<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _________ to __________.
Commission File Number 0-19175
OPENROUTE NETWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Massachusetts 04-2531856
(State or other jurisdiction of incorporation) (IRS Employer Identification Number)
</TABLE>
Nine Technology Drive, Westborough, MA 01581
(Address of principal executive offices)
Registrant's telephone number (508) 898-2800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES [X] NO [ ]
Indicate number of shares outstanding of each of the issuer's classes of common
stock as of September 25, 1999.
Common Stock, $0.01 par value 15,525,801
----------------------------- ------------------
(Title of each class) (Number of shares)
<PAGE> 2
OpenROUTE Networks, Inc.
Form 10-Q
Quarterly Report
September 25, 1999
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 25, 1999
(unaudited) and December 31, 1998.
Consolidated Statements of Operations for the three months and
nine months ended September 25, 1999 and September 26, 1998
(unaudited).
Consolidated Statement of Shareholders' Equity for the nine
months ended September 25, 1999 (unaudited).
Consolidated Statements of Cash Flows for the nine months
ended September 25, 1999 and September 26, 1998 (unaudited).
Notes to the Consolidated Financial Statements, unaudited.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Part II. Other Information
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OpenROUTE Networks, Inc.
Consolidated Balance Sheets
(in thousands)
September 25, December 31,
ASSETS 1999 1998
------------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 2,804 $ 2,024
Marketable securities 0 3,128
Accounts receivable, net 3,450 3,356
Inventories 5,563 8,546
Prepaids and other assets 343 509
------- -------
Total current assets 12,160 17,563
Trademarks,licenses 41 0
Property and equipment, net 2,239 2,715
------- -------
Total assets $14,440 $20,278
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,226 $ 1,449
Accrued compensation 88 353
Accrued expenses 1,417 2,743
Accrued warranty 582 582
------- -------
Total current liabilities 3,313 5,127
------- -------
Stockholders' equity
Preferred stock -- --
Common stock 160 157
Capital in excess of par value 49,689 49,418
Accumulated deficit (37,835) (33,526)
Cumulative translation adjustments 123 112
Less Treasury stock, at cost (1,010) (1,010)
------- -------
Total stockholders' equity 11,127 15,151
------- -------
Total liabilities and stockholders' equity $14,440 $20,278
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
OpenROUTE Networks, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Sales:
<S> <C> <C> <C> <C>
Product $ 2,534 $ 1,714 $ 8,425 $ 7,733
Software licensing 84 -- 785 1,663
Service and other 415 454 1,401 1,785
------- ------- ------- -------
Net sales 3,033 2,168 10,611 11,181
Cost of sales:
Product 1,717 1,017 5,058 5,281
Software licensing -- -- -- --
Service and other 223 411 1,187 1,452
------- ------- ------- -------
Cost of sales 1,940 1,428 6,245 6,733
------- ------- ------- -------
Gross profit 1,093 740 4,366 4,448
------- ------- ------- -------
Operating expenses:
Research and development 987 1,142 2,935 3,532
Selling and marketing 1,174 1,714 3,181 6,653
General and administrative 684 1,598 2,418 4,561
Restructure costs -- -- 243 --
------- ------- ------- -------
Total operating expenses 2,845 4,454 8,777 14,746
------- ------- ------- -------
Loss from operations (1,752) (3,714) (4,411) (10,298)
Interest income, net 22 145 112 498
------- ------- ------- -------
Loss before income taxes (1,730) (3,569) (4,229) (9,800)
Provision for income taxes 8 4 10 162
------- ------- ------- -------
Net loss $(1,738) $(3,573) $(4,309) $(9,962)
======= ======= ======= =======
Loss per share --
Basic and Diluted $ (0.11) $ (0.23) $ (0.28) $ (0.65)
======= ======= ======= =======
Weighted average number of common
shares outstanding -- Basic
and Diluted 15,460 15,323 15,461 15,302
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
OpenROUTE Networks, Inc
Consolidated Statement of Stockholders' Equity
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Capital in Other
Common Stock Excess of Accumulated Comprehensive
Shares Amount Par Value Deficit Income
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 15,740 $157 $49,418 $(33,526) $112
Issuance of common stock 176 3 271 -- --
Comprehensive income (loss)
Foreign currency translation -- -- -- -- 11
Net Loss -- -- -- (4,309)
==================================================================================================================
Total comprehensive loss -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
BALANCE, September 25, 1999 15,916 $160 $49,689 $(37,835) $123
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Total
Treasury Stock Stockholders'
Shares Amount Equity
- --------------------------------------------------------------------------------
BALANCE, December 31, 1998 390 $(1,010) $ 15,151
Issuance of common stock -- -- 274
Comprehensive income (loss)
Foreign currency translation -- -- 11
Net loss -- -- (4,309)
- --------------------------------------------------------------------------------
Total comprehensive loss (4,024)
- --------------------------------------------------------------------------------
BALANCE, September 25, 1999 390 $(1,010) $11,127
- --------------------------------------------------------------------------------
<PAGE> 6
OpenROUTE Networks, Inc.
Consolidated Statements of Cash Flows
for the nine months ended
(in thousands)
(unaudited)
September 25, September 26,
1999 1998
------------- -------------
Cash flows provided by operating activities:
Net loss ($4,309) ($ 9,962)
Adjustments to reconcile net loss to cash
flows used by operating activities:
Bad debt provision 210 470
Depreciation and amortization 565 890
Loss on disposition of fixed assets 8 4
Changes in operating assets and liabilities:
(Increase ) decrease in accounts receivable (304) 3,511
(Increase) decrease in inventories 2,983 (2,795)
Decrease in deposits and other assets 125 6
Decrease in accounts payable and accrued expenses (1,814) (1,054)
------ -------
Net cash used by operating activities (2,536) (8,930)
------ -------
Cash flows provided by investing activities:
Sale of equipment and fixed asset proceeds 153 1
Capital expenditures (250) (616)
Marketable securities sales and maturities 3,128 14,070
Marketable securities purchases -- (7,640)
------ -------
Net cash provided by investing activities 3,031 5,815
------ -------
Cash flows provided by financing activities:
Proceeds from the issuance of common stock 274 70
------ -------
Net cash provided by financing activities 274 70
------ -------
Effect of exchange rate changes on cash 11 23
------ -------
Net increase (decrease) in cash and cash equivalents 780 (3,022)
Cash and cash equivalents at beginning of period 2,024 5,317
------ -------
Cash and cash equivalents at end of period $2,804 $ 2,295
====== =======
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 7
OpenROUTE Networks, Inc.
