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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One )
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
--
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-50464
NETRIX CORPORATION
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(Exact name of registrant as specified in charter)
DELAWARE 54-1345159
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(State of Incorporation) (IRS Employer Identification No.)
13595 Dulles Technology Drive, Herndon, Virginia 20171
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 742-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.05 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
Aggregate market value of Common Stock (par value $.05 per share) held
by non-affiliates of Registrant on March 17, 1997: $28,551,276.
The number of shares of Registrant's Common Stock (par value $.05 per
share) outstanding as of March 17, 1997: 9,517,092.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on May 27, 1997.
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ITEM 1. BUSINESS
Netrix Corporation ("Netrix" or the "Company") develops, manufactures,
markets, and supports a family of high performance networking equipment and
associated network management software for use in data, voice, and image
networks. Netrix/(R)/ products are designed to address the rigors of both
domestic and multinational wide area networking as well as the networking needs
of government agencies.
The Company was incorporated in Virginia in October 1985, and was
reincorporated in Delaware in March 1987. The Company's principal executive
offices are located at 13595 Dulles Technology Drive, Herndon, Virginia 20171,
and its telephone number is (703) 742-6000. Unless the context otherwise
requires, "Netrix" and the "Company" refer to Netrix Corporation and its
subsidiaries.
BACKGROUND
Organizations increasingly rely on "wide area" communications to
interconnect decentralized offices, remote sites, and organizational
headquarters often spanning national boundaries. This trend has been driven
primarily by improvements in the cost and performance of computer and
communications technologies, which have in turn enabled a large scale transition
to distributed computing. These technological trends, combined with the
proliferation of global trade, have created a growing reliance on enterprise-
wide communications to facilitate the sharing of information. In an environment
in which wide area networking is critical to daily operations, communications
represent a significant and increasing component of operating costs.
In response to the varying traffic characteristics of different types
of networking applications, together with the need to transmit voice and image
as well as data, separate networking technologies have evolved. Popular wide
area networking technologies in use today include frame relay, X.25 packet
switching, Time Division Multiplexing (TDM), and Integrated Services Digital
Network (ISDN). Asynchronous Transfer Mode (ATM) is an emerging transport
technology that is beginning to be deployed by major carriers as their high
speed network backbone. ATM is not widely deployed for enterprise wide area
communications in most geographic areas. ATM is of interest to the wide area
networking market, especially as network managers consider future applications
and the growth of their networks. Depending on the characteristics of the
network traffic, frame relay, X.25, TDM, ISDN, or ATM may be the optimum choice
as a networking technology for any given application.
Because no single networking technology is appropriate for all
applications, Netrix products allow users to apply a mix of technologies
depending on application requirements. Some Netrix products support
simultaneous X.25, TDM, and frame relay in one integrated network. This
integrated approach enables the Company's customers to share multiple networking
technologies across each circuit in the network, thereby allowing them to choose
the best technology for each application, and to consolidate diverse data,
voice, and image traffic onto a single network. This results in improved
connectivity, reduced communications costs, and significant advantages in
network performance and flexibility.
Corporate communications networks that span a wide area are often
based upon a backbone of private leased lines, requiring the corporate user to
pay for the full capacity of those lines during low usage times, and limiting
communications to that same capacity during peak times. The increasing
availability of frame relay services on the public networks has fueled a trend
toward building corporate networks that access public frame relay services on an
as-needed basis. Netrix products can be used to implement enterprise networks
based upon either private leased lines, public services, or a combination of
private and public lines. Netrix believes that the trend toward the use of
public frame relay services will continue.
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In February 1997, the Company announced that it would enhance its
focus on the enterprise network market with particular attention to applications
for its Network Exchange family of products that consist of the 2200 series
access product and the new 2500 series of high performance multi-service WAN
switches. As part of intensifying its focus, the Company announced in early
1997 the discontinuance of its initiatives into the Internet access market,
including the discontinuance of its initial product in this area, the micro.pop
2300 system.
NETRIX PRODUCTS
The Company currently offers products that vary in scope, providing
multiple price points and permitting the customer to choose the most appropriate
platform for each site based upon functionality and performance requirements.
Some are designed to provide the corporate backbone network necessary to
support all of the communications needs of a large and diverse organization.
Others provide an access layer to support specific applications. All are
designed to enhance the efficiency and cost-effectiveness of the communications
infrastructure.
NETWORK EXCHANGE 2550. The 2550 is the first in the 2500 family, a
series of new products designed to support all existing network technologies
while providing a growth path toward the use of ATM for wide area enterprise
communications. The 2550 provides all of the features which have made the Series
10 product line successful for the past decade while adding a four-fold increase
in performance, support for up to 2400 low speed ports, and support for multiple
ATM high speed interfaces running at the T3 (45 Mbps) and E3 (34 Mbps) speeds.
The focus of this product is the large corporate WAN switch market. The 2550
interworks with the 2210 to provide complete multi-service networking support.
NETWORK EXCHANGE 2410. The 2410 is based upon the entry level model of
the #1-ISS SERIES 10, the Company's first product, with commercial shipments
beginning in 1988. Designed for large scale requirements, the Series 10 is a
multiprocessor architecture switch that ranges in size from 14 ports to models
that accommodate thousands of ports.
NETWORK EXCHANGE 2210. The 2210 is the first in the 2200 family, a
series of new products to provide access network access. This scaleable series,
designed to take advantage of frame relay services, is based upon enhanced frame
capabilities developed by the Company. It can be configured as a standalone
switch in smaller networks or as a data concentrator for large corporate
backbones. The 2210 has a complete set of features which support switched
compressed voice, LAN traffic, SNA traffic, as well as the traditional PAD/FRAD
capabilities found in an access level product.
The Netrix family of Network Exchanges provides flexible and scaleable
network solutions for enterprises. The products are used together to provide
coverage from the access level through to the corporate backbone. The Netrix
products provide truly integrated Voice and Data network solutions that use the
best networking technology available to the user.
NETRIX NETWORK MANAGEMENT SYSTEM (NMS). Each of the products listed
above is managed by Netrix' Network Management System (NMS). The NMS provides a
full graphical user interface and remote diagnostics, allowing nodes at several
different locations to be viewed and managed by the network manager at one
central location.
The Company also offers optional software features which extend the
NMS to provide additional functionality. (Revenues from these features have not
been significant.)
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IntelliCast/(TM)/ X.25 Broadcast. IntelliCast provides dynamic X.25
broadcast capabilities, allowing a user to send data to multiple locations
simultaneously. Typical applications served by IntelliCast include financial
service, news distribution, network bulletins, and software distribution.
IntelliCast currently operates on the Series 10.
SelectView/(TM)/. SelectView enables the creation of multiple subnetworks
within a larger Netrix network. SelectView provides users the ability to manage
a single corporate network, with its associated cost benefits, as a collection
of smaller departmental, geographical, or application specific networks.
SelectView operates on all of the above hardware platforms.
RLX/(R)/ PACKET MULTIPLEXER. Available in both analog and digital
versions, the RLX Packet Multiplexer compresses voice communication and
integrates the transmission with fax and data signals over a single line.
RIO/(R)/ WAN INTERFACE. The RIO WAN Interface provides a multiple access
platform for circuit-switched, compressed voice, data, and video transmissions
across T1, E1, and fractional T1/E1 circuits.
MARKETING AND SALES
The Company's primary target customers are business users with multiple
international locations, and government users. To address its markets
throughout the world, the Company has established a multi-channel distribution
and sales network.
DIRECT SALES FORCE. A dedicated sales team, currently operating out of
offices in suburban Washington, DC; Bracknell, UK; Frankfurt, Germany; and sales
offices across the United States, serve commercial end users domestically and
internationally.
SYSTEMS INTEGRATORS. Sales to the United States government originate
through systems integrators who in turn resell to government end users. The
Company's relationships with systems integrators typically support a specific
contract between the government and the systems integrator and are generally
established on a contract-by-contract basis.
INTERNATIONAL DISTRIBUTORS. Approximately 80 value added resellers
("VARs") with locations in Canada, Latin America, Europe, the Middle East,
Africa, and the Pacific Rim serve the remaining geographic markets. Netrix has
focused on developing relationships with VARs who it believes are knowledgeable
about wide area network design and operations and are capable of providing
systems installation, technical support, and follow-on service in addition to
selling the Company's products. In 1996, one of the Company's distributors
accounted for approximately 13.4% of total revenues.
CUSTOMER SUPPORT AND SERVICE
A significant element of the Company's strategy has been to provide
service, repair, and technical support for its customers throughout the world.
A substantial portion of Netrix' service and support activities relates to
software and network configuration and is provided by 24-hour, seven day
telephone support through the Netrix Technical Assistance Center ("TAC"). The
Company's products are designed to allow the TAC to be on line with any Netrix
network in the world to diagnose problems and to respond with solutions. In
addition, Netrix hardware is designed to facilitate replacement of boards; in
many cases, the customer's personnel can replace a board themselves under the
direction of the TAC. TAC service is provided directly to end users and as a
backup service to the Company's international distributors.
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Most domestic hardware maintenance and installation is performed by Netrix
personnel and third party providers. For customers outside the United States,
these services are generally provided by the Company's international VARs.
Netrix typically offers its customers a hardware warranty ranging from 90 days
to one year and offers an optional annually renewable hardware maintenance and
software support contract with each network.
The Company's support contracts with its customers offer a variety of
levels of support, with each option being priced as a percentage of the purchase
price of the installed equipment. In addition, Netrix provides technical
consulting and training both to end-users and to distributors. Revenues from
the Company's service activities accounted for approximately 26% of total
revenues in 1996, 21% in 1995 and 17% 1994. Most of the Company's customers
currently have support and maintenance contracts with the Company.
RESEARCH AND DEVELOPMENT
The market for networking products is characterized by rapidly changing
technology and constantly evolving standards. Netrix believes its future
success depends on its ability to continue to enhance its existing products to
improve performance and functionality and to develop new products that address
emerging networking market niches.
Research and development efforts during 1996 focused on the Netrix 2000
family of next generation, high performance, switching and access products. In
addition, migration of the company's network management system to a Sun Sparc
platform was completed. Development continued on the Netrix Network Exchange
2550, the high-end member of the 2000 family. This cell-based, integrated
switching product is designed to achieve higher performance frame relay
switching, and to extend enterprise networks to access ATM services as they
become available. In addition, it provides a seamless migration path for
networks moving to frame relay and ATM services.
The Netrix 2210 access product gained digital voice/fax capabilities in
1996 with the release of a 24/30 port (T1/E1) digital voice/fax card. This
card, which provides high quality switched compressed voice over frame relay,
can be hooked to a T1 or E1 PBX. Up to two digital voice cards can be
configured in a 2210, providing 60 channels of compressed voice and fax in a
single system. In addition, a T1/E1 line card was added for higher performance
access and trunking.
Enhancements made during 1996 to the existing product line included major
performance improvements in frame relay switching and one of the first
implementations of frame relay switched virtual circuits (SVCs). Frame relay
SVCs, which will be implemented across switching and access products in early
1997, allow the most efficient, cost effective usage of bandwidth and virtual
circuits in an enterprise wide area network. In addition, port density for high
speed lines was improved through the development of a new connector module.
