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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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-50464
NETRIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 54-1345159
(STATE OF INCORPORATION) (IRS EMPLOYER
IDENTIFICATION NO.)
13595 DULLES TECHNOLOGY DRIVE, HERNDON, VIRGINIA 20171
(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 _____
--
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.[ ]
AGGREGATE MARKET VALUE OF COMMON STOCK (PAR VALUE $.05 PER SHARE) HELD BY
NON-AFFILIATES OF REGISTRANT ON MARCH 13, 1998: $14,580,593.
THE NUMBER OF SHARES OF REGISTRANT'S COMMON STOCK (PAR VALUE $.05 PER SHARE)
OUTSTANDING AS OF MARCH 13, 1998: 9,643,240.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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ITEM 1. BUSINESS
Netrix Corporation ("Netrix" or the "Company") is a worldwide provider of
voice and data networking products. Netrix develops, manufactures, markets, and
supports networking equipment for voice, data, and image networks. Netrix
products are designed to transport voice over data networks to enable its
customers to realize significant cost savings. Netrix was incorporated in 1985.
The Company maintains operations in the United Kingdom through its wholly-owned
subsidiary, Netrix International Corporation (a Delaware corporation), and in
Germany and Italy through its wholly-owned subsidiaries Netrix GmbH and Netrix
S.r.l., respectively.
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 third party
contract manufacturers, and dependence on key management personnel.
BACKGROUND
Recent trends in network equipment investment have shown that network
infrastructures have been consolidated, resulting in fewer networks and
protocols to support an increasing number of applications. The Internet Protocol
(IP) for the LAN, along with Frame Relay and Asynchronous Transfer Mode (ATM)
for the Wide Area (WAN) has displaced most of the previous networking
technologies in this market space. These technological trends, combined with
the proliferation of global trade, have created a growing reliance on
telecommunications to facilitate commerce. In an environment in which wide area
networking is critical to daily operations, voice and data communications
represent a significant and increasing component of operating costs. Netrix has
re-focused its new products to support the `voice over' needs of this new
network model.
The varying traffic characteristics of different types of networking
applications, together with the need to transmit voice and image as well as
data, has created the need for vendors to supply multi-service platforms to meet
the user requirements within a single network fabric. Technologies in use today
include IP, Frame Relay, Integrated Services Digital Network (ISDN), and ATM.
Multi-service platforms, such as the Netrix Network Exchange products, enable
the Company's customers to support multiple applications across a single
network, thereby resulting in improved connectivity, reduced communications
costs, and improved network performance.
The increasing availability of IP and Frame Relay services on the public
networks has fueled a trend toward building corporate networks that access these
services on an as-needed basis. Netrix products can be used to implement voice
and data networks based upon private lines, public services, or a combination of
private and public services. Netrix believes that the trend toward the use of
services will continue to grow, especially with global telecommunications
deregulation. The use of the Internet will also expand for voice and fax
applications.
In January 1998, the Company entered the voice/data/fax-over-IP gateway market
with the announcement of the Vodex software for the 2210. Vodex is one of the
industry's first voice gateways to simultaneously deliver high quality voice
over IP and voice over Frame Relay with the ability to gateway between the two.
Vodex positions the Company firmly in the IP telephony market space, which is
emerging as the next wave of network consolidation and which leverages the vast
worldwide IP infrastructures being deployed.
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NETRIX PRODUCTS
The Company currently offers products that focus on providing voice over
packet solutions which leverage the emerging IP Telephony space as well as the
Frame Relay space. The products scale from a gateway consisting of as few as 2
voice ports to a network comprised of many remote sites connected to large
central sites via the largest Network Exchange switches the 2550. This
scaleable product family permits the customer to choose the most appropriate
platform for each site based upon functionality and performance requirements.
All are designed to enhance the efficiency and cost-effectiveness of the
communications infrastructure. The Company has two platforms which comprise the
Network Exchange product line, the 2210 and the 2550.
NETWORK EXCHANGE 2210. The Network Exchange 2210 is a voice gateway that
combines switched compressed voice and switching in a single platform. The 2210
incorporates the Company's recently announced Vodex voice gateway software, one
of the industry's first voice gateways to simultaneously deliver high quality
voice over IP and voice over Frame Relay with the ability to gateway between the
two. This scaleable product, designed to take advantage of available IP and
frame relay facilities/services, is based upon enhanced voice over frame
capabilities developed by the Company. In 1997, the 2210 Voice gateway gained a
higher quality voice compression algorithm, higher performance and capacity,
support for IP, and a cost effective analog voice/fax capabilities with the
release of a 2/4 port voice/fax card. This card, which provides high quality
switched compressed voice which can be connected to most analog lines, E&M, FXO,
and/or FXS. The 2210 also received significant performance enhancements to
better address the needs of our larger clients; a single 2210 can support up to
six E1 or seven T1 digital interfaces. The 2210 has a complete set of features
which support switched compressed voice, LAN traffic as well as the traditional
capabilities found in typical access level products. The 2210 can process up to
180 simultaneous voice calls one of the largest VoIP/VoFR gateways currently on
the market and can be interconnected to incrementally add to the overall
capacity of the site. For a fully redundant large site, the 2550 can augment
the 2210s.
NETWORK EXCHANGE 2550. The 2550 performs as a central site voice/data
switch to provide a resilient fault-tolerant hub. The 2550 interworks with the
2210 to provide complete multi-service networking support for compressed voice
traffic as well as all existing network technologies. With the 2550, networks
can be constructed to provide support for voice over IP, Frame Relay, and ATM
using narrowband or high speed broadband interfaces running at speeds up to DS3
(45 Mbps) and E3 (34 Mbps) rates.
The Netrix family of Network Exchanges provides flexible and scaleable
network solutions for small to large voice/data networks. The products are used
together to provide coverage from the access level through to the network
backbone. The Netrix products provide integrated voice and data network
solutions that use state of the art networking technology.
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 NMS has the capability to monitor attached SNMP devices,
such as a router, and to participate in global network management architecture
with other SNMP managers. Built into the NMS is the capability to support
Virtual Private Networks, remote diagnostics, and extensive "GateKeeper"
functionality such as call detail records for accounting and performance
statistics for on-going capacity planning/tuning. The NMS provides extensive
capabilities to insure non-stop operation with the lowest personnel costs. The
Company supplies network management software for operation with Windows 95' and
Sun Sparc platforms.
MARKETING AND SALES
The Company's primary target customers are business users with multiple
locations. To address its markets throughout the world, the Company has
established a multi-channel distribution and sales network. The Company's
products are designed to provide enterprise voice/data solutions and are
marketed mostly through indirect channels, either via carriers or enterprise
focused partners worldwide.
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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 per 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 failed 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.
Netrix personnel and third party providers perform most domestic hardware
maintenance and installation. 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 32% of total
revenues in 1997, 26% in 1996 and 21% 1995. Most of the Company's customers
currently have support and maintenance contracts with the Company.
RESEARCH AND DEVELOPMENT
Netrix believes its future success depends on its ability to continue to
enhance its products to improve performance and functionality and to develop new
products that address emerging networking market niches. In 1997, 1996, and
1995, research and development expenses totaled approximately $8.3 million or
25% of revenues, $11.1 million or 25% of revenues, and $10.8 million or 22% of
revenues, respectively.
COMPETITION
The Company encounters substantial competition in the marketing of its
products, and many of its competitors have greater financial, marketing and
technical resources. Important competitive factors in the Company's product
markets are established customer base, product performance and features, service
and support, as well as price. The Company believes that it competes favorably
with respect to these factors. There can be no assurance that the Company's
products will compete successfully with competitive products that may be offered
in the future or that aggressive pricing will not negatively impact the
profitability of the Company.
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 believes that its products and trademarks do not infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future.
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To protect the company's intellectual property rights in the "Voice Over"
market space, the prime patents held by the company in packetized compressed
voice networking have been brought to the attention of both the Voice over IP
and Frame Relay forum organizations.
The Company also uses various licensed products of other companies in
certain of its products.
EMPLOYEES
The Company had 166 employees at December 31, 1997. 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 satisfactory.
YEAR 2000
The Company is currently in the process of conducting a review of the
impact of Year 2000 on its information systems, as well as reviewing its impact
on relationships with key customers and vendors. Based on this preliminary
review, the information systems in place at the Company will be modified with
the appropriate upgrades provided by the original software vendors. Currently,
the aggregate costs associated with these upgrades have not been estimated.
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.
A separate facility of 8,600 square feet is under lease in Longmont, Colorado,
for product development operations. The Company also maintains space in
Charlotte, North Carolina, for its manufacturing operations. This space is
leased from its main outsourcing manufacturer. Additionally, the Company
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.
Other than the matters described above, the Company is involved in other
minor litigation and is not party to any litigation the adverse outcome of which
it believes would have a material adverse effect on its financial position or
future results of operations and is not aware that any such litigation is
threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 as reported by NASDAQ for the quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------------- -------------
<S> <C> <C>
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
1997
----
First Quarter....................... $ 6 3/8 $ 2 5/8
Second Quarter...................... $ 2 7/8 $ 1 1/2
Third Quarter....................... $ 2 5/8 $ 1 13/16
Fourth Quarter...................... $ 2 9/16 $ 21/32
</TABLE>
HOLDERS
At March 13, 1998, there were approximately 226 holders of record of Common
Stock and estimated 2,948 total holders based on the volume of proxy and other
material mailed to shareholders.
