisition Proposal or Liquidation Alternative (except to the extent
permitted pursuant to Section 6.03(b)(iii)), or (v) enter into any letter of
intent, memorandum of understanding, agreement in principle, merger agreement,
acquisition agreement, option agreement, joint venture agreement, partnership
agreement or other similar agreement constituting, contemplating or related to,
or an agreement that is intended to or would reasonably be expected to lead to,
any Acquisition Proposal.
(b) Notwithstanding Section 6.03(a), if and only if none of the Company,
its Subsidiaries nor any of their officers, directors, employees, investment
bankers, attorneys, accountants, consultants or other agents or advisors,
directly or indirectly, shall have breached any of the restrictions or the
obligations under this Section 6.03, the Board of Directors of the Company,
directly or indirectly through advisors, agents or other intermediaries, may (i)
engage in negotiations or discussions with any Third Party that, subject to the
Company's compliance with Section 6.03(a), has made an unsolicited bona fide
written Acquisition Proposal that the Board of Directors reasonably believes
(considering advice from Davis Polk & Wardwell, outside legal counsel to the
Company, and Goldman, Sachs & Co., financial advisor to the Company) will (x)
lead to a Superior Proposal and (y) is from a Person reasonably capable of
consummating such Acquisition Proposal; (ii) in the case of such Acquisition
Proposal referred to in Section 6.03(b)(i), furnish to such Third Party
nonpublic information relating to the Company or any of its Subsidiaries
pursuant to a confidentiality agreement with terms no less favorable to the
Company than those contained in the Confidentiality Agreement and terms which
shall not include any provision calling for an exclusive right to negotiate with
such Third Party or having the effect of prohibiting the Company from satisfying
its obligations hereunder (a copy of which shall be provided for informational
purposes only to Parent); provided that, contemporaneously with furnishing any
such nonpublic information to such Third Party, it furnishes such nonpublic
information to Parent (to the extent such nonpublic information has not been
previously so furnished); (iii) following receipt of a Superior Proposal or a
determination that a Superior Alternative exists, fail to make, withdraw, or
modify in a manner adverse to Parent its recommendation to its stockholders
("CHANGE OF RECOMMENDATION"); provided that, (A) the Company Stockholder Meeting
has not occurred, (B) the Company delivers to Parent, promptly following the
Board of Directors resolution to make the Change of Recommendation, written
notice ("CHANGE OF RECOMMENDATION NOTICE") of the Change of Recommendation,
which notice shall state the material terms and conditions of the Superior
Proposal, and the identity of the Third Party making any Superior Proposal, or,
in the case of a Superior Alternative, that such Superior Alternative exists,
(C) the Board of Directors of the Company determines in its reasonable judgment
by a majority vote, after considering advice from Davis Polk & Wardwell, outside
legal counsel to the Company, and the Company's financial advisors (including
Goldman, Sachs & Co.), that failure to make a Change of Recommendation would
cause the Board of Directors to breach its fiduciary duties or otherwise be
unlawful under applicable law, and (D) for a period ending at 5:00 p.m. San
Francisco time on the third Business Day after delivering the Change of
Recommendation Notice, the Company shall provide Parent a reasonable opportunity
to make adjustments in the terms and conditions of this Agreement, and negotiate
in good faith with respect thereto; and/or (iv) take any non-appealable, final
action that any court of competent jurisdiction orders the Company to take.
Nothing contained herein shall prevent the Board of Directors of the Company
from complying with Rule 14e-2(a) under the 1934 Act with regard to an
Acquisition Proposal or from making any disclosure to
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the stockholders of the Company if, in the reasonable judgment of the Board of
Directors of the Company, after considering the advice of outside counsel,
failure so to disclose would breach its obligations under applicable law.
(c) The Board of Directors of the Company shall not take any of the actions
referred to in clauses (i) through (iv) of the preceding subsection unless the
Company shall have delivered to Parent a prior written notice advising Parent
that it intends to take such action, and the Company shall continue to advise
Parent after taking such action. In addition, the Company shall notify Parent by
5:00 p.m. San Francisco time on the first Business Day following receipt by the
Company (or any of its advisors) of any Acquisition Proposal, any indication
that any Third Party is considering making an Acquisition Proposal or any
request for information relating to the Company or any of its Subsidiaries or
for access to the business, properties, assets, books or records of the Company
or any of its Subsidiaries by any Third Party that may be considering making, or
has made, an Acquisition Proposal. The Company shall use its commercially
reasonable efforts to provide such notice orally and shall provide such notice
in writing in accordance with Section 11.01 hereof and shall identify the Third
Party making, and the terms and conditions of, any such Acquisition Proposal,
indication or request. The Company shall use its commercially reasonable efforts
to keep Parent fully informed, on a current basis, of the status and material
details of any such Acquisition Proposal, indication or request, including of
any meeting of its Board of Directors at which its Board of Directors is
reasonably expected to consider any Acquisition Proposal. The Company shall, and
shall cause its Subsidiaries and the officers, directors, employees, investment
bankers, attorneys, accountants, consultants or other agents or advisors of the
Company and its Subsidiaries to, cease immediately and cause to be terminated
any and all existing activities, discussions and negotiations, if any, with any
Third Party conducted prior to the date hereof with respect to any Acquisition
Proposal and shall use its commercially reasonable efforts to cause any such
Party (or its agents or advisors) in possession of confidential information
about the Company that was furnished by or on behalf of the Company to return or
destroy all such information.
Section 6.04 TAX MATTERS.
(a) Neither the Company nor any of its Subsidiaries shall make or change
any material Tax election, change any annual tax accounting period, adopt or
change any method of tax accounting, file any material amended Tax Returns or
claims for material Tax refunds, enter into any material closing agreement,
surrender any material Tax claim, audit or assessment, surrender any right to
claim a material Tax refund, offset or other reduction in Tax liability
surrendered, consent to any extension or waiver of the limitations period
applicable to any Tax claim or assessment or take or omit to take any other
action, if any such action or omission would have the effect of increasing the
Tax liability or reducing any Tax asset of the Company or any of its
Subsidiaries.
(b) The Company and each of its Subsidiaries shall establish or cause to be
established in accordance with U.S. GAAP on or before the Effective Time an
adequate accrual for all material Taxes, whether or not shown as being due on
any Tax Return, due with respect to any period ending prior to or as of the
Effective Time.
(c) All transfer, documentary, sales, use, stamp, registration, value added
and other such Taxes and fees (including any penalties and interest) incurred in
connection with the Merger and imposed on the Company or any of its Subsidiaries
(including any real property transfer tax and any similar Tax) shall be paid by
the Company when due, and the Company shall, at its own expense, file all
necessary Tax Returns and other documentation with respect to all such Taxes and
fees, and, if required by applicable law, the Company shall, and shall cause its
Affiliates to, join in the execution of any such Tax Returns and other
documentation.
(d) Notwithstanding any other provision of this Agreement, the Company
shall, on or prior to the Effective Time, pay all Taxes, and file all Tax
Returns, directly relating to the Cash Dividend if such payments or filings are
due on or prior to the Effective Time. If any such payment or filing is not due
on or prior to the Effective Time, the Company shall make such payment or filing
on or before the due date thereof. The Company shall elect to reduce to zero the
amount of federal withholding Tax payable in respect of the Cash Dividend
pursuant to Code Sections 1441, 1442 and 1443 by making the election provided in
Treas.
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Regulations Section 1.1441-3(c)(2)(i)(C), which election shall be based on a
"reasonable estimate" of the Company's accumulated and current earnings and
profits on the date of payment of the Cash Dividend, as provided in U.S.
Treasury Regulations Section 1.1441-3(c)(2)(ii).
Section 6.05 WARN COVENANT.
The Company shall not, at any time within 90 days before the Closing Date,
without complying fully with the notice and other requirements of the WARN Act,
effectuate (i) a "plant closing" as defined in the WARN Act affecting any site
of employment or one or more facilities or operating units within any site of
employment of the Company; or (ii) a "mass layoff" as defined in the WARN Act
affecting any site of employment of the Company; or any similar action under
applicable state or local law requiring notice to employees in the event of a
plant closing or layoff.
Section 6.06 TERMINATION OF COMPANY 401(K) PLAN.
The Company agrees to terminate its 401(k) plan, in accordance with
reasonable directions from Parent, effective immediately prior to the Effective
Time, at which time participants in the plan will become fully vested in their
accounts under such plan, subject to Parent's agreement in Section 7.05(f).
ARTICLE 7
COVENANTS OF PARENT AND MERGER SUB
Parent and Merger Sub, jointly and severally, each agrees that:
Section 7.01 CONDUCT OF PARENT.
From the date hereof until the earlier of the termination of this Agreement
pursuant to its terms and the Effective Time, unless Parent shall have otherwise
consented in writing, Parent and its Subsidiaries shall conduct their business
in the ordinary course consistent with past practice and shall use their
commercially reasonable efforts to preserve intact their business organizations
and relationships with third parties and to keep available the services of their
present officers and employees. If the Company requests the written consent of
Parent under Section 6.01 prior to taking any action for which such consent is
required thereunder, Parent shall respond to such request as promptly as
practicable and shall not unreasonably withhold such consent. Without limiting
the generality of the foregoing, without the prior written consent of the
Company, from the date hereof until the Effective Time, Parent shall not, and
shall not permit any of its Subsidiaries, to:
(a) adopt or propose any change in its certificate of incorporation, except
that Parent may adopt a new general bylaw to conform to recent amendments to the
CBCA as has been previously disclosed by Parent to the Company; and
(b) take any action that would make any representation and warranty of
Parent hereunder inaccurate in any respect at, or as of any time prior to, the
Effective Time;
provided, however, that Parent may, in its sole discretion, repay in whole or in
part C$5,000,000 principal amount (plus interest and other fees due with respect
to such amount) outstanding under Parent's credit facility with Canadian
Imperial Bank of Commerce.
Section 7.02 VOTING OF SHARES.
Parent shall vote all shares of Company Stock beneficially owned by it or
any of its Subsidiaries in favor of adoption of this Agreement at the Company
Stockholder Meeting.
Section 7.03 DIRECTOR AND OFFICER LIABILITY.
(a) For six years after the Effective Time, the Surviving Corporation shall
indemnify and hold harmless each present and former officer and director of the
Company (each an "INDEMNIFIED PERSON") in respect of
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acts or omissions occurring at or prior to the Effective Time (including acts or
omissions in connection with this Agreement and the confirmation of the
transactions contemplated hereby, to the fullest extent permitted by Delaware
Law or any other applicable laws and in accordance with the indemnification
agreement in effect on the date hereof between the Company and such Indemnified
Person and as provided under the Company's certificate of incorporation and
bylaws in effect on the date hereof; provided that, such indemnification shall
be subject to any limitation imposed from time to time under applicable law.
(b) For three years after the Effective Time, the Surviving Corporation
shall provide officers' and directors' liability insurance, to the extent such
insurance can be obtained by the Surviving Corporation using its commercially
reasonable efforts, in respect of acts or omissions occurring prior to the
Effective Time (including acts or omissions in connection with this Agreement
and the confirmation of the transactions contemplated hereby) covering each such
Indemnified Person currently covered by the Company's officers' and directors'
liability insurance policy on terms with respect to coverage and amount
comparable to those of such policy in effect on the date hereof; provided that,
in satisfying its obligation under this Section 7.03(b), the Surviving
Corporation shall not be obligated to pay premiums in excess of 200% of the
current annual premium therefor, which amount is not more than $1,200,000, and
if such insurance cannot be so maintained at a cost equal to or less than 200%
of the current annual premium, Parent shall use commercially reasonable efforts
to maintain as much of such insurance as can be so maintained at a cost equal to
200% of the current annual premiums of the Company for such insurance.
(c) The certificate of incorporation and bylaws of the Surviving
Corporation shall include provisions for exculpation of director and officer
liability and indemnification that are at least as favorable as those set forth
in the Company's certificate of incorporation and bylaws in effect on the date
hereof. For six years after the Effective Time, the Surviving Corporation shall
maintain in effect the provisions in its certificate of incorporation and bylaws
providing for indemnification of Indemnified Persons, with respect to the facts
or circumstances occurring at or prior to the Effective Time, to the fullest
extent permitted from time to time under Delaware Law, which provisions shall
not be amended except as required by applicable law or except to make changes
permitted by applicable law that would enlarge the scope of the Indemnified
Persons' indemnification rights thereunder.
(d) If Parent, the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other Person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its properties
and assets to any Person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Parent or
the Surviving Corporation, as the case may be, shall assume the obligations set
forth in this Section 7.03. Subject to the immediately preceding sentence,
nothing in this Section 7.03 shall in any way restrict or preclude the sale,
liquidation or dissolution of any Subsidiary of Parent at any time after the
Effective Time.
(e) The rights of each Indemnified Person under this Section 7.03 shall be
in addition to any rights such Person may have under the certificate of
incorporation or bylaws of the Company or any of its Subsidiaries, under
Delaware Law or any other applicable laws or under any agreement of any
Indemnified Person with the Company or any of its Subsidiaries. These rights
shall survive consummation of the Merger and are intended to benefit, and shall
be enforceable by, each Indemnified Person.
Section 7.04 STOCK EXCHANGE LISTING.
Parent shall use its commercially reasonable efforts to cause the ADSs to
be issued in connection with the Merger to be approved for quotation on Nasdaq
and the shares of Parent Stock to be issued in connection with the Merger to be
listed on the TSX, subject to, in the case of Nasdaq, official notice of
issuance.
Section 7.05 EMPLOYEE MATTERS.
(a) As of the Effective Time, Parent shall cause the Surviving Corporation
to maintain compensation and employee benefits plans and arrangements for
employees of the Company and its Subsidiaries as of the
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Effective Time that, in the aggregate, are substantially comparable to those
provided to similarly situated employees of Parent (other than equity-based
benefits).
(b) Prior to the Effective Time, the Company Board of Directors shall
pursuant to Section 19 of the Company's 1999 Employee Stock Purchase Plan (the
"ESPP"), shorten the Purchase Periods and Offering Periods (each as defined in
the ESPP) then in progress by setting a New Purchase Date (as defined in the
ESPP) that is prior to the Effective Time and notifying all participants in the
ESPP of such New Purchase Date at least ten (10) Business Days prior to the New
Purchase Date, and each participant's option under the ESPP shall be exercised
automatically on the New Purchase Date, unless prior to such date such
participant has withdrawn from the Offering Period, and any Purchase Periods and
Offering Periods then in progress shall end on the New Exercise Date.
(c) Parent shall, with respect to each employee of the Company that becomes
an employee of Parent (a "COMPANY EMPLOYEE"), cause such Company Employee's
service with the Company to be recognized as service for purposes of
eligibility, vesting and for purposes of vacation, paid time off and severance,
benefit accrual, in each benefit plan of Parent that is extended to any Company
Employee on or after the Closing Date; provided, however, that such crediting of
service shall not operate to duplicate the payment or funding of any benefit
under such plan.
(d) Parent shall use its best efforts to cause its benefit plans to waive
any preexisting condition, exclusion or waiting period limitation that was
likewise waived or otherwise satisfied as to each Company Employee under the
terms of any corresponding Employee Plan immediately prior to the Effective
Time; provided that, the applicable insurance carrier, third party provider or
the like agrees to do so; provided further that, Parent agrees that it will
comply with Section 9801 of the Code with respect to Company Employees.
(e) For the period from the Effective Time through December 31, 2003,
Parent will, or will cause the Surviving Corporation to, honor the severance
policies set forth in Section 4.18(a) of the Company Disclosure Schedule with
respect to employees of the Company as of the date hereof and on the terms of
such plans and agreements as in effect on the date hereof; provided, however,
that in no event shall additional severance benefits granted under the authority
of the resolution of the Company Board of Directors as of February 21, 2003
listed on Schedule 4.18(a) exceed $100,000 in the aggregate.
(f) If the Company's 401(k) plan is terminated pursuant to Section 6.06,
Parent agrees to take, or cause to be taken, such actions as are necessary to
permit participants in the Company's 401(k) plan to roll over their accounts
under such plan into (or to have their accounts under such plan directly
transferred to), and to continue to be eligible to participate in, a plan or
plans qualified under Section 401 of the Code maintained by Parent after the
Effective Time.
Section 7.06 TAX MATTERS.
(a) Neither Parent nor any of its Subsidiaries shall make or change any
material Tax election, change any annual tax accounting period, adopt or change
any method of tax accounting, file any material amended Tax Returns or claims
for material Tax refunds, enter into any material closing agreement, surrender
any material Tax claim, audit or assessment, surrender any right to claim a
material Tax refund, offset or other reduction in Tax liability surrendered,
consent to any extension or waiver of the limitations period applicable to any
Tax claim or assessment or take or omit to take any other action, if any such
action or omission would have the effect of increasing the Tax liability or
reducing any Tax asset of Parent or any of its Subsidiaries.
(b) Parent and each of its Subsidiaries shall establish or cause to be
established in accordance with Canadian GAAP on or before the Effective Time an
adequate accrual for all material Taxes due with respect to any period ending
prior to or as of the Effective Time.
(c) All transfer, documentary, sales, use, stamp, registration, value added
and other such Taxes and fees (including any penalties and interest) incurred in
connection with the Merger and imposed on Parent (including any real property
transfer Tax and any similar Tax) shall be paid by Parent when due, and Parent
shall, at its own expense, file all necessary Tax Returns and other
documentation with respect to all such Taxes
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and fees, and, if required by applicable law, Parent shall, and shall cause its
Affiliates to, join in the execution of any such Tax Returns and other
documentation.
ARTICLE 8
COVENANTS OF PARENT, MERGER SUB AND THE COMPANY
The parties hereto agree that:
Section 8.01 COMMERCIALLY REASONABLE EFFORTS.