During 1996, 1995, and 1994, research and development expenses were
approximately $11.1 million, $10.8 million, and $10.1 million, respectively.
MANUFACTURING
Netrix' manufacturing operations consist primarily of the purchase and
quality control of materials, components, and subassemblies, and the final
assembly and testing of products. Netrix presently uses third party turn-key
vendors to perform printed circuit assembly and in-circuit testing. Hardware
subassemblies are then configured by Netrix in combinations to meet individual
customer requirements. While the typical lead time required for suppliers
varies depending on the component, the quantity required, and other factors, the
lead times in some cases can be as long as six months. However, because the
Company typically purchases components in advance in anticipation of future
orders, the Company is generally able to deliver products within 60 days of its
receipt of an order.
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Although the Company generally uses standard parts and components for its
products, certain components such as power supplies and microprocessors are
currently available only from a limited number of sources. The Company does not
have long-term agreements with any of these suppliers. To date, the Company has
been able to obtain adequate supplies of such components in a timely manner from
its existing sources. Although the Company believes it could develop
alternative sources of supply for most of these components within a reasonable
period of time, the inability to develop alternative sources, a reduction or
interruption in supply, or a significant increase in the price of materials,
parts or components could materially and adversely affect the Company's results
of operations. The Company attempts to reduce the risk of these adverse effects
by relying on forecasting of sales of different products to secure an adequate
inventory of supplies.
Netrix is certified for compliance with International Quality Standard ISO
9002 of the International Standards Organization. ISO 9002 addresses
capabilities in production and installation and is a requirement for doing
business with many companies and governments in Europe.
A substantial portion of the Company's revenue in each quarter results from
orders received in that quarter. The Company does not believe that its backlog
at any particular point in time is necessarily indicative of future revenue.
As part of the Company's restructuring of operations in 1996, manufacturing
operations previously in Longmont, Colorado, and Herndon, Virginia, were moved
to Netrix' current manufacturing outsourcing firm in Charlotte, North Carolina.
COMPETITION
Netrix has traditionally competed in the enterprise network switching
market. During 1996 it began to compete in a second area, the network access
products market. Both of these product markets are extremely competitive, and
the competition is likely to intensify. For 1997, Netrix has returned to the
enterprise segment of the market with a particular focus on networks in
transition and integrated voice/data networks.
In the enterprise network switching market, competitors include
Cisco/Stratacom, Inc., Nortel, Ascom Timeplex, and Newbridge Networks. Many of
these current and potential competitors benefit from greater market recognition
and have greater financial, technological, production, and marketing resources
than Netrix. The principal competitive advantage of the Company's products is
their ability to combine frame relay, X.25 packet switching, Time Division
Multiplexing (TDM), and switched compressed voice on a single product platform.
This allows customers to apply the most effective protocols for the transmission
of any mixture of voice; facsimile; and asynchronous, SNA, SDLC or LAN data.
Although some of the Company's competitors have developed products that combine
some of these technologies, such as frame relay with TDM or frame relay with
X.25, Netrix believes that its products are more cost-effective for networks
where multiple applications are to be shared.
Competition for the access layer of the enterprise networks includes
Dynatech, Memotech, Motorola, Micom, NUERA (PCSI), and ACT Networks, Inc.
Netrix believes that its frame-based architecture, technology, and product
strengths offer a competitive advantage. The architecture allows multiple
applications to share a single permanent virtual circuit, the basic connectivity
method in public frame relay networks, providing different classes of service
for each application. This means that a single frame relay virtual circuit can
be shared by different traffic types, such as voice, fax, SNA, SDLC, and LAN,
lowering the cost of using public frame relay networks.
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The Company pioneered the development of compressed voice and fax
communications over packet networks, and believes that the voice quality of its
proprietary compression algorithms is superior to competitive solutions. While
there is no guarantee that similar technology will not be available from other
networking product vendors, the Company believes that its offering is currently
unique. In the access market, many of the competitors are closer in size and
resources to Netrix, but have well-established distribution relationships and
more brand recognition. The access market is new and developing rapidly, and
competition could increase if new companies enter the market or if existing
competitors expand their product lines. An increase in competition could have
an adverse impact on the Company's operating margins because of price reductions
and loss of market share. Netrix believes that by focusing upon enterprise wide
solutions, the benefit of the product features will offset some of the price
pressures seen in the "commodity" access products.
Another competitive factor is the Company's wide range of network
management tools and their implementation, which use less network bandwidth than
competitive solutions. This allows customers to reduce the operating costs of
their networks by reducing people-related expenses, training, and network down-
time. The combination of these two product advantages has allowed Netrix to win
network sales against its competitors. However, when competing for networks
that do not require integration of multiple networking technologies, or in
simpler network configurations where comprehensive network management is less
important to the customer, competitive products may show an advantage in either
price or performance.
PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secret, copyright and
trademark law, non-disclosure agreements, and technical measures to establish
and protect their proprietary rights in their products. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. The laws of some foreign countries in which the Company
sells or may sell its products do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
The Company believes that, because of the rapid pace of technological
change in the networking industry, patent and copyright protection, while
important, are less significant to the Company's competitive position than
factors such as the knowledge, ability, and experience of the Company's
personnel, new product development, market recognition, and ongoing product
maintenance and support. The Company has registered the trademarks Netrix/(R)/,
RLX/(R)/, RNET/(R)/, and RDC/(R)/, and also owns certain unregistered
trademarks.
The Company believes that its products and trademarks do not infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future.
EMPLOYEES
The Company had 227 employees at December 31, 1996, including 57 in sales
and marketing, 54 in customer support, 67 in research and development, 15 in
manufacturing, and 34 in management administration and finance. None of the
employees are represented by collective bargaining agreements. The Company has
never experienced any work stoppage. The Company believes that its employee
relations are good.
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ITEM 2. PROPERTIES
The Company's principal administrative and research and development
facility consists of approximately 60,000 square feet located in Herndon,
Virginia. These premises are occupied under a lease agreement expiring in April
1999, with options to extend the lease for up to two additional five-year terms.
In addition, the Company leases approximately 28,000 square feet at another
location in Herndon, Virginia, which is currently vacant and being marketed for
sublet. The term of this lease is through November 1998. A separate facility
of 8,600 square feet is under lease in Longmont, Colorado, for the product
development operations. The Company also leases approximately 48,000 square
feet located in Boulder, Colorado, under a lease agreement expiring in July
1999. This space has been sublet to another party under a sublease agreement
expiring in May 1997. The Company also maintains space in Charlotte, North
Carolina, for its manufacturing operations. The space is leased from its main
outsourcing manufacturer. The Company also maintains sales offices located
across the US and internationally, in London, Frankfurt, Rome, and Hong Kong.
The Company believes its facilities are in all material respects, suitable,
adequate and well utilized.
ITEM 3. LEGAL PROCEEDINGS
In December 1991, Gandalf Systems Corporation ("Gandalf") filed an action
in the Superior Court of New Jersey against Graphnet, Inc. ("Graphnet") for
approximately $2,000,000 allegedly owed to Gandalf's predecessor under a 1990
lease of equipment, which included equipment manufactured by Netrix. Graphnet
counterclaimed, alleging that the equipment was inadequate and/or defective.
Subsequently, Graphnet demanded approximately $2,000,000 in damages from
Gandalf. In October 1993, Gandalf filed a third-party claim against the Company
for indemnification against any judgment obtained by Graphnet. In March 1994,
Netrix filed a third-party claim against Graphnet for moneys owed to it for
equipment purchased directly from Netrix subsequent to Graphnet's lease
transaction with Gandalf's predecessor. Netrix and Graphnet stipulated to a
dismissal of that claim in May 1994, having resolved the matter within the
context of their ongoing business relationship. Management believes Graphnet's
counterclaim and Gandalf's third-party claim are without merit. The Company is
defending the suit vigorously.
On March 14, 1995, the Company was named a defendant in Moll vs. American
Telephone and Telegraph Company and Netrix Corporation, 95-CV-1539, (United
States District Court for the Eastern District of Pennsylvania). In that action
the Company and AT&T are accused of willfully infringing a patent governing the
storage of digital information. No specific monetary claims were asserted, but
injunctive relief was requested. In parallel action involving a different
defendant but the same patent and the same plaintiff, summary judgement was
entered against the plaintiff. The plaintiff then dismissed the action against
the Company without prejudice and with a right to refile the action if the
plaintiff succeeds in reversing the decision in the parallel action on appeal.
To the best of the Company's knowledge, the law suit related to a single product
acquired as part of the acquisition of Republic Telcom Systems Corporation and
does not address, nor is it directed, to the core products of Netrix
Corporation. The Company does not currently believe that this action will
result in a material adverse impact on the financial position of the Company.
Other than the matters described above, the Company is not party to any
litigation the adverse outcome of which it believes would have a material
adverse effect on the Company of its business and is not aware that any such
litigation is threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders of Netrix during the
fourth quarter of fiscal year 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
Netrix Corporation's common stock is traded on the NASDAQ National Market
under the symbol NTRX. The following table reflects the range of high and low
selling prices of Netrix Corporation's common stock by quarter since January
1994. This information is based on prices reported on the NASDAQ National
Market.
<TABLE>
<CAPTION>
1994 HIGH LOW
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<S> <C> <C>
First Quarter............................. $ 7 1/4 $5
Second Quarter............................ $ 6 3/4 $4 3/4
Third Quarter............................. $ 5 3/4 $4
Fourth Quarter............................ $ 9 5/8 $4 3/8
1995
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First Quarter............................. $10 1/2 $6 1/8
Second Quarter............................ $ 8/3/8 $6 3/16
Third Quarter............................. $ 8 3/4 $4 3/8
Fourth Quarter............................ $ 5 5/8 $3 5/8
1996
--------------
First Quarter............................. $ 5 31/32 $3 3/4
Second Quarter............................ $10 7/8 $4 1/2
Third Quarter............................. $10 5/8 $5 3/4
Fourth Quarter............................ $ 8 1/8 $4 1/2
</TABLE>
HOLDERS
At March 17, 1997, there were approximately 234 holders of record of Common
Stock.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the fiscal years
ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the
Company's consolidated financial statements, which were audited by Arthur
Andersen LLP, independent public accountants. This data should be read in
conjunction with the Consolidated Financial Statements, related Notes and other
financial information included herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues....................... $31,394 $23,398 $53,021 $48,891 $43,635
Gross profit......................... 18,496 9,752 27,557 25,225 21,572
(Loss) Income from operations........ 2,464 (7,474) (980) (4,500) (6,305)
Net (loss) income 2,512 (7,827) (579) (3,795) (5,968)
Net (loss) income per share 0.37 (0.94) (0.06) (0.40) (0.63)
Balance sheet data (end of period):
Working capital 34,543 25,646 25,055 21,790 17,782
Total assets 46,830 35,023 45,343 41,985 34,779
Total long-term liabilities 2,240 1,413 843 943 614
Stockholders' equity 37,615 30,059 33,632 30,396 24,847
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
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In January 1997, the Company named a new President and Chief Executive
Officer, Lynn C. Chapman, who had previously served the Company as Vice
President of Engineering and Vice President of Private Networks. Charles W.