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.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the fiscal years
ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
Company's consolidated financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues...................... $23,398 $53,021 $48,891 $43,635 $33,087
Gross profit........................ 9,752 27,557 25,225 21,572 14,647
Loss from operations................ (7,474) (980) (4,500) (6,305) (8,773)
Net loss............................ (7,827) (579) (3,795) (5,968) (8,577)
Basic and diluted loss per share.... (0.94) (0.06) (0.40) (0.63) (0.90)
Balance sheet data (end of period):
Working capital..................... 25,646 25,055 21,790 17,782 10,271
Total assets........................ 35,023 45,343 41,985 34,493 24,024
Total long-term liabilities......... 1,413 843 943 614 96
Stockholders' equity................ 30,059 33,632 30,396 24,847 16,480
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
In January 1998, the Company announced its Vodex Voice Gateway software for
its Network Exchange 2210, a Voice/Data/Fax-Over-IP Gateway Switch. Vodex is
one of the industry's first voice gateways to simultaneously deliver high
quality voice over IP and voice over Frame Relay with the ability to gateway
between the two.
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 important 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
The results of operations for the year ended December 31, 1997 reflect
an overall decrease in the revenues and expenses of the Company from 1996.
During 1997, Netrix continued to experience a decline in revenues in the product
line it acquired from Republic Telcom, and an increase in its new products, the
2210, which combines the Republic technology with Netrix switching capability,
and the 2550, Netrix' enhanced switching platform. In both March of 1996 and
April of 1997, the Company implemented a restructuring of operations to reduce
and economize its work force. The restructuring resulted in the overall
reduction of compensation and travel expenses and other operating costs of the
Company for these years.
REVENUES. Total revenues decreased by $10.5 million or 24% from 1996
to 1997 and $5.3 million or 10% from 1995 to 1996. Product revenues in 1997 of
$22.5 million decreased $10.0 million or 31% from product revenues in 1996 of
$32.4 million, which decreased $6.4 million or 16% from 1995 product revenues of
$38.8 million. The decreased sales for both 1996 and 1997 were most prominent
in the Americas sales region (North, Latin and South America) which saw a
decrease in product revenues of $6.6 million or 43% from 1996 to 1997 and $6.4
million or 29% from 1995 to 1996. The International sales region (Europe,
Middle East, Africa, Pacific Rim) experienced decreased sales to a lesser extent
from 1996 to 1997 and maintained relatively flat sales from 1995 to 1996. The
mix of products sold contributed significantly to the decrease in revenues in
1997 and 1996. The products acquired in the Republic Telcom acquisition saw a
steady decrease of 42% from 1995 to 1996, and 59% from 1996 to 1997, while the
Netrix product utilizing the acquired technology saw a steady increase of 72%
and 69%, respectively, over the same periods. The series 10, the Company's main
switch product, decreased $1.1 million or 6% from 1995 to 1996 and $9.4 million
or 51% from 1996 to 1997, as the Company's new switching platform, the 2550, was
introduced into the market in the second quarter of 1997, generating $4.4
million in sales for 1997.
Service revenue decreased $0.6 million or 5% from 1996 to 1997 and
increased $1.1 million or 11% from 1995 to 1996. Service revenue is primarily
the result of the renewal of existing maintenance contracts as well as the
negotiation of new equipment contracts. As such, it has remained fairly
consistent due to the elimination of older product servicing offset by new
product and customer arrangements.
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GROSS PROFIT. Total gross profit decreased $6.9 million or 32% from
1996 to 1997 and decreased $3.7 million or 14% from 1995 to 1996. Gross profit
as a percentage of total revenues was 44% in 1997, 49% in 1996 and 52% in 1995.
The product gross margin decreased from 57% in 1995 to 55% in 1996 to 49% in
1997. Product margins decreased in 1997 because of lower introductory pricing
offered on the new 2550 product and the minimal configurations typical with new
products. Product margins decreased in 1996 due to a greater proportion of
sales made through distributors, which generally have higher discounts, than
direct retail sales. 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% in 1995 to 34% in 1996 and
1997. The increase in the service margin from 1995 to 1996 generally paralleled
the increase in service revenue, as the cost of providing that service only
increased 3% during the same period. The 1997 service gross margin remained
relatively flat, as the decrease in service costs from 1996 to 1997 due to the
restructuring discussed above were offset by the decrease in service revenues
for the same period.
SALES AND MARKETING. Sales and marketing expenses decreased $1.4
million or 12% from 1996 to 1997 and decreased $2.5 million or 18% from 1995 to
1996. The decreases are mainly attributed to the restructuring of operations as
discussed above. 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
decreased $2.8 million or 25% from 1996 to 1997 and increased $0.3 million or
3% from 1995 to 1996. As a percentage of revenues, R&D expenses increased from
22% of revenues in 1995 to 25% of revenues in 1996 and 1997. The decrease in
R&D expenses for 1997 is due mainly to the restructuring plan discussed above.
The increase in 1996 is due to a significant investment in developing two new
products, the 2550 switch and 2330 micro.pop, offset in part by the 1996
restructuring of operations. Most of the 1996 increase in expenses was in the
area of project parts. As previously discussed, the 2330 product was
discontinued in February 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased $0.3 million or 6% from 1996 to 1997 and decreased $0.5 million or 11%
from 1995 to 1996. Reductions from the restructuring of operations discussed
above and reduced consulting costs contributed to the lower 1997 and 1996
expenses.
RESTRUCTURING EXPENSE. In 1997, the Company recorded restructuring
expense of approximately $875,000, representing anticipated costs associated
with an overall reduction in work force and the discontinuance of its micro.pop
product. In 1996, the Company implemented a restructuring plan and recorded a
related charge of approximately $900,000, representing anticipated costs
associated with the consolidation and relocation of facilities and a 15%
reduction in personnel levels. These costs included severance and related
expenses for the reduction in work force and amounts 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. Additionally, the relocation of operations from Boulder,
Colorado, to the Company's headquarters in Herndon, Virginia, was completed
during 1995, and an additional amount of approximately $84,000 was charged to
the facility relocation reserve established in 1994.
INTEREST AND OTHER, NET. Net interest income decreased 71.0% from
1996 to 1997 and decreased 45.0% from 1995 to 1996, primarily as a result of
lower short-term investment balances during 1997 and 1996. Additionally, the
Company recorded a foreign currency gain of $54,000 in 1997, loss of $86,000 in
1996, and gain of $106,000 in 1995. These gains and losses resulted from the
Company's subsidiary operations in Germany, Italy and the United Kingdom.
PROVISION FOR INCOME TAXES. As of December 31, 1997, the Company had
net operating losses of approximately $34.2 million available for carryforward
to offset future income for Federal income tax purposes subject to limitations.
These carryforwards expire in years 1998 through 2012.
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LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company sold investments of $5.3 million to fund
operational and capital needs as well as contribute to an increase in cash
balances. At December 31, 1997, the Company had approximately $2.8 million in
cash and investments compared to $6.0 million at December 31, 1996.
For the year ended December 31, 1997, the Company used $1.7 million of cash
for operations. Non-cash items consisting of depreciation and amortization of
$3.3 million coupled with a reduction in accounts receivable of $5.4 million
partially offset the losses of $8.6 million and the reduction in accounts
payable and accrued expenses of $1.7 million. The reduction in accounts
receivable was the result of the lower sales volumes along with an improvement
in the average collection time.
Inventory levels at December 31, 1997 were $82,000 lower than at December
31, 1996 and were $581,000 lower than at September 30, 1997. This reduction is
the result of efforts during the last half of 1997 to bring inventories in line
with current sales volume and the expected phase out of older products. Accrued
expenses decreased by $1.3 million as payments have been made for those items
accrued as part of the restructuring reserves established in 1996 and 1997 as
well as the usage of accruals established at the time of the Republic Telecom
acquisition.
Capital acquisitions during 1997 were $1.7 million compared to $2.1 million
in 1996. These acquisitions were mostly for equipment used for research and
development purposes along with some computer and test equipment.
In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital. This
agreement provides for interest at a per annum rate equal to the lender's prime
rate plus 2%. The line of credit agreement includes a covenant that requires
the Company to maintain a tangible net worth of at least $13.5 million. At
December 31, 1997, tangible net worth was approximately $15.7 million. The
facility, which matures on November 30, 1999, is collateralized by the Company's
assets. Borrowings under the line are based on qualified accounts receivable.
At December 31, 1997, the Company had $2.0 million available under the line of
credit, of which $1.1 million was outstanding and was in compliance with the
tangible net worth covenant.
The success of the Company is dependent on its ability to generate adequate
cash for operations and capital needs. Its ability to generate adequate cash for
such needs is in part dependent on its success in increasing sales of its
products. The Company has developed a plan to increase revenues through sales of
its Network Exchange product line; however, due to market conditions and other
factors beyond its control, there can be no assurance the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sales of assets including technologies or
the sale of debt or equity securities. Although the Company believes it has the
ability to generate additional cash through such sales, such sales may be
dilutive and there can be no assurances that adequate funds will be available or
available on terms that are reasonable or acceptable to the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company.
Therefore, the Company has also developed a plan to implement certain cost
control measures to mitigate its liquidity risk.
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.
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The success of the Company is dependent on its ability to generate adequate
cash for operations and capital needs. Its ability to generate adequate cash for
such needs is in part dependent on its success in increasing sales of its
products. The Company has developed a plan to increase revenues through sales of
its Network Exchange product line; however, due to market conditions and other
factors beyond its control, there can be no assurance the Company will be able
to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sales of assets including technologies or
the sale of debt or equity securities. Although the Company believes it has the
ability to generate additional cash through such sales, such sales may be
dilutive and there can be no assurances that adequate funds will be available or
available on terms that are reasonable or acceptable to the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company.
Therefore, the Company has also developed a plan to implement certain cost
control measures to mitigate its liquidity risk.
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 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.