(a) Subject to the terms and conditions of this Agreement, the Company,
Parent and Merger Sub shall use commercially reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement, including (i)
preparing and filing as promptly as practicable with any Governmental Entity or
other Third Party all documentation to effect all necessary filings,
assignments, notices, petitions, statements, registrations, submissions of
information, applications and other documents and (ii) obtaining and maintaining
all approvals, consents, registrations, permits, authorizations and other
confirmations required to be obtained from any Governmental Entity or other
Third Party that are necessary, proper or advisable to consummate the
transactions contemplated by this Agreement. In connection with and without
limiting the foregoing, the Company and its Board of Directors shall, if any
state takeover statute or similar statute or regulation is or becomes applicable
to the Merger, this Agreement or any of the transactions contemplated by this
Agreement, use its commercially reasonable efforts to enable the Merger and the
other transactions contemplated by this Agreement to be consummated as promptly
as practicable on the terms contemplated by this Agreement. Notwithstanding
anything herein to the contrary, nothing in this Agreement shall be deemed to
require Parent or the Company or any Subsidiary or affiliate thereof to agree to
any divestiture by itself or any of its affiliates of shares of capital stock or
of any business, assets or property, or the imposition of any material
limitation on the ability of any of them to conduct their business or to own or
exercise control of such assets, properties and stock.
(b) In furtherance and not in limitation of the foregoing, each of Parent
and the Company shall make an appropriate filing of a Notification and Report
Form pursuant to the HSR Act with respect to the transactions contemplated
hereby as promptly as practicable and in any event within ten Business Days of
the date hereof and to supply as promptly as practicable any additional
information and documentary material that may be requested pursuant to the HSR
Act and to take all other actions necessary to cause the expiration or
termination of the applicable waiting periods under the HSR Act as soon as
practicable.
Section 8.02 CERTAIN FILINGS.
The Company, Parent and Merger Sub shall cooperate with one another (i) in
connection with the preparation of the Company Proxy Statement and the
Registration Statements, (ii) in determining whether any action by or in respect
of, or filing with, any Governmental Entity is required, or any actions,
consents, approvals or waivers are required to be obtained from parties to any
material contracts, in connection with the consummation of the transactions
contemplated by this Agreement and (iii) in taking such actions or making any
such filings, furnishing information required in connection therewith or with
the Company Proxy Statement or the Registration Statements and seeking on a
timely basis to obtain any such actions, consents, approvals or waivers.
Section 8.03 PUBLIC ANNOUNCEMENTS.
Parent and the Company shall consult with each other before issuing any
press release or making any other public statement with respect to this
Agreement or the transactions contemplated hereby (including, without
limitation, in the event of termination of this Agreement) and, except as may be
required by applicable law, order of a court of competent jurisdiction or any
listing agreement with or rule of any national securities exchange or
association, shall not issue any such press release or make any such other
public
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statement prior to such consultation. In addition, the Company shall give Parent
a reasonable opportunity to review and comment on any documents to be filed with
the SEC, or any other public company statements by the Company, to be made, to
the extent such filings or statements contain information concerning the
Company's financial condition or results of operations, prior to their being
publicly filed with the SEC or publicly released, as the case may be.
Section 8.04 FURTHER ASSURANCES.
At and after the Effective Time, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of the Company, any deeds, bills of sale, assignments or
assurances and to take and do, in the name and on behalf of the Company, any
other actions and things to vest, perfect or confirm of record or otherwise in
the Surviving Corporation any and all right, title and interest in, to and under
any of the rights, properties or assets of the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger.
Section 8.05 ACCESS TO INFORMATION.
(a) From the date hereof until the Effective Time and subject to applicable
law and the Confidentiality Agreement dated as of December 10, 2002 between the
Company and Parent (the "CONFIDENTIALITY AGREEMENT"), the Company and Parent
shall, upon reasonable notice, (i) give to the other party, its officers,
employees, accountants, counsel, financial advisors and other representatives
reasonable access (in the case of Parent, including access for the purpose of
coordinating integration activities and transition planning with the employees
of the Company and its Subsidiaries) to the offices, properties, books and
records of such party during normal business hours, (ii) furnish to the other
party, its officers, employees, accountants, counsel, financial advisors and
other representatives such financial and operating data and other information as
such party may reasonably request and (iii) instruct its employees, counsel,
financial advisors, auditors and its other representatives to cooperate with the
other party in its investigation. Any investigation pursuant to this Section
shall be conducted in such manner as not to interfere unreasonably with the
conduct of the business of the other party. No information or knowledge obtained
in any investigation pursuant to this Section shall affect or be deemed to
modify any representation or warranty made by any party hereunder. The parties
shall hold such information that is non-public in confidence in accordance with
the Confidentiality Agreement.
(b) Notwithstanding anything to the contrary in this Agreement or any other
agreement relating to the transactions contemplated by this Agreement, the
parties hereto shall be permitted to disclose the U.S. federal income tax
treatment and tax structure of the transaction (including any materials,
opinions or analyses relating to such tax treatment or tax structure, but
without disclosure of identifying information or, except to the extent relating
to such tax structure or tax treatment, any nonpublic commercial or financial
information) on and after the date hereof. Moreover, notwithstanding any other
provision of this agreement, there shall be no limitation on either party's
ability to consult any tax advisor, whether or not independent from the parties,
regarding the U.S. federal income tax treatment or tax structure of the
transaction.
Section 8.06 NOTICES OF CERTAIN EVENTS.
Each of the Company, on the one hand and Parent and Merger Sub, on the
other, shall promptly notify the other of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any Governmental Entity or stock
exchange in connection with the transactions contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced or,
to its Knowledge, threatened against, relating to or involving or otherwise
affecting the Company or any of its Subsidiaries or Parent or any of its
Subsidiaries, as the case may be, that, if pending on the date of this
Agreement, would have been
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required to have been disclosed pursuant to Sections 4.12, 4.13, 4.16, 4.18,
4.19, 5.12, 5.13, 5.15, 5.17 or 5.18, as the case may be, or that relate to the
consummation of the transactions contemplated by this Agreement.
Section 8.07 [RESERVED].
Section 8.08 AFFILIATES.
Within 30 days following the date of this Agreement, the Company shall
deliver to Parent a letter identifying all known Persons who may be deemed
affiliates of the Company under Rule 145 of the 1933 Act. As soon as practicable
and, in any event, at least ten days prior to the Effective Time, the Company
shall use its commercially reasonable efforts to obtain a written agreement,
substantially in the form of Exhibit A hereto, from each Person who may be so
deemed.
Section 8.09 SECTION 16 MATTERS.
Prior to the Effective Time, Parent and the Company shall take all such
steps as may be required to cause any dispositions of Company Stock (including
derivative securities with respect to Company Stock) or acquisitions of Parent
Stock (including derivative securities with respect to Parent Stock) resulting
from the transactions contemplated by this Agreement by each individual who is
subject to the reporting requirements of Section 16(a) of the 1934 Act with
respect to the Company, to be exempt under Rule 16b-3 promulgated under such
Act, such steps to be taken in accordance with the No-Action Letter dated
January 12, 1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom LLP.
Section 8.10 PROXY STATEMENT; REGISTRATION STATEMENT.
(a) As promptly as practicable after the execution of this Agreement,
Parent and the Company shall prepare and file the Company Proxy Statement, and
Parent shall prepare and file the Parent Stock Registration Statement (in which
the Company Proxy Statement shall be included) and the ADS Registration
Statement, with the SEC. Each of Parent and the Company shall provide promptly
to the other such information concerning its business and financial statements
and affairs as, in the reasonable judgment of the providing party or its
counsel, may be required or appropriate for inclusion in the Company Proxy
Statement and the Registration Statements, or in any amendments or supplements
thereto, and to cause its counsel and auditors to cooperate with the other's
counsel and auditors in the preparation of the Company Proxy Statement and the
Registration Statements. Parent and the Company shall use all commercially
reasonable efforts to cause the Registration Statements to become effective
under the 1933 Act as soon after such filing as practicable and to keep the
Registration Statements effective (in the case of the Parent Stock Registration
Statement, as long as is necessary to consummate the Merger). The Company Proxy
Statement shall include the recommendation of the Board of Directors of the
Company in favor of approval and adoption of this Agreement and the Merger,
except to the extent the Board of Directors shall have withdrawn or modified its
approval or recommendation pursuant to Section 6.03(b). Parent and the Company
shall use all commercially reasonable efforts to cause the Company Proxy
Statement to be mailed to Company stockholders as promptly as practicable after
the Parent Stock Registration Statement becomes effective. Parent and the
Company shall promptly provide to each other copies of, consult with each other
regarding and together prepare written responses with respect to any written
comments received from the SEC with respect to the Company Proxy Statement and
the Registration Statements and shall promptly advise each other of any oral SEC
comments. The Registration Statements and the Company Proxy Statement shall
comply as to form in all material respects with the 1933 Act and the 1934 Act,
respectively.
(b) Parent and the Company shall make all necessary filings with respect to
the Merger and the transactions contemplated thereby under the 1933 Act, the
1934 Act, Canadian Securities Laws and applicable foreign or state securities or
"blue sky" laws. Each party hereto shall advise the other, promptly after
receipt of notice thereof, of the time of the effectiveness of the Registration
Statements, the filing of any supplement or amendment thereto, the issuance of
any stop order relating thereto, the suspension of the qualification of the ADSs
issuable in connection with the Merger for offering or sale in any jurisdiction,
or of any SEC request for amendment to the Company Proxy Statement or the
Registration Statements, SEC
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comments thereon and each party's responses thereto or SEC request for
additional information. No amendment or supplement to the Company Proxy
Statement or the Registration Statements shall be filed without the approval of
the parties hereto, which approval shall not be unreasonably withheld or
delayed. If, at any time prior to the Effective Time, Parent or the Company
should discover any information relating to any party, or any of their
respective Affiliates, officers or directors, that should be set forth in an
amendment or supplement to the Registration Statements or the Company Proxy
Statement, so that such documents would not include any misstatement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the party that discovers such information shall promptly notify
the other parties hereto and an appropriate amendment or supplement describing
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the stockholders of Parent and the Company.
Section 8.11 BOARD OF DIRECTORS OF PARENT.
Following the Effective Time, the Board of Directors of Parent will take
all actions necessary such that one member of the Company's Board of Directors,
designated by the Company and reasonably acceptable to Parent, shall be
appointed to Parent's Board of Directors with a term expiring at the next annual
meeting of Parent's stockholders following the Effective Time and shall include
such person in the slate of nominees recommended by Parent's Board of Directors
to the stockholders of Parent at such annual meeting.
ARTICLE 9
CONDITIONS TO THE MERGER
Section 9.01 CONDITIONS TO OBLIGATIONS OF EACH PARTY.
The obligations of the Company and Parent to consummate the Merger are
subject to the satisfaction of the following conditions:
(a) this Agreement and the Merger shall have been approved and adopted by
the stockholders of the Company in accordance with Delaware Law, the rules of
Nasdaq and the Company's organizational documents;
(b) no provision of any applicable law or regulation and no judgment, and
no temporary, preliminary or permanent injunction, order or decree (which the
parties shall have used all reasonable efforts to resist, resolve or lift) shall
have the effect of making the Merger illegal or otherwise prohibit the
consummation of the Merger;
(c) any applicable waiting period under the HSR Act or the Competition Act,
if any, relating to the Merger shall have expired or been terminated;
(d) the Registration Statements and the 1934 Act Registration Statement
shall have been declared effective and no stop order suspending the
effectiveness of the Registration Statements or the 1934 Act Registration
Statement shall be in effect and no proceedings for such purpose, and no similar
proceeding in respect of the Company Proxy Statement, shall be pending before or
threatened by the SEC; all authorizations pursuant to Canadian Securities Laws
necessary to carry out the transactions contemplated hereby shall have been
obtained and be in effect; and all state securities and blue sky authorizations
necessary to carry out the transactions contemplated hereby shall have been
obtained and be in effect;
(e) the ADSs to be issued in the Merger shall have been approved for
quotation on Nasdaq and the underlying Parent Stock shall have been reserved for
listing on the TSX, subject, in the case of Nasdaq, to official notice of
issuance, and such underlying Parent Stock shall be freely tradable under the
Canadian Securities Laws (to the extent that such shares are not holdings out of
a "control block" as defined thereunder);
(f) all actions by or in respect of, or filings with, any Governmental
Entity, required to permit the consummation of the Merger shall have been taken,
made or obtained;
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(g) the declaration and payment of the Cash Dividend shall be permissible
under applicable law; and
(h) notice shall have been given to the National Association of Securities
Dealers, Inc. 10 days in advance of the record date for the Cash Dividend in
accordance with Rule 10b-17 of the 1934 Act (unless the SEC exempts the Company
from compliance with such rule).
Section 9.02 CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB.
The obligations of Parent and Merger Sub to consummate the Merger are
subject to the satisfaction of the following further conditions:
(a) (i) the representations and warranties of the Company contained in this
Agreement that are qualified as to materiality or Material Adverse Effect shall
be true and correct, and the representations and warranties of the Company
contained in this Agreement that are not so qualified shall be true and correct
in all material respects, in each case as of the date of this Agreement and as
of the Closing Date as though made on the Closing Date, except to the extent
such representations and warranties expressly relate to an earlier date, in
which case as of such earlier date, (ii) the Company shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and (iii) Parent shall have received
a certificate signed by the Chief Executive Officer of the Company to the
foregoing effect;
(b) there shall not be pending or threatened any suit, action or proceeding
by any Governmental Entity prohibiting the transactions contemplated by this
Agreement or otherwise making them illegal;
(c) the Company shall have delivered a certification in the form attached
as Exhibit B hereto dated not more than 30 days prior to the Effective Time and
signed by the Company to the effect that the Company is not, nor has it been
within five years of the date of the certification, a "United States real
property holding corporation" as defined in Section 897 of the Code;
(d) the Company shall have delivered to Parent evidence satisfactory to
Parent of the resignation of all directors of the Company, effective as of the
Effective Time; and
(e) the Company shall have declared the Cash Dividend.
Section 9.03 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to consummate the Merger are further subject
to the satisfaction of the following further conditions:
(a) (i) the representations and warranties of Parent and Merger Sub
contained in this Agreement that are qualified as to materiality or Material
Adverse Effect shall be true and correct, and the representations and warranties
of Parent and Merger Sub contained in this Agreement that are not so qualified
shall be true and correct in all material respects, in each case as of the date
of this Agreement and as of the Closing Date as though made on the Closing Date,
except to the extent such representations and warranties expressly relate to an
earlier date, in which case as of such earlier date, (ii) Parent and Merger Sub
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
(iii) the Company shall have received a certificate signed by the Chief
Executive Officer of Parent to the foregoing effect; and
(b) there shall not be pending or threatened any suit, action or proceeding
by any Governmental Entity prohibiting the transactions contemplated by this
Agreement or otherwise making them illegal.
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ARTICLE 10
TERMINATION
Section 10.01 TERMINATION.
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time (notwithstanding any approval of this Agreement
by the stockholders of the Company):
(a) by mutual written agreement of the Company and Parent;
(b) by either the Company or Parent, if:
(i) the Merger has not been consummated on or before August 31, 2003;
provided that, the right to terminate this Agreement pursuant to this Section
10.01(b)(i) shall not be available to any party whose breach of any provision of
this Agreement results in the failure of the Merger to be consummated by such
time;
(ii) (A) there shall be any law or regulation (other than relating to
declaration or payment of the Cash Dividend) that makes consummation of the
Merger illegal or otherwise prohibited or (B) any judgment, injunction, order or
decree (which the parties shall have used their commercially reasonable efforts
to resist, resolve or lift) of any Governmental Entity having competent
jurisdiction enjoining the Company or Parent from consummating the Merger is
entered and such judgment, injunction, order or decree shall have become final
and nonappealable; or
(iii) this Agreement shall not have been approved and adopted in accordance
with Delaware Law by the Company's stockholders at the Company Stockholder
Meeting (or any adjournment thereof); provided, however, that the right to
terminate this Agreement under this Section 10.01(b)(iii) shall not be available
to the Company where the failure to obtain the Company stockholder approval
shall have been caused by the action or failure to act of the Company and such
action or failure to act constitutes a material breach by the Company of this
Agreement.
(c) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the required vote of the stockholders of the
Company) if any of the following shall be deemed to have occurred: (i) the
Company's Board of Directors shall have made a Change of Recommendation, (ii)
the Company shall have failed to include in the Company Proxy Statement the
recommendation of its Board of Directors in favor of the adoption and approval
of the Agreement and the approval of the Merger, (iii) the Company's Board of
Directors fails to reaffirm (publicly, if so requested) its recommendation in
favor of the adoption and approval of the Agreement and the approval of the
Merger within ten Business Days after Parent requests in writing that such
recommendation be reaffirmed following the public announcement of any
Acquisition Proposal, (iv) the Company's Board of Directors or any committee
thereof shall have approved or recommended any Acquisition Proposal, or (v) a
tender or exchange offer relating to its securities shall have been commenced by
a Third Party and the Company shall not have sent to its securityholders
pursuant to Rule 14e-2 promulgated under the Securities Act, within 10 Business
Days after such tender or exchange offer is first published, sent or given, a
statement disclosing that the Company Board of Directors recommends rejection of
such tender or exchange offer;
(d) by the Company, upon a material breach of any (i) covenant or agreement
on the part of Parent set forth in this Agreement or (ii) representation or
warranty, or if any representation or warranty of Parent shall have become
materially untrue, in either case such that the conditions set forth in Section
9.03(a) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue; provided that, if such
inaccuracy in Parent's representations and warranties or breach by Parent is
curable by Parent prior to the Closing Date, then the Company may not terminate
this Agreement under this Section 10.01(d) for 30 days after delivery of written
notice from the Company to Parent of such breach, provided that, Parent
continues to exercise commercially reasonable efforts to cure such breach (it
being understood that the Company may not terminate this Agreement pursuant to
this Section 10.01(d) if it shall have materially breached this Agreement or if
such breach by Parent is cured during such 30-day period); and
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provided further, that, Parent shall not be deemed to be in breach of any of its
covenants or agreements contained in this Agreement (and no termination event
shall be available) to the extent such breach was caused by the Company's
failure to respond to a request for written consent under Section 7.01 or
unreasonable withholding of such consent;
(e) by Parent, upon a material breach of any (i) covenant or agreement on
the part of the Company set forth in this Agreement or (ii) representation or
warranty, or if any representation or warranty of the Company shall have become
materially untrue, in either case such that the conditions set forth in Section
9.02(a) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue; provided that, if such
inaccuracy in the Company's representations and warranties or breach by the
Company is curable by the Company prior to the Closing Date, then Parent may not
terminate this Agreement under this Section 10.01(e) for 30 days after delivery
of written notice from Parent to the Company of such breach, provided that, the
Company continues to exercise commercially reasonable efforts to cure such
breach (it being understood that Parent may not terminate this Agreement
pursuant to this Section 10.01(e) if it shall have materially breached this
Agreement or if such breach by the Company is cured during such 30-day period);
and provided further, that, the Company shall not be deemed to be in breach of
any of its covenants or agreements contained in this Agreement (and no
termination event shall be available) to the extent such breach was caused by
Parent's failure to respond to a request for written consent under Section 6.01
or unreasonable withholding of such consent;
(f) by (i) Parent, if within a reasonable time following the request of
Parent, the Company's Board of Directors, based on the information available to
the Company as of the date of the request for such reaffirmation and on
reasonable assumptions based on such information and after consultation with its
advisors, fails to reaffirm that the declaration and payment of the Cash
Dividend as of the date of the request for such reaffirmation would not be
illegal under applicable law or (ii) the Company, if the Company's Board of
Directors determines in its reasonable judgment, after considering the advice of
its advisors, that the declaration and payment of the Cash Dividend shall not be
permissible under applicable law.