Stein, who served the Company as President and CEO for ten years, was named
Chairman of the Board.
In February 1997, the Company announced that it would enhance its focus on
the enterprise network market with particular attention to applications for both
its Frame Access Node 2210 and its new multi-service Network Exchange 2550. As
part of intensifying its focus, the Company announced in early 1997 the
discontinuance of its initiatives into the Internet access market, including the
discontinuance of its initial product in this area, the micro.pop 2300 system.
The Company's plans for discontinuance of this initiative include a
reduction in workforce.
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This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of impportant factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors That May Affect Future Results."
RESULTS OF OPERATIONS
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BACKGROUND. The results for the year ended December 31, 1996 reflect
a decrease in revenues of the Company from 1995. In March 1996, the Company
implemented a restructuring plan to consolidate and economize its operating
facilities and to reduce and redeploy its US sales force. In line with this
plan, the Company moved its main operations facility from Herndon, Virginia, to
Charlotte, North Carolina. In late 1996, Netrix experienced a decline in
revenues in the product line it acquired from Republic Telcom, and an increase
in its new product, the 2210, which combines the Republic technology with Netrix
switching capability.
1996 COMPARED TO 1995
REVENUES. Total revenues decreased by $5.3 million or 10.8% from
1995 to 1996. Product revenues in 1996 of $32.4 million decreased $6.4 million
or 16.4% from 1995 product revenues of $38.8 million. This decrease was mainly
seen in revenues from the Americas region consisting of domestic product
revenues which decreased 41.7% from $19.8 million in 1995 to $11.6 million in
1996 offset by Latin American sales which increased $1.8 million. International
sales remained relatively flat; revenues from sales to Europe, Middle East and
Africa ("EMEA") increased $1.5 million, while revenues from the Pacific Rim
decreased $1.4 million. Service revenue increased $1.1 million or 11.1% from
1995 to 1996. Service revenue increased primarily due to the renewal of
existing maintenance contracts in addition to the negotiation of new equipment
contracts.
GROSS PROFIT. Total gross profit decreased $3.7 million, or 14.5%,
from 1995 to 1996, and decreased as a percentage of total revenues from 51.6% to
49.4%. The product gross margin decreased from 57.4% in 1995 to 54.7% in 1996.
The decrease is due to a greater proportion of sales through distributors, which
generally have higher discounts, verses direct retail sales in 1996 than in
1995. To a lesser extent, the decrease in margins was also due to the mix of
products shipped to customers in 1996. The service gross margin increased from
29.4% in 1995 to 34.3% in 1996. The increase is due to the 11.1% increase in
service revenue, while the cost of providing that service only increased 3.5%
from 1995 to 1996.
SALES AND MARKETING. Sales and marketing expenses decreased $2.5
million or 17.9% from 1995 to 1996. The decrease is due to a reduction in the
sales force in March of 1996, which resulted in decreased payroll, commission,
and travel and entertainment expenses during 1996. Sales & Marketing personnel
totalled 57 at the end of 1996 compared to 70 at the end of 1995. Marketing
program expenses were also reduced significantly in 1996, mainly in the areas of
advertising, promotional programs and trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased by $.3 million or 2.8% from 1995 to 1996. The increase is due to a
significant investment in developing two new products in 1996, the 2550 and
2330, offset in part by the Company-wide reduction in personnel that took place
in March 1996. The R&D headcount in 1996 was reduced to 67 from 91 in December
1995. Most of the increase in expenses was in the area of project parts. As
previously discussed, the 2330 product was discontinued in February 1997.
11
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased $.5 million or 10.9% from 1995 to 1996. Reductions in compensation
related costs, travel and entertainment, and consulting costs contributed to the
lower 1996 expenses. G&A headcount went from 38 at the end of 1995 to 34 at the
end of 1996.
RESTRUCTURING RESERVE. In March 1996, the Company implemented a
restructuring plan and recorded a related charge of approximately $.9 million
before income taxes. The charge included anticipated costs associated with the
consolidation and relocation of facilities and the reduction of personnel levels
as part of management's restructuring plan for the Company. Approximately
$403,000 of this charge was used during the first half of 1996 to cover
severence and other costs associated with an approximate 15% reduction of the
Company's workforce. The rest of the restructuring charge is for unrecoverable
lease obligations associated with the consolidation of the Longmont, Colorado,
and Herndon, Virginia, operations facilities into one facility leased in
Charlotte, North Carolina. Approximately $393,000 of the reserve remained
unused at December 31, 1996 related to future lease obligations.
INTEREST (INCOME) EXPENSE, NET. Net interest income decreased 45.0%
from 1995 to 1996, primarily as a result of lower short-term investment balances
during 1996.
PROVISION FOR INCOME TAXES. As of December 31, 1996, the Company had
net operating losses of approximately $25.6 million available for carryforward
to offset future income for Federal income tax purposes. These carryforwards
expire in years 1998 through 2011.
1995 COMPARED TO 1994
REVENUES. Total revenues decreased by $4.1 million, or 7.8%, from
1994 to 1995. Product revenues decreased $5.2 million, or 11.9%. Domestic
product revenues increased from $17.6 million in 1994 to $19.8 million in 1995,
while product revenues in the EMEA territory decreased from $18.2 million to
$10.0 million. The majority of the decrease in total revenue is attributable to
sales to distributors, which reflects the decreased EMEA sales activities.
Service revenues increased approximately $1.1 million, or 12.2%, from 1994 to
1995. Service revenue increased primarily due to the renewal of existing
maintenance contracts in addition to the negotiation of new equipment contracts.
GROSS PROFIT. Gross profit decreased by $2.3 million, or 8.5%, from
1994 to 1995, but decreased only slightly as a percentage of total revenues from
52.0% to 51.6%. The product gross margin increased from 56.1% in 1994 to 57.4%
in 1995. This increase is primarily attributable to a higher proportion of
direct end user sales which generate higher margins, and a lower proportion of
revenue from distributor channels than in 1994. In addition, a favorable mix of
products sold in 1995 generated higher gross margins. The margin on service
revenues decreased from 31.7% in 1994 to 29.4% in 1995. The decrease in
service gross margin was primarily a result of the slow growth of the install
base and increased investments in the customer support function.
SALES AND MARKETING. Sales and marketing expenses increased by $1.6
million, or 12.6%, from 1994 to 1995. The increase in expenses was principally
due to the addition of the direct sales operation in Germany in January 1995.
To a lesser extent, expenses increased related to travel and marketing programs,
which include trade shows and public relations.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by $0.7 million, or 7.0%, from 1994 to 1995. Increased capital expenditures in
past years resulted in higher depreciation expense. An increase in travel
expenses for 1995 was the result of a higher level of travel by engineering
personnel to Boulder, Colorado where the Company maintains a remote engineering
facility.
12
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $0.2 million, or 3.9%, from 1994 to 1995. The decrease in these
expenses was primarily a result of the consolidation of general and
administrative functions into a single location in Herndon, Virginia. With the
centralization of the administrative functions in Herndon, expense reductions
were achieved related to compensation, occupancy, and outside services.
FACILITY RELOCATION. The relocation of operations from Boulder,
Colorado, to the Company's headquarters in Herndon, Virginia, was completed
during the second quarter of 1995. The reserve for relocation decreased from
$841,000 at December 31, 1994, to $396,000 at December 31, 1995. During 1995,
relocation charges of approximately $529,000 were incurred and charged against
the relocation reserve. In the fourth quarter of 1995, an increase was recorded
to the reserve of approximately $84,000. The reserve balance at December 31,
1995, represents anticipated future losses from the sublease of the Boulder
facility and will be used over the remaining lease term.
INTEREST (INCOME) EXPENSE, NET. Net interest income increased 35.8%
from 1994 to 1995, primarily as a result of a significant reduction in line of
credit borrowings at the end of 1994, offset by a lesser increase in borrowings
in the third quarter of 1995.
PROVISION FOR INCOME TAXES. As of December 31, 1995, the Company had
net operating losses of approximately $20.9 million available for carryforward
to offset future income for Federal income tax purposes. These carryforwards
expire in years 1998 through 2010.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had approximately $0.7 million of
cash and cash equivalents, short-term investments of $5.3 million, and net
working capital of $17.8 million.
Capital expenditures in 1996 were $1.3 million compared to $2.2
million in 1995. These were financed with cash on hand. The expenditures were
primarily for computer and test equipment used in research and development and
leasehold improvements made to the headquarters building in Herndon, Virginia.
In January 1997, the Company negotiated an extension of its existing
line of credit agreement with a lending institution to provide for a $2.0
million line of credit for working capital at an interest rate per annum equal
to the lender's prime rate plus 3/4% (9% at December 31, 1996). The line of
credit agreement includes covenants that require the Company to maintain certain
levels of liquidity and tangible net worth. The working capital line of credit
matures with unpaid principal amounts due and payable on May 3, 1997. At
December 31, 1996 and 1995, the Company had approximately $754,000 and $750,000,
respectively, outstanding under the working capital line of credit.
The Company utilized approximately $561,000 of available draws under
an equipment line of credit with a lending institution, which was capped at this
amount in January 1996 and began to amortize as a term loan over a 28-month
period in accordance with the credit agreement. The term loan is payable in
monthly installments of approximately $20,000 from September 3, 1996 through
January 3, 1999, bears interest at a rate per annum equal to the linder's prime
rate plus 3/4% (9% at December 31, 1996), and is secured by certain machinery
and equipment. At December 31, 1996 and 1995, the Company had approximately
$481,000 and $561,000, respectively, outstanding under the equipment note
payable.
In the fourth quarter of 1995, the Company provided $84,000 in
addition to the $900,000 provided in 1994 for expenditures for the relocation of
the majority of the Boulder, Colorado, operations to Herndon, Virginia. The
Company's lease term for the 48,000 square foot facility in Boulder runs through
July 1999. In May 1995, the Company entered into a sublease agreement for this
space expiring in May 1997.
13
<PAGE>
The Company's cash and short term investments decreased from $11.7
million at the end of 1995 to $6.0 million at the end of 1996. The Company used
cash from operations of $4,525 during 1996 which was offset by cash generated
from investing and financing activities of $584 and $291, respectively. The
Company believes it has sufficient resources to meet its cash requirements
through the next 12 months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by management
from time to time.
The Company's future operating results are difficult to predict and
may be affected by a number of factors including the timing of new product
announcements or introductions by the Company and its competitors, competitive
pricing pressures and economic conditions in the United States and international
markets. As a result of these and other factors, there can be no assurance that
the Company will not experience material fluctuations in future operating
results on a quarterly or annual basis.
A limited number of relatively large customer orders has accounted for
and is likely to continue to account for a substantial portion of revenues in
any particular fiscal period. As a result, the timing of orders could
significantly affect the Company's operating results. In any period, the
unexpected loss of or decline in revenues from a major customer, or the failure
to generate significant revenues from other customers, could have an adverse
effect on the business and operating results of the Company. Although the
Company's expense levels are based in part on its expectations as to future
revenue, most expenses are relatively fixed and cannot be adjusted in the short
term. Accordingly if revenue levels are below expectations, operating results
could be adversely affected. In addition, the Company's products often
represent a significant capital expenditure for its customers and, for that
reason, the Company's operating results may vary significantly depending upon
general economic conditions and customers' budgetary cycles.
