<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 0-19640
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RETIX
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3948704
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4640 ADMIRALTY WAY
MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 828-3400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period as 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
---- ----
As of November 11, 1996 there were 22,550,006 shares of Common Stock
outstanding.
Total number of sequential pages: 14
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RETIX
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments . . . . . . . . . . $17,588 $14,950
Trade accounts receivable (net of allowances of
$1,878 as of December 31, 1995 and $1,333 as of
September 30, 1996). . . . . . . . . . . . . . . . 6,167 5,445
Inventories. . . . . . . . . . . . . . . . . . . . . 2,250 2,855
Prepaid expenses and other current assets. . . . . . 2,104 1,730
------- -------
Total current assets . . . . . . . . . . . . . . . . 28,109 24,980
Property and equipment, net . . . . . . . . . . . . . 2,586 3,073
Other assets . . . . . . . . . . . . . . . . . . . . . 1,513 1,345
------- -------
$32,208 $29,398
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term obligations . . . . . $ -- $ 54
Accounts payable . . . . . . . . . . . . . . . . . 2,121 1,336
Accrued wages and related liabilities . . . . . . . 1,222 1,060
Accrued restructuring expenses. . . . . . . . . . . 1,726 4,334
Other accrued liabilities . . . . . . . . . . . . . 3,523 3,012
Deferred revenue. . . . . . . . . . . . . . . . . . 923 1,058
------- -------
Total current liabilities . . . . . . . . . . . 9,515 10,854
Long-term obligations, less current portion . . . . . 4,174 4,184
------- -------
Total liabilities . . . . . . . . . . . . . . . 13,689 15,038
------- -------
Shareholders' equity:
Preferred stock, par value $.01, 2,000,000 shares
authorized; none issued and outstanding . . . . . -- --
Common stock, par value $.01, 50,000,000 shares
authorized; shares issued and outstanding
1995, 18,052,582; 1996, 22,544,881 . . . . . . . . 226 181
Additional paid-in capital . . . . . . . . . . . . . 77,785 65,821
Accumulated deficit . . . . . . . . . . . . . . . . (52,960) (50,009)
Cumulative translation adjustment . . . . . . . . . (1,630) (1,633)
------- -------
Total . . . . . . . . . . . . . . . . . . . . 23,421 14,360
Less notes receivable from issuance of
common stock . . . . . . . . . . . . . . . . . . . (4,902) --
------- -------
Total shareholders' equity . . . . . . . . . . 18,519 14,360
------- -------
$32,208 $29,398
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . $ 8,197 $ 7,509 $23,968 $31,162
Cost of revenues . . . . . . . . 2,244 3,726 7,832 14,113
------- ------- ------- -------
Gross profit . . . . . . . . . . 5,953 3,783 16,136 17,049
------- ------- ------- -------
Operating expenses:
Research and development . . . 2,703 3,719 7,829 10,398
Sales and marketing. . . . . . 2,966 4,364 8,325 13,464
General and administrative . . 1,238 1,841 3,608 4,663
------- ------- ------- -------
Total . . . . . . . . . . . 6,907 9,924 19,762 28,525
------- ------- ------- -------
Loss from operations . . . . . . (954) (6,141) (3,626) (11,476)
Other income, net . . . . . . . 362 358 674 677
------- ------- ------- -------
Loss before provision for
income taxes . . . . . . . . . (592) (5,783) (2,952) (10,799)
Provision for income taxes. . . . -- -- -- --
------- ------- ------- -------
Net loss . . . . . . . . . . . . $ (592) $(5,783) $(2,952) $(10,799)
------- ------- ------- -------
------- ------- ------- -------
Net loss per common and
common equivalent share . . . . $ (0.03) $ (0.32) $ (0.15) $ (0.61)
------- ------- ------- -------
Common and common equivalent
shares used in computing per
share amount . . . . . . . . . 20,723 17,939 20,170 17,849
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RETIX
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . $(2,952) $(10,799)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Depreciation and amortization . . . . . 1,208 3,147
Reserve for returns and bad debts . . . (595) (112)
Changes in operating assets and
liabilities (Note 4) . . . . . . . . (1,180) 3,963
------- -------
Net cash used for operating activities . (3,519) (3,801)
------- -------
Cash flows from investing activities:
Increase in short-term investments . . . . . (1,363) (158)
Additions to property and equipment . . . . (324) (1,588)
Increase in other assets . . . . . . . . . . (566) (453)
------- -------
Net cash used for investing activities . . (2,253) (2,199)
------- -------
Cash flows from financing activities:
Repayment of long term obligations . . . . . (62) (76)
Proceeds from issuance of common stock . . . 7,107 959
------- -------
Net cash provided by financing activities . 7,045 883
------- -------
Effect of exchange rate changes on cash . . . . 1 152
------- -------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . 1,274 (4,965)
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . . . 5,518 12,695
------- -------
Cash and cash equivalents, end of period . . . $ 6,792 $7,730
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements include the accounts of Retix and its
wholly-owned subsidiaries (the "Company"), including the newly formed
subsidiaries for the Company's internetworking business unit and wireless
business unit as announced in the second quarter of 1996. All significant
intercompany balances and transactions have been eliminated in consolidation.