The party desiring to terminate this Agreement pursuant to this Section
10.01 (other than pursuant to Section 10.01(a)) shall give notice of such
termination to the other party.
Section 10.02 EFFECT OF TERMINATION.
If this Agreement is terminated pursuant to Section 10.01, this Agreement
shall become void and of no effect with no liability on the part of any party
(or any stockholder, director, officer, employee, agent, consultant or
representative of such party) to the other party hereto; provided that, if such
termination shall result from the willful (i) failure of either party to fulfill
a condition to the performance of the obligations of the other party or (ii)
failure of either party to perform a covenant hereof, such party shall be fully
liable for any and all liabilities and damages incurred or suffered by the other
party as a result of such failure. The provisions of this Section 10.02 and
Sections 8.03, 11.04, 11.05, 11.07, 11.08 and 11.09 shall survive any
termination hereof pursuant to Section 10.01.
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ARTICLE 11
MISCELLANEOUS
Section 11.01 NOTICES.
All notices, requests and other communications to any party hereunder shall
be in writing (including facsimile transmission) and shall be given,
if to the Company, to:
Sanjay K. Khare
Netro Corporation
3860 North First Street
San Jose, California 95134
Fax: (408) 216-1772
with a copy to:
Francis S. Currie
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
Fax: (650) 752-2111
and
Patricia Olasker
Davies Ward Phillips & Vineberg LLP
44th Floor, 1 First Canadian Place
Toronto, ON M5X 1B1
Fax: (416) 863-0871
if to Parent, to:
David Adams
SR Telecom Inc.
8150 Trans-Canada Highway
Montreal, Quebec, Canada H4S 1M5
Fax: (514) 956-4405
with a copy to:
Peter Villani
Fasken Martineau Du Moulin LLP
The Stock Exchange Tower
PO Box 242, 34th Floor
800 Victoria Square
Montreal, QC H4Z 1E9
Canada
Fax: (514) 397 7600
and
Ronald A. Fleming, Jr.
Pillsbury Winthrop LLP
One Battery Park Plaza
New York, New York 10004
Fax: (212) 858-1500
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or to such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. All such notices,
requests and other communications shall be deemed received on the date of
receipt by the recipient thereof if received prior to 5:00 p.m. on a Business
Day in the place of receipt. Otherwise, any such notice, request or
communication shall be deemed to have been received on the next succeeding
Business Day in the place of receipt.
Section 11.02 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties and agreements contained herein and in
any certificate or other writing delivered pursuant hereto shall not survive the
Effective Time, except for those agreements contained herein and any other
agreements that by their terms apply or are to be performed in whole or in part
after the Effective Time (including the provisions regarding director and
officer liability set forth in Section 7.03).
Section 11.03 AMENDMENTS; WAIVERS.
(a) Any provision of this Agreement may be amended or waived prior to the
Effective Time if, but only if, such amendment or waiver is in writing and is
signed, in the case of an amendment, by each party to this Agreement or, in the
case of a waiver, by each party against whom the waiver is to be effective;
provided that, after the adoption of this Agreement by the stockholders of the
Company and without their further approval, no such amendment or waiver shall
reduce the amount or change the kind of consideration to be received in exchange
for any shares of capital stock of the Company.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 11.04 FEES; EXPENSES.
(a) Except as otherwise provided in this Section, all costs and expenses
incurred in connection with this Agreement, the Merger and the other
transactions contemplated by this Agreement shall be paid by the party incurring
such cost or expense, whether or not the Merger is consummated; provided,
however that, the costs and expenses incurred in connection with (i) the
printing, filing and mailing to stockholders of the Company Proxy Statement and
the Registration Statements and the solicitation of the stockholder approval of
the Company, and all SEC and other regulatory filing fees incurred in connection
with the Company Proxy Statement and (ii) the filing fee for the notification
and report forms filed with the Federal Trade Commission and Department of
Justice under the HSR Act and premerger notification and report forms under
similar applicable laws of other jurisdictions, shall be shared equally by the
Company and Parent.
(b) The Company shall pay Parent (by wire transfer of immediately available
funds) the amounts set forth below within four Business Days after any of the
following events ("PAYMENT EVENTS"):
(i) $6,000,000 upon termination of this Agreement for one or more of the
following reasons: (x) by Parent pursuant to Section 10.01(c), (y) by either
Parent or the Company pursuant to Section 10.01(b)(iii) but only if there has
been a Change of Recommendation or (z) by Parent pursuant to Section 10.01(e)(i)
(but only if the breach referred to in Section 10.01(e)(i) is a willful and
material breach of a material covenant or agreement contained in Article 6 or
Article 8 of this Agreement (it being understood that no Payment Event shall
occur pursuant to this clause (b)(i)(z) with respect to any breach of any
covenant contained in Section 6.01(c), 6.01(e), 6.04, 6.05, 6.06 or 8.06
hereof));
(ii) $2,000,000 upon termination of this Agreement (x) by either Parent or
the Company pursuant to Section 10.01(b)(iii) if there has been no Change of
Recommendation, (y) by the Company pursuant to Section 10.01(f)(ii) or (z) by
Parent pursuant to Section 10.01(e)(i) with respect to a breach of the covenant
contained in Section 6.01(c);
(iii) in the case of any termination described in Section 11.01(b)(ii)(x)
or (y), if the Company consummates a Qualifying Transaction within eighteen (18)
months of the termination, concurrently with
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consummation of such Qualifying Transaction, an additional $2,500,000, for an
aggregate payment under this Section 11.04(b) of $4,500,000; provided, however,
that if such Qualifying Transaction involves the participation of a Third Party
(or any of such Third Party's Affiliates) who made (directly or indirectly
through its Affiliates or representatives) an Acquisition Proposal that was
publicly announced and made known to the Company's stockholders prior to the
Company Stockholder Meeting (whether or not conditional and whether or not such
Acquisition Proposal shall have been rejected or shall have been withdrawn prior
to the Company Stockholder Meeting), then the Company shall pay Parent an
additional $4,000,000 for an aggregate payment under this Section 11.04(b) of
$6,000,000.
For purposes of this Section 11.04, a "QUALIFYING TRANSACTION" means a
transaction whereby, (A) the Company merges with or into, or is acquired,
directly or indirectly, by merger or otherwise by, a Third Party (other than the
Company); (B) a Third Party (other than the Company), directly or indirectly,
acquires more than 50% of the total assets of the Company and its Subsidiaries,
taken as a whole (other than a liquidation, dissolution or winding up initiated
by the Company or any of its officers and directors in their capacities as such
and not including any other Third Party prior to the time of adoption or
implementation of such liquidation, dissolution or winding up); (C) a Third
Party (other than the Company), directly or indirectly, acquires more than 50%
of the outstanding shares of Company Stock; or (D) the Company adopts or
implements a plan of liquidation, recapitalization or share repurchase at the
initiation of, or (prior to the time the Company so adopts or implements such
plan) involving, a Third Party (it being understood that a liquidation initiated
by the Company or any of its officers and directors in their capacity as such
and not involving any other Third Party prior to the time of adoption or
implementation of such liquidation shall not constitute a Qualifying
Transaction) relating to more than 50% of the outstanding Shares or an
extraordinary dividend relating to more than 50% of the outstanding Shares of
50% of the assets of the Company and its Subsidiaries, taken as a whole.
(c) If a Payment Event occurs, the Company shall pay to Parent in
immediately available funds, within four Business Days after submission of
reasonable documentation therefor, an amount equal to all out-of-pocket expenses
and fees actually incurred by Parent arising out of, or in connection with or
related to, the transactions contemplated by this Agreement, including, without
limitation, all fees and expenses of agents, counsel, commercial banks,
investment banking firms, accountants, experts and consultants to Parent and its
affiliates if this Agreement is terminated in any of the circumstances set forth
in clauses (i) or (ii) of paragraph (b) above.
(d) The Company acknowledges that the agreements contained in this Section
11.04 are an integral part of the transactions contemplated by this Agreement
and that, without these agreements, Parent and Merger Sub would not enter into
this Agreement. Accordingly, if the Company fails promptly to pay any amount due
to Parent pursuant to this Section 11.04, it shall also pay any costs and
expenses incurred by Parent in connection with any legal actions brought to
enforce this Agreement (including attorney's fee and expenses), together with
interest on the amount of the fees to be paid pursuant to Section 11.04(b) from
the date such payment was required to be made until the date of payment at the
prime rate of Canadian Imperial Bank of Commerce in effect on the date such
payment was required to be made.
Section 11.05 RIGHT OF FIRST NEGOTIATION AND FIRST REFUSAL.
If (x) this Agreement is terminated in accordance with Section 10.01 and
(y) the Board of Directors of the Company approves a plan to liquidate, dissolve
or wind up the Company that, prior to the time of such approval, does not
involve a Third Party (other than the Company or its officers or directors in
their capacity as such), then upon the public announcement of such plan the
Parent shall have (a) a right of first negotiation and (b) a right of first
refusal with the Company with respect to the purchase of the Technology from the
Company, in each case for a period ending at 5:00 p.m. San Francisco time on the
45th day following such announcement (the "Expiration Date"). During such
period, the Company shall be free to negotiate with any prospective transferee
to obtain an offer to purchase the Technology; provided that, such offer must be
a bona fide cash offer from an independent Third Party and must contain
customary representations and warranties, and must not contain any special
provisions which could not be fulfilled by the independent Third Party. If the
Company receives from a prospective transferee such an offer on terms that the
Company is willing to accept,
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the Company shall provide written notice thereof to Parent, setting forth the
cash price and the other principal terms and conditions of the proposed
transfer. Upon the receipt of such notice, Parent shall have the right to
purchase, at the offered price, the Technology. After the Expiration Date,
Parent shall have no further rights under this Section 11.05 and the Company
shall have the ability to sell or transfer the Technology to any Third Party at
any price on any terms or conditions.
Section 11.06 BINDING EFFECT; BENEFIT; ASSIGNMENT.
(a) The provisions of this Agreement shall be binding upon and, except as
provided in Section 7.03, shall inure to the benefit of the parties hereto and
their respective successors and assigns. Except as provided in Section 7.03, no
provision of this Agreement is intended to confer any rights, benefits,
remedies, obligations or liabilities hereunder upon any Person other than the
parties hereto and their respective successors and assigns.
(b) No party may assign, delegate or otherwise transfer any of its rights
or obligations under this Agreement without the consent of each other party
hereto, except that Parent may transfer or assign, in whole or from time to time
in part, to one or more of its Affiliates, the right to enter into the
transactions contemplated by this Agreement, but any such transfer or assignment
shall not relieve Parent of its obligations hereunder.
Section 11.07 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable conflict of law principles.
Section 11.08 JURISDICTION.
Any suit, action or proceeding seeking to enforce any provision of, or
based on any matter arising out of or in connection with, this Agreement or the
transactions contemplated hereby shall be brought in any federal court located
in the State of Delaware or any Delaware state court, and each of the parties
hereto hereby consents to the exclusive jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
that it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient form.
Process in any such suit, action or proceeding may be served on any party
anywhere in the world, whether within or without the jurisdiction of any such
court. Without limiting the foregoing, each party hereto agrees that service of
process on such party as provided in Section 11.01 shall be deemed effective
service of process on such party.
Section 11.09 WAIVER OF JURY TRIAL.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 11.10 COUNTERPARTS; EFFECTIVENESS.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument. This Agreement shall become effective when
each party hereto shall have received counterparts hereof signed by all of the
other parties hereto.
Section 11.11 ENTIRE AGREEMENT.
This Agreement (including the disclosure schedules and the other documents
and instruments referred to herein) and the Confidentiality Agreement constitute
the entire agreement among the parties with respect to
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the subject matter of this Agreement and supersede all prior agreements and
understandings, both oral and written, among the parties with respect to the
subject matter of this Agreement.
Section 11.12 CAPTIONS.
The captions herein are included for convenience of reference only and
shall be ignored in the construction or interpretation hereof.
Section 11.13 SEVERABILITY.
If any term, provision, covenant or restriction of this Agreement is held
by a court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such a determination, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties hereto as closely as possible in an acceptable manner so
that the transactions contemplated hereby be consummated as originally
contemplated to the fullest extent possible.
Section 11.14 SPECIFIC PERFORMANCE.
The parties hereto agree that irreparable damage would occur if any
provision of this Agreement were not performed in accordance with the terms
hereof and that the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement or to enforce specifically the performance of
the terms and provisions hereof in any federal court located in the State of
Delaware or any Delaware state court, in addition to any other remedy to which
they are entitled at law or in equity.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
NETRO CORPORATION
By: /s/ Sanjay K. Khare
Name: Sanjay K. Khare
Title: Chief Financial Officer
SR TELECOM INC.
By: /s/ Pierre St-Arnaud
Name: Pierre St-Arnaud
Title: President and Chief Executive Officer
By: /s/ David Adams
Name: David Adams
Title: Vice President, Finance
and Chief Financial Officer
NORWAY ACQUISITION CORPORATION
By: /s/ Pierre St-Arnaud
Name: Pierre St-Arnaud
Title: President
By: /s/ David Adams
Name: David Adams
Title: Vice President
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EXHIBIT F
LIST OF DIRECTORS AND OFFICERS
Gideon Ben-Efraim
Sanjay Khare
Shlomo Yariv
Peter Carson
Sanford Robertson
Richard Moley
Irwin Federman
Shirley Young
Thomas Baruch
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ANNEX B-1
AMENDMENT NO. 1 TO MERGER AGREEMENT
B-1-1
AMENDMENT NO. 1
DATED AS OF MAY 5, 2003
TO
AGREEMENT AND PLAN OF MERGER
DATED AS OF MARCH 27, 2003
BY AND AMONG
NETRO CORPORATION,
SR TELECOM INC.
AND
NORWAY ACQUISITION CORPORATION
B-1-2
AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 1 dated as of May 5, 2003 (this "AMENDMENT") to the Agreement
and Plan of Merger, dated as of March 27, 2003 (the "AGREEMENT"), by and among
Netro Corporation, a Delaware corporation, SR Telecom Inc. ("PARENT"), a
corporation organized under the Canadian Business Corporations Act, and Norway
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Parent.
RECITALS
WHEREAS, pursuant to Section 11.03 of the Agreement, the parties to the
Agreement desire to amend the Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Amendment and in the
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereby agree as follows:
AGREEMENT
SECTION 1. DEFINED TERMS; REFERENCES. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and
each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Agreement shall, after this Amendment
becomes effective, refer to the Agreement as amended by this Amendment.
SECTION 2. AMENDMENTS TO THE AGREEMENT. The Agreement shall be amended as
follows:
(a) The third recital of the Agreement is hereby deleted in its entirety
and replaced with the following:
WHEREAS, pursuant to the Merger, all of the issued and outstanding
shares of Company Stock (as defined herein) shall be converted into
the right to receive consideration in the form of shares of Parent
Stock (as defined herein).
(b) The following cross-references set forth in Section 1.01(b) of the
Agreement are hereby deleted: "ADSs," "ADS Registration Statement" and
"Registration Statements".
(c) Section 2.02(a) of the Agreement is hereby deleted in its entirety and
replaced with the following:
(a) except as otherwise provided in Sections 2.02(b) and 2.05, each
share of Company Stock (along with each Right attached thereto)
outstanding immediately prior to the Effective Time, shall be
automatically converted into the right to receive the number of
shares of Parent Stock equal to a fraction, the numerator of which
is 41,500,000 and the denominator of which is the number of shares
of Company Stock outstanding immediately prior to the Effective
Time (the "MERGER CONSIDERATION"); provided, that, in lieu of
issuing any fractional share of Parent Stock to any holder (after
aggregating all fractional shares of Parent Stock that otherwise
would be received by such holder), the number of shares of Parent
Stock issuable to such holder shall be rounded to the nearest whole
number, with any fraction equal to or greater than one-half rounded
up to the next succeeding whole number;
(d) The phrase "in respect of the ADSs" in the first sentence of Section
2.02(d) of the Agreement is hereby deleted.
(e) The word "ADSs" in each of Section 2.03(b), Section 4.05(b) and
Section 8.10(b) of the Agreement is hereby deleted and replaced with the
phrase "shares of Parent Stock".
(f) The phrase "ADSs or" in the penultimate sentence of Section 2.03(e) of
the Agreement is hereby deleted.