A significant portion of the Company's revenues results from sales to
the United States government, primarily through systems integrators. The
revenues generated by this government business, which is spread across numerous
agencies and departments, could be adversely affected by governmental budgetary
or fiscal restraints or changes in government policy.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and changes in
telecommunications services offered by public carriers. The introduction of
products embodying new technologies and the emergence of new industry standards
or telecommunications services may adversely affect the Company's ability to
market its products. This may require the Company to make substantial
expenditures on research and development in order to develop new products or to
maintain the competitiveness of its existing products. The Company's ability to
anticipate changes in technology and in industry standards, to anticipate
changes in market requirements and to successfully develop and introduce new and
enhanced products on a timely basis, will be a significant factor in the
Company's ability to remain competitive. If the Company is unable, for
technological, financial or other reasons, to develop, introduce and
successfully market products in a timely manner in response to changes in the
industry, the Company's business would be materially and adversely affected. In
addition, the Company has experienced delays in releasing certain of its
products and there can be no assurance that it will not encounter technical or
other difficulties that could delay the introduction or release of new products
in the future.
The development and introduction of new and enhanced products requires
a significant investment of financial resources. To the extent that the
Company's existing financial resources are insufficient to fund the Company's
activities, additional funds will be required. There can be no assurance that
additional financing will be available on terms reasonable to the Company or at
all.
14
<PAGE>
The market for networking systems is extremely competitive. Many of
the Company's competitors are more established, benefit from greater market
recognition and have greater financial, technological, production and marketing
resources than the Company. Competition could increase if new companies enter
the market or if existing competitors expand their product lines. An increase
in competition could have an adverse effect on the Company's business and
operating results. Maintaining the competitiveness of the Company's products
will require continued investment by the Company in research and development and
sales and marketing. There can be no assurance that the Company will have
sufficient resources to make such investment or that the Company will be able to
make the technological advances necessary to maintain the competitiveness of its
products.
A significant portion of the Company's total revenues has been derived
from international sales, and the Company expects that international business
will continue to represent an important element of its business. Substantially
all of the Company's international sales have been made through third-party
distributors, and in many cases the Company relies upon only one distributor for
a particular country. A reduction in the sales by some or all of these
distributors or a termination of their relationships with the Company could have
a material adverse effect on the Company's operations and financial performance.
In addition, the Company's international business may be adversely affected by
changes in demand for its products resulting from fluctuations in exchange
rates, as well as by risks such as trade and tariff regulations, political
instability, difficulties in obtaining export licenses, difficulties or delays
in collecting accounts receivable and difficulties in staffing and managing
international operations.
The Company's success depends to a significant extent upon the
continued service of its executive officers and other key personnel. None of
the Company's executive officers or key employees is subject to an employment or
non-competition agreement. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company. The Company's future success will depend in part upon its continuing
ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel.
The Company relies on reseller channels, including distributors and
systems integrators, for a significant portion of its revenues. None of these
resellers are under the control of the Company and there can be no assurance
that future sales by resellers will continue at present levels or will not
decline. The loss of one or more significant resellers could adversely affect
the Company's business. In addition, the Company relies on resellers to provide
certain limited service and support to their customers, and any deficiencies in
such service and support could adversely affect the Company's business and
operating results.
Certain components used in the Company's products are currently
available from only one source and others are available from only a limited
number of sources. Although the Company has generally been able to obtain
adequate supplies of components to date, the Company's inability to develop
alternative sources if and as required in the future, or to obtain sufficient
sole-source or limited-source components as required, could result in delays or
reductions in product shipments, which could adversely affect the Company's
operating results. Certain products that are or may in the future be marketed
with or incorporated into the Company's products are supplied by or under
development by third parties. These third parties may be the sole suppliers of
such products. The Company also currently relies on a single contact
manufacturer to assemble and test most of the Company's products. Although a
number of such contract manufacturers exist, the interruption or termination of
the Company's current manufacturing relationship could have a short-term adverse
effect on the Company's business. The inability of any such third parties to
supply, develop or manufacture components or products in a timely manner or the
termination of the Company's relationship with any such third party could delay
shipment of the Company's products and could have a material adverse impact on
the Company's operating results.
Because of these and other factors, past financial performance should
not be considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's Common Stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the networking industry, changes in earnings estimates and
recommendations by analysts or other events.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
NETRIX CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Public Accountants......... 17
Consolidated Statements of Operations............ 18
Consolidated Balance Sheets...................... 19
Consolidated Statements of Stockholders' Equity.. 21
Consolidated Statements of Cash Flows............ 22
Notes to Consolidated Financial Statements....... 23
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and the
Shareholders of Netrix Corporation:
We have audited the accompanying consolidated balance sheets of Netrix
Corporation (a Delaware corporation) and subsidiaries (together the "Company")
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Netrix Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 20, 1997
17
<PAGE>
NETRIX CORPORATION
------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Product................................... $32,434 $38,812 $44,036
Service................................... 11,201 10,079 8,985
------- ------- -------
Total revenues...................... 43,635 48,891 53,021
Cost of revenues:
Product................................... 14,700 16,549 19,325
Service................................... 7,363 7,117 6,139
------- ------- -------
Total cost of revenues.............. 22,063 23,666 25,464
------- ------- -------
Gross profit................. 21,572 25,225 27,557
------- ------- -------
Operating expenses:
Sales and marketing....................... 11,632 14,162 12,572
Research and development.................. 11,079 10,776 10,073
General and administrative................ 4,266 4,787 4,982
Restructuring charge...................... 900 -- --
Facility relocation....................... -- -- 910
------- ------- -------
Loss from operations........... (6,305) (4,500 ) (980)
Foreign currency (loss) gain................... (86) 106 --
Interest and other income, net................. 489 714 502
------- ------- -------
Loss before income taxes....... (5,902) (3,680) (478)
Provision for income taxes..................... (66) (115) (101)
------- ------- -------
Net loss....................................... $(5,968) $(3,795) $ (579)
======= ======= =======
Net loss per share............................. $(0.63) $(0.40 ) $(0.06)
======= ======= =======
Weighted-average number of shares outstanding.. 9,468 9,371 9,178
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE>
NETRIX CORPORATION
------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 687 $ 4,370
Short-term investments.............................. 5,350 7,357
Accounts receivable, net of allowance for doubtful
accounts of $1,380 and $1,530, respectively....... 11,649 11,052
Inventories, net.................................... 8,403 9,016
Other current assets................................ 1,011 962
------- -------
Total current assets...................... 27,100 32,757
Property and equipment, net of accumulated depreciation
and amortization of $15,297 and $12,131,
respectively......................................... 6,023 7,130
Deposits and other assets 244 282
Goodwill, net 1,412 1,816
------- -------
$ 34,779 $41,985
======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
19
<PAGE>
NETRIX CORPORATION
------------------
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Current liabilities:
Lines of credit..................................... $ 754 $ 1,311
Accounts payable.................................... 3,459 4,944
Accrued liabilities................................. 4,864 4,712
Current portion of long-term debt................... 241 --
-------- --------
Total current liabilities................. 9,318 10,967
Long-term debt, net of current portion................... 240 --
Deferred rent, net of current portion.................... 374 622
-------- --------
Total Liabilities 9,932 11,589
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; none issued and outstanding........... -- --
Common stock, $0.05 par value; 15,000,000
shares authorized; 9,510,109 and 9,435,268
shares issued and outstanding, respectively...... 476 472
Additional paid-in capital.......................... 55,603 55,105
Unrealized investment holding (loss) gain........... (7) 42
Cumulative translation adjustment................... (45) (11)
Accumulated deficit................................. (31,180) (25,212)
-------- --------
Total stockholders' equity.......................... 24,847 30,396
-------- --------
$ 34,779 $ 41,985
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
20
<PAGE>
NETRIX CORPORATION
------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL INVESTMENT CUMULATIVE UNREALIZED
COMMON PAID-IN HOLDING TRANSLATION ACCUMULATED
STOCK CAPITAL GAIN/(LOSS) ADJUSTMENT DEFICIT TOTAL
---------- ----------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... $420 $50,477 $ -- $ -- $(20,838) $30,059
Stock options exercised.......... 6 330 -- -- -- 336
Issuance of Common Stock for
Republic Telcom acquisition.. 39 3,815 -- -- -- 3,854
Net change in unrealized
investment holding loss...... -- -- (38) -- (38)
Net loss......................... -- -- -- -- (579) (579)
---- ------- ---- ---- -------- -------
Balance, December 31, 1994....... 465 54,622 (38) -- (21,417) 33,632
==== ======= ==== ==== ======== =======
Stock options exercised.......... 5 197 -- -- -- 202
Employee stock purchase plan..... 2 228 -- -- -- 230
Compensation element of
stock options (Note 7)....... -- 58 -- -- -- 58
Net change in unrealized
investment holding gain...... -- -- 80 -- -- 80
Cumulative translation
adjustment (Note 2).......... -- -- -- (11) -- (11)
Net loss......................... -- -- -- -- (3,795) (3,795)
---- ------- ---- ---- -------- -------
Balance, December 31, 1995....... 472 55,105 42 (11) (25,212) 30,396
==== ======= ==== ==== ======== =======
Stock options exercised.......... 2 218 -- -- -- 220
Employee stock purchase plan..... 2 144 -- -- -- 146
Retire escrow shares............. -- (36) -- -- -- (36)
Compensation element of
stock options (Note 7)....... -- 172 -- -- -- 172
Net change in unrealized
investment holding loss...... -- -- (49) -- -- (49)
Cumulative translation
adjustment (Note 2).......... -- -- -- (34) -- (34)
Net loss......................... -- -- -- -- (5,968) (5,968)
---- ------- ----- ----------- -------- -------
Balance, December 31, 1996....... $476 $55,603 $ (7) $(45) $(31,180) $24,847
==== ======= ==== =========== =========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE>
NETRIX CORPORATION
------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(5,968) $ (3,795) $ (579)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 3,602 3,510 3,706
Noncash compensation expense (Note 7).................... 172 58 --
Changes in assets and liabilities, net of acquisition -
Accounts receivable.................................... (597) 3,701 (2,062)
Inventories............................................ (106) (2,270) (967)
Other current assets................................... (49) 188 93
Deposits and other assets.............................. 38 (70) (723)
Accounts payable....................................... (1,485) 439 1,672
Accrued liabilities.................................... 86 (908) 957
Deferred rent.......................................... (218) (190) (162)
------- -------- --------
Net cash (used in) provided by operating activities.... (4,525) 663 1,935
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (9,395) (17,399) (12,221)
Sales and maturities of short-term investments........... 11,320 16,303 14,510
Purchases of property and equipment...................... (1,340) (2,189) (1,913)
Cash acquired from IDS acquisition....................... -- 35 --
Expenditures related to Republic Telcom acquisition...... -- -- (558)
------- -------- --------
Net cash provided by (used in) investing activities...... 585 (3,250) (182)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (Repayments under) lines of credit, net.... 4 561 (1,250)
Principal payments of long-term debt..................... (80) -- --
Proceeds from employee stock purchase plan............... 146 230 244
Proceeds from exercise of stock options.................. 220 202 92
Payments under capital lease obligations................. -- (25) (1,033)
------- -------- --------
Net cash provided by (used in) financing activities...... 290 968 (1,947)
------- -------- --------
Effect of foreign currency exchange rate changes on cash and
cash equivalents......................................... (33) (11) --
Net decrease in cash and cash equivalents..................... (3,683) (1,630) (194)
Cash and cash equivalents, beginning of period................ 4,370 6,000 6,194
------- -------- --------
Cash and cash equivalents, end of period...................... $ 687 $ 4,370 $ 6,000
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................... $ 139 $ 94 $ 193
Cash paid during the year for income taxes............... 5 66 58
Supplemental disclosure of noncash activity:
Capitalization of inventories into manufacturing
and test equipment...................................... $ 719 $ 1,140 $ 983
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
NETRIX CORPORATION
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Netrix Corporation (the "Company") was incorporated in 1985 to develop,
manufacture, market, and support a family of high performance, integrated
network switching and network management products for use in enterprise-wide
communications networks. During 1989, the Company formed a wholly-owned
subsidiary, Netrix International Corporation (a Delaware corporation) which
maintains operations in the United Kingdom. The Company also maintains
operations in Germany and Italy through its wholly-owned subsidiaries Netrix
GmbH and Netrix S.r.l., respectively. These consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated.