The interim consolidated financial statements are unaudited. In the opinion
of management, the interim financial statements include all adjustments,
consisting of only normal, recurring adjustments, necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows. The Company's fiscal year ends on the Saturday nearest to
December 31. For simplicity of presentation, the Company has described the
fiscal year ended December 30, 1995 as December 31, 1995 and has described
the thirteen weeks ended September 30, 1995 and September 28, 1996 as the
three months ended September 30, 1995 and 1996, respectively.
It is suggested that these consolidated financial statements and the
accompanying notes be read in conjunction with the audited consolidated
financial statements and the accompanying notes for the year ended December
31, 1995 included in the Company's Annual Report. The results of operations
for the three and nine month periods ended September 30, 1996 are not
necessarily indicative of results that may be expected for the full year.
2. CASH AND SHORT-TERM INVESTMENTS
Cash and short term investments consist of the following (in thousands):
September 30, December 31,
1996 1995
---- ----
(unaudited)
Cash and cash equivalents . . . . . $ 6,792 $ 5,518
Short-term investments . . . . . . 10,796 9,432
------- -------
$17,588 $14,950
------- -------
------- -------
Cash equivalents consist of short term investments with original maturities
of three months or less.
3. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
1996 1995
---- ----
(unaudited)
Raw materials and component parts . . $ 263 $ 1,718
Work-in-process . . . . . . . . . . . 1,237 491
Finished goods . . . . . . . . . . . 750 646
------- -------
$ 2,250 $ 2,855
------- -------
------- -------
Work-in-process and finished goods inventories consist of material, direct
labor and overhead associated with the manufacturing process.
5
<PAGE>
RETIX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. STATEMENT OF CASH FLOWS
Increases (decreases) in operating cash flows arising from changes in
operating assets and liabilities consist of the following (in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
Trade accounts receivable . . . . . . . . $ (128) $6,992
Inventories . . . . . . . . . . . . . . . 606 (460)
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . . (374) 294
Accounts payable . . . . . . . . . . . . . 786 (309)
Accrued wages and related liabilities . . 162 (497)
Accrued restructuring expenses . . . . . . (2,609) --
Deferred revenue . . . . . . . . . . . . . (135) (45)
Other accrued liabilities . . . . . . . . 512 (2,012)
------- -------
Increase (decrease) in operating
assets and liabilities . . . . . . . . $(1,180) $3,963
------- -------
------- -------
Financing and investing activities during the nine months ended September
30, 1995 and 1996 which affected recognized assets or liabilities but that
did not result in cash receipts or cash payments were not significant, except
as noted in Note 5, Shareholders' Equity.
5. SHAREHOLDERS' EQUITY
Effective January 30, 1996, Sierra Ventures V, L.P. ("Sierra"), a venture
capital firm, purchased 2,000,000 shares of the Company's Common Stock in a
private placement at $2.00 per share. Additionally, Sierra was granted a
warrant to purchase an additional 2,000,000 shares of the Company's Common
Stock at prices ranging from $2.00 to $5.00 per share over the three year term
of the warrant. Sierra's equity investment totaled $4.2 million and was
recorded in common stock and additional paid-in capital.