9
<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 contract 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.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, DC
February 27, 1998
11
<PAGE>
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996 1995
--------- --------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Product $22,474 $32,434 $38,812
Service 10,613 11,201 10,079
------- ------- -------
Total revenues 33,087 43,635 48,891
------- ------- -------
Cost of revenues:
Product 11,395 14,700 16,549
Service 7,045 7,363 7,117
------- ------- -------
Total cost of revenues 18,440 22,063 23,666
------- ------- -------
Gross profit 14,647 21,572 25,225
------- ------- -------
Operating expenses:
Sales and marketing 10,220 11,632 14,162
Research and development 8,323 11,079 10,776
General and administrative 4,002 4,266 4,787
Restructuring charge 875 900 --
------- ------- -------
Loss from operations (8,773) (6,305) (4,500)
Interest and other, net 196 403 820
------- ------- -------
Loss before income taxes (8,577) (5,902) (3,680)
Provision for income taxes -- (66) (115)
------- ------- -------
Net loss $(8,577) $(5,968) $(3,795)
======= ======= =======
Net loss per share $ (0.90) $ (0.63) $ (0.40)
======= ======= =======
Shares used in per share calculation 9,553 9,468 9,371
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
12
<PAGE>
NETRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
-------- --------
(In thousands, except share amounts)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,758 $ 687
Short-term investments -- 5,350
Accounts receivable, net of allowance for doubtful accounts
of $1,505 and $1,380, respectively 6,212 11,649
Inventories, net 8,035 8,117
Other current assets 713 1,011
------- -------
Total current assets 17,718 26,814
Property and equipment, net of accumulated depreciation
and amortization of $18,016 and $15,297, respectively 4,969 6,023
Deposits and other assets 543 244
Goodwill, net of accumulated amortization of $1,447 and
$1,090, respectively 794 1,412
------- -------
$24,024 $34,493
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 1,147 $ 754
Accounts payable 3,002 3,459
Accrued liabilities 3,298 4,819
-------- --------
Total current liabilities 7,447 9,032
Other liabilities 97 614
-------- --------
Total liabilities 7,544 9,646
-------- --------
Commitments and contingencies
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;
9,593,253 and 9,510,109 shares issued and outstanding, 480 476
respectively
Additional paid-in capital 55,774 55,603
Other equity adjustments (17) (52)
Accumulated deficit (39,757) (31,180)
-------- --------
Total stockholders' equity 16,480 24,847
-------- --------
$ 24,024 $ 34,493
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
13
<PAGE>
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL OTHER
COMMON PAID-IN EQUITY ACCUMULATED
STOCK CAPITAL ADJUSTMENTS DEFICIT TOTAL
-------- ---------- ----------- ------------ -----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995....... $ 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.............. -- 58 -- -- 58
Net change in unrealized
investment holding gain.... -- -- 80 -- 80
Cumulative translation
adjustment................. -- -- (11) -- (11)
Net loss....................... -- -- -- (3,795) (3,795)
------- -------- ------- --------- --------
Balance, December 31, 1995..... 472 55,105 31 (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.............. -- 172 -- -- 172
Net change in unrealized
investment holding loss.... -- -- (49) -- (49)
Cumulative translation
adjustment................. -- -- (34) -- (34)
Net loss....................... -- -- -- (5,968) (5,968)
------- -------- ------- --------- --------
Balance, December 31, 1996..... 476 55,603 (52) (31,180) 24,847
------- -------- ------- --------- --------
Stock options exercised........ 3 134 -- -- 137
Employee stock purchase plan... 1 37 -- -- 38
Net change in unrealized
investment holding loss.... -- -- 7 -- 7
Cumulative translation
adjustment................. -- -- 28 -- 28
Net loss....................... -- -- -- (8,577) (8,577)
------- -------- ------- --------- --------
Balance, December 31, 1997..... $ 480 $ 55,774 $ (17) $ (39,757) $ 16,480
======= ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE>
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996 1995
-------- ---------- -------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,577) $(5,968) $ (3,795)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,338 3,602 3,510
Noncash compensation expense -- 172 58
Changes in assets and liabilities, net of acquisition -
Accounts receivable 5,437 (597) 3,701
Inventories 82 505 (930)
Other current assets 298 (49) 188
Deposits and other assets (299) 38 (70)
Accounts payable (457) (1,485) 439
Accrued liabilities (1,280) 224 (1,080)
Other liabilities (278) (248) (218)
------- ------- --------
Net cash (used in) provided by operating activities (1,736) (3,806) 1,803
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (2,473) (9,395) (17,399)
Sales and maturities of short-term investments 7,823 11,320 16,303
Purchases of property and equipment (1,665) (2,059) (3,294)
------- ------- --------
Net cash provided by (used in) investing activities 3,685 (134) (4,390)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit, net 393 4 561
Principal payments of long-term debt (481) (80) --
Proceeds from exercise of stock options 137 220 202
Proceeds from employee stock purchase plan 38 146 230
Payments under capital lease obligations -- -- (25)
------- ------- --------
Net cash provided by financing activities 87 290 968
------- ------- --------
Effect of foreign currency exchange rate changes on cash and cash equivalents 35 (33) (11)
Net increase (decrease) in cash and cash equivalents 2,071 (3,683) (1,630)
Cash and cash equivalents, beginning of period 687 4,370 6,000
------- ------- --------
Cash and cash equivalents, end of period $ 2,758 $ 687 $ 4,370
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 117 $ 139 $ 94
Cash paid during the year for income taxes 5 5 66
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
15
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated.
RISKS AND OTHER IMPORTANT FACTORS
For the year ended December 31, 1997, the Company experienced declining
revenues and a net loss of $8.6 million due to declining sales of the Company's
mature products. The success of the Company is dependent on its ability to
generate adequate cash for operations and capital needs. Its ability to generate
adequate cash for such needs is in part dependent on its success in increasing
sales of its products. The Company has developed a plan to increase revenues
through sales of its Network Exchange product line; however, due to market
conditions and other factors beyond its control, there can be no assurance the
Company will be able to adequately increase product sales. Therefore, the
Company may have to generate additional cash through the sales of assets
including technologies or the sale of debt or equity securities. Although the
Company believes it has the ability to generate additional cash through such
sales, such sales may be dilutive and there can be no assurances that adequate
funds will be available or available on terms that are reasonable or acceptable
to the Company. If the Company is unable to generate adequate cash, there could
be a material and adverse effect on the business and financial condition of the
Company. Therefore, the Company has also developed a plan to implement certain
cost control measures to mitigate its liquidity risk.
Future operating results may be affected by a number of other factors
including the timing of new products in the market place, competitive pricing
pressures and economic conditions. As the market for the Company's products is
characterized by rapidly changing technology, the development and introduction
of competitive products may require a significant investment of financial
resources. Additionally, the Company relies on reseller channels which are not
under its control for a significant portion of its revenues, particularly in its
international regions. Also, while the Company has generally been able to
obtain adequate supplies of components to date, the interruption or termination
of the Company's current manufacturing relationships could have an adverse
effect on the Company's operating results.
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 held as available-for-sale, primarily US government obligations with
maturities between twelve and eighteen months. 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 component of stockholders' equity. For the year
ended December 31, 1997 there was no unrealized holding gain/loss on short-term
investments. For the year ended December 31, 1996 there was a loss of
approximately $7,000, which is reported as an adjustment to stockholders'
equity.
16
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and
cash equivalents, 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. Work in process and finished goods include direct
labor and manufacturing overhead.
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
GOODWILL
Goodwill represents the excess purchase price of subsidiary assets acquired
and is amortized over a seven-year period.
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 68% of total revenues in
1997, 74% of total revenues in 1996, and 79% of total revenues in 1995.
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.
17
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Interest and other, net, for the years ended December 31, 1997, 1996 and 1995 is
a foreign exchange gain of approximately $54,000, loss of approximately $86,000,
and gain of approximately $106,000, respectively.
EARNINGS PER SHARE
The Company implemented Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," at December 31, 1997. SFAS No. 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share and requires a reconciliation of the numerator and
denominator of basic earnings per share to fully diluted earnings per share.
The 1997, 1996 and 1995 earnings per share amounts have been restated in
accordance with SFAS No. 128; however, the implementation of SFAS No. 128 did
not have a material impact. The effect of options were not considered in the
calculation of diluted earnings per share as it would have been anti-dilutive;
as such, the numerator and denominator of basic earnings per share is the same
as for diluted earnings per share. Stock options outstanding at December 31,
1997 (see Note 4) could potentially have a dilutive effect on basic earnings per
share in the future. Earnings per share have been computed using the weighted-
average number of common shares outstanding.
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 future, undiscounted, net cash flows compared to the
carrying amount of the assets.
YEAR 2000
The Company is currently in the process of conducting a review of the
impact of Year 2000 on its information systems, as well as reviewing its impact
on relationships with key customers and vendors. Based on this preliminary
review, the information systems in place will be modified with the appropriate
upgrades provided by the original software vendors. Currently, the aggregate
costs associated with these upgrades have not been estimated.
18
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of a statement of financial position. The Company
plans to adopt SFAS No. 130 in the first quarter of 1998. The Company does not
expect SFAS No. 130 to have a significant impact on its financial statements.
SFAS No. 131 requires the Company to report financial and descriptive
information about its reportable operating segments. The Company will adopt
SFAS No. 131 at its year-end December 31, 1998. The Company is currently
evaluating the impact of SFAS No. 131 on its financial statements.
2. ACQUISITIONS:
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, of
which $185,000 was classified as goodwill. 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.
3. BALANCE SHEET DETAILS:
INVENTORIES
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Raw materials............................... $ 462 $ 326
Work in process............................. 772 869
Finished goods.............................. 6,801 6,922
-------- --------
Total inventories.......................... $ 8,035 $ 8,117
======== ========
</TABLE>
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Manufacturing and test equipment............ $ 13,512 $ 12,310
Office furniture and equipment.............. 6,708 6,367
Purchased software.......................... 2,765 2,643
-------- --------
Total property and equipment............... 22,985 21,320
Accumulated depreciation and amortization... (18,016) (15,297
-------- --------
Net........................................ $ 4,969 $ 6,023
======== ========
</TABLE>
19
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Deferred revenue................... $ 699 $ 870
Payroll and related compensation... 1,207 929
Other.............................. 1,392 3,020
------ ------
$3,298 $4,819
====== ======
</TABLE>
4. 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. SFAS No. 123,
"Accounting for Stock-Based Compensation" 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,
--------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C> <C>
Net loss As reported $ (8,577) $(5,968) $(3,795)
Pro forma $(10,377) $(6,807) $(4,031)
Net loss per share As reported $ (0.90) $ (0.63) $ (0.40)
Pro forma $ (1.08) $ (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.