Notes to Consolidated Financial Statements, unaudited
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
OpenROUTE Network, Inc. and its subsidiaries (collectively, "the Company" or
"OpenROUTE"). The consolidated financial statements for the Company for the
interim periods ended September 25, 1999 and September 26, 1998 have been
prepared without an audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in the Company's
annual financial statements have been condensed or omitted. The interim
financial statements, in the opinion of management, reflect all adjustments
(including normal recurring accruals) necessary for a fair statement of the
results for the interim periods ended September 25, 1999 and September 26, 1998.
Operating results for the interim periods ended September 25, 1999 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1999.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1998, which are
contained in the Company's 1998 Annual Report to its shareholders and in its
Form 10-K filed with the SEC.
PROPOSED MERGER
On September 30, 1999, OpenROUTE signed a definitive merger agreement with
Netrix Corporation (Netrix) whereby OpenROUTE will merge with and into Netrix
and Netrix will be the surviving corporation. As consideration for the merger,
each holder of OpenROUTE common stock will receive one share of Netrix common
stock for each share of OpenROUTE common stock that it holds. The agreement has
been approved by the boards of directors of both companies and is subject to the
approval of the stockholders of each company. For a complete description of this
proposed transaction and to review the agreement and plan of merger, see the
Current Report on Form 8-K filed by the Company on October 13, 1999
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements were prepared by the Company in conformity
with generally accepted accounting principles which require 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 reported period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. Actual results could
differ from those estimates. The Articles of Organization of the Company were
amended on June 10, 1998 to change the Company's name to OpenROUTE Networks,
Inc. from its former name of Proteon, Inc.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
- --------------------------------------------------------------------------------
(in thousands) September 25, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Raw Materials $1,056 $2,270
Work In Process 27 15
Finished goods 4,480 6,261
- --------------------------------------------------------------------------------
Total Inventories $5,563 $8,546
- --------------------------------------------------------------------------------
NET LOSS PER SHARE OF COMMON AND COMMON EQUIVALENT STOCK
The Company follows SFAS No. 128 "Earnings per Share". Under SFAS No. 128, Basic
Earnings Per Share ("EPS") excludes the effect of any dilutive options, warrants
or convertible securities and is computed by dividing the net income (loss)
available to holders of Common Stock by the weighted average number of shares of
Common Stock outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue Common Stock
were exercised. Diluted EPS is computed by dividing the net income (loss)
available to holders of Common Stock by the sum of the weighted average number
of shares of Common Stock and Common Stock equivalents computed using the
average market price for the period under the treasury stock method.
<PAGE> 8
NET LOSS PER SHARE OF COMMON AND COMMON EQUIVALENT STOCK (CONTINUED)
The following table presents the numerator and the denominator of the basic and
diluted EPS computations shown on the consolidated statements of operations:
3 Months ended September 25, 1999 September 26, 1998
- --------------------------------------------------------------------------------
Basic and diluted EPS (in thousands, except per share data)
computation:
Numerator:
Net loss $(1,738) $(3,573)
Denominator:
Weighted average common
shares outstanding 15,460 15,323
- --------------------------------------------------------------------------------
Basic and diluted EPS $ (0.11) $ (0.23)
- --------------------------------------------------------------------------------
Outstanding stock options of 2,185,776 with an average exercise price of $1.69
as of September 25, 1999 and outstanding stock options of 2,078,263 with an
average exercise price of $1.72 as of September 26, 1998 were not included in
the diluted EPS computation because their effect would be anti-dilutive.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement displayed
with the same prominence as other financial statements. The Company has elected
to disclose this information in its statement of stockholders' equity.
NEWLY ISSUED ACCOUNTING STANDARDS
The FASB issued Statement No. 131 ("SFAS 131"), "Disclosures about Segments of
an Enterprise and Related Information". This Statement, which supersedes
Statement No. 14, "Financial Reporting for Segments of a Business Enterprise,"
changes the way public companies report information about segments. SFAS 131,
which is based on the management approach to segment reporting, includes
requirements to report segment information quarterly and entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenues.
The Company is engaged principally in one business segment having two lines of
business: (i) Internet access and (ii) local area network access. During the
three months ended September 25, 1999 and September 26, 1998, net sales to one
customer accounted for approximately 17% and 20% of the Company's total net
sales, respectively. A second significant customer accounted for approximately
8% of total net sales during the three months ended September 25, 1999 and
September 26, 1998.
During the nine months ended September 25, 1999 and September 26, 1998, net
sales to one customer accounted for approximately 10% and 13% of the Company's
total net sales, respectively. A second significant customer accounted for
approximately 9% of total net sales during the nine months ended September 25,
1999 and 10% during the nine months ended September 26, 1998.
<PAGE> 9
The geographic distribution of the Company's operating data is summarized as
follows:
United Asia Europe
States Pacific And Other Total
----------------------------------------
(In thousands)
Quarter ended September 25, 1999
Net sales 2,196 137 700 3,033
Loss from operations (1,303) (218) (231) (1,752)
Long-lived assets 2,212 10 17 2,239
Capital expenditures 140 0 0 140
Depreciation and amortization 174 3 2 179
Quarter ended September 26, 1998
Net sales 1,805 100 263 2,168
Loss from operations (2,900) (315) (499) (3,714)
Long-lived assets 2,859 105 29 2,993
Capital expenditures 401 0 4 405
Depreciation and amortization 272 10 3 285
Nine Months ended September 25, 1999
Net sales 7,728 656 2,227 10,611
Loss from operations (3,275) (561) (575) (4,411)
Long-lived assets 2,212 10 17 2,239
Capital expenditures 250 0 0 250
Depreciation and amortization 543 14 8 565
Nine Month ended September 26, 1998
Net sales 8,544 1,039 1,598 11,181
Loss from operations (9,082) (693) (523) (10,298)
Long-lived assets 2,859 105 29 2,993
Capital expenditures 604 2 10 616
Depreciation and amortization 837 34 19 890
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. These forward-looking statements are
based on numerous assumptions about future conditions that could prove not to be
accurate. Actual events, transactions and results may materially differ from the
anticipated events, transactions or results described in such statements.