Notes receivable from issuance of common sftock arose from the exercise of
stock options. During the first quarter of 1996, the Board of Directors
approved the exercise of stock options held and outstanding by certain key
employees and consultants in exchange for promissory notes. The common stock
issued upon such exercise of options is subject to repurchase by the Company
based upon continuation of the terms of employment or consultancy agreements,
with vesting and release from the Company's repurchase right on a cumulative
basis from original date of option grant at a rate of 25% one year after the
vesting commencement date and 1/48th of the shares subject to the original
option in equal monthly installments thereafter. For purposes of computing
earnings per share, the common stock issued subject to notes receivable are
treated as options and are excluded from the calculation of earnings per share
because they are considered antidilutive.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained in this Quarterly Report
on Form 10-Q, the matters discussed herein are forward-looking statements
that are subject to certain risks and uncertainties that could cause the
actual results to differ materially from those projected, including the risks
detailed below and included from time to time in the Company's other SEC
reports and press releases, copies of which are available from the Company
upon request. The Company assumes no obligation to update any
forward-looking statements contained herein.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and accompanying notes, included in Part I
- -Item 1 of this Quarterly Report, and the audited consolidated financial
statements and accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1995 contained in the Company's Annual Report.
RESULTS OF OPERATIONS
In response to the losses experienced over the past three years, the
Company commenced a major reorganization during the fourth quarter of 1995
with an emphasis on focusing resources toward leveraging identified areas of
value within Retix's primary lines of business. The reorganization included
a significant restructuring of the Company's internetworking business unit,
including staff reductions, consolidation within channels of distribution and
abandonment of facilities, expansion in the Company's software businesses
including the telecommunications management network (TMN) market and wireless
data networking in narrowband PCS two-way messaging. While substantial
progress was made in support of the Company's development during the first
nine months of 1996, ongoing efforts will be required to further strengthen
operating results and capitalize on the values within the Company's
businesses.
Although year-over-year annual net revenues have declined in 1996 as
compared to 1995, the Company has shown recovery from 1995 to the third
quarter of 1996 as it achieved year-over-year quarterly revenue growth of
9.2% and an improvement in gross margins from 50.4% to 67.3% during this
period. Additionally, efficiencies gained from the Company's reorganization
resulted in the reduction of recurring operating expenses by 30.4% to
$6,907,000 in the third quarter of 1996 from $9,924,000 in the same period
for 1995. As a result of improving product margins, operating efficiencies
and stabilized revenues, the Company's net loss was reduced 89.8% to
$592,000, or $0.03 per share, for the three months ended September 30, 1996
as compared to $5,783,000, or $0.32 per share, for the same period of 1995.
The Company believes that the margin improvements noted in the first nine
months of 1996, the operating expense reductions achieved as a result of the
restructuring initiated in October 1995, and the $17,588,000 in cash and
short-term investments as of September 30, 1996 provide financial support for
the Company's ongoing operations.
NET REVENUES. Net revenues increased 9.2% to $8,198,000 for the three
months ended September 30, 1996 as compared to $7,509,000 for the same period
in 1995. However, net revenues for the nine months ended September 30, 1996
decreased 23.1% to $23,968,000 from $31,162,000 for the same period in 1995.
The increase in revenues for the three month period ended September 30, 1996
reflects overall growth in the Company's software product offerings within its
TMN and wireless data networking businesses. The decrease in revenues for the
nine month period reflects overall decreases in internetworking revenues
during the first six months of 1996 as compared to the same period in 1995.
Revenues generated by the Company's TMN software product lines increased 24.2%
to $3,767,000 and 18.7% to $10,376,000 during the three and nine month
periods, respectively, ended September 30, 1996 as compared to the same
periods in 1995. Sales of internetworking products declined 20.7% to
$3,397,000 and 40.9% to $11,634,000, respectively, for the three and nine
months ended September 30, 1996 as compared to the same periods in 1995.