B-1-3
(g) Section 4.09(b) of the Agreement is hereby amended by (i) replacing
the phrase "Registration Statements" with the phrase "Parent Stock
Registration Statement" and (ii) replacing the phrase "each Registration
Statement" with the phrase "the Parent Stock Registration Statement".
(h) Section 5.02(a) of the Agreement is hereby amended by adding the
following phrase to the end of the first sentence (before the period):
, except for stockholder approval required in connection with any
reverse stock split of Parent Stock necessary to obtain quotation
on Nasdaq.
(i) Section 5.03(iii) is hereby deleted in its entirety and replaced with
the following:
(iii) the filing and effectiveness of the Parent Stock Registration
Statement and of a registration statement on Form 8-A with respect
to the Parent Stock under the 1934 Act (the "1934 ACT REGISTRATION
STATEMENT") and compliance with any other applicable securities
laws or takeover laws, whether state or foreign,
(j) The first two sentences of Section 5.09(b) of the Agreement are hereby
deleted in their entirety and replaced with the following:
(b) The registration statement of Parent on Form F-4 to be filed with
the SEC with respect to the offering of Parent Stock in connection
with the Merger (the "PARENT STOCK REGISTRATION STATEMENT") and any
amendments or supplements thereto, when filed, will comply as to
form in all material respects with the requirements of the 1933
Act. At the time the Parent Stock Registration Statement or any
amendment or supplement thereto becomes effective and at the
Effective Time, such Parent Stock Registration Statement, as
amended or supplemented, will not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading.
(k) The phrase "Registration Statements" in Section 5.09(b), Section 8.02,
Section 8.10, Section 9.01(d) and Section 11.04(a) of the Agreement is
hereby deleted and replaced with the phrase "Parent Stock Registration
Statement".
(l) The proviso set forth immediately after Section 7.01(b) of the
Agreement is amended to add the following further proviso to the end of
such proviso:
; and provided, further, that nothing in this Agreement shall
prohibit (or be deemed to cause any representation or warranty of
the Parent, including, without limitation, the representation set
forth in Section 5.10(b) to become untrue) the Parent from
declaring or effecting a reverse stock split of the shares of
Parent Stock so as to effectuate the quotation of the shares of
Parent Stock on Nasdaq.
(m) Section 7.04 of the Agreement is hereby deleted in its entirety and
replaced with the following:
Parent shall use its commercially reasonable efforts (i) to hold,
if necessary, a special meeting of Parent stockholders for the
purpose of approving the reverse stock split of the shares of
Parent Stock so as to effectuate the quotation of the shares of
Parent Stock on Nasdaq, (ii) to solicit from its stockholders
proxies in favor of the approval of the reverse stock split, as
applicable, and (iii) to cause the shares of Parent Stock to be
issued in connection with the Merger to be approved for quotation
on Nasdaq and to be listed on the TSX, subject to, in the case of
Nasdaq, official notice of issuance.
(n) The phrase "and the ADS Registration Statement" in the first sentence
of Section 8.10(a) of the Agreement is hereby deleted.
B-1-4
(o) The text of Section 9.01(e) of the Agreement is hereby deleted in its
entirety and replaced with the following:
the shares of Parent Stock to be issued in the Merger shall have
been approved for quotation on Nasdaq and shall have been reserved
for listing on the TSX, subject in the case of Nasdaq, to official
notice of issuance, and such shares of Parent Stock shall be freely
tradable under the Canadian Securities Laws (to the extent that
such shares are not holdings out of a "control block" as defined
thereunder);
(p) The phrase "Section 11.01(b)(ii)(x) or (y)" in the first sentence of
Section 11.04(b)(iii) of the Agreement is hereby deleted and replaced
with the phrase "Section 11.04(b)(ii)(x) or (y)".
SECTION 3. REPRESENTATIONS OF EACH PARTY. Each party represents and
warrants that (i) the execution, delivery and performance of this Amendment by
such party have been duly authorized by all necessary corporate action and (ii)
this Amendment constitutes a valid and binding agreement of such party.
SECTION 4. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation hereof
SECTION 5. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable conflict of law
principles.
SECTION 6. COUNTERPARTS; EFFECTIVENESS. This Amendment may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
SECTION 7. SEVERABILITY. If any term or other provision of this Amendment
is invalid, illegal or unenforceable, all other provisions of this Amendment
shall remain in full force and effect so long as the economic or legal substance
of the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
B-1-5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
NETRO CORPORATION
By: /s/ Sanjay K. Khare
Name: Sanjay K. Khare
Title: Chief Financial Officer
SR TELECOM INC.
By: /s/ Pierre St-Arnaud
Name: Pierre St-Arnaud
Title: President and Chief Executive Officer
By: /s/ David Adams
Name: David Adams
Title: Vice President, Finance
and Chief Financial Officer
NORWAY ACQUISITION CORPORATION
By: /s/ Pierre St-Arnaud
Name: Pierre St-Arnaud
Title: President
By: /s/ David Adams
Name: David Adams
Title: Vice President
B-1-6
ANNEX B-2
AMENDMENT NO. 2 TO MERGER AGREEMENT
B-2-1
AMENDMENT NO. 2 (INCLUDING CONSENT AND WAIVER)
DATED AS OF JULY 17, 2003
TO
AGREEMENT AND PLAN OF MERGER
DATED AS OF MARCH 27, 2003
BY AND AMONG
NETRO CORPORATION,
SR TELECOM INC.
AND
NORWAY ACQUISITION CORPORATION
B-2-2
AMENDMENT NO. 2 (INCLUDING CONSENT AND WAIVER)
TO AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 2 (including Consent and Waiver) dated as of July 17, 2003
(this "AMENDMENT") to the Agreement and Plan of Merger, dated as of March 27,
2003 (the "ORIGINAL MERGER AGREEMENT"), by and among Netro Corporation, a
Delaware corporation, SR Telecom Inc. ("PARENT"), a corporation organized under
the Canada Business Corporations Act, and Norway Acquisition Corporation, a
Delaware corporation and a wholly owned subsidiary of Parent, as previously
amended by Amendment No. 1 to the Original Merger Agreement, dated as of May 5,
2003 (the Original Merger Agreement as so amended by such Amendment No. 1, the
"AGREEMENT").
RECITALS
WHEREAS, pursuant to Section 11.03 of the Agreement, the parties to the
Agreement desire to amend the Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Amendment and in the
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereby agree as follows:
AGREEMENT
SECTION 1. DEFINED TERMS; REFERENCES. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and
each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Agreement shall, after this Amendment
becomes effective, refer to the Agreement as amended by this Amendment.
SECTION 2. AMENDMENT TO THE AGREEMENT. The Agreement shall be amended as
follows:
(a) Section 5.05(b) of the Agreement is hereby amended by deleting the
first sentence thereof in its entirety and replacing it with the
following:
Except as set forth in this Section 5.05 and for changes since the
close of business on March 24, 2003 resulting from (x) the exercise
of stock options or the grant of stock based compensation to
directors or employees and (y) the issuance and sale of up to
5,280,000 units (each a "Unit" and, collectively, the "Units") at a
purchase price of C$0.85 per Unit, each Unit comprised of one share
of Parent Stock and one-half of one warrant (each whole warrant to
purchase one share of Parent Stock at C$1.00 per share), pursuant to
the Agency Agreement to be dated on or about July 18, 2003 between
the Company and TD Securities Inc. and CIBC World Markets Inc., and
from the exercise of such warrants, there are no outstanding (i)
shares of capital stock or voting securities of Parent, (ii)
securities of Parent convertible into or exchangeable for shares of
capital stock or other voting securities or ownership interests in
Parent or (iii) options or other rights (including preemptive
rights) to acquire from Parent or other obligation of Parent to
issue, deliver, or sell or cause to be issued, delivered or sold,
any capital stock or other voting securities or ownership interests
in or any securities convertible into or exchangeable for capital
stock or other voting securities or ownership interests in Parent.
(b) The phrase "unless Parent shall have otherwise consented in writing"
in the first sentence of Section 7.01 of the Agreement is hereby
deleted and replaced with the phrase "unless the Company shall have
otherwise consented in writing".
SECTION 3. CONSENT AND WAIVER. The Company hereby consents to the
issuance and sale by Parent of the Parent Stock and warrants referred to in
clause (y) of the first sentence of Section 5.05(b) of the
B-2-3
Agreement, as amended by this Amendment, and the Company expressly waives the
application of all covenants of Parent set forth in Section 7.01 of the
Agreement applicable thereto.
SECTION 4. REPRESENTATIONS OF EACH PARTY. Each party represents and
warrants that (i) the execution, delivery and performance of this Amendment by
such party have been duly authorized by all necessary corporate action and (ii)
this Amendment constitutes a valid and binding agreement of such party.
SECTION 5. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation hereof
SECTION 6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable conflict of law
principles.
SECTION 7. COUNTERPARTS; EFFECTIVENESS. This Amendment may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
SECTION 8. SEVERABILITY. If any term or other provision of this Amendment
is invalid, illegal or unenforceable, all other provisions of this Amendment
shall remain in full force and effect so long as the economic or legal substance
of the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
B-2-4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
NETRO CORPORATION
By: /s/ Sanjay K. Khare
------------------------------------
Name: Sanjay K. Khare
Title: Chief Financial Officer
SR TELECOM INC.
By: /s/ Pierre St-Arnaud
------------------------------------
Name: Pierre St-Arnaud
Title: President and Chief Executive
Officer
By: /s/ David Adams
------------------------------------
Name: David Adams
Title: Senior Vice President,
Finance & Chief Financial
Officer
NORWAY ACQUISITION CORPORATION
By: /s/ Pierre St-Arnaud
------------------------------------
Name: Pierre St-Arnaud
Title: President
By: /s/ David Adams
------------------------------------
Name: David Adams
Title: Vice President
B-2-5
ANNEX B-3
AMENDMENT NO. 3 TO MERGER AGREEMENT
B-3-1
AMENDMENT NO. 3
DATED AS OF AUGUST 6, 2003
TO
AGREEMENT AND PLAN OF MERGER
DATED AS OF MARCH 27, 2003
BY AND AMONG
NETRO CORPORATION,
SR TELECOM INC.
AND
NORWAY ACQUISITION CORPORATION
B-3-2
AMENDMENT NO. 3 TO AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 3 dated as of August 6, 2003 (this "AMENDMENT") to the
Agreement and Plan of Merger, dated as of March 27, 2003 (the "ORIGINAL MERGER
AGREEMENT"), by and among Netro Corporation, a Delaware corporation, SR Telecom
Inc. ("PARENT"), a corporation organized under the Canada Business Corporations
Act, and Norway Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Parent, as previously amended by Amendment No. 1 to the
Original Merger Agreement, dated as of May 5, 2003 and Amendment No. 2 to the
Original Merger Agreement, dated as of July 17, 2003 (the Original Merger
Agreement as so amended by such Amendment No. 1 and Amendment No. 2, the
"AGREEMENT")
RECITALS
WHEREAS, pursuant to Section 11.03 of the Agreement, the parties to the
Agreement desire to amend the Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Amendment and in the
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereby agree as follows:
AGREEMENT
SECTION 1. DEFINED TERMS; REFERENCES. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and
each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Agreement shall, after this Amendment
becomes effective, refer to the Agreement as amended by this Amendment.
SECTION 2. AMENDMENT TO THE AGREEMENT. The Agreement shall be amended as
follows:
(a) Section 4.13 of the Agreement is hereby amended and restated as
follows:
"Except as set forth in the Company SEC Documents filed prior to
the date hereof, there is no action, suit, investigation or
proceeding, other than the actions styled Fuller & Thaler Asset
Management, Inc. v. Netro Corp. et al., Case No. CV816170 (Cal.
Super. Ct.) and Maritime Association -- I.L.A. Pension Fund v.
Netro Corp. et al., Case No. CV817375 (Cal. Super. Ct.) pending
against, or, to the Knowledge of the Company, threatened against or
affecting, the Company, any of its Subsidiaries, any of their
respective officers or directors in their capacity as officers or
directors of the Company or any of its Subsidiaries or any of their
respective properties before any court or arbitrator or before or
by any Governmental Entity, that, if determined or resolved
adversely in accordance with the plaintiff's demands, would
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on the Company, or that in any manner
challenges or seeks to prevent, enjoin, alter or materially delay
the Merger or any of the other transactions contemplated hereby."
(b) Section 10.01(b)(i) of the Agreement is hereby amended and restated as
follows:
"(i) the Merger has not been consummated on or before September 30,
2003; provided that, the right to terminate this Agreement pursuant
to this Section 10.01(b)(i) shall not be available to any party
whose breach of any provision of this Agreement results in the
failure of the Merger to be consummated by such time and provided,
further, that the Company hereby expressly waives its rights to
terminate this Agreement pursuant to this Section 10.01(b)(i) as a
result of either or both of the actions styled Fuller & Thaler
Asset Management, Inc. v. Netro Corp. et al., Case No. CV816170
(Cal. Super. Ct.) or Maritime
B-3-3
Association -- I.L.A. Pension Fund v. Netro Corp. et al., Case No.
CV817375 (Cal. Super. Ct.)."
SECTION 3. CONSENT AND WAIVER. For the avoidance of doubt, Parent and
Merger Sub hereby expressly waive their condition to close pursuant to Section
9.02(a)(i) and their rights to terminate this Agreement pursuant to Section
10.01(e)(ii) as a result of either or both of the actions styled Fuller & Thaler
Asset Management, Inc. v. Netro Corp. et al., Case No. CV816170 (Cal. Super.
Ct.) or Maritime Association -- I.L.A. Pension Fund v. Netro Corp. et al., Case
No. CV817375 (Cal. Super. Ct.).
SECTION 4. REPRESENTATIONS OF EACH PARTY. Each party represents and
warrants that (i) the execution, delivery and performance of this Amendment by
such party have been duly authorized by all necessary corporate action and (ii)
this Amendment constitutes a valid and binding agreement of such party.
SECTION 5. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable conflict of law
principles.
SECTION 7. COUNTERPARTS; EFFECTIVENESS. This Amendment may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
SECTION 8. SEVERABILITY. If any term or other provision of this Amendment
is invalid, illegal or unenforceable, all other provisions of this Amendment
shall remain in full force and effect so long as the economic or legal substance
of the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
B-3-4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
NETRO CORPORATION
By: /s/ Sanjay K. Khare
------------------------------------
Name: Sanjay K. Khare
Title: Chief Financial Officer
SR TELECOM INC.
By: /s/ Pierre St-Arnaud
------------------------------------
Name: Pierre St-Arnaud
Title: President and Chief Executive
Officer
By: /s/ David Adams
------------------------------------
Name: David Adams
Title: Senior Vice President,
Finance & Chief Financial
Officer
NORWAY ACQUISITION CORPORATION
By: /s/ Pierre St-Arnaud
------------------------------------
Name: Pierre St-Arnaud
Title: President
By: /s/ David Adams
------------------------------------
Name: David Adams
Title: Vice President
B-3-5
ANNEX C-1
OPINION OF GOLDMAN, SACHS & CO.
C-1-1
(Letterhead of Goldman, Sachs & Co.)
PERSONAL AND CONFIDENTIAL
March 27, 2003
Board of Directors
Netro Corporation
3860 North First Street
San Jose, CA 95134
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.001
per share (the "Shares"), of Netro Corporation (the "Company") of the
Consideration (as defined below) to be received by such holders pursuant to the
Agreement and Plan of Merger, dated as of March 27, 2003 (the "Agreement"),
among SR Telecom, Inc. ("SR Telecom"), Norway Acquisition Corporation, a wholly
owned subsidiary of SR Telecom ("Acquisition Sub"), and the Company. The
Agreement provides that Acquisition Sub will be merged with and into the Company
(the "Merger") and each outstanding Share will be converted into the number of
American Depository Shares representing shares of Common Stock, without par
value (the "SR Telecom Common Stock"), of SR Telecom equal to a fraction, the
numerator of which is 41,500,000 and the denominator of which is the number of
Shares outstanding immediately prior to consummation of the Merger (the "Merger
Consideration"). You have informed us (and we have assumed for purposes of this
opinion) that, immediately prior to consummation of the Merger, the Company will
declare a dividend on its Shares in an amount per Share equal to $100,000,000
divided by the number of Shares outstanding immediately prior to consummation of
the Merger (the "Dividend"; together with the Merger Consideration, the
"Consideration").
C-1-2
Board of Directors
Netro Corporation
March 27, 2003
Page Two
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in performing financial analyses with respect to businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for estate, corporate and
other purposes. We are familiar with the Company having provided certain
investment banking services to the Company from time to time, including having
acted as sole lead manager and bookrunner of its public offering of 6,000,000
Shares in March 2000, its financial advisor in connection with the purchase of
certain assets from AT&T Wireless Services, Inc. in January 2002 and its
financial advisor and dealer manager in connection with its self-tender for
Shares in August 2002, and having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Agreement. We also may provide investment banking services to the Company and SR
Telecom in the future. Goldman, Sachs & Co. provides a full range of financial
advisory, financing and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold positions
in securities, including derivative securities, of the Company or SR Telecom for
its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company for the four years ended December 31, 2002; Annual Reports to
Shareholders of SR Telecom for the five years ended December 31, 2002; the
Registration Statement on Form S-1 of the Company, including the prospectus
dated August 18, 1999, relating to the initial public offering of the Shares;
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
the Company and certain quarterly reports to shareholders of SR Telecom; certain
other communications from the Company to its stockholders; and certain internal
financial analyses and forecasts for the Company and SR Telecom prepared by
their respective managements (the "Forecasts"), including certain cost savings
and operating synergies projected by the management of the Company and SR
Telecom to result from the transaction contemplated by the Agreement and
forecasts and analyses prepared by management for the Company of the proceeds
that would be distributed to holders of Shares in the event of a liquidation of
the Company. We also have held discussions with members of the senior
managements of the Company and SR Telecom regarding their assessment of the
strategic rationale for, and the potential benefits of, the transaction
contemplated by the Agreement and the past and current business operations,
financial condition and future prospects of their respective companies. In
addition, we have reviewed the reported price and trading activity for the
Shares and the SR Telecom Common Stock, compared certain financial and stock
market information for the Company and SR Telecom with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the
communications
C-1-3
Board of Directors
Netro Corporation
March 27, 2003
Page Three
technology industry specifically and in other industries generally and performed
such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting and other information discussed with or reviewed by us and have
assumed such accuracy and completeness for purposes of rendering this opinion.