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 1997, 1996 and 1995, respectively: no dividend yield; expected
volatility of 98 percent, 70 percent, and 70 percent; risk free interest rates
approximating 5.5 percent, 5 percent, and 5 percent; and an average expected
life of approximately 5 years. The per share weighted average fair value of the
options on the date of grant for shares issued in 1997, 1996 and 1995 was
approximately $2.30, $5.89 and $5.61, respectively. The weighted average
remaining contractual life for options outstanding as of December 31, 1997 is
8.1 years.
20
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 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. The expense approximated $172,000 in 1996 and $58,000 in
1995, with no expense in 1997. At December 31, 1997 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, January 1, 1995..... 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
1997:
Granted..................... 396,940 $ 1.250-$3.250 $2.30
Exercised................... (63,077) $ 1.680-$6.250 $2.18
Canceled.................... (594,786) $ 1.680-$7.875 $5.57
---------
Outstanding, December 31, 1997... 1,225,225 $ 1.250-$8.690 $2.93
=========
Exercisable, December 31, 1995... 187,774 $1.680-$17.250 $6.74
=========
Exercisable, December 31, 1996... 488,187 $1.680-$17.250 $5.74
=========
Exercisable, December 31, 1997... 479,177 $ 1.250-$8.690 $3.21
=========
</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
20,067 shares, 36,556 shares, and 43,848 shares to employees in 1997, 1996, and
1995, respectively.
21
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1997, 1996, and
1995, independent members of the Board of Directors were granted options to
purchase a total of 9,000, 27,000, and 9,000 shares, respectively, of common
stock at $2.19, $4.69, and $7.13 per share, respectively, under the Director
Option Plan. At December 31, 1997 a total of 54,000 shares were outstanding
under the Director Option Plan.
5. COMMITMENTS AND CONTINGENCIES:
LINE OF CREDIT
In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital. This
agreement provides for interest at a per annum rate equal to the lender's prime
rate plus 2%. The line of credit agreement includes a covenant that requires
the Company to maintain tangible net worth of at least $13.5 million. At
December 31, 1997, tangible net worth was approximately $15.7 million. The
facility, which matures on November 30, 1999, is collateralized by the Company's
assets. Borrowings under the line are based on qualified accounts receivable.
At December 31, 1997, the Company had $2.0 million available under the line of
credit. At December 31, 1997 and 1996, the Company had approximately $1,147,000
and $754,000, respectively, outstanding under its working capital line of credit
arrangements.
LONG-TERM DEBT
In conjunction with the working capital line of credit obtained in November
1997, the Company repaid its equipment note payable in full. At December 31,
1996, the Company had approximately $481,000 outstanding under the equipment
note payable.
Interest expense related to the above borrowings was approximately $117,000
and $125,000 for the years ended December 31, 1997 and 1996, respectively.
RESTRUCTURING CHARGE
In 1997, the Company recorded restructuring expense of approximately
$875,000, representing anticipated costs associated with an overall reduction in
work force and the discontinuance of its micro.pop product. At December 31,
1997, approximately $158,000 of the accrual remains. In 1996, the Company
implemented a restructuring plan and recorded a related charge of approximately
$900,000, representing anticipated costs associated with the consolidation and
relocation of facilities and a 15% reduction in personnel levels. These costs
included severance and related expenses for the reduction in work force and
amounts 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. At December 31, 1997,
approximately $101,000 of the accrual remains to cover anticipated losses from
the Herndon and Longmont lease commitments.
22
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LEASES
The Company has existing lease agreements for office space and equipment
expiring through April 2003. The lease for the Company's headquarters facility
in Herndon, Virginia, includes annual escalations of a fixed amount during each
year of the lease. Additionally, the Company leases approximately 8,600 square
feet in Longmont, Colorado, for the purpose of continuing certain product
development activities and approximately 8,000 square feet of space from its
main outsourcing manufacturer in Charlotte, North Carolina, for its operations
facilities. The Company was relieved of its lease commitment for 48,000 square
feet of space in Boulder, Colorado, in August 1997. The Company also leases
space for sales offices in the US, the UK, Germany, Italy and Hong Kong. The
Company recognizes rent expense, net of any sublease revenue, on a straight-line
basis. Net rent expense in 1997, 1996, and 1995 was approximately $1,643,000,
$2,475,000 and $2,501,000, respectively.
The Company subleases approximately 28,000 square feet in Herndon,
Virginia. Sublease revenue for 1997 and 1996 was approximately $223,000 and
$380,000, respectively, and is presented as a reduction of rent expense in the
accompanying consolidated statements of operations.
Future minimum lease payments for office space and equipment under
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDING NET
DECEMBER 31, PAYMENTS
- - -------------------------------- --------
<S> <C>
1998.................. $1,688
1999.................. 544
2000.................. 76
2001.................. 74
2002 and thereafter... 85
------
$2,467
======
</TABLE>
These payments are net of future sublease revenue of approximately $371,000
in 1998.
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 1997 and 1996, the company contributed approximately $86,000 and
$44,000, respectively, to the 401(k) plan.
23
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 monies 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.
Other than the matters described above, the Company is involved in other
minor litigation and 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.
6. REVENUES:
SIGNIFICANT CUSTOMERS
Customers that accounted for greater than 10% of total revenues in 1997,
1996, and 1995 are described below (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ -------- -------
<S> <C> <C> <C>
Distributor 1... $3,640 $5,837 *
End User 1...... * * $5,592
</TABLE>
* Revenue accounted for less than 10% of total revenues for the period.
PRODUCT REVENUES
The Company's product revenues for 1997, 1996 and 1995 were generated in
the following geographic regions (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Domestic......................... $ 7,884 $11,554 $19,822
Europe, Middle East and Africa... 9,308 11,531 10,002
Pacific Rim, Latin America and
South America............... 5,282 9,349 8,988
------- ------- -------
Total............................ $22,474 $32,434 $38,812
======= ======= =======
</TABLE>
Included in domestic product revenues are sales through systems integrators
and distributors to the Federal Government of approximately $627,000,
$2,164,000, and $5,873,000 in 1997, 1996 and 1995 respectively.
24
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES:
The components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- -------------- ------------
<S> <C> <C> <C>
Current provision:
Federal.................. $(2,105) $(1, 534) $(1,251)
State.................... (256) (185) (135)
Increase in valuation
allowance............... 2,361 1,719 1,416
Foreign -- 66 85
Deferred (benefit)
provision:
Federal.................. -- -- --
State.................... -- -- --
------- -------- -------
$ -- $ 66 $ 115
======= ======== =======
The provision for income taxes results in effective rates that differ from the Federal
statutory rate as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------- -------- -------
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....... -- -- --
Losses without current
tax benefit............. 38.3 38.3 39.1
Foreign income taxes..... -- 1.1 2.3
------- -------- -------
Effective rate........... -- % 1.1 % 3.1 %
======= ======== =======
</TABLE>
As of December 31, 1997, the Company had net operating losses of
approximately $34.2 million available for carryforward to offset future income
for Federal income tax purposes. The Company has additional net operating loss
carryforwards of $2.7 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 2012 as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.................. $ 229,587
1999.................. 229,587
2000.................. 229,587
2001.................. 229,587
2002.................. 1,798,680
2003 and thereafter... 31,514,002
-----------
$34,231,030
===========
</TABLE>
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 $2.1 million 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.
25
<PAGE>
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Federal regular tax operating
loss carryforwards............... $ 11,639 $ 9,933
State regular tax operating
loss carryforwards............... 1,472 1,220
Research and development tax
credit carryforwards............. 2,048 2,029
Basis difference attributable to
Telcom acquisition.............. (1,067) (1,182)
Other.............................. 3,660 2,467
-------- --------
$ 17,752 $ 14,467
Valuation allowance................ (17,752) (14,467)
-------- --------
Deferred tax asset................. $ -- $ --
======== ========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, position and business experience of
the executive officers and directors of Netrix.
<TABLE>
<CAPTION>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
<S> <C>
Lynn C. Chapman, 44................... President, Chief Executive Officer and Director. 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 and a director of the
Company in February 1997. Prior to joining Netrix, Mr. Chapman served in
various management positions at Data General Corporation from 1989 to November
1992.
Richard D. Rose, 43................... Executive Vice President -- Finance and Chief Financial Officer. Prior to
joining the Company in October 1997, Mr. Rose was with Penril DataComm
Networks, Inc., from 1988 until 1997, where he served in various positions,
lastly as CFO.
G. Brent Wilson, 41................... Executive Vice President -- Engineering Services. Mr. Wilson joined the
Company in December 1990 and was named Vice President -- Customer Service in
January 1996 and Vice President -- Engineering Services in April 1997. 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.
V. Orville Wright, 77................. Director. Mr. Wright has been a Director of the Company since 1991. From
1975 to 1985, he served as President and Chief Operating Officer of MCI
Communications Corporation ("MCI") and from 1987 to 1991 as Vice Chairman and
Co-Chief Executive Officer of MCI. From 1985 to 1987, Mr. Wright served as
Vice Chairman of MCI. Mr. Wright has also held senior executive positions at
IBM Corporation, RCA Corporation, Amdahl Corporation and Xerox Corporation.
Mr. Wright also serves as a director of Calpine Corporation, and independent
power producing company.
William T. Rooker, Jr., 64............ Director. Mr. Rooker has been a Director of the Company since July 1994. Mr.
Rooker retired from IBM Corporation ("IBM") at the end of 1992 after 37 years
of service and has since served as a private consultant. During his tenure at
IBM he held a variety of marketing and executive management positions. From
1974 to 1990 he was Vice President and General Manager of Federal Marketing
Programs at IBM, and from 1990 to 1992 he was Corporate Director of Government
Relations at IBM.