Revenues generated by the Company's wireless data products for the three
months ended September 30, 1996 increased 447% to $1,033,000 and decreased
28.4% to $1,958,000 for the nine months ended September 30, 1996, as compared
to the same periods during 1995.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Demand for the Company's telecommunications management network (TMN)
products sold through its subsidiary, Vertel, increased in the third quarter
and first nine months of 1996 as compared to the corresponding three and nine
month periods of 1995. This trend is a result of an ongoing effort to
increase Vertel's share of the emerging TMN market by providing embedded
software, tools and management products for integration into
telecommunications service providers' network management environments. In
support of this effort to expand market share, Vertel added several key new
licensees and extensions of existing licenses for deployment of its TMN
technology by telecommunications equipment manufacturers and software
infrastructure providers during the third quarter. Vertel also announced
joint product development efforts with Tandem and Versant Object Technologies
during the third quarter of 1996. Sales of TMN-based products and services
accounted for 46.0% and 43.3%, respectively, of Vertel's net revenues during
the three and nine months ended September 30, 1996. The emerging demand for
TMN software solutions is driven by telecommunication network deregulation
and the demand for increased network bandwidth. Vertel's current products
offer network management software with built-in TMN support to standardize
the interface between carrier network management systems and devices within a
service provider's network. Increased Vertel revenues will be primarily
dependent on market acceptance of TMN architecture specifications in carrier
network management environments and Vertel's ability to form strategic
relationships with key service providers and supporting equipment
manufacturers.
Wireless data product revenues for the third quarter of 1996 totalled
$1,033,000 and reflect increasing sales compared to both the immediately
preceding quarter and the same period in 1995. The increase in wireless data
product revenues during the third quarter of 1996 was attributable to the
development of mobile data and messaging software products which provide
consumers the ability to transfer data over wireless markets. Previously,
the Company focused on contracts which generated nonrecurring engineering
project revenues during 1995. The decrease in revenues during the first nine
months of 1996 as compared to 1995 was the result of a significant
nonrecurring sale of a source license from the Company's CDPD product line in
the first half of 1995. This sale marked the completion of a significant
nonrecurring engineering project contract. During 1996, the Company has
announced enhancements to its wireless data technology for narrowband PCS
based software applications, including network management system applications
which enable wireless communications providers to expand service offerings
within the two-way messaging marketplace.
Software product revenues, including from TMN and wireless data products,
may continue to fluctuate from period to period due to nonrecurring software
license agreements or royalties derived from these agreements or certain
government contracts in addition to the size and timing of license fees
closed during the quarter. Additionally, there can be no assurance that
software product markets will attain broad acceptance or generate long-term
growth opportunities in line with the Company's past performance or future
objectives.
Internetworking revenues are primarily comprised of sales of multi-protocol
routers, local and remote LAN bridges, Ethernet switch and broadband
products. As a consequence of declining revenues, the Company initiated a
significant restructuring of its internetworking business unit in the fourth
quarter of 1995. Such activities included staff reductions focused primarily
within the business unit's selling, general and administrative functions and
a consolidation within its channels of distribution in an effort to leverage
field selling activities and increase return on sales.
Sales of internetworking products declined 20.7% to $3,397,000 and 40.9% to
$11,634,000, respectively, during the three and nine months ended September
30, 1996 as compared to the same periods of 1995. Router, bridge and Ethernet
switch product revenues declined 43.6%, 38.1% and 19.1%, respectively, during
the nine months ended September 30, 1996 as compared to the same period of
1995. The declines noted in internetworking product sales reflect the
decrease in demand for internetworking products within Europe and Asia Pacific
as products have matured in the marketplace. During the third quarter of
1996, the Company released the 7223 and 7224 ISDN routers and an ISDN card for
the Company's 7500 series routers for the European market.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
There can be no assurance that the Company's internetworking products will
attain broad acceptance or generate long term growth opportunities. The
Company plans to leverage its technologies in routing combined with bridging
and Ethernet switching to develop integrated solutions which capitalize on
industry available components and are standards-based, upgradable and
expandable. As the Company transitions its internetworking business to this
new product-line, certain of its legacy products and long-term product
programs are likely to enter end-of-life. There can be no assurance as to
the success of the Company's new intenetworking products or their ability to
offset maturation of legacy internetworking products with increased revenues.