In that regard, we have assumed with your consent that the Forecasts have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the Company and SR Telecom. In addition, we have not made an
independent evaluation or appraisal of the assets and liabilities (including any
derivative or off-balance-sheet assets and liabilities) of the Company or SR
Telecom or any of their respective subsidiaries and we have not been furnished
with any such evaluation or appraisal. We are also not expressing any opinion as
to the impact of the transactions contemplated by the Agreement on the solvency
or viability of the Company or the ability of the Company to pay its obligations
when they become due. In addition, our opinion does not address the relative
merits of the transaction contemplated pursuant to the Agreement as compared to
any alternative business transaction or strategic course that might be available
to the Company. Our advisory services and the opinion expressed herein are
provided solely for the information and assistance of the Board of Directors of
the Company in connection with its consideration of the transaction contemplated
by the Agreement and such opinion does not constitute a recommendation as to how
any holder of Shares should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Consideration to be received by holders of Shares pursuant to the Agreement is
fair from a financial point of view to such holders.
Very truly yours,
/s/ Goldman, Sachs & Co.
------------------------
(GOLDMAN, SACHS & CO.)
C-1-4
ANNEX C-2
PRELIMINARY OPINION OF AMERICAN APPRAISAL ASSOCIATES, INC.
C-2-1
(American Appraisal Associates LOGO)
UNITED STATES 411 East Wisconsin Avenue INTERNATIONAL
Suite 1900
Atlanta Milwaukee P.O. Box 664 Brazil Mexico
Boston Minneapolis Milwaukee, Wisconsin 53202-0664 Canada Morocco
Buffalo New Orleans Telephone: (414) 271-7240 China Philippines
Charlotte New York www.american-appraisal.com Croatia Portugal
Chicago Oak Lawn Czech Republic Russia
Cincinnati Philadelphia England Spain
Dallas Pittsburgh Germany Taiwan
Denver Princeton Greece Thailand
Detroit Schaumburg Hong Kong Turkey
Houston St. Louis Hungary Venezuela
Irvine San Francisco Italy
Jacksonville Seattle Japan
Los Angeles
March 26, 2003
Board of Directors
Netro Corporation
3860 North First Street
San Jose, California 95134
Dear Members of the Board:
American Appraisal Associates, Inc. ("AAA") has been engaged by Netro
Corporation, a Delaware corporation (together with its subsidiaries on a fully
consolidated basis, "NETRO") for the limited purpose of providing a solvency
opinion, as described herein, in connection with a planned $US100 million
dividend to be paid to its stockholders (the "DIVIDEND") and a subsequent
acquisition of Netro by SR Telecom Inc., a Canadian corporation (together with
its subsidiaries on a fully consolidated basis, "SRT") by means of a reverse
triangular merger, in which a wholly owned subsidiary of SRT will merge with and
into Netro and Netro will continue as a wholly owned subsidiary of SRT (the
"MERGER").
BACKGROUND
We understand that the terms and conditions of the planned Dividend and
Merger are broadly summarized as follows:
- Netro will declare and pay the Dividend to its stockholders; and
- Shortly following the declaration of the Dividend, the Merger will
become effective (the "EFFECTIVE TIME") and the holders of outstanding
shares of Netro common stock immediately prior to the Effective Time
will receive an aggregate of approximately 41.5 million shares of newly
authorized SRT common stock.
The Dividend, the Merger and the payment of related fees and expenses in
connection therewith are collectively referred to as the "TRANSACTION."
For purposes of the remaining portions of this document, the term "SRT"
pertains to SRT and Netro, together with their respective subsidiaries, on a
fully consolidated basis.
SOLVENCY TESTS
In connection with the planned Transaction, you have requested that we
render (i) an oral preliminary opinion ("ORAL OPINION") presented to the Board
of Directors of Netro (the "BOARD") on March 25, 2003, (ii) this written summary
of the oral preliminary opinion ("PRELIMINARY SOLVENCY OPINION") and (iii) a
final written opinion addressed to the Board just prior to the declaration of
the Dividend (the "OPINION"), as to whether, assuming the Transaction were
consummated as proposed, and after giving effect to, the consummation of the
Transaction:
C-2-2
NETRO CORPORATION MARCH 26, 2003
SRT
(a) The Fair Value of the aggregate assets of SRT will exceed its total
Liabilities;
(b) The Present Fair Saleable Value of the aggregate assets of SRT will be
greater than its total Liabilities;
(c) Based upon the facts known by us as of the date of our Opinion, SRT
will be able to pay its Liabilities as they mature; and
(d) SRT will not have unreasonably small capital for the business in which
it is engaged, as management of SRT has stated such business is now
conducted and is proposed to be conducted with Netro immediately
following the consummation of the Transaction.
NETRO
(a) The Fair Value of the aggregate assets of Netro will exceed its total
Liabilities;
(b) The Present Fair Saleable Value of the aggregate assets of Netro will
be greater than its total Liabilities;
(c) Based upon the facts known by us as of the date of our Opinion, Netro
will be able to pay its Liabilities as they mature; and
(d) Netro will not have unreasonably small capital for the business in
which it is engaged, as management of Netro has stated such business is
now conducted and as SRT has stated such business is proposed to be
conducted immediately following the consummation of the Transaction.
You have also requested us to render (i) the Oral Opinion, (ii) this
Preliminary Solvency Opinion, and (iii) the Opinion, as to whether:
(a) The excess of the value of the aggregate assets of Netro over the
total Liabilities of Netro, immediately prior to the payment of the
Dividend, will exceed the value of the Dividend plus the Stated Capital
of Netro; and
(b) After taking into account the payment of the Dividend but not the
Merger, the excess of the value of the aggregate assets of Netro over
the total Liabilities of Netro will exceed the Stated Capital of Netro.
SOLVENCY DEFINITIONS
For purposes of the Oral Opinion, this Preliminary Solvency Opinion and the
Opinion, the following terms will have the meanings set forth below:
(1) "ABLE TO PAY ITS LIABILITIES AS THEY MATURE" means with respect to
SRT, that assuming the Transaction has been consummated as proposed (and
taking into consideration the stated borrowing capacity to be available
to SRT, upon completion of the Transaction under its unsecured
line-of-credit facility), during the period covered by the financial
projections prepared by management of Netro and SRT, which begins as of
the Effective Time (anticipated to occur during the period from July 1,
2003 through August 31, 2003) and ends on December 31, 2005 (the "SRT
FINANCIAL PROJECTIONS"), SRT will have the ability in the ordinary
course of business to pay current Debt, short-term Debt, long-term Debt,
other contractual obligations and other Liabilities, including
Contingent Liabilities as such Liabilities mature;
(2) "ABLE TO PAY ITS LIABILITIES AS THEY MATURE" means with respect to
Netro, that assuming the Transaction has been consummated as proposed,
during the period covered by the financial projections prepared by
management of Netro and SRT, which begins as of the Effective Time
(anticipated to occur during the period from July 1, 2003 through August
31, 2003) and ends on
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NETRO CORPORATION MARCH 26, 2003
December 31, 2006 (the "NETRO FINANCIAL PROJECTIONS"), Netro will have
the ability in the ordinary course of business to pay its Liabilities
and other contractual obligations, including Contingent Liabilities as
such obligations mature;
(3) "COMMERCIALLY REASONABLE PERIOD OF TIME" means at least twelve months
for a willing buyer and a willing seller to agree on price and terms,
plus the time necessary to complete the sale;
(4) "CONTINGENT LIABILITIES" of SRT or Netro, as applicable, means the
maximum stated amount of Liabilities including, but not limited to those
that may result from pending litigation or arbitration, asserted claims
and assessments, guarantees and other contingent liabilities that are
not absolute and which have been identified to us and valued by
responsible officers and employees of Netro and SRT, their respective
accountants and financial advisors, and such other experts as we deemed
necessary to consult, and which have been reasonably represented to us
by management of Netro and SRT as all that exist. We will not
independently value or estimate such Contingent Liabilities, but will
accept the value given to us by responsible officers and employees of
Netro and SRT and/or their accountants and financial advisors, or such
other experts as we deemed necessary to consult. Such Contingent
Liabilities may not meet the criteria for accrual under Statement of
Financial Accounting Standards No. 5 and therefore may not be recorded
as liabilities under Generally Accepted Accounting Principles ("GAAP");
(5) "DEBT(S)" means with respect to SRT, the following as disclosed to us
by management of SRT (i) all indebtedness of SRT for borrowed money;
(ii) all obligations of SRT evidenced by bonds, debentures, notes and
other similar instruments; (iii) all lease and mortgage obligations of
SRT and (iv) all debt of other persons guaranteed by SRT;
(6) "DEBT(S)" means with respect to Netro, the following as disclosed to
us by management of Netro (i) all indebtedness of Netro for borrowed
money; (ii) all obligations of Netro evidenced by bonds, debentures,
notes and other similar instruments; (iii) all lease and mortgage
obligations of Netro and (iv) all debt of other persons guaranteed by
Netro;
(7) "FAIR VALUE" means the amount at which the aggregate assets of SRT or
Netro, as applicable, would change hands between a willing buyer and a
willing seller, within a Commercially Reasonable Period of Time, each
having reasonable knowledge of the relevant facts, neither being under
any compulsion to act, with equity to both;
(8) "LIABILITIES" means with respect to SRT or Netro, as applicable, Debts
or other obligations specifically identified to us by management of SRT
and/or Netro (whether matured or unmatured, secured or unsecured, senior
or subordinated, liquidated or unliquidated, disputed or fixed, accrued
or unaccrued), and including Contingent Liabilities of SRT or Netro, as
applicable;
(9) "PRESENT FAIR SALEABLE VALUE" means with respect to the assets of SRT
or Netro, as applicable, the amount that may be realized if such
aggregate assets are sold with Reasonable Promptness in an arm's-length
transaction under present conditions in a current market for the sale of
assets of a comparable business enterprise;
(10) "REASONABLE PROMPTNESS" means a period of time of nine to twelve
months for a willing buyer and a willing seller to agree on price and
terms, plus the time necessary to complete the sale;
(11) "STATED CAPITAL" means the aggregate par value of Netro's common stock
outstanding immediately prior to the declaration of the Dividend; and
(12) "WILL NOT HAVE UNREASONABLY SMALL CAPITAL WITH WHICH TO CONDUCT ITS
BUSINESS" means with respect to SRT or Netro, as applicable, that SRT or
Netro, as applicable, will not lack sufficient capital for the needs and
anticipated needs for capital of their respective businesses, including
their respective Contingent Liabilities, as management of SRT has stated
they are and are proposed to be, conducted following the consummation of
the Transaction.
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NETRO CORPORATION MARCH 26, 2003
CONDITIONS, ASSUMPTIONS AND LIMITATIONS
This Preliminary Solvency Opinion is effective as of the date hereof and
the Opinion will be submitted just prior to the declaration of the Dividend.
This Preliminary Solvency Opinion and the Opinion will be, subject to the
following conditions and assumptions:
(a) The revenues, gross profit, earnings before interest, taxes,
depreciation and amortization ("EBITDA") of Netro and SRT, as
applicable, after the Transaction as represented in the Netro Financial
Projections and SRT Financial Projections, respectively, will be
achieved;
(b) After consummation of the Transaction, SRT will ensure that the assets
of Netro following the Transaction will remain available to Netro to pay
Netro's Liabilities;
(c) For purposes of determining Fair Value and Present Fair Saleable Value
of Netro, the Opinion will value the aggregate assets of Netro, on a
going concern basis (as a wholly owned subsidiary of SRT) after giving
effect to consummation of the Transaction as proposed;
(d) For purposes of determining Fair Value and Present Fair Saleable Value
of SRT the Opinion will value the aggregate assets of SRT, as
applicable, on a going concern basis after giving effect to consummation
of the Transaction as proposed;
(e) With regard to the approximate $CA62 principal amount notes payable
("NOTES") issued by Comunicacion y Telefonia Rural ("CTR"), a 95% owned
subsidiary of SRT, either (i) completion of Network Construction (as
defined in CTR's Amended and Restated Performance Undertaking dated as
of December 22, 1999) shall have occurred by February 12, 2004 or (ii)
the existing waiver of the operating and financial performance covenants
and financial condition covenants of the Notes by the holders of the
Notes will be renewed and remain in effect through the period of the SRT
Financial Projections;
(f) The values of identified Contingent Liabilities of Netro and SRT, as
applicable, are in the amounts provided by management of Netro and SRT,
respectively;
(g) The operating cash flow of SRT or Netro, as applicable, as represented
by the SRT Financial Projections or Netro Financial Projections, as
applicable, will be used to satisfy their respective Liabilities as they
mature;
(h) Any indebtedness of SRT will be permitted to be refinanced in
conformity with common business practice;
(i) Any sale of SRT, including the underlying assets thereof, will be
completed as the sale of an ongoing business entity;
(j) SRT and Netro, as applicable, would be saleable as a separate
business enterprise (we have not been requested to identify, and have
not identified, potential purchasers nor have we ascertained the actual
prices and terms under which SRT or Netro could currently be sold);
(k) In determining the Fair Value and Present Fair Saleable Value of the
assets of SRT, any taxes or Transaction costs which may be owed by SRT
as a result of the Transaction, other than those specifically identified
in the Financial Projections, were not considered;
(l) Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or
ascertained prior to engaging in an actual selling effort, we express no
opinion as to whether SRT could actually be sold for amounts we opine to
be the Fair Value and Present Fair Saleable Value;
(m) We have not independently tested the accuracy of information provided
to us by the management of Netro and SRT and assume no responsibility
for such accuracy and therefore all such information and documents
(including all financial information) provided by Netro, SRT and third
C-2-5
NETRO CORPORATION MARCH 26, 2003
parties is assumed to be accurate and complete provided, however, that
in the course of preparing to express the conclusions set forth in the
Oral Opinion and this Preliminary Solvency Opinion, nothing has come to
our attention that would lead us to believe that any such information or
document was incorrect in any material respect or that it was
unreasonable for us to utilize and rely upon such information or
document;
(n) The Oral Opinion and this Preliminary Solvency Opinion are necessarily
based on business, economic, market and other conditions as known to us
as such conditions currently exist and as they can be evaluated by us as
of this date;
(o) The Transaction is consummated as described herein; and
(p) The Oral Opinion and this Preliminary Solvency Opinion are to be used
only for the purposes stated herein and may not be used or relied upon
for any other purpose and are intended only to supplement, not
substitute for other due diligence required in connection with the
proposed Transaction or any related transaction.
PRELIMINARY SOLVENCY OPINION
As of the date hereof, it is our conclusion that Netro and SRT will pass
the solvency tests as defined above, provided that the following conditions are
satisfied:
(a) The Effective Time is not delayed beyond August 31, 2003;
(b) The SRT Financial Projections and Netro Financial Projections, each
current as of the date of the Opinion will not differ materially during
the period of the SRT Financial Projections or the Netro Financial
Projections, as the case may be, from those provided to us, as of the
date hereof;
(c) For the period from February 28, 2003 to the date of the Opinion, the
reported operating results, cash flow and financial condition of Netro
and SRT will not materially differ from what has been projected by
management of Netro and SRT as of the date hereof;
(d) The Contingent Liabilities of SRT and Netro, as of the date hereof,
will not materially change; and
(e) The terms and conditions of the Merger Agreement will not change
materially.
Very truly yours,
AMERICAN APPRAISAL ASSOCIATES, INC.
/s/ Richard L. Kelsey
Richard L. Kelsey
Senior Vice President
C-2-6
ANNEX D
FORM OF VOTING AGREEMENT
D-1
FORM OF COMPANY VOTING AGREEMENT
THIS COMPANY VOTING AGREEMENT (this "AGREEMENT") is dated as of March 27,
2003 between SR Telecom Inc. ("PARENT"), a corporation organized under the
Canada Business Corporations Act (the "CBCA"), and the undersigned stockholder
("STOCKHOLDER") of Netro Corporation, a Delaware corporation (the "COMPANY"),
and, if applicable, the undersigned spouse of Stockholder ("SPOUSE").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Parent,
the Company and Norway Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Parent ("MERGER SUB"), have entered into an Agreement
and Plan of Merger of even date herewith (the "MERGER AGREEMENT"), pursuant to
which the parties thereto have agreed, upon the terms and subject to the
conditions set forth therein, to merge Merger Sub with and into the Company (the
"MERGER").
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of the number of shares of common
stock, par value $0.001 per share, of the Company (the "COMPANY STOCK"), as
indicated on the signature page of this Agreement (such shares of Company Stock,
together with any other shares of capital stock of the Company acquired by such
Stockholder after the date hereof and during the term of this Agreement
(including through the exercise of any stock options, warrants or similar
instruments), being collectively referred to herein as the "SECURITIES" of
Stockholder).
C. In consideration of the execution of the Merger Agreement by Parent, and
as inducement and a condition to entering into the Merger Agreement, Parent has
required Stockholder to agree, and Stockholder has agreed, to enter into this
Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
In addition to the terms defined elsewhere herein, capitalized terms used
but not otherwise defined herein shall have the respective meanings ascribed to
them in the Merger Agreement. For purposes of this Agreement:
1.1 "TRANSFER", when used as a verb, shall mean to sell, pledge, assign,
encumber, dispose of or otherwise transfer (including by merger, testamentary
disposition, interspousal disposition pursuant to a domestic relations
proceeding or otherwise by operation of law), or, when used as a noun, shall
mean a sale, pledge, assignment, encumbrance, disposition or other transfer
(including a merger, testamentary disposition, interspousal disposition pursuant
to a domestic relations proceeding or other transfer by operation of law).