Arthur J. Marks, 52................... Director. Mr. Marks has been a Director of the Company since 1987. He has
been a General Partner of New Enterprise Associates, a venture capital firm,
since 1984. Mr. Marks serves as director of Progress Software Corporation, an
application development software company, Platinum Software Corporation, a
marketing and development company for LAN-based and client server software,
and AMISYS, a managed care software company.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
John F. Burton, 45.................... Director. Mr. Burton has been a Director of the Company since 1995. Since
March 1997, Mr. Burton has been managing director of Updata Group, an
investment banking firm. From October 1996 to March 1997, Mr. Burton was
managing director of Burton Technology Partners, a technology investment and
consulting company. From September 1995 to September 1996, Mr. Burton was the
President and Chief Executive Officer of NatSystems Inc., a client server
software company. From February to August 1995, Mr. Burton was an independent
consultant. Mr. Burton was employed by Legent Corporation, a systems
management software company, from 1989 through 1995, as President and
Director, and from 1992 through 1995 as Chief Executive Officer. He is
currently a director of Banyan Systems Corporation, a networking software
company, Mapinfo Corporation, a desktop mapping software company, and Axent
Technologies Inc., a network security company.
</TABLE>
DELINQUENT FILINGS
The Company notes that one of its officers, Lynn C. Chapman, did not timely
report transactions in the Company's Common Stock that occurred in 1997 as
required by the rules under Section 16 of the Securities Exchange Act of 1934.
Mr. Chapman subsequently reported the transactions.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
the last three fiscal years of the Company's Chief Executive Officer and the
Company's other most highly compensated executive officers (together, the "Named
Executive Officers") for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------- ----------
Name/Position Year Salary($) Bonus($) Other(1) Options(#)
- - ---------------------------------- ---- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Lynn C. Chapman (2)............... 1995 141,928 11,355 -- 25,000
President and Chief 1996 140,578 -- 1,125 75,000
Executive Officer 1997 156,546 21,750 2,375 29,000
Richard D. Rose (3)............... 1995 -- -- -- --
Vice President, Finance and 1996 -- -- -- --
Chief Financial Officer 1997 120,000 4,000 -- 45,000
J. Gerard Cregan (4).............. 1995 147,744 11,355 -- 25,000
Vice President, Operations 1996 143,948 -- -- 50,000
1997 115,946 9,063 -- 9,000
G. Brent Wilson................... 1995 96,796 -- -- 20,000
Vice President, Engineering 1996 109,701 -- -- 25,000
Services 1997 114,815 14,500 -- 12,000
Charles W. Stein (5).............. 1995 203,542 22,710 -- 60,000
1996 204,789 -- 1,125 150,000
1997 225,592 -- 693 --
</TABLE>
- - ------------
(1) Represents matching 401(k) plan contributions by the Company.
(2) Mr. Chapman was made President and Chief Executive Officer of the Company in
February 1997.
(3) Mr. Rose joined the Company as Chief Financial Officer in October 1997.
Salary amount represents annualized compensation.
(4) Mr. Cregan resigned as a Vice President of the Company in January 1998.
(5) Mr. Stein resigned as President and Chief Executive Officer of the Company
and was elected to serve as Chairman of the Board of Directors of the
Company in January 1997. He resigned as Chairman of the Board of Directors
of the Company in March 1997.
29
<PAGE>
OPTION GRANTS
The following table summarizes option grants during 1997 to the Named
Executive Officers:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
GRANTED TO MARKET STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE PRICE FOR OPTION TERM (E)
GRANTED IN FISCAL PRICE ($/SHARE) EXPIRATION ---------------------------
NAME (#)(A) YEAR ($/SHARE) (D) DATE 0%($) 5%($) 10%($)
- - ------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lynn C. Chapman 29,000(B) 7.3% $2.33 $2.33 3/12/07 - $42,494 $107,689
Richard D. Rose 45,000(C) 11.3 1.63 1.63 11/20/07 - 46,129 116,901
J. Gerard Cregan 9,000(B) 2.3 2.33 2.33 3/12/07 - 13,188 33,421
G. Brent Wilson 12,000(B) 3.0 2.33 2.33 3/12/07 - 17,584 44,561
Charles W. Stein -- -- -- -- -- - -- --
</TABLE>
_____________
(A) Under the terms of the Company's incentive stock option plan, the Board of
Directors retains descretion, subject to plan limits, to modify the terms of
the outstanding options and to reprice the options. The options were
granted for a term of 10 years, subject to earlier termination in the event
of termination of employment. The options were granted with tandem tax
withholding rights.
(B) Identified options were granted March 11, 1997, and become exercisable in
equal monthly installments on the 11th day of each calendar month following
the date of grant, with full vesting occurring on the fourth anniversary
date.
(C) Identified options were granted November 19, 1997, and become exercisable in
equal monthly installments on the 19th day of each calendar month following
the date of grant, with full vesting occurring on the fourth anniversary
date.
(D) Equals fair market value of Common Stock on the date of grant.
(E) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 0%, 5% and 10%
compounded annually from the date of grant to their expiration date. Actual
gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock and the date on which the options are
exercised.
OPTION EXERCISES AND YEAR-END VALUES
The following table summarizes option exercises during 1997 by the Named
Executive Officers and the value of the options held by such persons at the end
of 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(A)
EXERCISE REALIZED ----------------------------- -----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Lynn C. Chapman -- -- 66,996 74,004 -- --
Richard D. Rose -- -- 750 44,250 -- --
J. Gerard Cregan -- -- 65,425 42,658 -- --
G. Brent Wilson -- -- 31,247 36,779 -- --
Charles W. Stein 44,048 $(13,743) 91,327 101,625 -- --
</TABLE>
_____________
(A) Value is based on the closing sales price of the Company's Common Stock on
December 31, 1997 ($1.06), the last trading day of 1997, less the applicable
option exercise price.
30
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 13, 1998,
with respect to the beneficial ownership of Common Stock by (I) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock, (ii) each Director of the Company and nominee for Director,
(iii) each executive officer of the Company named in the Summary Compensation
Table set forth under the caption "Executive Compensation" below and (iv) all
Directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
BENEFICIAL OWNER OWNED(1) OUTSTANDING (2)
- - --------------------------------------------------------------------- ------------- --------------
<S> <C> <C>
Kopp Investment Advisors(3).......................................... 606,813 6.3
7701 France Avenue South, Suite 500
Edina, MN 55435
New Enterprise Associates IV, Limited Partnership(4)................. 582,009 6.0
1119 St. Paul Street
Baltimore, MD 21202
Dimensional Fund Advisors, Inc.(5)................................... 548,600 5.7
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Lynn C. Chapman(6)................................................... 77,163 *
Richard D. Rose(7)................................................... 13,750 *
J. Gerard Cregan(8).................................................. 37,035 *
G. Brent Wilson(9)................................................... 36,247 *
Charles W. Stein(10)................................................. 22,233 *
V. Orville Wright(11)................................................ 26,696 *
Arthur J. Marks(12).................................................. 803,039 8.3
William T. Rooker, Jr.(13)........................................... 9,000 *
John F. Burton(14)................................................... 6,030 *
All Directors and executive officers as a group (9 persons)(15)...... 982,784 10.2
</TABLE>
_____________
* Less than 1%
(1) The number of shares of Common Stock beneficially owned by each person is
determined under the rules of the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares of Common Stock which the individual
has the right to acquire within 60 days after March 13, 1998 through the
exercise of any stock option or other right. The inclusion herein of any
shares of Common Stock deemed beneficially owned does not constitute an
admission of beneficial ownership of those shares. Unless otherwise
indicated, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them.
31
<PAGE>
(2) Number of shares deemed outstanding includes 9,643,240 shares outstanding
as of March 13, 1998, plus any shares subject to options held by the person
or entity in question that are currently exercisable or exercisable within
60 days after March 13, 1998.
(3) This information is based on a Schedule 13G dated February 12, 1998.
(4) This information is based on a Schedule 13G dated February 10, 1998.
(5) This information is based on a Schedule 13G dated February 9, 1998.
(6) Includes 77,163 shares issuable upon exercise of outstanding stock options
exercisable within 60 days after March 13, 1998.
(7) Includes 3,750 shares issuable upon exercise of outstanding stock options
exercisable within 60 days after March 13, 1998.
(8) Mr. Cregan resigned as a Vice President of the Company in January 1998.
(9) Includes 36,247 shares issuable upon exercise of outstanding stock options
exercisable within 60 days after March 13, 1998.
(10) Mr. Stein resigned as President and Chief Executive Officer of the Company
and was elected to serve as Chairman of the Board of Directors of the
Company in January 1997. He resigned as Chairman of the Board of Directors
of the Company in March 1997.
(11) Includes 1,000 shares held by Mr. Wright's wife, as to which Mr. Wright
disclaims beneficial ownership. Also includes 6,030 shares issuable upon
exercise of outstanding stock options exercisable within 60 days after
March 13, 1998.
(12) Includes 582,009 shares held by New Enterprise Associates IV, Limited
Partnership and 200,000 shares held by New Enterprise Associates V, Limited
Partnership. Mr. Marks is a general partner of the general partners of New
Enterprise Associates IV, LP and New Enterprise Associates V, LAP,
respectively. Mr. Marks disclaims beneficial ownership of such shares.
Also includes 6,030 shares issuable upon exercise of outstanding stock
options exercisable within 60 days after March 13, 1998.
(13) Includes 9,000 shares issuable upon exercise of outstanding stock options
exercisable within 60 days after March 13, 1998.
(14) Includes 6,030 shares issuable upon exercise of outstanding stock options
exercisable within 60 days after March 13, 1998.
(15) Includes shares as indicated in footnotes (6) through (14) above.