Furthermore, greater marketing and distribution resources of larger
competitors, increasing price pressures and delays in releasing new products
and features have affected the Company's ability to gain or retain market
share in previous periods. Increased internetworking revenues will be
primarily dependent on the success of the Company with regard to enhancing
its presence in the rapidly evolving networking markets through the
development of efficient channels of product distribution and innovative
products.
Sales to third party customers outside of North America comprised
approximately 45.3% of net revenues for the nine months ended September 30,
1996 as compared to 54.3% for the same period in 1995. The Company's high
percentage of sales to customers outside of North America has historically
been due primarily to relatively strong demand for internetworking products
within Europe and Asia Pacific and to relatively strong international demand
for its TMN and OSI technology software.
GROSS MARGIN. Cost of revenues consists primarily of manufacturing costs
(material, labor, packaging, documentation and overhead) and, to a lesser
extent, royalties paid under licensing agreements and warranty costs. Gross
margin increased to 72.6% and 67.3% of net revenues for the three and nine
months ended September 30, 1996, respectively, from 50.4% and 54.7% for the
same periods in 1995. The increase in gross margin was attributable primarily
to a shift in revenue mix toward software-based products which have
significantly higher gross margins than engineering services or
internetworking products. Software product revenues accounted for 58.6% and
51.5% of total revenues for the three and nine months ended September 30,
1996, respectively, as compared to 42.9% and 36.8% for the same periods in
1995. In addition, the increase in gross margin was attributable to further
progress in the reduction in excess capacity and associated costs of the
Company's manufacturing operations. The Company is transitioning to an
outsourcing strategy for the manufacture of its products during 1996. Failure
to complete this transition on a timely basis or any difficulties experienced
by the Company's manufacturing partners, on which the Company could become
solely dependent for the supply of its products, could adversely affect the
Company's operating results. The Company anticipates continued pricing
pressures within its internetworking product areas, and while the Company is
responding with reductions in manufacturing overhead and product costs as well
as changes to pricing structures and distribution strategies, margins may
decline in future periods.
RESEARCH AND DEVELOPMENT. The Company continues to make significant
investments in research and development to expand its expertise in TMN and
wireless data technologies, to develop new internetworking products and to
support its product offerings. The major components of research and
development expenses are engineering salaries, employee benefits and
associated overhead. For the three months ended September 30, 1996, the
Company's research and development expenses decreased 27.3% to $2,703,000 as
compared to $3,719,000 for the same period in 1995. For the nine months ended
September 30, 1996, the Company's research and development expenses decreased
24.7% to $7,829,000 as compared to $10,398,000 for the same period in 1995.
The decrease in research and development expense for the three and nine months
ended September 30, 1996 as compared to the same periods in 1995 is primarily
due to reductions in spending within the Company's internetworking business
unit due to consolidation of facilities and realignment to more efficient
staffing levels as a result of the restructuring activities announced and
executed in late 1995. This decrease was offset by a reduction in customer
reimbursements for engineering costs in connection with nonrecurring
engineering projects. As a percentage of revenue, research and development
expenses were 33.0% and 32.7% for the three and nine months ended September
30, 1996, respectively, as compared to 49.5% and 33.4% for the same period in
1995. The Company expects to continue significant investments in the
development of new products and feature enhancements to existing product
lines.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The markets for the Company's products are characterized by rapidly
changing technology and frequent new product introductions. Accordingly, the
Company believes that its future success will depend on its ability to
enhance its existing products and to develop and introduce in a timely
fashion new products that achieve market acceptance. Delays in new product
introductions or product enhancements, or the introduction of products that
are not successful in the market, could adversely affect the Company. The
Company's revenues are dependent on, among other things, the acceptance of
these products by customers, and no assurance concerning their acceptance can
be given.
SALES AND MARKETING. Sales and marketing expenses decreased 32.0% to
$2,966,000 for the three months ended September 30, 1996 as compared to
$4,364,000 for the same period in 1995. For the nine months ended September
30, 1996, sales and marketing expenses decreased 38.2% to $8,325,000 as
compared to $13,464,000 for the same period in 1995. The significant
decrease in the absolute spending for sales and marketing and the decrease of
such expenses as a percentage of revenue in the third quarter of 1996 as
compared to the same period of 1995 reflect efforts to restructure the
Company's internetworking sales and marketing activities, including the
consolidation of field sales offices, streamlining of sales organizations and
elimination of other nonperforming selling infrastructure costs worldwide.