2. VOTING OF SECURITIES.
Stockholder hereby agrees to appear, or cause the holder of record on any
applicable record date to appear, for the purpose of obtaining a quorum at any
annual or special meeting of stockholders of the Company and at any postponement
or adjournment thereof. At every meeting of the stockholders of the Company, and
at every postponement or adjournment thereof, and on every action or approval by
written consent of the stockholders of the Company, Stockholder hereby
irrevocably agrees to vote the Securities, or cause the Securities to be voted,
(a) in favor of approval and adoption of the Merger Agreement and the approval
of the Merger and all other actions contemplated by the Merger Agreement and
this Agreement and any action required in furtherance thereof or hereof and (b)
against (i) any Acquisition Proposal, (ii) any dissolution, liquidation or
winding up of or by the Company and (iii) any amendment of the Company's
certificate of incorporation or by-laws or other proposal or transaction
involving the Company, which amendment or other proposal or transaction would
(x) in any manner impede, frustrate, delay, prevent, nullify or adversely affect
any transaction contemplated by the Merger Agreement (including the Merger) or
the
D-2
likelihood of consummation thereof, (y) result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Merger Agreement or (z) would result in any of the conditions to the
Company's or Parent's obligations under the Merger Agreement not being
fulfilled. Stockholder shall not commit or agree to take any action, or enter
into any agreement or understanding with any person, the effect of which would
be inconsistent with or violative of any provision contained in this Section 2.
3. IRREVOCABLE PROXY.
Stockholder is hereby delivering to Parent an irrevocable proxy in the form
attached hereto as Exhibit A (the "IRREVOCABLE PROXY"), such Irrevocable Proxy
to cover the total number of Securities in respect of which Stockholder is
entitled to vote. Upon the execution of this Agreement by Stockholder,
Stockholder hereby revokes any and all prior proxies, powers of attorney or
similar authorizations given thereby with respect to the Securities and agrees
not to grant any subsequent proxies, powers of attorney or similar
authorizations with respect to the Securities.
4. RESTRICTION ON TRANSFER OF SECURITIES.
Prior to the Expiration Date (as defined herein), Stockholder shall not,
either directly or indirectly, consent to any Transfer of, or enter into any
contract, agreement, obligation, commitment, arrangement, understanding,
instrument, option or other arrangement (including any profit sharing
arrangement) with respect to the Transfer of, any Securities (or any interest
therein); provided that, the foregoing requirements shall not prohibit any
Transfer under Stockholder's will or pursuant to the laws of descent and
distribution or any such Transfer to an immediate family member or a family
trust for the benefit of immediate family member(s), so long as, in each case,
as a precondition to such Transfer the transferee: (i) executes a counterpart of
this Agreement and an Irrevocable Proxy in the form attached hereto as Exhibit A
(with such modifications as Parent may reasonably request); and (ii) agrees in
writing to hold such Securities (or interest in such Securities) subject to all
of the terms and provisions of this Agreement. Stockholder agrees that
Stockholder shall not (a) deposit (or permit the deposit of) any Securities in a
voting trust or grant any proxy, power of attorney or similar authority (other
than for fulfilling the terms of this Agreement) or enter into any voting
agreement or similar agreement in contravention of the obligations of
Stockholder under this Agreement with respect to any of the Securities or (b)
take any action that would make any representation or warranty of Stockholder
contained herein untrue or incorrect or that would in any way restrain, limit or
interfere with the performance of Stockholder's obligations under this Agreement
or the transactions contemplated hereby and by the Merger Agreement.
5. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER.
5.1 Stockholder (i) is the sole record and beneficial owner of, and has
good and marketable title to, the Securities set forth on the signature page of
this Agreement, which at the date of this Agreement and at all times until the
termination of this Agreement, will be free and clear of any liens, claims,
options, rights of first refusal, co-sale rights, charges or other encumbrances;
(ii) does not own, of record or beneficially, any shares of capital stock of the
Company other than the Securities set forth opposite his, her or its name on the
signature page of this Agreement; and (iii) has the sole right to vote such
Securities (except to the extent that such Securities are issuable upon the
exercise of options or warrants that have not been exercised by such
Stockholder). Except as contemplated by this Agreement, none of the Securities
is subject to any voting trust or other agreement, arrangement or restriction
with respect to the voting of such Securities. If Stockholder is married, and
Stockholder's Securities constitute community property or otherwise need spousal
or other approval for this Agreement to be legal, valid and binding, this
Agreement has been duly authorized, executed and delivered by, and constitutes a
valid and binding agreement of, Stockholder's spouse, enforceable against such
spouse in accordance with its terms. No trust of which Stockholder is a trustee
requires the consent of any beneficiary to the execution and delivery of this
Agreement or to the consummation of the transactions contemplated hereby. If
this Agreement is being executed in a representative or fiduciary capacity, the
Person signing this Agreement has full power and authority to enter into and
perform this Agreement.
D-3
5.2 Stockholder has all requisite power and authority to execute and
deliver this Agreement and the Irrevocable Proxy, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution, delivery and performance by Stockholder of this
Agreement and consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary action on the part of Stockholder and
no other proceedings on the part of Stockholder are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby and thereby.
Each of this Agreement and the Irrevocable Proxy has been duly and validly
executed and delivered by Stockholder and constitutes the valid and binding
obligations of Stockholder, enforceable against Stockholder in accordance with
its respective terms. The execution and delivery of this Agreement and the
Irrevocable Proxy by Stockholder do not, and the performance of Stockholder's
obligations hereunder will not, (a) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any right to terminate, amend, accelerate or
cancel any right or obligation under, or result in the creation of any lien or
encumbrance on any Securities pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligations to which Stockholder is a party or by which Stockholder or the
Securities are or will be bound or affected or (b) violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable to
Stockholder or any of Stockholder's properties or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with, or
notice to, any state or federal public body or authority is required by or with
respect to Stockholder in connection with the execution and delivery of this
Agreement and the Irrevocable Proxy by Stockholder or the consummation by
Stockholder of any of the transactions contemplated hereby or thereby.
6. ADDITIONAL DOCUMENTS.
Stockholder (in his or her capacity as such) hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Parent, to carry out the purpose and intent of this
Agreement.
7. LEGENDING OF SECURITIES.
Stockholder agrees that it shall forthwith surrender all certificates
representing the Securities so that they shall bear a conspicuous legend stating
that they are subject to this Agreement (and the restrictions on transfer
provided for herein) and to an Irrevocable Proxy. Stockholder agrees that it
shall not Transfer the Securities without first having the aforementioned legend
affixed to the certificates representing the Securities (and subject, in any
event, to the limitations set forth in Section 4). In furtherance of this
Agreement, Stockholder shall, and hereby authorizes Parent to, notify the
Company's transfer agent that the Securities are subject to a "stop transfer"
order.
8. NO SOLICITATION.
8.1 Stockholder acknowledges that he or she also has read, and
understands, the restrictions set forth in Section 6.03 of the Merger Agreement
and agrees to comply with them as if a party to such Merger Agreement.
8.2 Until the Expiration Date, Stockholder shall use all reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by the Merger Agreement.
9. CONFIDENTIALITY.
Stockholder agrees (i) to hold any information regarding this Agreement and
the Merger in strict confidence and (ii) not to divulge any such information to
any third person, except to the extent any of the same is hereafter publicly
disclosed by Parent.
D-4
10. STOCKHOLDER CAPACITY.
Stockholder is executing and delivering into this Agreement solely in its
capacity as the owner of the Securities. If Stockholder is a natural person,
nothing contained in this Agreement shall restrict Stockholder from taking any
action required by his or her fiduciary duties solely in his or her capacity as
an officer, director or employee of the Company.
11. TERMINATION.
This Agreement, and all rights and obligations of the parties hereunder,
shall be effective as of the date hereof and shall terminate upon the earlier of
(i) the date upon which the Merger Agreement is terminated in accordance with
its terms and (ii) the Effective Time (the "Expiration Date") of the Merger.
12. GENERAL PROVISIONS.
12.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
12.2 Binding Effect and Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but, except as otherwise specifically provided herein, or
in the case of Parent, Section 11.06 of the Merger Agreement, neither this
Agreement nor any of the rights, interests or obligations of the parties hereto
may be assigned by any of the parties without prior written consent of the
others. Nothing contained in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature whatsoever
by reason of this Agreement.
12.3 Amendments and Modification. This Agreement may be amended by the
parties hereto and the terms and conditions hereof may be waived only by an
instrument in writing signed on behalf of each of the parties hereto or, in the
case of a waiver, by an instrument signed on behalf of the party waiving
compliance. The failure of any party hereto to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of these rights.
12.4 Specific Performance. The parties hereto acknowledge that Parent
shall be immediately and irreparably harmed and injured if for any reason any of
the provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached by any of the other parties hereto.
Therefore, it is agreed that, in addition to any other remedies that may be
available to Parent upon any such violation, Parent shall have the right to
enforce such covenants and agreements by specific performance, injunctive relief
or by any other means available to Parent at law or in equity. If Parent brings
an action in equity to enforce the provisions of this Agreement, Stockholder
will not allege, and Stockholder waives the defense, that there is an adequate
remedy at law.
12.5 Notice. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally, sent by
facsimile if confirmation is received by sender, sent by nationally-recognized
overnight courier or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following address (or at such
other address for a party as shall be specified by like notice):
if to Parent, to:
SR Telecom Inc.
8150 Trans-Canada Highway
Montreal, Quebec, Canada H4S 1M5
Attention: David Adams
Telephone No.: (514) 335-4035
Facsimile No.: (514) 956-4405
D-5
with copies to:
Fasken Martineau
Stock Exchange Tower
P.O. Box 242, Suite 3400
800 Place-Victoria
Montreal, Quebec, Canada H4Z
Attention: Peter Villani
Telephone No.: (514) 397-4316
Facsimile No.: (514) 397-7600
and
Pillsbury Winthrop LLP
One Battery Park Plaza
New York, New York 10004-1490
Attention: Ronald A. Fleming, Jr., Esq.
Telephone No.: (212) 858-1143
Facsimile No.: (212) 858-1500
if to Stockholder, to the address for notice set forth on the signature
page hereof,
with copies to:
Netro Corporation
3860 North First Street
San Jose, California 95134
Attention: Sanjay K. Khare
Telephone No.: (408) 216-1500
Facsimile No.: (408) 216-1772
and
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
Attention: Francis S. Currie, Esq.
Telephone No.: (650) 752-2002
Facsimile No.: (650) 752-2111
12.6 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof. Any suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with, this Agreement or
the transactions contemplated hereby shall be brought exclusively in any federal
court located in the State of Delaware or any state court of the State of
Delaware, and each of the parties hereto consents to the jurisdiction of such
courts (and of the appropriate appellate courts therefrom) in any such suit,
action or proceeding and irrevocably waives, to the fullest extent permitted by
law, any objection that it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding in any such court or that any such suit,
action or proceeding brought in any such court has been brought in an
inconvenient form. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 12.5 shall be deemed
effective service of process on such party.
12.7 Entire Agreement. This Agreement and the Irrevocable Proxy, together
with the Company Affiliate Letter, in the form attached as Exhibit A to the
Merger Agreement, contain the entire understanding
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of the parties in respect of the subject matter hereof, and supersede all prior
negotiations and understandings between the parties with respect to such subject
matter.
12.8 Descriptive Headings. The section headings are for convenience only
and shall not affect the construction or interpretation of this Agreement.
12.9 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Wherever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
12.10 Counterparts. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, but all of which, taken together,
will constitute one and the same instrument. Delivery of an executed counterpart
of a signature page to this Agreement by facsimile shall be effective as
delivery of a manually executed counterpart of this Agreement.
12.11. Expenses. All fees, costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such fees, costs and expenses.
12.12 Effectiveness. This Agreement shall become effective simultaneously
with the execution and delivery of the Merger Agreement.
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IN WITNESS WHEREOF, the parties have caused this Company Voting Agreement
to be executed as of the date first above written.
SR TELECOM INC.
By:
Name:
Title:
STOCKHOLDER SPOUSE
By: By:
Name: Name:
Title: Title:
Print Address Print Address
Telephone Telephone
Facsimile No. Facsimile No.
Number of Securities beneficially owned:
________ shares of Company Stock of the Company
________ shares of Company Stock of the Company issuable upon exercise of
outstanding options or warrants
D-8
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of Netro Corporation, a Delaware corporation
(the "COMPANY"), hereby irrevocably (to the fullest extent permitted by law)
appoints the members of the Board of Directors of SR Telecom Inc. ("PARENT"), a
corporation organized under the Canada Business Corporations Act (the "CBCA"),
and each of them, or any other designee of Parent, as the sole and exclusive
attorneys-in-fact and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to (i) all of the outstanding shares of common stock, par value $0.001
per share, of the Company ("COMPANY STOCK") owned of record by Stockholder as of
the date of this Irrevocable Proxy and (ii) any and all other shares of capital
stock of the Company (including through the exercise of any stock options,
warrants or similar instruments) which Stockholder may acquire on or after the
date hereof (collectively, the "SECURITIES") in accordance with the terms of
this Irrevocable Proxy. The Securities beneficially owned by the undersigned
Stockholder of the Company as of the date of this Irrevocable Proxy are listed
on the signature page of this Irrevocable Proxy. Upon the undersigned's
execution of this Irrevocable Proxy, any and all prior proxies given by the
undersigned with respect to any Securities are hereby revoked and the
undersigned agrees not to grant any subsequent proxies with respect to the
Securities.
This proxy is irrevocable, is coupled with an interest and is granted
pursuant to that certain Company Voting Agreement of even date between Parent
and the undersigned stockholder (the "VOTING AGREEMENT"), and is granted in
consideration of and as a condition to Parent entering into that certain
Agreement and Plan of Merger (the "MERGER AGREEMENT"), by and among Parent,
Norway Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), and the Company. The Merger Agreement
provides for the merger of the Merger Sub with and into the Company in
accordance with its terms (the "MERGER").
The attorneys-in-fact and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time set forth in the Voting
Agreement, to act as the undersigned's attorney-in-fact and Irrevocable Proxy to
demand that the Secretary of the Company call a special meeting of stockholders
of the Company for the purpose of considering any action related to the Merger
Agreement and to vote the Securities, and to exercise all voting, consent and
similar rights of the undersigned with respect to the Securities (including,
without limitation, the power to execute and deliver written consents) at every
annual, special, postponed or adjourned meeting of stockholders of the Company
and in every written consent in lieu of such meeting (a) in favor of approval
and adoption of the Merger Agreement and the approval of the Merger and in favor
of each other action contemplated by the Merger Agreement and any action
required in furtherance hereof or thereof and (b) against (i) any Acquisition
Proposal, (ii) any dissolution, liquidation or winding up of or by the Company
or (iii) any amendment of the Company's certificate of incorporation or by-laws
or other proposal or transaction involving the Company, which amendment or other
proposal or transaction would (x) in any manner impede, frustrate, delay,
prevent, nullify or adversely affect any transaction contemplated by the Merger
Agreement (including the Merger) or the likelihood of consummation thereof, (y)
result in a breach of any covenant, representation or warranty or any other
obligation or agreement of the Company under the Merger Agreement or (z) would
result in any of the conditions to the Company's or Parent's obligations under
the Merger Agreement not being fulfilled.
If any provision of this Irrevocable Proxy or any part of any such
provision is held under any circumstances to be invalid or unenforceable in any
jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this
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Irrevocable Proxy. Each provision of this Irrevocable Proxy is separable from
every other provision of this Irrevocable Proxy, and each part of each provision
of this Irrevocable Proxy is separable from every other part of such provision.
This proxy granted by Stockholder shall be revoked upon termination of the
Voting Agreement in accordance with its terms.
Any obligation of the undersigned hereunder shall be binding upon the
heirs, estate, executors, personal representatives, and permitted successors and
assigns of the undersigned.
Dated: March ____, 2003
STOCKHOLDER SPOUSE
By: By:
Name: Name:
Title: Title:
Number of shares beneficially owned:
________ shares of the company stock of the Company
________ shares of the company stock of the Company issuable upon
exercise of outstanding options or warrants
D-10
ANNEX E
VOTING AGREEMENT OF GIDEON BEN-EFRAIM
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COMPANY VOTING AGREEMENT
THIS COMPANY VOTING AGREEMENT (this "AGREEMENT") is dated as of March 27,
2003 between SR Telecom Inc. ("PARENT"), a corporation organized under the
Canada Business Corporations Act (the "CBCA"), and the undersigned stockholder
("STOCKHOLDER") of Netro Corporation, a Delaware corporation (the "COMPANY"),
and, if applicable, the undersigned spouse of Stockholder ("SPOUSE").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Parent,
the Company and Norway Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of Parent ("MERGER SUB"), have entered into an Agreement
and Plan of Merger of even date herewith (the "MERGER AGREEMENT"), pursuant to
which the parties thereto have agreed, upon the terms and subject to the
conditions set forth therein, to merge Merger Sub with and into the Company (the
"MERGER").
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) of the number of shares of common
stock, par value $0.001 per share, of the Company (the "COMPANY STOCK"), as
indicated on the signature page of this Agreement (such shares of Company Stock,
together with any other shares of capital stock of the Company acquired by such
Stockholder after the date hereof and during the term of this Agreement
(including through the exercise of any stock options, warrants or similar
instruments), being collectively referred to herein as the "SECURITIES" of
Stockholder).
C. In consideration of the execution of the Merger Agreement by Parent, and
as inducement and a condition to entering into the Merger Agreement, Parent has
required Stockholder to agree, and Stockholder has agreed, to enter into this
Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
In addition to the terms defined elsewhere herein, capitalized terms used
but not otherwise defined herein shall have the respective meanings ascribed to
them in the Merger Agreement. For purposes of this Agreement:
1.1 "TRANSFER", when used as a verb, shall mean to sell, pledge, assign,
encumber, dispose of or otherwise transfer (including by merger, testamentary
disposition, interspousal disposition pursuant to a domestic relations
proceeding or otherwise by operation of law), or, when used as a noun, shall
mean a sale, pledge, assignment, encumbrance, disposition or other transfer
(including a merger, testamentary disposition, interspousal disposition pursuant
to a domestic relations proceeding or other transfer by operation of law).