The Company's operations are subject to certain risks and uncertainties
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technological, production and
marketing resources, reliance on certain sole source suppliers and a single
contract manufacturer, and dependence on key management personnel.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents are primarily bank deposits, commercial paper, and
government agency securities with original maturities of three months or less.
These investments are carried at cost which approximates market value.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper with
maturities of more than three months and less than twelve months and longer-term
investments which are primarily US government obligations with maturities
between twelve and eighteen months. Longer-term investments are bought and held
principally for the purpose of selling them in the near term. Short-term
investments are reported at fair value.
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," debt securities that are
classified as available-for-sale are reported at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity. At
December 31, 1996 and 1995, the unrealized holding gain/loss on short-term
investments was a loss of approximately $7,000 and a gain of approximately
$42,000, respectively, and is reported as a separate component of stockholders'
equity.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to accounts receivable and is
subject to the financial conditions of the certain major customers as discussed
in Note 9. The Company's receivables are concentrated with both domestic and
international resellers, including distributors and system integrators.
23
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. SFAS No.
107 excludes certain financial instruments and all nonfinancial instruments from
these disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The carrying amounts reported in the balance sheet approximate the fair value
for cash, accounts receivable, accounts payable, borrowings under the line of
credit agreement and long-term debt.
INVENTORIES
Inventories are valued at the lower of cost or market, using the first-in,
first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a straight-
line basis over the following estimated useful lives:
Manufacturing and test equipment.......... 3-5 years
Office furniture and equipment............ 5 years
Purchased software........................ 3 years
Leasehold improvements.................... Shorter of useful life or
remaining lease term
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
the capitalization of certain computer software development costs incurred after
technological feasibility is established. Amounts that could have been
capitalized under this statement were immaterial and have not been capitalized.
REVENUE RECOGNITION
The Company receives revenue both from sales of products and from service
contracts. In most cases, revenue from product sales is recognized upon
shipment. Revenue from service contracts is recognized ratably over the period
covered by the contract. Product sales accounted for 74% of total revenues in
1996, 79% of total revenues in 1995, and 83% of total revenues in 1994.
WARRANTY
The Company generally warrants its products for periods ranging from 90
days to one year and sells an optional, annually renewable, maintenance contract
with most networks. Estimated future warranty obligations related to certain
products are provided by charges to operations in the period in which the
related revenue is recognized.
24
<PAGE>
FOREIGN EXCHANGE GAIN/LOSS
Generally, assets and liabilities denominated in foreign currencies are
translated into US dollars at current exchange rates. Operating results are
translated into US dollars using the average rates of exchange prevailing during
the period. Gains or losses resulting from the translation of assets and
liabilities are included in the cumulative translation adjustment account in
stockholders' equity, except for the translation effect of intercompany balances
that are anticipated to be settled in the foreseeable future. Included in the
consolidated statements of operations for the year ended December 31, 1996, is a
foreign exchange loss of approximately $86,000. For the year ended December 31,
1995 there was a foreign exchange gain of approximately $106,000, and there was
no foreign exchange gain or loss for the year ended December 31, 1994.
INTEREST EXPENSE
Interest expense of approximately $125,000, $86,000, and $222,000 for 1996,
1995, and 1994, respectively, was incurred and is presented as a reduction of
interest income in the accompanying consolidated statements of operations.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share amounts have been computed using the weighted-
average number of common shares and common equivalent shares having a dilutive
effect during the periods. For the years ended December 31, 1996, 1995, and
1994, the effect of options has not been considered as they would have been
antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year financial statements
to conform with current year presentation of these amounts.
LONG-LIVED ASSETS
The Company reviews its long-lived assets, including property and equipment,
identifiable intangibles, and goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future, undiscounted, net cash flows will
be less than the carrying amount of the assets.
25
<PAGE>
3. ACQUISITIONS:
REPUBLIC
On January 20, 1994, the Company acquired Republic Telcom Systems
Corporation ("Republic") by means of a merger of NAC Corp., a newly formed
subsidiary of Netrix, with and into Republic, leaving Republic, renamed Netrix
Telcom Systems Corporation ("Telcom"), a wholly-owned subsidiary. The
acquisition was financed through the issuance of approximately 782,000 shares of
the Company's Common Stock and net cash payments totaling approximately
$558,000. These shares, valued at approximately $3.9 million, were issued to
certain creditors of Republic holding promissory notes in an aggregate amount of
$4.5 million on December 31, 1993. In addition, the Company incurred other
acquisition related expenses of approximately $340,000. The acquisition was
accounted for as a purchase. The purchase price was allocated as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable..... $ 4,447
Inventories............. 2,312
Property and equipment.. 1,392
Other assets............ 1,013
Goodwill................ 2,309
Line of credit assumed.. (2,000)
Liabilities assumed..... (4,562)
-------
$ 4,911
=======
</TABLE>
Goodwill recorded as a result of the acquisition is being amortized over
seven years.
The unaudited pro forma information presented below (in thousands, except
per share data) reflects the acquisition of Republic as if it had occurred on
January 1, 1994. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisition actually
been consummated on that date.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
-------------------
DECEMBER 31, 1994
------------------
<S> <C>
Revenues..................................... $ 53,483
Net loss..................................... (487)
Net loss per share........................... (0.05)
</TABLE>
Effective January 1, 1995, Telcom was merged with and into the Company.
IDS
On January 1, 1995, the Company acquired the equipment, inventory, and
contract rights of InterData Systems GmbH ("IDS"), relating to its corporate
network business. Prior to this acquisition, IDS was a distributor of the
Company and provided sales and service of the Company's products in Germany.
The purchase price for the assets acquired in this transaction was $545,000.
All of the assets acquired were transferred to Netrix GmbH, a wholly-owned
subsidiary of the Company, which was established concurrently with the
acquisition of the assets of IDS. The purchase price was allocated as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Capital assets.................................... $313
Goodwill.......................................... 185
Inventories....................................... 47
----
$545
====
</TABLE>
26
<PAGE>
The unaudited pro forma information presented below (in thousands, except per
share data) reflects the acquisition of IDS as if it had occurred on January 1,
1994. These results are not necessarily indicative of future operating results
or of what would have occurred had the acquisition actually been consummated on
that date.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
-------------------
DECEMBER 31, 1994
-----------------
<S> <C>
Revenues................................... $ 52,469
Net loss................................... (817)
Net loss per share......................... (0.09)
</TABLE>
4. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Raw materials........................... $ 326 $ 335
Work in process......................... 869 798
Finished goods.......................... 7,208 7,883
------ ------
Total inventories....................... $8,403 $9,016
====== ======
</TABLE>
Work in process and finished goods include direct labor and
manufacturing overhead. Finished goods include approximately $1,059,000 and
$892,000 of inventory in the hands of customers for evaluation as of December
31, 1996 and 1995, respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment, net, consists of assets owned and leased under
capital lease arrangements as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Manufacturing and test equipment........... $ 12,310 $ 11,181
Office furniture and equipment............. 6,367 5,561
Purchased software......................... 2,643 2,519
Accumulated depreciation and amortization.. (15,297) (12,131)
-------- --------
Net........................................ $ 6,023 $ 7,130
======== ========
</TABLE>
27
<PAGE>
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Deferred maintenance revenue...... $ 870 $1,137
Payroll and related compensation.. 929 956
Warranty.......................... 595 650
Facility Relocation............... 353 396
Restructuring Reserve............. 393 --
Distributor maintenance payable... 111 36
Deferred rent, current portion.... 248 218
Other............................. 1,365 1,319
------ ------
$4,864 $4,712
====== ======
</TABLE>
7. COMMON STOCK AND STOCK PLANS:
The Company maintains three plans which are described below, whereby
employees and directors of the Company are granted the opportunity to acquire an
equity interest in the Company. A total of 2,925,000 shares of Common Stock
have been reserved for issuance in aggregate under these plans. In October
1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 defines a "fair value based method" of accounting for an employee
stock option or similar equity instrument. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period. The Company has historically
accounted for employee stock options or similar equity instruments under the
"intrinsic value method" as defined by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the intrinsic value method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method. However, entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value based method of accounting had been applied. The Company has
elected to apply APB Opinion No. 25 and the related interpretations in
accounting for its stock-based compensation. Had compensation cost for the
Company's three stock-based compensation plans been determined based upon the
fair value method at the grant dates for award under those plans, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------
1996 1995
--------- ---------
<S> <C> <C> <C>
Net loss As reported $(5,968) $(3,795)
Pro forma $(6,807) $(4,031)
Net loss per share As reported $ (0.63) $ (0.40)
Pro forma $ (0.72) $ (0.43)
</TABLE>
Because the fair value method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
costs may not be representative of the cost to be expected in future years.
28
<PAGE>
The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1996 and 1995; no dividend yield, 70 percent volatility, risk free
interest rates approximating 5 percent and an average expected life of
approximately 5 years. The weighted average grant date fair value of the options
issued in 1996 and 1995 was approximately $5.89 and $5.61, respectively. The
weighted average remaining contractual life for options outstanding as of
December 31, 1996 is 8.5 years.
INCENTIVE STOCK OPTION PLAN
Under the terms of the Company's 1996 Stock Option Plan, either
incentive stock options or nonstatutory options may be granted. Generally, the
purchase price of shares subject to any incentive option granted will not be
less than the fair market value at the date of grant. Stock options granted
expire five to ten years from the grant date and typically vest 20% to 25% per
year. Compensation expense recorded for options granted at less than the fair
market value at the date of the grant is recognized on a straight-line basis
over the performance period and totaled approximately $172,000 in 1996, $58,000
in 1995, and $0 in 1994. At December 31, 1996 there is no remaining deferred
compensation expense related to these grants.