Investors are cautioned that forward-looking statements involve risks and
uncertainties and may be affected by a number of factors including: business
conditions within the networking industry; timing of orders from and shipments
to major customers; timing of new product introductions; acceptance of products
in the marketplace; increased competition; changes in manufacturing costs;
changes in the mix of product sales; the Company's proposed merger with Netrix
Corporation and their ability to integrate their operations; availability of
financing; and changes in world economic conditions. No assurance can be given
that these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.
The following discussion of the financial condition and performance of the
Company should be read in conjunction with the consolidated financial statements
and related notes and other detailed information regarding the Company included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998 and other reports filed by the Company with the SEC.
SUMMARY
OpenROUTE is a pioneer in the data communications industry. OpenROUTE has
distinguished itself as a leader in networking and in particular, in developing
networking connectivity solutions that focus exclusively on the Internet's edge.
For more than 18 years OpenROUTE has shipped network connectivity products that
have helped companies grow and prosper through deploying network-centric
computing. Historically, the Company's local area networking ("LAN") products
have provided connectivity solutions in more than 70 percent of the Fortune 100
companies. Leveraging this expertise in mission-critical network solutions,
OpenROUTE aggressively delivers this same quality of product and service for
Internet connectivity. OpenROUTE is committed to providing solutions that make
the Internet a more cost-effective, secure and comfortable place to grow a
business. The Company's comprehensive line of products and solutions is designed
to meet the needs of Internet service providers ("ISPs") and corporate
enterprises.
OpenROUTE's data networking products and services combine cost effectiveness
with ease of operation, interoperability, network security, reliability and
performance. The Company's customers include Global 1000 multinationals, ISPs as
well as corporations looking to the Internet to grow their businesses.
Specifically, OpenROUTE provides solutions that complement and optimize the edge
of the network.
RESULTS OF OPERATIONS
NET SALES
Net sales for the quarter ended September 25, 1999 were $3,033,000 as compared
with $2,168,000 for the quarter ended September 26, 1998, an increase of
$865,000, or 39.9%. This increase was primarily due to the sale of Internet
access products. For the first nine months of 1999, net sales were $10,611,000,
as compared with $11,181,000 for the same period in 1998, a decrease of
$570,000, or 5.1%. Although sales of Internet access products increased 42.6%
for the first nine months of 1999 as compared to the first nine months of 1998,
a decrease in product revenue from the Company's LAN products, combined with
decreases in licensing and service revenue, accounted for the overall net
decrease in sales for the period.
Product sales for the quarter ended September 25, 1999 were $2,534,000, as
compared with $1,714,000 for the quarter ended September 26,1998, an increase of
$820,000, or 47.8%. For the first nine months of 1999, product sales were
$8,425,000, as compared to $7,733,000 for the same period in 1998, an increase
of $692,000, or 8.9%.
Internet access product revenue increased by $1,079,000, or 90% for the quarter
ended September 25, 1999 as compared to the same period in 1998. For the first
nine months of 1999, Internet access product revenue increased by $2,261,000, or
42.6%. Internet access product revenue contributed 90% of the total product
sales for the quarter ended September 25, 1999 and 89.8% for the nine months
ended September 25, 1999. This reflects the Company's transition from LAN to
internet access products.
The total number of units of Internet access products sold increased by 71.2%
for the quarter ended September 25, 1999 and 93.2% for the nine months ended
September 25, 1999, as compared to the same periods in 1998. This reflects the
Company's selling strategy to focus its efforts on the ISP and
telecommunications company marketplace and the growth in demand for
<PAGE> 11
Internet access products within this market place.
Software licensing revenue for the three and nine months ended September 25,
1999 was $84,000 and $785,000, respectively. There was no software license
revenue for the quarter ended September 26, 1998; nine month's software license
revenue for the period ended September 26, 1998 was $1,663,000. This represents
a decrease in software licensing revenue for 1999 of $878,000, or 52.8%. The
Company expects future software licensing revenue to be at varying and uncertain
levels. Software licensing revenue is an ancillary component of the Company's
core revenue stream but is strategic in its promotion of the OpenROUTE routing
technology in its markets.
For the quarter ended September 25, 1999 service and other revenues decreased by
$39,000, or 8.6%, to $415,000, as compared to $454,000 for the same period in
1998. For the first nine months of 1999, service and other revenues were
$1,401,000, as compared with $1,785,000 for the same period in 1998, a decrease
of $384,000, or 21.5%. This decrease was primarily due to the reduction in
service contracts worldwide resulting from the Company's decision to focus on
Internet access products, which require fewer support services.
GROSS PROFIT
The total gross profit margin as a percentage of net sales increased to 36.0%
for the quarter ended September 25, 1999, from 34.1% for the same period in
1998. The Company's product gross profit for the quarter ended September 25,
1999 was 41.1% compared to the 40.7% for the quarter ended September 26, 1998.
Total gross profit increased as a percentage of net sales to 41.1% for the first
nine months of 1999 from 39.8% for the nine months ended September 26, 1998. The
margin improvement is primarily due to the sale of certain higher margin
products and purchasing efficiencies.