2. VOTING OF SECURITIES.
Stockholder hereby agrees to appear, or cause the holder of record on any
applicable record date to appear, for the purpose of obtaining a quorum at any
annual or special meeting of stockholders of the Company and at any postponement
or adjournment thereof. At every meeting of the stockholders of the Company, and
at every postponement or adjournment thereof, and on every action or approval by
written consent of the stockholders of the Company, Stockholder hereby
irrevocably agrees to vote the Securities, or cause the Securities to be voted,
(a) in favor of approval and adoption of the Merger Agreement and the approval
of the Merger and all other actions contemplated by the Merger Agreement and
this Agreement and any action required in furtherance thereof or hereof and (b)
against (i) any Acquisition Proposal, (ii) any dissolution, liquidation or
winding up of or by the Company and (iii) any amendment of the Company's
certificate of incorporation or by-laws or other proposal or transaction
involving the Company, which amendment or other proposal or transaction would
(x) in any manner impede, frustrate, delay, prevent, nullify or adversely affect
any transaction contemplated by the Merger Agreement (including the Merger) or
the
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likelihood of consummation thereof, (y) result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Merger Agreement or (z) would result in any of the conditions to the
Company's or Parent's obligations under the Merger Agreement not being
fulfilled. Stockholder shall not commit or agree to take any action, or enter
into any agreement or understanding with any person, the effect of which would
be inconsistent with or violative of any provision contained in this Section 2.
3. IRREVOCABLE PROXY.
Stockholder is hereby delivering to Parent an irrevocable proxy in the form
attached hereto as Exhibit A (the "Irrevocable Proxy"), such Irrevocable Proxy
to cover the total number of Securities in respect of which Stockholder is
entitled to vote. Upon the execution of this Agreement by Stockholder,
Stockholder hereby revokes any and all prior proxies, powers of attorney or
similar authorizations given thereby with respect to the Securities and agrees
not to grant any subsequent proxies, powers of attorney or similar
authorizations with respect to the Securities.
4. RESTRICTION ON TRANSFER OF SECURITIES.
Prior to the Expiration Date (as defined herein), Stockholder shall not,
either directly or indirectly, consent to any Transfer of, or enter into any
contract, agreement, obligation, commitment, arrangement, understanding,
instrument, option or other arrangement (including any profit sharing
arrangement) with respect to the Transfer of, any Securities (or any interest
therein); provided that, the foregoing requirements shall not prohibit any
Transfer under Stockholder's will or pursuant to the laws of descent and
distribution or any such Transfer to an immediate family member or a family
trust for the benefit of immediate family member(s), so long as, in each case,
as a precondition to such Transfer the transferee: (i) executes a counterpart of
this Agreement and an Irrevocable Proxy in the form attached hereto as Exhibit A
(with such modifications as Parent may reasonably request); and (ii) agrees in
writing to hold such Securities (or interest in such Securities) subject to all
of the terms and provisions of this Agreement. Stockholder agrees that
Stockholder shall not (a) deposit (or permit the deposit of) any Securities in a
voting trust or grant any proxy, power of attorney or similar authority (other
than for fulfilling the terms of this Agreement) or enter into any voting
agreement or similar agreement in contravention of the obligations of
Stockholder under this Agreement with respect to any of the Securities or (b)
take any action that would make any representation or warranty of Stockholder
contained herein untrue or incorrect or that would in any way restrain, limit or
interfere with the performance of Stockholder's obligations under this Agreement
or the transactions contemplated hereby and by the Merger Agreement.
5. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER.
5.1 Stockholder (i) is the sole record and beneficial owner of, and has
good and marketable title to, the Securities set forth on the signature page of
this Agreement, which at the date of this Agreement and at all times until the
termination of this Agreement, will be free and clear of any liens, claims,
options, rights of first refusal, co-sale rights, charges or other encumbrances;
(ii) does not own, of record or beneficially, any shares of capital stock of the
Company other than the Securities set forth opposite his, her or its name on the
signature page of this Agreement; and (iii) has the sole right to vote such
Securities (except to the extent that such Securities are issuable upon the
exercise of options or warrants that have not been exercised by such
Stockholder). Except as contemplated by this Agreement, none of the Securities
is subject to any voting trust or other agreement, arrangement or restriction
with respect to the voting of such Securities. If Stockholder is married, and
Stockholder's Securities constitute community property or otherwise need spousal
or other approval for this Agreement to be legal, valid and binding, this
Agreement has been duly authorized, executed and delivered by, and constitutes a
valid and binding agreement of, Stockholder's spouse, enforceable against such
spouse in accordance with its terms. No trust of which Stockholder is a trustee
requires the consent of any beneficiary to the execution and delivery of this
Agreement or to the consummation of the transactions contemplated hereby. If
this Agreement is being executed in a representative or fiduciary capacity, the
Person signing this Agreement has full power and authority to enter into and
perform this Agreement.
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5.2 Stockholder has all requisite power and authority to execute and
deliver this Agreement and the Irrevocable Proxy, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution, delivery and performance by Stockholder of this
Agreement and consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary action on the part of Stockholder and
no other proceedings on the part of Stockholder are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby and thereby.
Each of this Agreement and the Irrevocable Proxy has been duly and validly
executed and delivered by Stockholder and constitutes the valid and binding
obligations of Stockholder, enforceable against Stockholder in accordance with
its respective terms. The execution and delivery of this Agreement and the
Irrevocable Proxy by Stockholder do not, and the performance of Stockholder's
obligations hereunder will not, (a) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any right to terminate, amend, accelerate or
cancel any right or obligation under, or result in the creation of any lien or
encumbrance on any Securities pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligations to which Stockholder is a party or by which Stockholder or the
Securities are or will be bound or affected or (b) violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable to
Stockholder or any of Stockholder's properties or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with, or
notice to, any state or federal public body or authority is required by or with
respect to Stockholder in connection with the execution and delivery of this
Agreement and the Irrevocable Proxy by Stockholder or the consummation by
Stockholder of any of the transactions contemplated hereby or thereby.
6. ADDITIONAL DOCUMENTS.
Stockholder (in his or her capacity as such) hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Parent, to carry out the purpose and intent of this
Agreement.
7. LEGENDING OF SECURITIES.
Stockholder agrees that it shall forthwith surrender all certificates
representing the Securities so that they shall bear a conspicuous legend stating
that they are subject to this Agreement (and the restrictions on transfer
provided for herein) and to an Irrevocable Proxy. Stockholder agrees that it
shall not Transfer the Securities without first having the aforementioned legend
affixed to the certificates representing the Securities (and subject, in any
event, to the limitations set forth in Section 4). In furtherance of this
Agreement, Stockholder shall, and hereby authorizes Parent to, notify the
Company's transfer agent that the Securities are subject to a "stop transfer"
order.
8. NO SOLICITATION.
8.1 Stockholder acknowledges that he or she also has read, and
understands, the restrictions set forth in Section 6.03 of the Merger Agreement
and agrees to comply with them as if a party to such Merger Agreement.
8.2 Until the Expiration Date, Stockholder shall use all reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by the Merger Agreement.
9. CONFIDENTIALITY.
Stockholder agrees (i) to hold any information regarding this Agreement and
the Merger in strict confidence and (ii) not to divulge any such information to
any third person, except for disclosures made by Stockholder to his advisors in
connection with the transactions contemplated by this Agreement and the Merger
Agreement, and except to the extent any of the same is hereafter publicly
disclosed by Parent.
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10. STOCKHOLDER CAPACITY.
Stockholder is executing and delivering into this Agreement solely in its
capacity as the owner of the Securities. If Stockholder is a natural person,
nothing contained in this Agreement shall restrict Stockholder from taking any
action required by his or her fiduciary duties solely in his or her capacity as
an officer, director or employee of the Company.
11. NO EFFECT UPON EXISTING EMPLOYMENT OR CHANGE OF CONTROL AGREEMENTS.
Reference is made to (i) that certain Employment Agreement dated March ___,
1995 by and between Stockholder and the Company, as amended by that certain
Amendment to Employment Agreement dated June ___, 1995 by and between
Stockholder and the Company (such Employment Agreement, as so amended, the
"EMPLOYMENT AGREEMENT"), (ii) that certain Change of Control Agreement dated
December 9, 1997 by and between Stockholder and the Company (the "CHANGE OF
CONTROL AGREEMENT"), and (iii) the Company's reduction-in-force severance policy
adopted at the November 24, 2002 meeting of the Company's Board of Directors, as
set forth under the caption "Amendment to Severance Pay" on page 21 of the
Company's Employee Handbook dated August 2002 (such policy the "SEVERANCE
POLICY").
Parent hereby agrees in connection with the Merger to assume, and agrees
that the Merger shall not act to terminate or otherwise diminish Stockholder's
rights under, the Employment Agreement, the Change of Control Agreement and the
Severance Policy.
For purposes of Section 4.3(ii) of the Employment Agreement, Parent
acknowledges and agrees that the Merger shall (notwithstanding Stockholder's
execution and delivery of this Voting Agreement, the Irrevocable Proxy and the
affiliate letter, and notwithstanding any vote by Stockholder in his capacity as
a member of the Company's Board of Directors in favor of, or other cooperation
in any capacity with, the Merger and related transactions) be deemed to engender
the commencement of employment of a Chief Executive Officer ("CEO") of the
Company not previously approved by Stockholder (irrespective of whether
Stockholder remains CEO of the Company following the Merger), and that
Stockholder shall consequently continue to be entitled to the severance and
benefits described in such Section 4.3 in the event Stockholder voluntarily
terminates his employment relationship with the Company within a period of 180
days after the Effective Time, as set forth in and subject to the terms and
conditions of such Section 4.3.
12. TERMINATION.
This Agreement, and all rights and obligations of the parties hereunder,
shall be effective as of the date hereof and shall terminate upon the earlier of
(i) the date upon which the Merger Agreement is terminated in accordance with
its terms and (ii) the Effective Time of the Merger (such earlier to occur of
(i) and (ii) the "EXPIRATION DATE"), provided, however, that Section 11 of this
Agreement (entitled "No Effect Upon Existing Employment or Change of Control
Agreements") shall survive any termination of this Agreement pursuant to this
clause (ii).
13. GENERAL PROVISIONS.
13.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
13.2 Binding Effect and Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but, except as otherwise specifically provided herein, or
in the case of Parent, Section 11.06 of the Merger Agreement, neither this
Agreement nor any of the rights, interests or obligations of the parties hereto
may be assigned by any of the parties without prior written consent of the
others. Nothing contained in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature whatsoever
by reason of this Agreement.
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13.3 Amendments and Modification. This Agreement may be amended by the
parties hereto and the terms and conditions hereof may be waived only by an
instrument in writing signed on behalf of each of the parties hereto or, in the
case of a waiver, by an instrument signed on behalf of the party waiving
compliance. The failure of any party hereto to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of these rights.
13.4 Specific Performance. The parties hereto acknowledge that Parent
shall be immediately and irreparably harmed and injured if for any reason any of
the provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached by any of the other parties hereto.
Therefore, it is agreed that, in addition to any other remedies that may be
available to Parent upon any such violation, Parent shall have the right to
enforce such covenants and agreements by specific performance, injunctive relief
or by any other means available to Parent at law or in equity. If Parent brings
an action in equity to enforce the provisions of this Agreement, Stockholder
will not allege, and Stockholder waives the defense, that there is an adequate
remedy at law.
13.5 Notice. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally, sent by
facsimile if confirmation is received by sender, sent by nationally-recognized
overnight courier or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following address (or at such
other address for a party as shall be specified by like notice):
if to Parent, to:
SR Telecom Inc.
8150 Trans-Canada Highway
Montreal, Quebec, Canada H4S 1M5
Attention: David Adams
Telephone No.: (514) 335-4035
Facsimile No.: (514) 956-4405
with copies to:
Fasken Martineau
Stock Exchange Tower
P.O. Box 242, Suite 3400
800 Place-Victoria
Montreal, Quebec, Canada H4Z
Attention: Peter Villani
Telephone No.: (514) 397-4316
Facsimile No.: (514) 397-7600
and
Pillsbury Winthrop LLP
One Battery Park Plaza
New York, New York 10004-1490
Attention: Ronald A. Fleming, Jr., Esq.
Telephone No.: (212) 858-1143
Facsimile No.: (212) 858-1500
if to Stockholder, to the address for notice set forth on the signature
page hereof,
with copies to:
Netro Corporation
3860 North First Street
San Jose, California 95134
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Attention: Sanjay K. Khare
Telephone No.: (408) 216-1500
Facsimile No.: (408) 216-1772
and
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, California 94025
Attention: Francis S. Currie, Esq.
Telephone No.: (650) 752-2002
Facsimile No.: (650) 752-2111
13.6 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof. Any suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with, this Agreement or
the transactions contemplated hereby shall be brought exclusively in any federal
court located in the State of Delaware or any state court of the State of
Delaware, and each of the parties hereto consents to the jurisdiction of such
courts (and of the appropriate appellate courts therefrom) in any such suit,
action or proceeding and irrevocably waives, to the fullest extent permitted by
law, any objection that it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding in any such court or that any such suit,
action or proceeding brought in any such court has been brought in an
inconvenient form. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 13.5 of this Agreement
shall be deemed effective service of process on such party.
13.7 Entire Agreement. This Agreement and the Irrevocable Proxy, together
with the Company Affiliate Letter, in the form attached as Exhibit A to the
Merger Agreement, contain the entire understanding of the parties in respect of
the subject matter hereof, and supersede all prior negotiations and
understandings between the parties with respect to such subject matter.
13.8 Descriptive Headings. The section headings are for convenience only
and shall not affect the construction or interpretation of this Agreement.
13.9 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Wherever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
13.10 Counterparts. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, but all of which, taken together,
will constitute one and the same instrument. Delivery of an executed counterpart
of a signature page to this Agreement by facsimile shall be effective as
delivery of a manually executed counterpart of this Agreement.
13.11 Expenses. All fees, costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such fees, costs and expenses.
13.12 Effectiveness. This Agreement shall become effective simultaneously
with the execution and delivery of the Merger Agreement.
IN WITNESS WHEREOF, the parties have caused this Company Voting Agreement
to be executed as of the date first above written.
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SR TELECOM INC.
By: /s/ David Adams
-------------------------------------------
Name: David Adams
Title: Vice President Finance & CFO
STOCKHOLDER SPOUSE
By: /s/ Gideon Ben-Efraim By: /s/ Bina Ben-Efraim
--------------------------------------- ---------------------------------------
Name: Gideon Ben-Efraim Name: Bina Ben-Efraim
420 Lowell Avenue
Palo Alto, CA 94301
Print Address
Telephone Telephone
Facsimile No. Facsimile No.
Number of Securities beneficially owned:
2,920,561 shares of Company Stock of the Company
1,517,085 shares of Company Stock of the Company issuable upon exercise
of outstanding options or warrants
with copies to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94306
Attention: Steven E. Bochner, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
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EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of Netro Corporation, a Delaware corporation
(the "COMPANY"), hereby irrevocably (to the fullest extent permitted by law)
appoints the members of the Board of Directors of SR Telecom Inc. ("PARENT"), a
corporation organized under the Canada Business Corporations Act (the "CBCA"),
and each of them, or any other designee of Parent, as the sole and exclusive
attorneys-in-fact and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to (i) all of the outstanding shares of common stock, par value $0.001
per share, of the Company ("COMPANY STOCK") owned of record by Stockholder as of
the date of this Irrevocable Proxy and (ii) any and all other shares of capital
stock of the Company (including through the exercise of any stock options,
warrants or similar instruments) which Stockholder may acquire on or after the
date hereof (collectively, the "SECURITIES") in accordance with the terms of
this Irrevocable Proxy. The Securities beneficially owned by the undersigned
Stockholder of the Company as of the date of this Irrevocable Proxy are listed
on the signature page of this Irrevocable Proxy. Upon the undersigned's
execution of this Irrevocable Proxy, any and all prior proxies given by the
undersigned with respect to any Securities are hereby revoked and the
undersigned agrees not to grant any subsequent proxies with respect to the
Securities.
This proxy is irrevocable, is coupled with an interest and is granted
pursuant to that certain Company Voting Agreement of even date between Parent
and the undersigned stockholder (the "VOTING AGREEMENT"), and is granted in
consideration of and as a condition to Parent entering into that certain
Agreement and Plan of Merger (the "MERGER AGREEMENT"), by and among Parent,
Norway Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), and the Company. The Merger Agreement
provides for the merger of the Merger Sub with and into the Company in
accordance with its terms (the "MERGER").
The attorneys-in-fact and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time set forth in the Voting
Agreement, to act as the undersigned's attorney-in-fact and Irrevocable Proxy to
demand that the Secretary of the Company call a special meeting of stockholders
of the Company for the purpose of considering any action related to the Merger
Agreement and to vote the Securities, and to exercise all voting, consent and
similar rights of the undersigned with respect to the Securities (including,
without limitation, the power to execute and deliver written consents) at every
annual, special, postponed or adjourned meeting of stockholders of the Company
and in every written consent in lieu of such meeting (a) in favor of approval
and adoption of the Merger Agreement and the approval of the Merger and in favor
of each other action contemplated by the Merger Agreement and any action
required in furtherance hereof or thereof and (b) against (i) any Acquisition
Proposal, (ii) any dissolution, liquidation or winding up of or by the Company
or (iii) any amendment of the Company's certificate of incorporation or by-laws
or other proposal or transaction involving the Company, which amendment or other
proposal or transaction would (x) in any manner impede, frustrate, delay,
prevent, nullify or adversely affect any transaction contemplated by the Merger
Agreement (including the Merger) or the likelihood of consummation thereof, (y)
result in a breach of any covenant, representation or warranty or any other
obligation or agreement of the Company under the Merger Agreement or (z) would
result in any of the conditions to the Company's or Parent's obligations under
the Merger Agreement not being fulfilled.