Partially offsetting these efficiencies was the increased staffing of sales
and marketing functions by Vertel during the three months ended September 30,
1996. Sales and marketing expenses as a percentage of net revenues decreased
to 36.2% and 34.7% for the three and nine months ended September 30, 1996,
respectively, as compared to 58.1% and 43.2% for the same periods in 1995.
Sales and marketing expenses consist primarily of personnel and related
costs relative to the selling, sales support and marketing activities,
including marketing programs such as trade shows and other promotional costs.
The Company believes that substantial sales and marketing expenditures are
essential to developing the opportunities for revenue growth and to renewing
the Company's competitive position. Sales and marketing expenses are expected
to continue to comprise a significant percentage of the Company's total
expenses because of costs associated with supporting a worldwide organization
of sales and service functions necessary to meet the needs of the Company's
customer base and to respond to the opportunities in the rapidly growing
telecommunications management and networking markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
32.8% to $1,238,000 for the three months ended September 30, 1996 as compared
to $1,841,000 for the same period in 1995, and decreased 22.6% to $3,608,000
for the nine months ended September 30, 1996 as compared to $4,663,000 for
the same period in 1995. The decrease in absolute spending for general and
administrative services in the first nine months of 1996 as compared to the
same period of 1995 is primarily attributable to the net effect of headcount
reductions and elimination of non-critical infrastructure costs worldwide in
connection with restructuring efforts executed in late 1995 related to the
Company's internetworking business unit, partially offset by increases in
spending by the Company's Vertel and Wireless subsidiaries. General and
administrative expenses as a percentage of net revenues decreased to 15.1%
for the three months ended September 30, 1996 as compared to 24.5% for the
same period of 1995. General and administrative expenses remained relatively
unchanged at 15.1% of net revenues for the nine months ended September 30,
1996 as compared to the year earlier period despite a 23.1% decrease in net
revenues.
LOSS FROM OPERATIONS. The Company's loss from operations decreased 84.5%
to $954,000 for the three months ended September 30, 1996 as compared to
$6,141,000 for the same period in 1995. Additionally, the Company's loss from
operations decreased 68.4% to $3,626,000 for the nine months ended September
30, 1996 as compared to $11,476,000 for the same period in 1995 despite a
23.1% decline in revenues. The reductions achieved in losses from operations
were due to an increase in gross margin percentages and significant decreases
in operating expenses as a result of the restructuring activities within the
Company's internetworking business unit. Total operating expenses decreased
30.4% to $6,907,000 for the three months ended September 30, 1996 as compared
to $9,924,000 for the same period in 1995, and decreased 30.7% to $19,762,000
for the nine months ended September 30, 1996 as compared to $28,525,000 for
the same period in 1995.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In 1994, 1995 and the first nine months of 1996, the Company experienced
operating losses and a decrease in revenues from the results of the prior
year. There can be no assurance that the Company will be able to regain
profitability or resume or maintain revenue growth on a quarterly or annual
basis. The Company's expense levels are based in part on its expectation of
future revenues. As a result of failure to meet these expectations, the
Company has had to undertake several reorganizations in the past, including
in 1995. Delays in new product introductions or product enhancements or the
introduction of products that are not successful in the market could
adversely affect the Company. If revenues are below expectations, results of
operations may be adversely affected.
OTHER INCOME. For the three months ended September 30, 1996 other income,
consisting of interest income, net of interest expense, currency gains and
losses, investment income and various other items remained relatively
unchanged at $362,000 as compared to $358,000 of the same period of 1995. For
the nine months ended September 30, 1996, other income remained relatively
unchanged at $674,000 as compared to $677,000 for the same period of 1995.
PROVISION FOR INCOME TAXES. The Company recorded no provision for income
taxes on a loss before income taxes of $592,000 in the third quarter of 1996
and $2,951,000 for the first nine months of 1996. A valuation allowance
against the total amount of net deferred tax assets has been established. As
a result of the increase in the valuation allowance, the Company has net
deferred tax assets of approximately $23,000,000 for which no benefit has been
provided at September 30, 1996. These net deferred tax assets will be
realized to the extent that the Company operates profitably in the future
during the respective carryforward periods.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996 the Company's principal sources of liquidity consisted
of $17,588,000 in cash, cash equivalents and short-term investments. The
Company's cash management system includes a sweep account which enables the
Company to consolidate its operating cash into a central account daily and
advance cash to its subsidiaries to fund operating cash requirements.