RESEARCH AND DEVELOPMENT
Research and development expenses were $987,000, or 32.5% of net sales for the
quarter ended September 25, 1999, compared to $1,142,000, or 52.7% of net sales
for the same period in the prior year. The decrease in expenses of $155,000 was
primarily due a reduction in depreciation and occupancy related costs. For the
first nine months of 1999, research and development costs were $2,935,000, or
27.7% of net sales compared to $3,532,000, or 31.6% of net sales for the same
period in 1998. The decrease of $597,000, or 16.9%, was due primarily to the
same factors stated above. The Company considers investments in research and
development to be critical to future revenues and intends to focus these
expenditures on Internet access products.
SELLING AND MARKETING
Selling and marketing expenses were $1,174,000, or 38.7% of net sales for the
quarter ended September 25, 1999, compared to $1,714,000, or 79.1% of net sales
for the quarter ended September 25, 1998, a decrease of $540,000, or 31.5%. This
decrease was the result of lower fixed personnel related costs, and cost
containment measures in line with the Company's selling strategy. For the first
nine months of 1999, selling and marketing expenses were $3,181,000, or 30.0% of
net sales, as compared to $6,653,000, or 59.5% of net sales for the same period
in the prior year. This decrease in expenses of $3,472,000, or 52.2% was due
primarily to the same factors stated above.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $684,000,or 22.6% of net sales for the
quarter ended September 25, 1999, compared to $1,598,000, or 73.7% of net sales
for the quarter ended September 26, 1998, a decrease of $914,000, or 57.2%. For
the first nine months of 1999, general and administrative expenses were
$2,418,000, or 22.8% of net sales as compared to $4,561,000, or 40.8% of net
sales for the same period in the prior year. The decrease of $2,143,000, or
47.0% was primarily due to cost containment measures implemented and lower
personnel related costs after restructuring in the same period last year.
RESTRUCTURING OF OPERATIONS
The Company's management continually reviews methods to reduce its expense base
to keep in line with the Company's current and projected revenue stream. As a
result, the Company has implemented a series of restructurings; the most recent
of which was in connection with the consolidation of Asian operations. This
restructuring of operations was necessary to reestablish the strategic direction
of the Company and better align its operating expenses and anticipated revenues.
In the second quarter of 1999, the Company recorded a $243,000 restructuring
charge. This charge included approximately $60,000 of severance costs, $93,000
of office rental liability, $43,000 of provision for bad debts, $23,000 for
legal, audit and professional fees, $11,000 for inventory write down and $13,000
of other expenses. During the quarter ended September 25, 1999 the Company
incurred cash expenditures of approximately $37,000 relating to the
restructuring reserve.
PROVISION FOR INCOME TAXES
For the quarter ended September 25, 1999, the Company booked an income tax
adjustment of $8,000 bringing the 1999-year to date total to $10,000. This is a
result of foreign taxes withheld from software licensing fees received from a
foreign
<PAGE> 12
corporation.
SUBSEQUENT EVENTS
On September 30, 1999, OpenROUTE signed a definitive merger agreement with
Netrix Corporation (Netrix) whereby OpenROUTE will merge with and into Netrix
and Netrix will be the surviving corporation. As consideration for the merger,
each holder of OpenROUTE common stock will receive one share of Netrix common
stock for each share of OpenROUTE common stock that it holds. The agreement has
been approved by the boards of directors of both companies and is subject to the
approval of the stockholders of each company. For a complete description of this
proposed transaction and to review the agreement and plan of merger, see the
Current Report on Form 8-K filed by the Company on October 13, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 25, 1999, the Company's ratio of current assets to current
liabilities was 3.67:1, compared to 3.43:1 at December 31, 1998. As of September
25, 1999, the Company's quick assets ratio of cash, cash equivalents, marketable
securities and accounts receivable to current liabilities was 1.89:1, compared
to 1.66:1 at December 31, 1998. During the first nine months of 1999, the net
increase in cash and cash equivalents was $780,000, as compared to a net
decrease of $3,022,000 for the same period in 1998.
During the first nine months of 1999, the Company consumed $2,536,000 of cash
for operating activities as compared to $8,930,000 used for the same period in
1998. This was due primarily to the net operating loss of $4,309,000 and a
decrease in accounts payable and accrued expenses of $1,814,000, offset by a
decrease in inventories of $2,983,000,and depreciation and amortization of
$565,000.
Investing activities for the first nine months of 1999 provided net proceeds of
$3,031,000 principally from the sales of marketable securities. Net cash
provided by financing activities provided $274,000, all of which resulted from
the issuance of common stock.
As of September 25, 1999, the Company's principal sources of liquidity consisted
of $2,804,000 of cash and cash equivalents, and a $5,000,000 working capital
line of credit from Silicon Valley Bank. The $5,000,000 line was established to
provide short-term working capital financing on an "as needed" basis and also to
fund planned growth. The line is based on eligible accounts receivable and
approximately $1,150,000 was available at September 25, 1999. The interest rate
on outstanding borrowings is at a variable rate; there were no outstanding
borrowings at September 25, 1999.
The Company's management believes that if it achieves its twelve month operating
plan, then the Company's current levels of cash, cash equivalents, and
marketable securities, as well as its borrowing capability, will be sufficient
to satisfy its expected working capital and capital expenditure requirements
through the next twelve months.
TRENDS AND UNCERTAINTIES
The Company continues to face many risks and uncertainties in addition to those
set forth below, including without limitation, risks that apply to most
businesses, such as risks arising from competition and general and specific
market and economic risks.
TECHNOLOGICAL CHANGE, NEW PRODUCTS AND INDUSTRY STANDARDS
OpenROUTE is positioning itself as a company focused on the edge of the
Internet. OpenROUTE views the network access market as having two lines of
business - Internet access and local access. Its current strategy is based upon
concentration on the Internet access market segment.
The market for the Company's products is characterized by rapidly changing
technology, new product introductions and multiplicity of current and evolving
industry standards. Accordingly, the Company believes that its future success
will depend on its continuing ability to enhance and expand its existing
products and to develop or private label other manufacturer's technology and
introduce in a timely fashion new products which incorporate new technologies,
conform to standards and achieve market acceptance.