The following table summarizes the option activity under this plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OPTION PRICE OPTION PRICE
OF SHARES PER SHARE PER SHARE
----------------- -------------- -------------
<S> <C> <C> <C>
Outstanding, December 31, 1993.. 499,377 $0.750-$17.250 $5.42
1994:
Granted.................... 280,000 $ 4.000-$6.250 $6.14
Exercised.................. (63,015) $ 1.080-$5.750 $1.44
Canceled................... (116,462) $ 1.680-$6.720 $6.10
---------
Outstanding, December 31, 1994.. 599,900 $1.080-$17.250 $6.04
1995:
Granted.................... 475,000 $ 2.563-$8.690 $5.12
Exercised.................. (94,101) $ 1.080-$6.250 $2.14
Canceled................... (131,093) $ 1.680-$8.690 $6.40
---------
Outstanding, December 31, 1995.. 849,706 $1.680-$17.250 $5.90
1996:
Granted.................... 820,055 $ 4.250-$9.625 $5.89
Exercised.................. (43,113) $ 1.680-$6.250 $5.12
--------- -------------- -----
Canceled.................. (140,500) $ 1.680-$7.875 $5.88
---------
Outstanding, December 31, 1996.. 1,486,148 $1.680-$17.250 $5.92
========= =====
Exercisable, December 31, 1994.. 180,126 $1.080-$17.250 $4.53
========= =====
Exercisable, December 31, 1995.. 187,774 $1.680-$17.250 $6.74
========= =====
Exercisable, December 31, 1996.. 488,187 $1.680-$17.250 $5.74
========= =====
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the 1992 Employee Stock Purchase Plan (the "Plan"), the Company
is authorized to issue semi-annual offerings of up to 50,000 shares. The number
of shares available for an offering may be increased at the election of the
Board of Directors by the number of shares of Common Stock, if any, which were
made available but not purchased during an earlier offering. Each offering is
six months in length and commences on each July 1 and January 1. Under the terms
of the Plan, employees can choose prior to each offering to have up to 10
percent of their annual base earnings withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of its
beginning-of-offering or end-of-offering market price. Under the Plan, the
Company sold 36,556 shares, 43,848 shares, and 54,709 shares to employees in
1996, 1995, and 1994, respectively.
29
<PAGE>
DIRECTOR OPTION PLAN
Under the terms of the Director Option Plan, directors of the Company who are
not officers or employees of the Company each receive nonstatutory options to
purchase 9,000 shares of Common Stock of the Company. In 1996, 1995, and 1994,
independent members of the Board of Directors were granted options to purchase a
total of 27,000, 9,000, and 9,000 shares, respectively, of common stock at
$4.69, $7.13, and $4.00 per share, respectively, under the Director Option Plan.
At December 31, 1996 a total of 72,000 shares were outstanding under the
Director Option Plan.
8. COMMITMENTS AND CONTINGENCIES:
LINE OF CREDIT
In January 1997, the Company negotiated an extension of its existing line of
credit agreement with a lending institution to provide for a $2.0 million line
of credit for working capital at an interest rate per annum equal to the
lender's prime rate plus 3/4% (9% at December 31, 1996). The line of credit
agreement includes covenants that require the Company to maintain certain levels
of liquidity and tangible net worth. The working capital line of credit matures
with unpaid principal amounts due and payable on May 3, 1997. At December 31,
1996 and 1995, the Company had approximately $754,000 and $750,000,
respectively, outstanding under the working capital line of credit.
LONG-TERM DEBT
The Company utilized approximately $561,000 of available draws under an
equipment line of credit with a lending institution, which was capped at this
amount in January 1996 and began to amortize as a term loan over a 28-month
period in accordance with the credit agreement. The term loan is payable in
monthly installments of approximately $20,000 from September 3, 1996 through
January 3, 1999, bears interest at a rate per annum equal to the lender's prime
rate plus 3/4% (9% at December 31, 1996), and is secured by certain machinery
and equipment. At December 31, 1996 and 1995, the Company had approximately
$481,000 and $561,000, respectively, outstanding under the equipment note
payable.
CAPITAL LEASE OBLIGATION
In November 1994, the Company paid down capital lease obligations in the
amount of $518,000 under a prior lease agreement with another banking
institution.
RESTRUCTURING CHARGE
In March 1996, the Company recorded a restructuring charge of approximately
$900,000 before income taxes. The charge included anticipated costs associated
with the consolidation and relocation of facilities and the reduction of
personnel levels as part of management's restructuring plan for the Company. As
part of this plan, the Company vacated leased office space in Herndon, Virginia,
and Longmont, Colorado. Approximately $403,000 was charged against this reserve
during 1996 related to severence and other costs associated with an approximate
15% reduction of the Company's workforce. Approximately, $393,000 of this
provision remained accrued at December 31, 1996 to cover anticipated losses from
the Herndon and Longmont lease commitments.
The accompanying financial statements include management's best estimate of
the amounts expected to be realized from the subleasing of its Herndon facility.
The estimates are based upon an analysis of the facility, the local real estate
markets and the advice of real estate professionals. The amounts the Company
will ultimately realize could differ materially in the near term from the
amounts assumed in the calculation of the accrual. The future minimum rental
payments under this lease are approximately $3.2 million. The lease also calls
for payments for the Company's proportionate share of certain operating
expenses.
30
<PAGE>
FACILITY RELOCATION
During the third quarter of 1994, the Company recorded a provision for
facility relocation totaling approximately $910,000, related to the relocation
of Telcom operations from Boulder, Colorado, to the Company's headquarters in
Herndon, Virginia. These charges included approximately $375,000 associated
with severance and other costs related to the Company's reduction in work force,
$425,000 related to the consolidation of offices, including vacating the office
space in Boulder, and $110,000 for miscellaneous expenses including the write-
off of certain of Telcom's assets. During the fourth quarter of 1995, the
Company recorded an additional provision of approximately $84,000 related to the
sublease of the Boulder facility. Relocation activities were completed during
the second quarter of 1995, and at December 31, 1996, approximately $353,000 of
this provision remained to cover anticipated losses from the Boulder lease
commitment.
The accompanying financial statements include management's best estimate of
the amounts expected to be realized from the subleasing of its Boulder facility.
The estimates are based upon an analysis of the facility, the local real estate
markets and the advice of real estate professionals. The amounts the Company
will ultimately realize could differ materially in the near term from the
amounts assumed in the calculation of the accrual. The future minimum rental
payments under this lease are approximately $983,000. The lease also calls for
payments for the Company's proportionate share of certain operating expenses.
LEASES
The Company has entered into lease agreements for office space and equipment
expiring through April 1999. The lease for the Company's headquarters facility
includes annual escalations of a fixed amount during each year of the lease.
The Company recognizes rent expense on a straight-line basis. Net rent expense
in 1996, 1995, and 1994 was approximately $2,475,000, $2,501,000 and $2,775,000,
respectively.
In 1995, the Company began operations under a lease for a facility in
Longmont, Colorado, containing approximately 8,600 square feet for the purpose
of continuing product development activities in Colorado. In addition, the
Company completed the relocation of the remaining operations in Boulder and
entered into a sublease arrangement for this facility of 48,000 square feet,
which expires in May 1997. Sublease revenue for 1996 and 1995 was approximately
$380,000 and $230,000, respectively, and is presented as a reduction of rent
expense in the accompanying consolidated statements of operations.
In 1996, the Company began leasing space from its main outsourcing
manufacturer in Charlotte, North Carolina, for its operations facilities.
Future minimum lease payments for office space and equipment under operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING SUBLEASE NET
DECEMBER 31, PAYMENTS REVENUE PAYMENTS
-------------------- -------- -------- --------
<S> <C> <C> <C>
1997................. $2,380 $158 $2,222
1998................. 2,344 -- 2,344
1999................. 731 -- 731
2000 and thereafter.. -- -- --
------ -------- ------
$5,455 $158 $5,297
====== ======== ======
</TABLE>
31
<PAGE>
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan ("401(k) plan") covering all eligible
employees. The Company began contributing to the 401(k) plan effective July 1,
1996. The Company matches employee contributions up to the first 6% of eligible
income at a rate of 25%. The matching funds are subject to 20% vesting per year
beginning with the employee's first day with the Company; therefore, certain
employees were 100% vested in the Company matching contributions on July 1,
1996. In 1996, the company contributed approximately $44,000 to the 401(k)
plan. No Company contributions were made to the 401(k) plan in 1995 and 1994.
LITIGATION
In December 1991, Gandalf Systems Corporation ("Gandalf") filed an action in
the Superior Court of New Jersey against Graphnet, Inc. ("Graphnet") for
approximately $2,000,000 allegedly owed to Gandalf's predecessor under a 1990
lease of equipment, which included equipment manufactured by Netrix. Graphnet
counterclaimed, alleging that the equipment was inadequate and/or defective.
Subsequently, Graphnet demanded approximately $2,000,000 in damages from
Gandalf. In October 1993, Gandalf filed a third-party claim against the Company
for indemnification against any judgment obtained by Graphnet. In March 1994,
the Company filed a third-party claim against Graphnet for moneys owed to it for
equipment purchased directly from the Company subsequent to Graphnet's lease
transaction with Gandalf's predecessor. The Company and Graphnet stipulated to
a dismissal of that claim in May 1994, having resolved the matter within the
context of their ongoing business relationship. Management believes Graphnet's
counterclaim and Gandalf's third-party claim are without merit. The Company is
defending the suit vigorously.
On March 14, 1995, the Company was named a defendant in Moll vs. American
Telephone and Telegraph Company and Netrix Corporation, 95-CV-1539, (United
States District Court for the Eastern District of Pennsylvania). In that action
the Company and AT&T are accused of willfully infringing a patent governing the
storage of digital information. No specific monetary claims were asserted, but
injunctive relief was requested. In parallel action involving a different
defendant but the same patent and the same plaintiff, summary judgment was
entered against the plaintiff. The plaintiff then dismissed the action against
the Company without prejudice and with a right to refile the action if the
plaintiff succeeds in reversing the decision in the parallel action on appeal.
To the best of the Company's knowledge, the lawsuit related to a single product
acquired as part of the acquisition of Republic Telcom Systems Corporation and
does not address, nor is it directed, to the core products of Netrix
Corporation. The Company does not currently believe that this action will
result in a material adverse impact on the financial position of the Company.
Other than the matters described above, the Company is not party to any
litigation the adverse outcome of which it believes would have a material
adverse effect on the Company's financial position or future results of
operations and is not aware that any such litigation is threatened.
9. REVENUES:
SIGNIFICANT CUSTOMERS
Customers that accounted for greater than 10% of total revenues in 1996, 1995,
and 1994 are described below (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Distributor 1.. $5,837 * *
End User 1..... * $5,592 *
Distributor 2.. * * $6,969
</TABLE>
* Revenue accounted for less than 10% of total revenues for the period.
32
<PAGE>
PRODUCT REVENUES
The Company's product revenues for 1996, 1995 and 1994 were generated
in the following geographic regions (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic........................ $11,554 $19,822 $17,561
Europe, Middle East and Africa.. 11,531 10,002 18,214
Pacific Rim and other........... 9,349 8,988 8,261
------- ------- -------
Total........................... $32,434 $38,812 $44,036
======= ======= =======
</TABLE>
Included in domestic product revenues are sales through systems
integrators and distributors to the Federal Government of approximately
$2,164,000, $5,873,000, and $6,077,000 in 1996, 1995 and 1994 respectively.