If any provision of this Irrevocable Proxy or any part of any such
provision is held under any circumstances to be invalid or unenforceable in any
jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) the invalidity or
unenforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this
E-9
Irrevocable Proxy. Each provision of this Irrevocable Proxy is separable from
every other provision of this Irrevocable Proxy, and each part of each provision
of this Irrevocable Proxy is separable from every other part of such provision.
This proxy granted by Stockholder shall be revoked upon termination of the
Voting Agreement in accordance with its terms.
Any obligation of the undersigned hereunder shall be binding upon the
heirs, estate, executors, personal representatives, and permitted successors and
assigns of the undersigned.
Dated: March 27, 2003
STOCKHOLDER SPOUSE
By: /s/ Gideon Ben-Efraim
---------------------------------------- By: /s/ Bina Ben-Efraim
----------------------------------------
Name: Gideon Ben-Efraim Name: Bina Ben-Efraim
Number of shares beneficially owned:
2,920,561 shares of the company stock of the Company
1,517,085 shares of the company stock of the Company issuable upon
exercise of outstanding options or warrants
E-10
(sr telecom LOGO)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Canada Business Corporations Act, a corporation may indemnify a
director or officer, a former director or officer or a person who acts or acted
at the corporation's request as a director or officer of another entity (each
such person is referred to as an "indemnifiable person") against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him or her in respect of any civil, criminal,
investigative or administrative action or proceeding in which the indemnifiable
person is involved because of his or her association with the corporation or
such body corporate, if he or she was not judged by the court or other competent
authority to have committed any fault or omitted to do anything that the
individual ought to have done and: (a) he or she acted honestly and in good
faith with a view to the best interests of such corporation; and (b) in the case
of a criminal or administrative action or proceeding that is enforced by a
monetary penalty, he or she had reasonable grounds for believing that his or her
conduct was lawful. An indemnifiable person is entitled under the Canada
Business Corporations Act to such indemnity from the corporation if he or she
was substantially successful on the merits in his or her defense of the action
or proceeding and fulfilled the conditions set out in (a) and (b) above.
A corporation may, with the approval of a court, also indemnify an
indemnifiable person in respect of an action by or on behalf of the corporation
or body corporate to procure a judgment in its favor, to which such person is
made a party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set forth in
(a) and (b), above.
The Canada Business Corporations Act provides that a corporation may
advance monies to a director, officer or other individual for the costs, charges
and expenses of a proceeding for which the corporation is permitted to indemnify
such a person. The individual shall repay such monies if he or she does not
fulfill the conditions for indemnification.
The bylaws of the registrant require the registrant to indemnify specified
persons to the fullest extent authorized by applicable law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger dated as of March 27, 2003 by
and among SR Telecom Inc., Netro Corporation and Norway
Acquisition Corporation (included as Annex A to the proxy
statement/ prospectus included in this registration
statement).
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of
May 5, 2003 by and among SR Telecom Inc., Netro Corporation
and Norway Acquisition Corporation (included as Annex B-1 to
the proxy statement/prospectus included in this registration
statement).
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of
July 17, 2003 by and among SR Telecom Inc., Netro
Corporation and Norway Acquisition Corporation (included as
Annex B-2 to the proxy statement/prospectus included in this
registration statement).
2.4 Amendment No. 3 to Agreement and Plan of Merger dated as of
August 6, 2003 by and among SR Telecom Inc., Netro
Corporation and Norway Acquisition Corporation (included as
Annex B-3 to the proxy statement/prospectus included in this
registration statement).
2.5 Form of Voting Agreement dated as of March 27, 2003 between
SR Telecom Inc. and each of Thomas Baruch, Peter Carson,
Irwin Federman, Sanjay Khare, Richard Moley, Sanford
Robertson, Shlomo Yariv and Shirley Young (included as Annex
D to the proxy statement/prospectus included in this
registration statement).*
II-1
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.6 Voting Agreement dated as of March 27, 2003 between SR
Telecom Inc. and Gideon Ben-Efraim (included as Annex E to
the proxy statement/prospectus included in this registration
statement).*
3.1 Certificate and Articles of Incorporation.*
3.2 By-Law No. 2003-1, General By-Laws.*
4 Trust Indenture dated April 22, 1998 between SR Telecom Inc.
and Montreal Trust Company.*
5 Opinion of Fasken Martineau DuMoulin LLP regarding the
validity of the common shares of SR Telecom Inc. being
registered under this Registration Statement.
8.1 Opinion of Pillsbury Winthrop LLP regarding U.S. Federal
income tax consequences of the merger.
8.2 Opinion of Fasken Martineau DuMoulin LLP regarding Canadian
Federal income tax consequences of the merger (included in
exhibit 5).
8.3 Opinion of Davis Polk & Wardwell regarding U.S. Federal
income tax consequences of the merger.
10.1 Product Sourcing Agreement between Lucent Technologies
Australia Pty Limited and Telstra Corporation Limited dated
July 12, 2001.*
10.2 Deed of Novation and Assumption among Telstra Corporation
Limited, Network Design and Construction Limited and Lucent
Technologies Australia Pty Limited dated July 2001 and
Schedule 1 thereto.*
10.3 Novation Deed among Telstra Corporation Limited, SR Telecom
Pty Limited, Lucent Technologies Australia Pty Limited and
Network Design and Construction Limited dated September 21,
2001.*
10.4 Novation Deed among Telstra Corporation Limited, SR Telecom
Pty Limited and Lucent Technologies Australia Pty Limited
dated September 21, 2001.*
10.5 Memorandum of Agreement for the Supply of Goods and Services
for the MTPO Telephono SA Barangay Phase IA Project dated
November 18, 1998.*
10.6 Master Purchase Agreement for 450K Project between SR
Telecom Inc. and Saudi Telecom Company.*
10.7 Operation loans facility letter between Canadian Imperial
Bank of Commerce and SR Telecom Inc. dated February 10,
2003.*
10.8 Manufacturing Agreement between Viasystems, Inc. and SR
Telecom Inc. and SR Telecom S.A.S. dated September 21,
2001.*
10.9 Common Agreement dated as of December 22, 1999 among
Comunicacion y Telefonia Rural S.A., Export Development
Corporation and Inter-American Development Bank.*
10.10.1 Loan Agreement dated as of December 22, 1999 among
Comunicacion y Telefonia Rural S.A. and Inter-American
Development Bank.*
10.10.2 Amended and Restated Loan Agreement dated as of December 22,
1999 between Comunicacion y Telefonia Rural S.A. and Export
Development Corporation.*
10.11 Amended and Restated Direct Agreement dated as of December
22, 1999 among Comunicacion y Telefonia Rural S.A., Export
Development Corporation and Inter-American Development
Bank.*
10.12 Amended and Restated Transfer Restrictions Agreement dated
as of December 22, 1999 among SR Telecom Inc., SR (BV)
Holdings Limited, CTR Holdings Limited, Servicios Rurales de
Telecomunicaciones S.A., Comunicacion y Telefonia Rural
S.A., Export Development Corporation and Inter-American
Development Bank.*
10.13 Amended and Restated Performance Undertaking dated as of
December 22, 1999 among SR Telecom Inc., Export Development
Corporation and Inter-American Development Bank.*
10.14 Amended and Restated Project Funds Agreement dated as of
December 22, 1999 among SR Telecom Inc., Comunicacion y
Telefonia Rural S.A., Export Development Corporation and
Inter-American Development Bank.*
10.15 Sixth Amendment and Limited Term Waiver Agreement dated as
of February 20, 2002 among SR Telecom Inc., Comunicacion y
Telefonia Rural S.A., Export Development Canada (formerly
Export Development Corporation) and Inter-American
Development Bank.+*
II-2
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16 Seventh Amendment and Limited Term Waiver Agreement dated as
of February 17, 2002 among SR Telecom Inc., Comunicacion y
Telefonia Rural S.A., Export Development Canada (formerly
Export Development Corporation) and Inter-American
Development Bank.+*
10.17 Formal Loan Agreement, dated July 3, 2001, between the
Registrant and Pierre St-Arnaud.*
10.18 Formal Loan Agreement, dated June 13, 2002, between the
Registrant and Pierre St-Arnaud.*
10.19 Formal Loan Agreement, dated July 3, 2001, between the
Registrant and David L. Adams.*
21 Subsidiaries of the Registrant.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Fasken Martineau DuMoulin LLP (included in
exhibit 5).
23.4 Consent of Pillsbury Winthrop LLP (included in exhibit 8.1).
23.5 Consent of Davis Polk & Wardwell (included in exhibit 8.3).
24 Power of attorney.
99.1 Opinion of Goldman, Sachs & Co. to Netro Corporation
(attached as Annex C-1 to the proxy statement/prospectus
included in this Registration Statement).
99.2 Consent of Goldman, Sachs & Co.
99.3 Preliminary Opinion of American Appraisal Associates, Inc.
to Netro Corporation (attached as Annex C-2 to the proxy
statement/prospectus included in this Registration
Statement).*
99.4 Consent of American Appraisal Associates, Inc.
99.5 Consent of Gideon Ben-Efraim.
99.6 Form of Proxy Card for Netro Corporation Special Meeting.
---------------
+ Portions omitted pursuant to grant of confidential treatment.
* Previously filed.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant, pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by any such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether or not such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes: (i) to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means and (ii) to arrange or provide for a facility
in the United States for the purpose of responding to such requests. The
undertaking in (i) includes information contained in documents filed subsequent
to the effective date of the registration statement through the date of
responding to the request.
II-3
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(e) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (d) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file a post-effective amendment to the registration statement
to include any financial statements required by Item 8.A. of Form 20-F at
the start of any delayed offering or throughout a continuous offering. The
registrant understands that financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided
that the registrant includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (f)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Montreal, Province of
Quebec, Country of Canada, on this 6th day of August 2003.
SR TELECOM INC.
By: /s/ David L. Adams
--------------------------------------
Name: David L. Adams
Title: Senior Vice President and
Chief Financial Officer
SR TELECOM INC.
SIGNATURE CAPACITY DATE
--------- -------- ----
* Director, President and Chief August 6, 2003
-------------------------------------- Executive Officer (Principal
Pierre St-Arnaud Executive Officer)
/s/ David L. Adams Senior Vice President and Chief August 6, 2003
-------------------------------------- Financial Officer (Principal
David L. Adams Financial Officer and Principal
Accounting Officer)
* Director August 6, 2003
--------------------------------------
John C. Charles
* Director August 6, 2003
--------------------------------------
Constance L. Crosby
* Director August 6, 2003
--------------------------------------
J.V. Raymond Cyr
II-5
SIGNATURE CAPACITY DATE
--------- -------- ----
* Director August 6, 2003
--------------------------------------
Paul A. Dickie
* Director August 6, 2003
--------------------------------------
Francis Fox
* Director August 6, 2003
--------------------------------------
Lionel P. Hurtubise
* Director August 6, 2003
--------------------------------------
Paul E. Labbe
* Director August 6, 2003
--------------------------------------
Nancy E. McGee
*Signed by David L. Adams pursuant to powers of attorney.
Authorized Representative in the United States
Puglisi & Associates
By: /s/ Donald J. Puglisi
------------------------------
Name: Donald J. Puglisi
Title: Managing Director
Date: August 6, 2003
II-6
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
2.1 Agreement and Plan of Merger dated as of March 27, 2003 by
and among SR Telecom Inc., Netro Corporation and Norway
Acquisition Corporation (included as Annex A to the proxy
statement/prospectus included in this registration
statement).
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of
May 5, 2003 by and among SR Telecom Inc., Netro Corporation
and Norway Acquisition Corporation (included as Annex B-1 to
the proxy statement/prospectus included in this registration
statement).
2.3 Amendment No. 2 to Agreement and Plan of Merger dated as of
July 17, 2003 by and among SR Telecom Inc., Netro
Corporation and Norway Acquisition Corporation (included as
Annex B-2 to the proxy statement/prospectus included in this
registration statement).
2.4 Amendment No. 3 to Agreement and Plan of Merger dated as of
August [ ], 2003 by and among SR Telecom Inc., Netro
Corporation and Norway Acquisition (included as Annex B-3 to
the proxy statement/prospectus included in the registration
statement).
2.5 Form of Voting Agreement dated as of March 27, 2003 between *
SR Telecom Inc. and each of Thomas Baruch, Peter Carson,
Irwin Federman, Sanjay Khare, Richard Moley, Sanford
Robertson, Shlomo Yariv and Shirley Young (included as Annex
D to the proxy statement/ prospectus included in this
registration statement).
2.6 Voting Agreement dated as of March 27, 2003 between SR *
Telecom Inc. and Gideon Ben-Efraim (included as Annex E to
the proxy statement/prospectus included in this registration
statement).
3.1 Certificate and Articles of Incorporation. *
3.2 By-Laws 2003-1, General By-Laws. *
4 Trust Indenture dated April 22, 1998 between SR Telecom Inc. *
and Montreal Trust Company.
5 Opinion of Fasken Martineau DuMoulin LLP regarding the
validity of the common shares of SR Telecom Inc. being
registered under this Registration Statement.
8.1 Opinion of Pillsbury Winthrop LLP regarding U.S. Federal
income tax consequences of the merger.
8.2 Opinion of Fasken Martineau DuMoulin LLP regarding Canadian
Federal income tax consequences of the merger (included in
exhibit 5).
8.3 Opinion of Davis Polk & Wardwell regarding U.S. Federal
income tax consequences of the merger.
10.1 Product Sourcing Agreement between Lucent Technologies *
Australia Pty Limited and Telstra Corporation Limited dated
July 12, 2001.
10.2 Deed of Novation and Assumption among Telstra Corporation *
Limited, Network Design and Construction Limited and Lucent
Technologies Australia Pty Limited dated July 2001 and
Schedule 1 thereto.
10.3 Novation Deed among Telstra Corporation Limited, SR Telecom *
Pty Limited, Lucent Technologies Australia Pty Limited and
Network Design and Construction Limited dated September 21,
2001.
10.4 Novation Deed among Telstra Corporation Limited, SR Telecom *
Pty Limited and Lucent Technologies Australia Pty Limited
dated September 21, 2001.
10.5 Memorandum of Agreement for the Supply of Goods and Services *
for the MTPO Telephono SA Barangay Phase IA Project dated
November 18, 1998.
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
10.6 Master Purchase Agreement for 450K Project between SR *
Telecom Inc. and Saudi Telecom Company.
10.7 Operation loans facility letter between Canadian Imperial *
Bank of Commerce and SR Telecom Inc. dated February 10,
2003.
10.8 Manufacturing Agreement between Viasystems, Inc. and SR *
Telecom Inc. and SR Telecom S.A.S. dated September 21, 2001.
10.9 Common Agreement dated as of December 22, 1999 among *
Comunicacion y Telefonia Rural S.A., Export Development
Corporation and Inter-American Development Bank.
10.10.1 Loan Agreement dated as of December 22, 1999 between *
Comunicacion y Telefonia Rural S.A., and Inter-American
Development Bank.
10.10.2 Amended and Restated Loan Agreement dated as of December 22, *
1999 between Comunicacion y Telefonia Rural S.A. and Export
Development Corporation.
10.11 Amended and Restated Direct Agreement dated as of December *
22, 1999 among Comunicacion y Telefonia Rural S.A., Export
Development Corporation and Inter-American Development Bank.
10.12 Amended and Restated Transfer Restrictions Agreement dated *
as of December 22, 1999 among SR Telecom Inc., SR (BV)
Holdings Limited, CTR Holdings Limited, Servicios Rurales de
Telecomunicaciones S.A., Comunicacion y Telefonia Rural
S.A., Export Development Corporation and Inter-American
Development Bank.
10.13 Amended and Restated Performance Undertaking dated as of *
December 22, 1999 among SR Telecom Inc., Export Development
Corporation and Inter-American Development Bank.
10.14 Amended and Restated Project Funds Agreement dated as of *
December 22, 1999 among SR Telecom Inc., Comunicacion y
Telefonia Rural S.A., Export Development Corporation and
Inter-American Development Bank.
10.15 Sixth Amendment and Limited Term Waiver Agreement dated as *+
of February 20, 2002 among SR Telecom Inc., Comunicacion y
Telefonia Rural S.A., Export Development Canada (formerly
Export Development Corporation) and Inter-American
Development Bank.
10.16 Seventh Amendment and Limited Term Waiver Agreement dated as *+
of February 17, 2002 among SR Telecom Inc., Comunicacion y
Telefonia Rural S.A., Export Development Canada (formerly
Export Development Corporation) and Inter-American
Development Bank.
10.17 Formal Loan Agreement, dated July 3, 2001, between the *
Registrant and Pierre St-Arnaud.
10.18 Formal Loan Agreement, dated June 13, 2002, between the *
Registrant and Pierre St-Arnaud.
10.19 Formal Loan Agreement, dated July 3, 2001, between the *
Registrant and David L. Adams.
21 Subsidiaries of the Registrant. *
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Fasken Martineau DuMoulin LLP (included in
exhibit 5).
23.4 Consent of Pillsbury Winthrop LLP (included in exhibit 8.1).
23.5 Consent of Davis Polk & Wardwell (included in exhibit 8.3).
24 Power of attorney.
99.1 Opinion of Goldman, Sachs & Co. to Netro Corporation
(attached as Annex C-1 to the proxy statement/prospectus
included in this Registration Statement).
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
99.2 Consent of Goldman, Sachs & Co.
99.3 Preliminary Opinion of American Appraisal Associates, Inc.
to Netro Corporation (attached as Annex C-2 to the proxy
statement/prospectus included in this Registration
Statement).
99.4 Consent of American Appraisal Associates, Inc.
99.5 Consent of Gideon Ben-Efraim.
99.6 Form of Proxy Card for Netro Corporation Special Meeting.
---------------
+ Portions omitted pursuant to a grant of confidential treatment.
* Previously filed.