32
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The graph below compares cumulative total stockholder return on the
Company's Common Stock during the period from September 21, 1992 (the date on
which the Company's Common Stock was first registered under the Exchange Act)
through December 31, 1997 with the cumulative total return over the same period
of (I) the Russell 2000 Index and (ii) a peer group of publicly-traded
companies* selected by the Company for purposes of this comparison (the "Peer
Group"). This graph assumes the investment of $100 at the close of trading on
September 21, 1992 in the Company's common Stock, the Russell 2000 Index and the
Peer Group and assumes reinvestment of dividends. Measurement points are at
September 21, 1992 and December 31, 1993, 1994, 1995, 1996 and 1997.
COMPARATIVE FIVE-YEAR TOTAL RETURNS*
NETRIX CORPORATION, RUSSELL 2000, PEER GROUP
(PERFORMANCE RESULTS THROUGH 12/31/97
PERFORMANCE GRAPH APPEARS HERE
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
33
<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
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page
------------------------------------------ ----
<S> <C>
Report of Independent Public Accountants 11
Consolidated Statements of Operations 12
Consolidated Balance Sheets 13
Consolidated Statements of Stockholders' Equity 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated Financial Statements 16
(2) FINANCIAL STATEMENT SCHEDULES
<CAPTION>
Index to Consolidated Financial Statement Supplemental Schedule PAGE
--------------------------------------------------------------- ----
<S> <C>
Report of Independent Public Accountants on Supplemental Schedule... 37
For the three years in the period ended December 31, 1997:
Schedule II - Consolidated Valuation and Qualifying Accounts... 38
</TABLE>
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.
34
<PAGE>
(3) EXHIBITS
<TABLE>
<CAPTION>
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 Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (the "1995 10-K").
10.2* --1992 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit
10.2 of the 1995 10-K).
10.3* --1992 Directors Stock Option Plan of the Registrant (incorporated by reference to exhibit
10.3 of the 1995 10-K).
10.4* --1996 Stock Option Plan of the Registrant (incorporated by reference to exhibit 10.4 of the
1995 10-K).
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 --Loan Agreement dated, November 18, 1997 between the Registrant and Coast Business Credit.
#21 --Subsidiaries of the Registrant.
#23.1 --Consent of Arthur Andersen LLP
</TABLE>
- - --------------
# Filed herewith
* This exhibit is a compensatory plan or arrangement in which executive
officers or directors of the Registrant participate.
(b) REPORTS ON FORM 8-K
None
35
<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 26, 1998 By: /s/ Lynn C. Chapman
--------------------------------------
LYNN C. CHAPMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<TABLE>
<CAPTION>
Signature Title Date
- - ----------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
/s/ Lynn C. Chapman President, Chief Executive March 26, 1997
--------------------------- Officer and Director
LYNN C. CHAPMAN (Principal Executive Officer)
/s/ Richard D. Rose Vice President-Finance and March 26, 1997
--------------------------- Chief Financial Officer
RICHARD D. ROSE (Principal Financial Officer)
/s/ Arthur J. Marks Director March 26, 1997
---------------------------
ARTHUR J. MARKS
/s/ William T. Rooker Director March 26, 1997
---------------------------
WILLIAM T. ROOKER
/s/ V. Orville Wright Director March 26, 1997
---------------------------
V. ORVILLE WRIGHT
/s/ John Burton Director March 26, 1997
---------------------------
JOHN BURTON
</TABLE>
36
<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 27, 1998. 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 38 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 27, 1998
37
<PAGE>
SCHEDULE II
NETRIX CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- - ----------- ---------- ---------- ----- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
Year Ended December 31, 1997:
Allowance for doubtful
accounts (deducted from
accounts receivable)...... $ 1,380 150 -- 25 $1,505
</TABLE>
------------
*Amounts related to Republic Telcom purchase accounting.
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------- ---------------------------------------------------------------
<S> <C>
10.8 --Loan Agreement between Registrant and Coast Business Credit.
21 --Subsidiaries of the Registrant.
23.1 --Consent of Arthur Andersen LLP
</TABLE>
39
<PAGE>
Exhibit 10.8
- - --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
by and between
NETRIX CORPORATION
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
Dated as of November 18, 1997
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
1. DEFINITIONS 1
Account Debtor..................................................... 1
Affiliate.......................................................... 1
Audit.............................................................. 1
Borrower........................................................... 1
Borrower's Address................................................. 1
Business Day....................................................... 1
Change of Control.................................................. 1
Closing Date....................................................... 1
Coast.............................................................. 1
Code............................................................... 1
Collateral......................................................... 2
Credit Limit....................................................... 2
Default............................................................ 2
Deposit Account.................................................... 2
Dollars or $....................................................... 2
Early Termination Fee.............................................. 2
Eligible Foreign Receivables....................................... 2
Eligible Receivables............................................... 2
Equipment.......................................................... 3
Equipment Acquisition Loans........................................ 3
Event of Default................................................... 3
GAAP............................................................... 3
General Intangibles................................................ 3
Inventory.......................................................... 3
Investment Property................................................ 4
Loan Documents..................................................... 4
Loans.............................................................. 4
Material Adverse Effect............................................ 4
Maturity Date...................................................... 4
Maximum Dollar Amount.............................................. 4
Minimum Monthly Interest........................................... 4
Obligations........................................................ 4
Permitted Liens.................................................... 4
Person............................................................. 5
Prime Rate......................................................... 5
Receivable Loans................................................... 5
Receivables........................................................ 5
Renewal Date....................................................... 5
Renewal Fee........................................................ 5
Solvent............................................................ 5
Tangible Net Worth................................................. 5
Term Loan.......................................................... 5
Other Terms........................................................ 5
2. CREDIT FACILITIES.................................................. 6
2.1 Loans........................................................ 6
3. INTEREST AND FEES.................................................. 6
3.1 Interest..................................................... 6
3.2 Fees......................................................... 6
4. SECURITY INTEREST.................................................. 6
5. CONDITIONS PRECEDENT............................................... 6
5.1 Status of Accounts at Closing................................ 6
5.2 Minimum Availability......................................... 6
5.3 Landlord Waiver.............................................. 6
5.4 Intentionally Deleted........................................ 6
5.5 Executed Agreement........................................... 6
5.6 Opinion of Borrower's Counsel................................ 7
5.7 Priority of Coast's Liens.................................... 7
5.8 Insurance.................................................... 7
5.9 Borrower's Existence......................................... 7
5.10 Organizational Documents..................................... 7
5.11 Taxes........................................................ 7
5.12 Due Diligence................................................ 7
5.13 Other Documents and Agreements............................... 7
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.......... 7
6.1 Existence and Authority...................................... 7
6.2 Name; Trade Names and Styles................................. 7
6.3 Place of Business; Location of Collateral.................... 8
6.4 Title to Collateral; Permitted Liens......................... 8
6.5 Maintenance of Collateral.................................... 8
6.6 Books and Records............................................ 8
6.7 Financial Condition, Statements and Reports.................. 8
6.8 Tax Returns and Payments; Pension Contributions.............. 8
6.9 Compliance with Law.......................................... 9
6.10 Litigation................................................... 9
6.11 Use of Proceeds.............................................. 9
7. RECEIVABLES........................................................ 9
7.1 Representations Relating to Receivables...................... 9
7.2 Representations Relating to Documents and Legal Compliance... 9
7.3 Schedules and Documents relating to Receivables.............. 9
7.4 Collection of Receivables.................................... 10
7.5 Remittance of Proceeds....................................... 10
7.6 Disputes..................................................... 10
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
(CONTINUED)
PAGE
----
7.7 Returns...................................................... 10
7.8 Verification................................................. 10
7.9 No Liability................................................. 10
8. ADDITIONAL DUTIES OF THE BORROWER.................................. 11
8.1 Financial and Other Covenants................................ 11
8.2 Insurance.................................................... 11
8.3 Reports...................................................... 11
8.4 Access to Collateral, Books and Records...................... 11
8.5 Negative Covenants........................................... 11
8.6 Litigation Cooperation....................................... 12
8.7 Further Assurances........................................... 12
9. TERM............................................................... 12
9.1 Maturity Date................................................ 12
9.2 Early Termination............................................ 12
9.3 Payment of Obligations....................................... 12
10. EVENTS OF DEFAULT AND REMEDIES..................................... 13
10.1 Events of Default........................................... 13
10.2 Remedies.................................................... 14
10.3 Standards for Determining Commercial Reasonableness......... 15
10.4 Power of Attorney........................................... 15
10.5 Application of Proceeds..................................... 17
10.6 Remedies Cumulative......................................... 17
11. GENERAL PROVISIONS................................................. 17
11.1 Interest Computation........................................ 17
11.2 Application of Payments..................................... 17
11.3 Charges to Accounts......................................... 17
11.4 Monthly Accountings......................................... 17
11.5 Notices..................................................... 18
11.6 Severability................................................ 18
11.7 Integration................................................. 18
11.8 Waivers..................................................... 18
11.9 No Liability for Ordinary Negligence........................ 18
11.10 Amendment................................................... 18
11.11 Time of Essence............................................. 18
11.12 Attorneys Fees, Costs and Charges........................... 18
11.13 Benefit of Agreement........................................ 19
11.14 Publicity................................................... 19
11.15 Paragraph Headings; Construction............................ 19
11.16 Governing Law; Jurisdiction; Venue.......................... 19
11.17 Mutual Waiver of Jury Trial................................. 19
-ii-
<PAGE>
- - --------------------------------------------------------------------------------
COAST
LOAN AND SECURITY AGREEMENT
Borrower: Netrix Corporation
Address: 13595 Dulles Technology Drive
Herndon, Virginia 22071
Date: November 18, 1997
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower named above (the "Borrower"), whose chief
executive office is located at the above address ("Borrower's Address"). The
Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to
be a part of this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section 1
below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General Intangible.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records and
-----
the Collateral.