There can be no assurance that the Company's strategy is the correct one under
the circumstances; that the Company has correctly assessed trends in the
marketplace; that the Company will be able to develop, market, support or secure
external supplies of such products successfully; or that the Company will be
able to respond effectively to technological changes, new product announcements
by others or new industry standards.
<PAGE> 13
MANUFACTURING AND SUPPLY; DEPENDENCE ON SUPPLIERS
The Company's manufacturing operations consist of systems level integration and
testing. The Company has strategic relationships with U.S. Assemblies of
Taunton, Massachusetts, a major subcontract manufacturer with access to
cost-effective, high volume manufacturing, distribution and repair capability
worldwide, and since October 1998 with Venture Manufacturing (Venture). U.S.
Assemblies manufactures the Company's board assemblies for its router, hub and
adapter card product lines and specific, turnkey manufacturing assignments for a
number of OpenROUTE products. As of June 1999, Venture began turnkey
manufacturing for some of the Company's adapter card and remote access router
product lines. Venture conducts complete in-circuit and functional testing of
all units. Venture is certified by ISO9002, British Approval Board for
Telecommunications (BABT), Underwriters Laboratory (UL), TUV and Canadian
Standards Association (CSA).
The Company believes that in the event of an interruption in manufacturing by
either of its subcontractors (U.S. Assemblies or Venture) it will be able to
shift its production needs to the unaffected facility as necessary and continue
to meet its expected demand. Both U.S. Assemblies and Venture operate a number
of other plants within the United States and Asia.
OpenROUTE performs some final assembly and testing of its intelligent hubs and
routers at its Westborough, Massachusetts facility. A repair depot and logistics
operation is also located at its Westborough facility, coordinating global
service requirements for all products.
The token ring chip sets used in the Company's 4 and 16 million bits per seconds
(Mbps) adapters are currently manufactured by Texas Instruments Inc. (Texas
Instruments). The Company has an agreement with Texas Instruments under which it
believes it will be able to obtain adequate supplies of these chipsets in a
timely manner to meet customer demand. However, the reduction or interruption in
supply or a significant price increase could adversely affect the Company's
operating results. The reduced instruction set chip ("RISC") processor presently
used in the Company's CNX 600 and CNX 500 bridging routers is available solely
from Advanced Micro Devices Inc. ("AMD"). The Company believes, however, that
other available RISC processors could be substituted for the AMD chip, if
necessary, with some product modifications. Certain logic semiconductors, signal
processors and subassembly components used in the Company's products are also
available only from limited sources. The Company has not experienced any
significant problems in obtaining required supplies of such limited source
components and believes that alternative sources could be developed quickly.
However, such shortages could result in production delays that might adversely
affect the Company's business. The Company's line of GTX and GT business series
products incorporates microprocessors supplied by Motorola Inc. ("Motorola").
The Company is not aware of any shortages of chips from Motorola, and believes
that supplies will be adequate for the coming year.
OpenROUTE continues to have OEM arrangements with manufacturers for some of its
token ring product offerings. The Company does not feel these arrangements
jeopardize the quality of the products the Company is shipping. In most cases,
if supply from one vendor was interrupted or made scarce, the Company believes
it could find a comparable source for the affected product with limited delays
in shipment.
The inability to obtain sufficient sole or limited source components as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments which would adversely
affect the Company's operating results. There can be no assurance that, in the
event of interruptions in contract manufacturing, supplies of components from
sole or limited sources or supplies of units from original equipment
manufacturer ("OEM") vendors or similar occurrences, the Company could find and
engage suitable alternatives in a timely manner. Such interruptions or the
inability of OpenROUTE to counteract them successfully could have an adverse
effect on the Company's business, operations and finances.
INTELLECTUAL PROPERTY
Currently, OpenROUTE relies principally upon a combination of contractual
rights, trade secrets and copyright laws to establish and protect proprietary
aspects of its products. The Company believes that, because of the rapid pace of
technological change in the data communications and computer industries, legal
protection for its products is a less significant factor in the Company's
success than the knowledge, ability and experience of the Company's employees,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company. However, should a successful challenge be
mounted against the rights of OpenROUTE in and to its intellectual property, by
allegations of infringement on the rights of others or for any other reason, the
Company's business, operations and finances could be adversely affected. Certain
technology used in the Company's products is licensed by the Company from third
parties. The termination of certain of these licenses would have a material
adverse effect on the Company's operations.
<PAGE> 14
PRODUCT COMPATIBILITY AND COMPETITION
INTERNET ACCESS (ROUTERS)
OpenROUTE expects to participate significantly in the market segment of Internet
access routing by focusing exclusively on the Internet's edge. Specifically, the
Company provides best-of-class edge solutions that complement with the core and
maximize the edge. The Company has enhanced its Internet access capabilities
with the introduction of new products that and expanded its presence in the
Integrated Services Digital Network ("ISDN") marketplace.
INTERNETWORKING SOFTWARE
OpenROUTE(TM), OpenROUTE's inter-networking software suite, is the foundation of
the Company's high performance Internet access products. All of OpenROUTE's
internetworking products ship with this software technology installed. Also,
OpenROUTE licenses this software to other providers of internetworking products.
As routing technology progresses, the Company may be required to modify its
routing and bridging software to maintain compatibility of its products with
various standards and interoperability with other manufacturers' router
products. Failure by the Company to maintain such compatibility,
interoperability and technical competencies could adversely affect the Company's
business, operations and finances.
NETWORK INTERFACE CARD PRODUCTS
The market for token ring network interface card products is dominated by IBM,
MADGE and Olicom. While token ring networking is an industry standard, OpenROUTE
believes that its ability to address successfully the market for token ring
network products is dependent upon the compatibility and interoperability of the
Company's products with products offered by these vendors and upon maintaining
compatibility with the token ring standard as it continues to evolve.
LAN ACCESS
The Company continues to sell token ring switches; intelligent hubs that provide
connectivity and management of different network cabling schemes and local area
network ("LAN") topologies; Ethernet hubs, the pronto/E series, for the
workgroup market segment; token ring hubs, the Serial 75 Stackable Hub family
for building networked and extended workgroups; token ring adapters for physical
connectivity and token ring signaling between a personal computer or workstation
and cabling; and multi port cards intended to provide a full range of solution
for the client/server marketplace. The Company also seeks opportunities to
leverage technology through licensing arrangements.