Beginning in 1996, all of the Company's products are assembled, tested
and shipped out of its facility in Charlotte, North Carolina.
10. INCOME TAXES:
The components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Current provision:
Federal $(1,534) $(1,251) $ 321
Federal - Alternative minimum tax -- -- 20
State (185) (135) 60
Current provision (benefit) creation of net operating
loss carryforward..................................... 1,719 1,416 (366)
Foreign 66 85 66
Deferred (benefit) provision:
Federal................................................ -- -- --
State.................................................. -- -- --
------- ------- ----
$ 66 $ 115 $ 101
======= ======= =====
</TABLE>
33
<PAGE>
The provision for income taxes results in effective rates that differ from the
Federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory Federal income tax rate........................ (35.0)% (35.0)% (35.0)%
Effect of graduated rates................................. 1.0 1.0 1.0
State income taxes,net of Federal tax benefit............. (4.3) (4.3) (4.3)
Benefit of net operating loss carryforward................ -- -- (76.8)
Losses without current tax benefit........................ 38.3 39.1 118.4
Federal alternative minimum tax........................... -- -- 4.0
Foreign income taxes...................................... 1.1 2.3 13.7
------ ------ ------
Effective rate............................................ 1.1% 3.1% 21.0%
</TABLE>
As of December 31, 1996, the Company had net operating losses of
approximately $25.6 million available for carryforward to offset future income
for Federal income tax purposes. The Company has additional net operating loss
carryforwards of $3 million as a result of the 1994 acquisition of Republic.
Due to Internal Revenue Service rules regarding change in ownership, the use of
these net operating losses is limited to $300,000 per year. These carryforwards
expire in years 1998 through 2011.
Net operating loss carryforwards may be used to offset only 90% of the
Company's alternative minimum taxable income. The provision for the alternative
minimum tax will be allowed as a credit carryover against regular tax in the
future in the event the regular tax expense exceeds the alternative minimum tax
expense.
These carryforwards are subject to limitation of the amount available
to be used in any given year due to significant changes in ownership interests.
In addition, the Company has research and development tax credit carryforwards
of approximately $2,029,000 which are available to offset future Federal income
taxes with certain limitations. Temporary differences between financial
reporting and income tax reporting result primarily from the treatment of
deferred rent, depreciation expense, and capitalization of certain inventory
costs for tax purposes.
The components of the net deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Federal regular tax operating
loss carryforwards.............. $ 9,933 $ 8,361
State regular tax operating
loss carryforwards.............. 1,220 1,027
Research and development tax
credit carryforwards............ 2,029 1,792
Basis difference attributable to
Telcom acquisition............. (1,182) (1,312)
Other............................. 2,467 2,396
-------- --------
$ 14,467 $ 12,264
Valuation allowance............... (14,467) (12,264)
-------- --------
Deferred tax asset................ $ -- $ --
======== ========
</TABLE>
The Company determined that the net deferred tax asset did not satisfy
the recognition criteria set forth in SFAS No. 109 and, accordingly, established
a valuation allowance for 100 percent of the net deferred tax asset.
34
<PAGE>
11. SUBSEQUENT EVENTS:
In February 1997, the Company announced that it would enhance its focus on the
enterprise network market with particular attention to applications for both its
Frame Access Node 2210 and its new multi-service Network Exchange 2550. As part
of intensifying its focus, the Company announced in early 1997 the
discontinuance of its initiatives into the Internet access market, including the
discontinuance of its initial product in this area, the micro.pop 2300 system.
The Company's plans for discontinuance of this initiative include a reduction in
workforce.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of Netrix Corporation will be set forth in the
Netrix Corporation proxy statement for the annual meeting of shareholders to be
held May 27, 1997, and is incorporated herein by reference.
Set forth below are the names, ages as of March 1, 1997, position and business
experience of the executive officers of Netrix.
<TABLE>
<CAPTION>
Name and Age Office and Experience
- ------------ ---------------------------------------------------
<S> <C>
Lynn C. Chapman, 43....... President and Chief Executive Officer. Mr.
Chapman joined the Company in December 1992 and
was named Vice President in February 1993. During
1996 Mr. Chapman assumed additional responsibility
as Vice President -- Network Products, and was
named President and CEO in February 1997. Prior
to joining Netrix, Mr. Chapman served in various
management positions at Data General Corporation
from 1989 to November 1992, where his most recent
position was Director, Special Systems Division
Health Care Markets where he was responsible for
strategic planning and operations.
J. Gerard Cregan, 61...... Executive Vice President -- Operations. Mr.
Cregan joined the Company in his present position
in October 1988. During 1994 Mr. Cregan assumed
additional responsibility as Vice President and
Director of Telcom Operations. From 1984 to 1988
Mr. Cregan served as Vice President of Operations
and Field Service of Raster Technologies, Inc., a
manufacturer of high resolution graphic systems
for computer applications.
G. Brent Wilson, 40....... Executive Vice President -- Customer Support. Mr.
Wilson joined the Company in December 1990 and was
named Vice President in January 1996. While at
Netrix he has also served as Director of Technical
Services. Prior to Netrix, Mr. Wilson served as
Manager of Communications for the Price Company.
Robert W. Carroll, 36..... Executive Vice President -- Finance and
Administration. Prior to his appointment as Vice
President in July 1996, Mr. Carroll served as the
Company's Corporate Controller since 1992 and had
previously held the position of General Accouting
Manager from 1987 to 1992. Before joining Netrix
he was with Magnavox CATV (now Phillips Broadband,
Inc.) where he served as General Accounting
Manager for five years.
</TABLE>
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Netrix Corporation proxy statement for the annual meeting of shareholders to be
held May 27, 1997, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Netrix Corporation proxy statement for the
annual meeting of shareholders to be held May 27, 1997, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Consolidated Financial Statements on page 16.
(2) FINANCIAL STATEMENT SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SUPPLEMENTAL SCHEDULE PAGE
--------------------------------------------------------------- ----
Report of Independent Public Accountants on Supplemental Schedule 41
For the three years in the period ended December 31, 1996:
Schedule II - Consolidated Valuation and Qualifying Accounts 42
All other Schedules have been omitted because the required information
is shown in the consolidated financial statements or notes thereto or they are
not applicable.
38
<PAGE>
<TABLE>
<CAPTION>
(3) EXHIBITS
EXHIBIT
- -------
NUMBER DESCRIPTION
- ------- ----------------------------------------
<C> <S>
3.1 --Amended and Restated Certificate of Incorporation of the Registrant,
as amended (incorporated by reference to Exhibit 3.1 to the
Registrant's registration statement on Form S-1 filed September 18,
1992, as amended (File No. 33-50464) (the "1992 S-1").
3.2 --Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.2 of the 1992 S-1).
4.1 --Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of the 1992 S-1).
10.1* --Amended and Restated Incentive Stock Option Plan of the Registrant,
as amended (incorporated by reference to Exhibit 10.1 of the 1992 S-1).
10.2* --1992 Employee Stock Purchase Plan of the Registrant (incorporated by
reference to Exhibit 10.2 of the 1992 S-1).
10.3* --1992 Directors Stock Option Plan of the Registrant (incorporated by
reference to exhibit 10.3 of the 1992 S-1).
10.4 --Class D Convertible Preferred Stock Purchase Agreement, dated June 1,
1990, among the Registrant and purchasers of the Registrant's Class D
Convertible Preferred Stock (incorporated by reference to Exhibit 10.4
of the 1992 S-1).
10.5 --Office Lease, dated December 9, 1988, as amended, between the
Registrant and Dulles Technology Center Venture, for the Registrant's
principal executive offices at 13595 Dulles Technology Drive, Herndon,
Virginia (incorporated by reference to Exhibit 10.6 of the 1992 S-1).
10.6 --Office Lease, dated September 15, 1992, between the Registrant and
Brit Limited Partnership, for the Registrant's administrative offices
at The Hallmark Building, Renaissance Centre in the Renaissance Park at
Dulles, Herndon, Virginia (incorporated by reference to Exhibit 10.6 of
the Annual Report on Form 10-K for the fiscal year ended December 31,
1992 (the "1992 10-K")).
10.7 --Agreement and Plan of Merger dated December 23, 1993, among
Registrant, NAC Corp., and Republic Telcom Systems Corporation, as
amended (incorporated by reference to the Registrant's Current Report
on Form 8-K filed on February 3, 1994, as amended by Amendment No. 1 on
Form 8-K/A filed on March 30, 1994 (the "8-K").
10.8 --Debtholders Agreement dated January 23, 1994, among Registrant and
the other signatories thereto (incorporated by reference to the 8-K).
10.9 --Loan Agreement dated, December 27, 1994 between the Registrant and
Silicon Valley Bank
10.10 --Loan Agreement dated March 18, 1996 between the Registrant and
Silicon Valley Bank, as modified by this agreement.
10.11 --Loan Agreement dated, January 3, 1997 between the Registrant and
Silicon Valley Bank, as modified by this agreement.
11 --Computation of Earnings Per Share.
21 --Subsidiaries of the Registrant.
23.1 --Consent of Arthur Andersen LLP
</TABLE>
- --------------
* This exhibit is a compensatory plan or arrangement in which executive
officers or directors of the Registrant participate.
(B) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Registrant during the quarter
ended December 31, 1996.
39
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NETRIX CORPORATION
Date: March 28, 1997 By:____________________________
Lynn C. Chapman
President and Chief Executive
Officer
SIGNATURE TITLE DATE
- --------- ------------------------------- --------------
President, Chief Executive March 28, 1997
- ------------------------- Officer and Director
Lynn C. Chapman (Principal Executive Officer)
Vice President-Finance, Chief March 28, 1997
- ------------------------- Financial Officer and Treasurer
Robert W. Carroll (Principal Financial Officer)
March 28, 1997
- ------------------------- Director
Charles W. Stein
March 28, 1997
- ------------------------- Director
Stephen E. Coit
March 28, 1997
- ------------------------- Director
Arthur J. Marks
March 28, 1997
- ------------------------- Director
William T. Rooker
March 28, 1997
- ------------------------- Director
V. Orville Wright
March 28, 1997
- ------------------------- Director
John Burton
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and
Shareholders of Netrix Corporation:
We have audited in accordance with generally accepted auditing
standards, the financial statements of Netrix Corporation (a Delaware
corporation) and subsidiaries included in this Form 10-K and have issued our
report thereon dated February 20, 1997. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule included on page 42 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, DC,
February 20, 1997
41
<PAGE>
SCHEDULE II
NETRIX CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- -------------------------------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994:
Allowance for doubtful
accounts (deducted from
accounts receivable)..... $ 850 $229 $1,000* $284 $1,795
Year Ended December 31, 1995:
Allowance for doubtful
accounts (deducted from
accounts receivable)..... $1,795 -- -- 265 $1,530
Year Ended December 31, 1996:
Allowance for doubtful
accounts (deducted from
accounts receivable)..... $1,530 156 (200)* 106 $1,380
</TABLE>
*Amounts related to Republic Telcom purchase accounting.
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- ---------
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------- ----
<S> <C> <C>
10.11 -- Loan Agreement between Registrant and Silicon Valley Bank.