"Borrower" has the meaning set forth in the introduction to this Agreement.
--------
"Borrower's Address" has the meaning set forth in the introduction to this
------------------
Agreement.
"Business Day" means a day on which Coast is open for business.
------------
"Change of Control" shall be deemed to have occurred at such time as a
-----------------
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty percent
(20%) of the total voting power of all classes of stock or other ownership
interests then outstanding of any Borrower normally entitled to vote in the
election of directors or analogous governing body.
"Closing Date" date of the initial funding under this Agreement.
------------
"Coast" has the meaning set forth in the introduction to this Agreement.
-----
"Code" means the Uniform Commercial Code as adopted and in effect in the
----
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
----------
1
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- - --------------------------------------------------------------------------------
"Credit Limit" means the maximum amount of Loans that Coast may make to
------------
Borrower pursuant to the amounts and percentages shown on the Schedule.
"Default" means any event which with notice or passage of time or both,
-------
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Dollars or $" means United States dollars.
------- -
"Early Termination Fee" means the amount set forth on the Schedule that
---------------------
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"Eligible Foreign Receivables" means Receivables arising from Borrower's
----------------------------
customers located outside the United States which Coast otherwise approves for
borrowing in its sole and absolute discretion. Without limiting the foregoing,
Coast will consider the following in determining the eligibility of such
receivables: (i) whether the Borrower's goods are shipped backed by an
irrevocable letter of credit satisfactory to Coast (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to Coast and is
directly drawable by Coast, or (ii) whether the Borrower's customer is a large
or rated company having a verifiable credit history, or (iii) whether Borrower's
customer is a foreign subsidiary of a customer of Borrower that is a company
that was formed and has its primary place of business within the United States,
or (iv) whether Borrower's customer is a large foreign corporation, or (v)
whether Borrower's customer is a foreign company with a Dun & Bradstreet rating,
or (vi) whether Borrower's goods are shipped to a company that has credit
insurance acceptable to Coast in its discretion.
"Eligible Receivables" means Receivables and Eligible Foreign Receivables
--------------------
arising in the ordinary course of Borrower's business from the sale of goods or
rendition of services, which Coast, in its sole judgment, shall deem eligible
for borrowing, based on such considerations as Coast may from time to time deem
appropriate. Eligible Receivables shall not include the following:
(a) Receivables that the Account Debtor has failed to pay within 90
days of invoice date or Accounts with selling terms of more than 30 days (up to
net 60 for Eligible Foreign Receivables), provided that the Republic Telecom
(ManMan) receivables shall be eligible up to 60 days from invoice date (provided
further that Coast may establish reserves equal to the gross amount of such
receivables or adjust the eligibility based on an audit), which eligibility may
be increased by Coast to 90 days or made ineligible in its sole discretion after
Coast conducts its first quarterly audit);
(b) Receivables owed by an Account Debtor or its Affiliates where
thirty five percent (35%) or more of all Receivables owed by that Account Debtor
(or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(d) Receivables with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the Account Debtor may be conditional;
(e) Receivables, other than Eligible Foreign Receivables, that are not
payable in Dollars or with respect to which the Account Debtor: (i) does not
maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof;
(f) Receivables with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Coast, with the Assignment of Claims Act, 31
U.S.C. 3727), or (ii) any State of the United States (exclusive, however, of
Receivables owed by any State that does not have a statutory counterpart to the
Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a creditor
of Borrower, has or has asserted a right of setoff, has
2
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- - --------------------------------------------------------------------------------
disputed its liability, or has made any claim with respect to the Receivables;
(h) Receivables with respect to an Account Debtor whose total
obligations owing to Borrower exceed twenty five percent (25%) of all Eligible
Receivables, to the extent of the obligations owing by such Account Debtor in
excess of such percentage. In order to exceed the above referenced limits,
Borrower must obtain the prior written approval of Coast, which approval shall
be in the reasonable business judgment of Coast on an Account Debtor by Account
Debtor basis;
(i) Receivables with respect to which the Account Debtor is subject to
any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation proceeding, or becomes insolvent, or goes out of
business;
(j) Receivables the collection of which Coast, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Receivables with respect to which the goods giving rise to such
Receivable have not been shipped and billed to the Account Debtor, the services
giving rise to such Receivable have not been performed and accepted by the
Account Debtor, or the Receivable otherwise does not represent a final sale;
(l) Receivables with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Receivables that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract for goods or services.
"Equipment" means all of Borrower's present and hereafter acquired
---------
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Equipment Acquisition Loans" means the Loans described in Section [2(b)]
---------------------------
of the Schedule.
"Event of Default" means any of the events set forth in Section 10.1 of
----------------
this Agreement.
"GAAP" means generally accepted accounting principles as in effect from
----
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower, whether
-------------------
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
3
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- - --------------------------------------------------------------------------------
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit, and
including without limitation all farm products), and all materials and supplies
of every kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"Investment Property" has the meaning set forth in Section 9115 of the Code
-------------------
as in effect as of the date hereof.
"Loan Documents" means this Agreement, the agreements and documents listed
--------------
on Section 5 of the Schedule, and any other agreement, instrument or document
executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
-----
"Material Adverse Effect" means a material adverse effect on (i) the
-----------------------
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
-------------
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
---------------------
Schedule.
"Minimum Monthly Interest" has the meaning set forth in Section 3 of the
------------------------
Schedule.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following:
---------------
(a) purchase money security interests in specific items of Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing by
Coast, in Coast's discretion, reasonably exercised;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or other
similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (a) or (b) above, provided that any extension, renewal or replacement
lien is limited to the property encumbered by the existing lien and the
principal amount of the
4
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- - --------------------------------------------------------------------------------
indebtedness being extended, renewed or refinanced does not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, general partnership,
------
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
----------
of the Bank of America NT & SA whether or not that rate is the lowest interest
rate charged by said bank. If the Prime Rate, as defined, is unavailable,
"Prime Rate" shall mean the highest of the prime rates published in the Wall
Street Journal on the first business day of the applicable month, as the base
rate on corporate loans at large U.S. money center commercial banks.
"Receivable Loans" means the Loans described in Section 2(a) of the
----------------
Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
------------
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal of
-----------
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"Solvent" means, with respect to any Person on a particular date, that on
-------
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Tangible Net Worth" means consolidated Owner's equity plus subordinated
------------------
debt otherwise permitted hereunder, less, goodwill, patents, trademarks,
----
copyrights, franchises, formulas, leasehold interests, leasehold improvements,
non-compete agreements, engineering plans, deferred tax benefits, organization
costs, and any other intangible assets of Borrower that would be treated as
tangible assets on Borrower's balance sheet prepared in accordance with GAAP.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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"Term Loan" means the Loans described in Section 2(c) of the Schedule.
---------
"Other Terms" All accounting terms used in this Agreement, unless
-----------
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
and in percentages to be determined by Coast in its good faith discretion, up to
the Credit Limit, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its
advance rates based upon Eligible Receivables or Eligible Inventory without
declaring a Default or an Event of Default if it determines that there has
occurred a Material Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be
outstanding from time to time, Borrower shall pay Coast Minimum Monthly Interest
during the term of this Agreement with respect to the Receivable Loans and the
Inventory Loans in the amount set forth on the Schedule.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Coast and are
deemed fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the satisfaction,
in the sole discretion of Coast, at or prior to the first advance of funds
hereunder, of each, every and all of the following conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and
unpaid ninety (90) days past its due date except for such accounts payable being
contested in good faith in appropriate proceedings and for which adequate
reserves have been provided or as otherwise permitted by Coast in its
discretion.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability
immediately following the initial funding in the amount set forth on the
Schedule.
5.3 INTENTIONALLY DELETED.
5.4 INTENTIONALLY DELETED.
5.5 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.6 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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5.7 PRIORITY OF COAST'S LIENS. Coast shall have received the results of
"of record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
5.8 INSURANCE. Coast shall have received copies of the insurance binders
or certificates evidencing Borrower's compliance with Section 8.2 hereof,
including lender's loss payee endorsements.
5.9 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's
ARTICLES OR CERTIFICATE OF INCORPORATION and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the Closing
Date, and Coast shall have received Certificates of Foreign Qualification for
Borrower from the Secretary of State of each state wherein the failure to be so
qualified could have a Material Adverse Effect.
5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's BY-LAWS and all amendments thereto, and Coast shall have received
copies of the resolutions of the BOARD OF DIRECTORS of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the SECRETARY or other acceptable officer of
Borrower as of the Closing Date.
5.11 TAXES. Coast shall have received evidence from Borrower that Borrower
has complied with all tax withholding and Internal Revenue Service regulations,
in form and substance satisfactory to Coast in its sole and absolute discretion.