COMPETITION
The data communications, networking and computer industries are highly
competitive and characterized by rapidly changing technology and evolving
industry standards. These advances result in frequent new product introductions,
increased capabilities and improvements in the relative price/performance of
networking products. As a competitor in the networking industry, OpenROUTE
believes one of the keys to success will be making networks more accessible to a
broader base of customers. OpenROUTE is committed to open, standards based
products, innovative solutions to customer requirements for reliable and high
performance networks, a favorable price/performance ratio, ease of installation
and ease of use.
The Company competes with several companies having greater research and
development, marketing and financial resources, manufacturing capability,
customer support organizations, and name recognition than those of the Company.
There can be no assurance that the Company will be able to compete successfully
in the future or those competitive pressures will not adversely affect the
Company's business.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes the Company's future success depends in large part upon
timely enhancement of existing products and the development of new products that
not only maintain technological excellence, but also improve the capabilities,
efficiency and cost effectiveness of the end users' data communication networks.
The Company is developing new products to improve price/performance ratios,
enhance its network management capabilities, simplify ease of use and ensure
interoperability with other vendors' standards based products.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results may vary significantly depending upon
factors such as the timing of new product announcements and releases by the
Company and its competitors, the timing of significant orders, the mix of
products sold and the mix of distribution channels through which the products
are sold. In addition, substantially all of the Company's sales in each quarter
result from orders booked in that quarter. Consequently, if sales do not close
in any quarter as anticipated, the Company's results of operations for that
quarter would be adversely affected. Further, the Company's expense levels are
based, in part, on its expectations of future sales. If sales levels are below
expectations, operating results may be adversely affected. Also, quarterly
results can be materially affected by the existence and/or the timing of
software licensing revenues.
<PAGE> 15
METHOD OF DISTRIBUTION
The Company sells its products to end users worldwide primarily through an
indirect sales channel comprised of ISPs, OEMs, and value added resellers. These
resellers also represent other lines of products which are, in some cases,
identical or complementary to, or which compete with, those of the Company.
While the Company attempts to encourage these resellers to focus on its products
through marketing and support programs, there is a risk that these resellers may
give higher priority to products of other suppliers, thereby reducing their
efforts devoted to selling the Company's products. One reseller accounted for
approximately 12%, 11% and 14%, of the Company's total net sales in 1998, 1997
and 1996, respectively, and a second reseller accounted for approximately 10%,
8%, and 14% of the Company's total net sales in 1998, 1997, and 1996,
respectively.
There can be no assurance that the Company has selected appropriate channels of
distribution for its products or that existing resellers will dedicate adequate
resources to sales of the Company's products. Failure to do so could result in
an adverse impact on the Company's business, operations and finances.
LIQUIDITY
Failure of the Company to create and maintain adequate working capital and
liquidity, by sales of equity, obtaining lines of credit or otherwise, could
adversely impact the Company's business, operations and finances.
INTERNATIONAL SALES, REGULATORY STANDARDS AND CURRENCY EXCHANGE
International sales accounted for 30.9%, 35.4% and 38.3% of the Company's net
sales in 1998, 1997 and 1996, respectively. The decrease in the international
sales as a percentage of the Company's net sales was primarily the result of the
economic crisis in the Asia Pacific region. The Company expects that
international sales to continue to be a significant portion of the Company's
business. Foreign regulatory bodies continue to establish standards different
from those in the United States, and the Company's products are designed
generally to meet those standards. The inability of the Company to design
products in compliance with such foreign standards could have an adverse effect
on the Company's operating results. The Company's international business may be
affected by changes in demand resulting from fluctuation in currency exchange
rates and tariffs and difficulties in obtaining export licenses.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 15,525,801 outstanding shares of Common Stock as of September 25,
1999 are now freely tradable or eligible for sale on the open market. In
addition, options to acquire an aggregate of 571,118 shares of Common Stock were
vested as of September 25, 1999, and the shares issuable upon exercise of any
such option will be freely tradable or eligible for sale in the public market.
Additional shares will become eligible for resale in the public market at
subsequent dates. Sales of substantial numbers of such shares in the public
market could adversely affect the market price of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The Company believes factors such as announcements of new products by the
Company or its competitors and quarterly variations in financial results could
cause the market price of the Company's Common Stock to fluctuate substantially.
In addition, the stock market has experienced volatility which has particularly
affected the market prices the stocks of many high technology companies' and
which often has been unrelated to the operating performance of such companies.
These market fluctuations may adversely affect the price of the Company's Common
Stock.
CERTAIN CHARTER AND BY LAW PROVISIONS
The Company's Amended and Restated Articles of Organization and By-Laws contain
certain provisions that could have the effect of making it more difficult for a
third party to acquire, or could discourage a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of such provisions allow the Company to issue
preferred stock with rights senior to those of the Common Stock and impose
various procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions.
YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If computer programs
with date sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
<PAGE> 16
The Company has initiated a program to review the Year 2000 readiness of its
internal systems, product line and third party suppliers and vendors. The
program consists of: (i) preparing an inventory of the Company's products and
suppliers to determine which systems, if any, may encounter date processing
problems; (ii) assessing the Year 2000 issues presented; (iii) remediation, if
necessary, of products owned or manufactured by the Company; (iv) testing of
systems; and (v) contingency plans. The program's implementation varies
depending upon the problems or issues encountered, and their resolution.
PRODUCTS MANUFACTURED BY THE COMPANY. The Company's main business since its
formation has consisted primarily of the manufacture and sale of: (i) remote
access routers used to access the Internet; (ii) LAN equipment used to link
together computers and peripheral devices; and (iii) network interface cards
("NIC"), which connect computer workstations to a network. The Company has
installed its own proprietary software in all of its manufactured remote access
routers and LANs, and at times has licensed this software to third parties. The
Company's installed proprietary software and the products manufactured and sold
by the Company, do not track or report dates, are not date dependent and are
Year 2000 compliant. The Company's manufactured NIC cards do not contain any
date-dependent functions, and thus also are Year 2000 compliant. Therefore, the
Company does not expect that Year 2000 processing problems will occur in
products sold by the Company, or that Year 2000 product problems would have a
material effect on the Company's business, financial condition or the results of
operations.