Cash, cash equivalents and short-term investments increased 17.6%, or
$2,638,000, during the nine months ended September 30, 1996. The increase in
cash is primarily attributable to a $7,107,000 capital infusion from a private
placement of the Company's Common Stock and the exercise of stock options by
employees and consultants during the nine months ended September 30, 1996.
The use of cash for operations was attributable primarily to the loss from
operations of $2,952,000 for the nine months ended September 30, 1996. The
largest component of the use of cash from operations was $2,609,000 in
payments for restructuring activities within the internetworking business
unit. The restructuring activities, announced in October 1995, called for
streamlining of specific sales channels, territories and product lines, and
included costs of elimination of excess manufacturing capacity, inventory
reductions related to product line and distribution streamlining, facility
and asset consolidation, employee severance pay and other related charges.
The restructuring plan entailed work force reductions of 108 employees within
manufacturing, engineering, sales, marketing and administration, as well as
the disposition of various sales, service and engineering facilities. As of
September 30, 1996, $4,458,000 of the restructuring costs had been paid and
substantially all reserves related to the write down of inventories and fixed
assets have been utilized. Also, as of September 30, 1996, 103 positions had
been eliminated while the remaining reserves relating to severance totaled
$366,000. Facility reduction costs include the lease cost of vacated space
for the estimated period of time required to sublet the facilities. Of the
$1,720,000 in facility related reserves remaining as of September 30, 1996,
$520,000 are classified as a short term obligation. The Company is
finalizing negotiations to sublease or cancel all remaining lease terms for
affected facilities. Other restructuring reserves remaining as of September
30, 1996 totaled $840,000 and primarily related to costs associated with
customer returns, consolidation of repair depots and warranties. In the
fourth quarter of 1996, the Company plans to analyze the remaining accruals
in order to determine disposition of such reserves.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company believes that the quarterly cost reductions gained as a result
of the 1995 restructuring and the $7,107,000 capital infusion resulting from
the private placement of the Company's Common Stock and exercise of stock
options during the nine months ended September 30, 1996 along with existing
sources of liquidity, capital resources and funds from operations will satisfy
the Company's anticipated cash needs for at least the next twelve months.
From time to time, the Company may also consider the acquisition of, or
evaluate investments in, certain products and businesses complementary to the
Company's business. Any such acquisition or investment may require additional
capital resources.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, nor is
their property the subject of, any material pending 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
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
13
<PAGE>
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.
RETIX
(Registrant)
Date: November 12, 1996 /S/ Steven M. Waszak
---------------------------------
Steven M. Waszak
Vice President of Finance and
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q
DATED SEPTEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000880458
<NAME> RETIX
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 6,792
<SECURITIES> 10,796
<RECEIVABLES> 6,167<F1>
<ALLOWANCES> 0
<INVENTORY> 2,250
<CURRENT-ASSETS> 28,109<F2>
<PP&E> 2,586<F3>
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,208
<CURRENT-LIABILITIES> 9,515
<BONDS> 0
0
0
<COMMON> 226
<OTHER-SE> 18,293
<TOTAL-LIABILITY-AND-EQUITY> 32,208<F4>
<SALES> 23,968
<TOTAL-REVENUES> 23,968
<CGS> 7,832
<TOTAL-COSTS> 27,594<F5>
<OTHER-EXPENSES> (674)<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,952)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,952)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
<FN>
<F1>IS NET OF ALLOWANCES OF $1,333
<F2>INCLUDES PREPAID AND OTHER CURRENT ASSETS OF $2,104
<F3>IS NET OF ACCUMULATED DEPRECIATION
<F4>INCLUDES $4,174 IN LONG TERM OBLIGATIONS
<F5>INCLUDES $19,762 IN OPERATING EXPENSES
<F6>INCLUDES INTEREST INCOME, NET
</FN>
</TABLE>