21 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP
</TABLE>
43
<PAGE>
LOAN DOCUMENT MODIFICATION AGREEMENT
------------------------------------
(No. 4; dated as of January 3, 1997)
------------------------------------
LOAN DOCUMENT MODIFICATION AGREEMENT dated as of January 3, 1997 by and
between NETRIX CORPORATION, a Delaware corporation with its principal place of
business at 13595 Technology Drive, Herndon, Virginia 22071, (the "Borrower")
--------
and SILICON VALLEY BANK (the "Bank"), a California chartered bank with its
----
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054,
and with a loan production office located at Wellesley Office Park, 40 William
Street, Wellesley, MA 02181 and One Central Plaza, 11300 Rockville Plaza,
Rockville, MD 20852 doing business under the name "Silicon Valley East".
1. Reference to Existing Loan Documents.
------------------------------------
Reference is hereby made to that Credit Agreement dated December 27, 1994
between the Bank and the Borrower as previously amended as of July 31, 1995,
October 5, 1995 and March 18, 1996 (with the attached schedules and exhibits,
the "Credit Agreement") and the Loan Documents referred to therein, including
----------------
without limitation that certain Amended and Restated Promissory Note (Line of
Credit Loans) of the Borrower dated as of March 18, 1996 in the principal amount
of $2,000,000 (the "Note"), and the Security Documents referred to therein.
----
Unless otherwise defined herein, capitalized terms used in this Agreement shall
have the same respective meanings as set forth in the Credit Agreement.
2. Effective Date.
--------------
This Agreement shall become effective as of January 3, 1997 (the "Effective
---------
Date"), provided that the Bank shall have received the following on or before
- ----
March 27, 1997 and provided further, however, that in no event shall this
Agreement become effective until signed by an officer of the Bank in California:
a. two copies of this Agreement, duly executed by the Borrower;
b. a Second Amended and Restated Promissory Note (Line of Credit
Loans) in the form enclosed herewith (the "Second Amended Note"),
-------------------
duly executed by the Borrower; and
c. a check in the amount of $785 payable to Sullivan & Worcester LLP,
its special legal counsel, in connection with this Agreement.
By the signature of its authorized officer below, the Borrower is hereby
representing that the representations of the Borrower set forth in the Loan
Documents (including those contained in the Credit Agreement, as amended by this
and previous Agreements) are true and correct as of the Effective Date as if
made on and as of such date. Finally, the Borrower (and each guarantor,
<PAGE>
if any, signing below) agrees that, as of the Effective Date, it has no defenses
against its obligations to pay any amounts under the Credit Agreement and the
other Loan Documents.
3. Description of Change in Terms.
------------------------------
As of the Effective Date, the Credit Agreement is modified in the following
respects:
a. Section 1.1 is hereby amended by changing the date "January 3,
1997" referred to in the third line of such section as the
Commitment Expiration Date to "May 3, 1997."
b. Section 1.5 is hereby amended by changing the date "January 3,
1997" referred to in the second line of such section as the Line of
Credit Loans Maturity Date to "May 3, 1997."
c. The Credit Agreement and the other Loan Documents are hereby
amended wherever necessary or appropriate to reflect the foregoing
changes.
4. Continuing Validity.
-------------------
Upon the effectiveness hereof, each reference in each Security Instrument
or other Loan Document to "the Credit Agreement", "thereunder", "thereof",
"therein", or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement, as amended hereby. Except as
specifically set forth above, the Credit Agreement shall remain in full force
and effect and is hereby ratified and confirmed. Each of the other Loan
Documents is in full force and effect and is hereby ratified and confirmed. The
amendments set forth above (i) do not constitute a waiver or modification of any
term, condition or covenant of the Credit Agreement or any other Loan Document,
other than as expressly set forth herein and (ii) shall not prejudice any rights
which the Bank may now or hereafter have under or in connection with the Credit
Agreement, as modified hereby, or the other Loan Documents and shall not
obligate the Bank to assent to any further modifications.
5. Miscellaneous.
-------------
a. This Agreement may be signed in one or more counterparts each of
which taken together shall constitute one and the same document.
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. THE BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY
STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE
COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF
ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON
<PAGE>
OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR
ANY REASON THE BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA
COUNTY, CALIFORNIA.
d. The Borrower agrees to promptly pay on demand all costs and
expenses of the Bank in connection with the preparation, reproduction,
execution and delivery of this letter amendment and the other
instruments and documents to be delivered hereunder, including the
reasonable fees and out-of-pocket expenses of Sullivan & Worcester LLP
special counsel for the Bank with respect thereto.
IN WITNESS WHEREOF, the Bank and the Borrower have caused this Agreement to
be signed under seal by their respective duly authorized officers as of the date
set forth above.
Sincerely,
SILICON VALLEY EAST, a Division
of Silicon Valley Bank
By:
-----------------------------
Name:
Title:
SILICON VALLEY BANK
By:
-----------------------------
Name:
Title:
(signed in Santa Clara, CA)
NETRIX CORPORATION
By: /s/ Robert W. Carroll
--------------------------------
Name: Robert W. Carroll
Title: Vice President of Finance
<PAGE>
SECOND AMENDED AND RESTATED PROMISSORY NOTE
(Line of Credit Loans)
$2,000,000 Herndon, Virginia
As of January 3, 1997 (Originally
dated December 27, 1994, as
previously amended as of October 5,
1995 and March 18, 1996)
For value received, the undersigned, NETRIX CORPORATION, a Delaware
corporation (the "Borrower"), promises to pay to SILICON VALLEY BANK (the
--------
"Bank") at the office of the Bank located at 3003 Tasman Drive, Santa Clara,
----
California 95054, or to its order, the lesser of Two Million Dollars
($2,000,000) or the outstanding principal amount hereunder, on May 3, 1997 (the
"Maturity Date"), together with interest on the principal amount hereof from
-------------
time to time outstanding at a fluctuating rate per annum equal to the Prime Rate
(as defined in the Credit Agreement referred to below) plus 0.75% until the
Maturity Date, payable monthly in arrears on the third day of each calendar
month occurring after the date hereof and on the Maturity Date. The Borrower
promises to pay on demand interest at a per annum rate of interest equal to the
Prime Rate plus 5.75% on any overdue principal (and to the extent permitted by
law, overdue interest).
Computations of interest shall be made by the Bank on the basis of a
year of 360 days for the actual number of days occurring in the period for which
such interest is payable.
This promissory note further amends and restates the terms and
conditions of the obligations of the Borrower under the promissory note (line of
credit loans) dated December 27, 1994, as previously amended and restated as of
October 5, 1995 and March 18, 1996 (the "Original Note"), by the Borrower to the
-------------
Bank. Nothing contained in this promissory note shall be deemed to create or
represent the issuance of new indebtedness or the exchange by the Borrower of
the Original Note for a new promissory note. This promissory note is referred
to in the Credit Agreement dated December 27, 1994, as amended by a letter
amendment dated as of July 31, 1995 and by three Loan Document Modification
Agreements dated as of October 5, 1995, March 18, 1996 and January 3, 1997
respectively, between the Bank and the Borrower together with all related
schedules, as the same may be amended, modified or supplemented from time to
time (the "Credit Agreement") and is subject to optional and mandatory
----------------
prepayment as provided therein, and is entitled to the benefits thereof and of
the other Loan Documents referred to therein. This note is secured by a
Security Agreement dated as of December 27, 1994, as amended March 18, 1996 (the
"Security Agreement"), by the Borrower in favor of the Bank, as the same may be
------------------
amended, modified or supplemented from time to time, and by the other Security
Instruments referenced in the Credit Agreement.
<PAGE>
Each reference in each Loan Document (as defined in the Credit
Agreement) to "the Note", "thereof", "therein", "thereunder", or words of like
import referring to the Original Note, shall mean and be a reference to the
Original Note, as amended and restated hereby.
Upon the occurrence of any Event of Default under, and as defined in,
the Credit Agreement, at the option of the Bank, the principal amount then
outstanding and the accrued interest on the advances under this note and all
other amounts payable under this note shall become immediately due and payable,
without notice (including, without limitation, notice of intent to accelerate),
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
The Bank shall keep a record of the amount and the date of the making
of each advance pursuant to the Credit Agreement and each payment of principal
with respect thereto by maintaining a computerized record of such information
and printouts of such computerized record, which computerized record, and the
printouts thereof, shall constitute prima facie evidence of the accuracy of the
----- -----
information so endorsed.
The undersigned agrees to pay all reasonable costs and expenses of the
Bank (including, without limitation, the reasonable fees and expenses of
attorneys) in connection with the enforcement of this note and the other Loan
Documents and the preservation of their respective rights hereunder and
thereunder.
No delay or omission on the part of the Bank in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Bank, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every endorser or guarantor of this note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any one or more extensions or postponements of the
time of payment or any other indulgences, to any substitutions, exchanges or
releases of collateral for this note, and to the additions or releases of any
other parties or persons primarily or secondarily liable.
THIS NOTE HAS BEEN DELIVERED TO THE BANK AND ACCEPTED BY THE BANK IN
THE STATE OF CALIFORNIA.
THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER
HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY
REASON OF THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE COMMITMENT LETTER) OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS NOTE, THE BORROWER ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS (OR IF FOR ANY REASON ACCESS
TO SUCH COURTS IS DENIED TO THE BANK, THEN, IN THE STATE OF CALIFORNIA) IN ANY
ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF
<PAGE>
THIS NOTE, ANY LOAN DOCUMENT (AS DEFINED IN THE COMMITMENT LETTER) OR THE
TRANSACTIONS CONTEMPLATED HEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH
ACTION, SUIT OR PROCEEDING MAY BE BROUGHT, IRREVOCABLY AGREES TO BE BOUND BY ANY
FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING
IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER
PROVIDED, SUBJECT TO EXERCISE AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE
EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF
MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIMS
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS
PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT
OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER, AND AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT
OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAW OF
THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER
SEAL.
NETRIX CORPORATION
By: /s/ Robert W. Carroll
--------------------------------
Name: Robert W. Carroll
Title: Vice President of Finance
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Netrix International Corporation, Delaware
Netrix GmbH, Germany
Netrix S.r.l., Italy
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports dated Feburary 20, 1997, included in this
Form 10-K, into Netrix Corporation's previously filed Registration Statement on
Form S-8, File No. 33-52456.
ARTHUR ANDERSEN LLP
Washington, DC,
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 687
<SECURITIES> 5,350
<RECEIVABLES> 11,649
<ALLOWANCES> 1,380
<INVENTORY> 8,403
<CURRENT-ASSETS> 27,100
<PP&E> 6,023
<DEPRECIATION> 15,297
<TOTAL-ASSETS> 34,779
<CURRENT-LIABILITIES> 9,318
<BONDS> 0
0
0
<COMMON> 476
<OTHER-SE> 24,371
<TOTAL-LIABILITY-AND-EQUITY> 34,779
<SALES> 32,434
<TOTAL-REVENUES> 43,635
<CGS> 14,700
<TOTAL-COSTS> 22,063
<OTHER-EXPENSES> 27,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> (5,902)
<INCOME-TAX> 66
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,968)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> 0
</TABLE>