Internal Business Software And Systems. The Company in 1998 conducted an
inventory of its internal business systems to determine whether any Year 2000
processing problems existed in critical equipment or systems. As a result, and
as part of a corporate program intended to reduce cycle time and improve
efficiency, the Company purchased new business operations systems, which operate
the Company's financial, administrative, business, manufacturing and customer
service functions. The software vendor has indicated these systems are Year 2000
compliant. The Company successfully completed the installation of these systems
in January 1999. The Company has a one year limited warranty on these systems
commencing from the date of delivery, which warranty would expire before January
1, 2000.
The Company also has installed a new telephone system under a long-term lease,
which the Company believes to be Year 2000 compliant. However, if testing
demonstrates unexpected Year 2000 problems in these new systems, there would be
no assurance that the Year 2000 problems would not have a material impact on the
Company's internal operations and would not materially impact the Company's
business, financial condition or results of operations.
The Company expended $340,000 in Year 2000 system costs in 1998. Some of these
costs have been capitalized under generally accepted accounting practices. The
Company expended $72,000 for the first nine months of 1999 and expects to incur
additional expenditures of $35,000 in the fourth quarter of 1999, related to
Year 2000 equipment purchases and leases, including consulting fees, license
agreements and lease payments.
Readiness Of Third Party Suppliers And Vendors. The Company relies on third
party suppliers, service providers and contractors for critical services,
including utility power and telephone, parts and supplies. In addition, the
Company sells its products to customers, including ISPs and others, which are
highly dependent on computers, and which could be adversely affected by their
own or their suppliers' lack of Year 2000 readiness. The Company has conducted
an inventory of its critical suppliers, service providers and contractors to
determine the extent to which the Company's operations could be affected by
those third parties' failure to remedy their own Year 2000 issues. This exercise
was substantially completed in March 1999. Most of the Company's critical
suppliers, service providers and contractors are also in the high technology
field, thus year 2000 compliance has received intense attention throughout the
vendors' base. OpenROUTE's major contract manufacturer, U.S. Assemblies, has
recently completed implementation of the Year 2000 compliant version of MAPICS
for their material resource planning ("MRP") efforts.
Following completion of its inventory and assessment of third party readiness,
the Company will determine whether testing, verification or contingency plan
procedures are necessary. The worst case scenario if suppliers or customers were
not Year 2000 compliant would be interruption in the Company's ability to
manufacture or deliver its products through loss of power, supply shortages or
disruption of delivery systems, or a material decrease in the sale of products
if customers lose substantial business or divert substantial resources to
uncorrected Internet Year 2000 problems. The Year 2000 readiness of outside
suppliers or customers is outside the Company's control. There can be no
assurance that the failure of third party suppliers or the Company's customers
to effectively remedy Year 2000 defects would not have a material adverse impact
on the Company's business, results of operations or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company is not exposed to any market risks arising from changes
in interest rates, foreign currency rates or other market risk sensitive
instruments. Under its current policy, the Company places its investments in
highly rated financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Financial instruments, which
<PAGE> 17
potentially subject the Company to concentration of credit risk, are principally
cash and cash equivalents, marketable securities and accounts receivable.
<PAGE> 18
Part II - Other Information
Item 1. Legal Proceedings:
OpenROUTE filed a civil complaint against Digital Equipment Corporation
("Digital") and Cabletron Systems, Inc. ("Cabletron") (the Defendants) on April
1, 1998 in the Middlesex Superior Court located in Cambridge, Massachusetts.
Docket # 98-01533-F is assigned to this matter.
In its complaint (as amended), OpenROUTE alleges that Digital breached two
separate existing agreements by and between OpenROUTE and Digital, namely the
Source Code Licensing Agreement and the Hardware and Software Development and
Software Distribution Agreement for Networks Brouters, by assigning its rights
under both agreements to Cabletron without the required consent of OpenROUTE. In
addition, OpenROUTE alleges unfair and deceptive practices in violation of
Massachusetts Law and, as against Cabletron, OpenRoute alleges unjust enrichment
for unauthorized receipt and use of OpenROUTE technology. OpenROUTE seeks
monetary damages against Digital.
Digital counter-claimed that it had the right to assign its rights without
OpenROUTE's consent, and therefore, the suit should be dismissed. Cabletron
answered the Company's complaint by asserting that it was a good faith purchaser
for value, and as such, the claim against it should also be dismissed.
Court hearings have been held to narrow the issues in the case. To date, the
court has found a breach of contract by Digital to exist as a matter of law. The
court has also found that Cabletron was a good faith purchaser for value and
dismissed the claim against Cabletron. However, the court specifically reserved
the right for OpenROUTE to amend its complaint if it discovers any unlawful
transfer of intellectual property apart from the issue of improper assignment of
rights under the two agreements. The case has now proceeded to discovery along
with Motions for Reconsideration being filed by both sides.
Reconsideration of the court has resulted in the case against Cabletron being
reinstated. Digital had requested dismissal of the case but the court has denied
the request(s). Discovery in this matter will continue over the next several
months.
Neither the Company nor any of its subsidiaries is a party to any other material
legal proceedings nor is any property of the Company the subject of any material
legal proceedings.
Item 2. Changes in Securities:
Not applicable.
Item 3. Defaults upon senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8 - K:
(a) Exhibits: See Exhibits Index
(b) Reports on Form 8 - K:
Registrant filed a Current Report on Form 8-K on August 30,
1999. This Form 8-K was filed to report that on August 27,
1999, the Registrant and Netrix Corporation filed a joint
press release announcing that they had signed a non-binding
letter of intent providing for the merger of the two
corporations
<PAGE> 19
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OpenROUTE Networks, Inc.
November 9, 1999 By: /s/ Bryan R. Holley
-------------------
Bryan R. Holley
President & Chief Executive Officer
(principal executive officer)
By: /s/ Henry Barber
-------------------
Henry Barber
Chief Financial Officer, Vice President
Treasurer and Clerk
(principal financial officer)
<PAGE> 20
Exhibit Index
Exhibit
Number Description
- ------
(2.1) Amendment No. 1 To Agreement and Plan of Merger (filed
herewith)
(3.1) Restated Articles of Organization as Amended * (a)
(filed as Exhibit 3.1)
(3.3) By-Laws, as amended and restated, of the Registrant * (b)
(filed as Exhibit 3.3)
(4.1) Article 4 of the Restated Article of Organization,
(See 3.1 above)
(4.2) Form of Common Stock Certificate * (c)
(filed as Exhibit 4.2)
(27) Financial Data Schedule (filed herewith)
All exhibit descriptions followed by an asterisk and a letter in parentheses
were previously filed with the Securities and Exchange Commission as Exhibits
to, and are hereby incorporated by reference from, the document to which the
letter in parentheses corresponds, as set forth below:
(a) Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1991.
(b) Registrant's Registration Statement on Form S-1 Registration No. 33-40073.
(c) Amendment No. 1 on Form 8 to the Registrant's Registration Statement on
Form 8-A, File No. 0-19175.
Where documents are incorporated by reference from previous filings, the Exhibit
number of the document in that previous filing is indicated in parentheses after
the incorporation by reference code.
<PAGE> 1
AMENDMENT NO. 1
TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 (this "AMENDMENT NO. 1") is made as of November 9,
1999 (the "EFFECTIVE DATE") to that certain Agreement and Plan of Merger (the
"AGREEMENT") dated as of September 30, 1999, by and between NETRIX CORPORATION,
a Delaware corporation ("Acquiror"), and OPENROUTE NETWORKS, INC., a
Massachusetts corporation (the "Company"). The Company and Acquiror are each
referred to individually as a "PARTY" and are collectively referred to as the
"PARTIES".
RECITALS
A. The Agreement provides that Acquiror must pay to the Company
$1,000,000 if the Agreement is terminated in the event that the
Agreement fails to receive the Requisite Stockholder Approval by the
Acquiror Stockholders.
B. The Agreement provides that the Company must pay to Acquiror
$1,000,000 if the Agreement is terminated in the event that the
Agreement fails to receive the Requisite Stockholder Approval by the
Company Stockholders.
C. The Parties wish to amend the Agreement to remove the obligation of
each Party to pay to the other Party $1,000,000 in the event that the
Agreement fails to receive the Requisite Stockholder Approval by the
Company Stockholders or the Acquiror Stockholders, respectively.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Members hereby
agree as follows:
SECTION 1. As used in this Amendment No. 1, unless otherwise defined
herein, terms defined in the Agreement shall have the meaning set forth therein
when used herein.
SECTION 2. Section 7(b)(ii) is hereby amended and restated in its entirety
to read as follows:
(ii) If this Agreement is terminated (A) by Acquiror pursuant to
ss.7(a)(v) or (B) any Person makes an Acquisition Proposal that
remains in effect on the date 60 days prior to the Outside Date and
the Requisite Stockholder Approval of the Company Stockholders is not
obtained prior to termination of this Agreement pursuant to
ss.7(a)(ii), then, within 60 days after such termination, the Company
shall pay Acquiror the sum of $1,000,000 in immediately available
funds.
<PAGE> 2
SECTION 3. Section 7(b)(iii) is hereby amended and restated in its entirety
to read as follows:
(iii) If this Agreement is terminated (A) by the Company pursuant
to ss.7(a)(vi) or (B) any Person makes a Prohibited Acquiror
Acquisition Proposal that remains in effect on the date 60 days prior
to the Outside Date and the Requisite Stockholder Approval of the
Acquiror Stockholders is not obtained prior to termination of this
Agreement pursuant to ss.7(a)(ii), then, within 60 days after such
termination, Acquiror shall pay the Company the sum of $1,000,000 in
immediately available funds.
SECTION 4. All references in the Agreement to "this Agreement" shall be
deemed to include this Amendment No. 1.
SECTION 5. Except to the extent provided in this Amendment No. 1, the
Agreement remains unmodified and in full force and effect.
SECTION 6. This Amendment No. 1 shall be governed by and construed in
accordance with the domestic laws of the state of New York without giving effect
to any choice or conflict of law provision or rule (whether of the state of New
York or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the state of New York.
SECTION 7. This Amendment No. 1 may be executed in any number of
counterparts with the same effect as if all signing parties had signed the same
document. All counterparts shall be construed together and constitute the same
instrument.
SECTION 8. Each Party represents to the other Party that it has the full
power and authority (including full corporate power and corporate authority),
and has taken all required action, necessary to properly execute and deliver
this Amendment No. 1 and to perform its obligations hereunder, and this
Amendment No. 1 constitutes the valid and legally binding obligation of such
Party, enforceable in accordance with its terms and conditions, except as
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally and (ii) general principles of equity, regardless of whether asserted
in a proceeding in equity or at law.
<PAGE> 3
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment No. 1
as of the date first above written.
OPENROUTE NETWORKS, INC.
By: /s/ Bryan R. Holley
---------------------------------------
Bryan R. Holley
President and Chief Executive Officer
(principal executive officer)
By: /s/ Henry Barber
---------------------------------------
Henry Barber
Chief Financial Officer, Vice President
Treasurer and Clerk
(principal financial officer)
NETRIX CORPORATION
By: /s/ Steven T. Francesco
---------------------------------------
Steven T. Francesco
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of OpenROUTE Networks, Inc. as of June 26, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<PERIOD-START> JUN-27-1999
<PERIOD-END> SEP-27-1999
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<CURRENT-ASSETS> 12,160
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0
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<COMMON> 160
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<CGS> 1,493
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<OTHER-EXPENSES> 2,845
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