5.12 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.13 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other
agreements, instruments and documents as Coast may require in connection with
the transactions contemplated hereby, all in form and substance satisfactory to
Coast in Coast's sole and absolute discretion, and in form for filing in the
appropriate filing office, including, but not limited to, those documents listed
in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance
by Borrower of this Agreement, and all other documents contemplated hereby (a)
have been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower's
ARTICLES OR CERTIFICATE OF INCORPORATION, or Borrower's BY-LAWS, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and
will in the future comply, with all laws relating to the conduct of business
under a fictitious business name.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule. Borrower will give Coast at least thirty
(30) days' prior written notice before opening any additional place of business,
changing its chief executive office, or moving any of the Collateral to a
location other than Borrower's Address or one of the locations set forth on the
Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property
in such a manner, or with such intent, as to become a fixture. Borrower is not
and will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any
Collateral is located upon premises in which any third party has an interest
(whether as owner, mortgagee, beneficiary under a deed of trust, lien or
otherwise), Borrower shall, whenever requested by Coast, use its best efforts to
cause such third party to execute and deliver to Coast, in form acceptable to
Coast, such waivers and subordinations as Coast shall specify, so as to ensure
that Coast's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and
effect, and will comply with all the terms of, any lease of real property where
any of the Collateral now or in the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, normal wear and tear excepted, and Borrower will not
use the Collateral for any unlawful purpose. Borrower will immediately advise
Coast in writing of any material loss or damage to the Collateral in excess of
$10,000.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with GAAP (except, in the case of unaudited financial statements,
for the absence of footnotes and subject to normal year-end adjustments) and now
and in the future will fairly reflect, in all material respects, the financial
condition of Borrower, at the times and for the periods therein stated. Between
the last date covered by any such statement provided to Coast and the date
hereof, there has been no Material Adverse Effect. Borrower is now and will
continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof,
Borrower is unaware of any claims or adjustments proposed for any of Borrower's
prior tax years which could result in additional taxes becoming due and payable
by Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Benefit Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower,
provided that Borrower may handle its payroll and payment of payroll taxes in
house without a payroll service so long as (i) no Event of Default has occurred
and is continuing, (ii) Borrower remits monthly (or more often if requested by
Coast) written evidence reasonably satisfactory to Coast of timely payment of
all payroll taxes and deposits and (iii) no event or condition has caused a
Material Adverse Effect.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving an amount set forth on the Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms (unless otherwise mutually agreed by Coast and Borrower
in writing); provided, however, that Borrower's failure to execute and deliver
the same shall not affect or limit Coast's security interest and other rights in
all of Borrower's Receivables, nor shall Coast's failure to advance or lend
against a specific Receivable affect or limit Coast's security interest and
other rights therein. Loan requests received after 10:30 A.M. Los Angeles,
California time, will not be considered by Coast until the next Business Day.
Together with each such schedule, or later if requested by Coast, Borrower shall
furnish Coast with copies (or, at Coast's request, originals provided that in
the normal course Coast shall not request originals but reserves the right to do
so for specific transactions) of all contracts, orders, invoices, and other
similar documents, and all original shipping instructions, delivery receipts,
bills of lading, and other evidence of delivery, for any goods the sale or
disposition of which gave rise to
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such Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Coast an aged accounts receivable trial balance
in such form and at such intervals as Coast shall request. In addition, Borrower
shall deliver to Coast the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Receivables, upon receipt thereof and in the same form as received, with all
necessary endorsements, all of which shall be with recourse. Borrower shall also
provide Coast with copies of all credit memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred and is
continuing. Borrower shall hold all payments on, and proceeds of, Receivables in
trust for Coast, and Borrower shall deliver all such payments and proceeds to
Coast within one (1) Business Day after receipt by Borrower, in their original
form, duly endorsed to Coast, to be applied to the Obligations in such order as
Coast shall determine. Coast may, in its discretion, require that all proceeds
of Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Coast may specify, pursuant to a blocked account agreement
in such form as Coast may specify. Coast or its designee may, at any time,
notify Account Debtors that Coast has been granted a security interest in the
Receivables. [frequency].
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of Borrower's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Coast. Nothing in
this Section limits the restrictions on disposition of Collateral set forth
elsewhere in this Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (a) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence of an
Event of Default, settle or adjust disputes or claims directly with Account
Debtors for amounts and upon terms which Coast considers advisable in its
reasonable credit judgment and, in all cases, Coast shall credit Borrower's Loan
account with only the net amounts received by Coast in payment of any
Receivables.
7.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (a) hold the returned Inventory in trust for
Coast, (b) segregate all returned Inventory from all of Borrower's other
property, (c) conspicuously label the returned Inventory as subject to Coast's
security interest, and (d) immediately notify Coast of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Coast's request deliver such returned Inventory
to Coast.
7.8 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
7.9 NO LIABILITY. Coast shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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settling any Receivable in good faith for less than the full amount thereof, nor
shall Coast be deemed to be responsible for any of Borrower's obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve Coast from liability for its own gross negligence or willful
misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other written
reports with respect to Borrower (including budgets, sales projections,
operating plans and other financial documentation), as Coast shall from time to
time reasonably specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not
less frequently than quarterly and on one (1) Business Day's notice (provided
that in the absence of an Event of Default, Coast shall endeavor to give a
longer notice but shall have no obligation to do so), Coast, or its agents,
shall have the right to perform Audits. Coast shall take reasonable steps to
keep confidential all confidential information obtained in any Audit, but Coast
shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower's expense and the charge for the
Audits shall be Seven Hundred Fifty Dollars ($750) per person per day (or such
higher amount as shall represent Coast's then current standard charge for the
same), plus reasonable out-of-pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, do any of the following:
(a) merge or consolidate with another entity, except in a transaction
in which (i) the owners of the Borrower hold at least fifty percent (50%) of the
ownership interest in the surviving entity immediately after such merger or
consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of business,
or (ii) in a transaction or a series of transactions not involving the payment
of an aggregate amount in excess of the amount set forth in Section 8 of the
Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
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(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any warehouseman or
other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would have a
Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default is continuing or would occur as a
result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than 120 days prior to the Maturity Date or the next Renewal
Date, that such party elects to terminate this Agreement effective on the
Maturity Date or such next Renewal Date. If this Agreement is renewed under
this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown
in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the
Renewal Date and thereafter shall bear interest at a rate equal to the rate
applicable to the Receivable Loans.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full
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all Obligations, whether evidenced by installment notes or otherwise, and
whether or not all or any part of such Obligations are otherwise then due and
payable. Notwithstanding any termination of this Agreement, all of Coast's
security interests in all of the Collateral and all of the terms and provisions
of this Agreement shall continue in full force and effect until all Obligations
have been paid and performed in full; provided that, without limiting the fact
that Loans are subject to the discretion of Coast, Coast may, in its sole
discretion, refuse to make any further Loans after termination. No termination
shall in any way affect or impair any right or remedy of Coast, nor shall any
such termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Coast's security
interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers, employees
or agents, now or in the future, shall be untrue or misleading and results in a
Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to Coast
as provided in Section 7.5 above, or shall fail to give Coast access to its
books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within five (5) Business Days after the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within ten (10) days after the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is (i) not
timely controverted, or (ii) not cured by the dismissal thereof within sixty
(60) days after the date commenced; or
(l) revocation or termination of, or limitation or denial of liability
upon, any guaranty of the Obligations or any attempt to do any of the foregoing,
or commencement of proceedings
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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by any guarantor of any of the Obligations under any bankruptcy or insolvency
law; or
(m) revocation or termination of, or limitation or denial of liability
upon, any pledge of any certificate of deposit, securities or other property or
asset of any kind pledged by any third party to secure any or all of the
Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been subordinated
to the Obligations, other than as permitted in the applicable subordination
agreement, or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer or
experience any Change of Control without Coast's prior written consent, which
consent shall be in the discretion of Coast in the exercise of its reasonable
business judgment; or
(p) Borrower shall generally not pay its debts as they become due, or
Borrower shall conceal, remove or transfer any part of its property, with intent
to hinder, delay or defraud its creditors, or make or suffer any transfer of any
of its property which may be fraudulent under any bankruptcy, fraudulent
conveyance or similar law; or
(q) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower under
this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may be
found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store or remove any of the Collateral, and remain
on the premises or cause a custodian to remain on the premises in exclusive
control thereof, without charge for so long as Coast deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement; provided, however, that should Coast seek to
take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives:
(i) any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such possession;
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and make
it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any Collateral
prior to a disposition thereof and, for such purpose and for the purpose of
removal, Coast shall have the right to use Borrower's premises, vehicles,
hoists, lifts, cranes, equipment and all other property without charge.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Coast is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations incurred
by Coast (including attorneys' fees and expenses incurred in connection with
bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least five days prior
to the sale, and, in the case of a public sale, notice of the sale is published
at least five days before the sale in a newspaper of general circulation in the
county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general, non-
specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m Los
Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may (but
is not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
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10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of
attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner:
(a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of Borrower
or Coast, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same;
(g) After the occurrence and continuation of an Event of Default,
grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure
the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Coast the same rights of
access and other rights with respect thereto as Coast has under this Agreement;
and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney
or any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery,
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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enforcement, performance, and administration of this Agreement and any other
Loan Documents or the transactions contemplated herein, and with respect to any
investigation, litigation, or proceeding related to this Agreement, any other
Loan Document, or the use of the proceeds of the credit provided hereunder
(irrespective of whether any Indemnified Person is a party thereto), or any act,
omission, event or circumstance in any manner related thereto (all the
foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no
obligation to any Indemnified Person hereunder with respect to any Indemnified
Liability that a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. This provision shall survive the termination of this Agreement and the
repayment of the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Coast of one or more of its rights or remedies shall not be deemed an election,
nor bar Coast from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Coast to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been
indefeasibly paid and performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations one (1) Business Days after
receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such one (1) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such one (1) Business Days of "clearance" or "float" actually occur, and
shall be deemed to be the equivalent of charging one (1) Business Days of
interest on such collections. This across-the-board one (1) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of any
item of payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all payments
with respect to the Obligations may be applied, and in Coast's sole discretion
reversed and re-applied, to the Obligations, in such order and manner as Coast
shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of
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advances, charges, expenses and payments made pursuant to this Agreement. Such
account shall be deemed correct, accurate and binding on Borrower and an account
stated (except for reverses and reapplications of payments made and corrections
of errors discovered by Coast), unless Borrower notifies Coast in writing to the
contrary within thirty (30) days after each account is rendered, describing the
nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
---------
no oral understandings, representations or agreements between the parties which
- - -------------------------------------------------------------------------------
are not set forth in this Agreement or in other written agreements signed by the
- - --------------------------------------------------------------------------------
parties in connection herewith.
- - ------------------------------
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not
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limited to, any attorneys' fees and costs (including attorneys' fees and
expenses incurred pursuant to bankruptcy) Coast incurs in order to do the
following: prepare and negotiate this Agreement and the documents relating to
this Agreement; obtain legal advice in connection with this Agreement or
Borrower; enforce, or seek to enforce, any of its rights; prosecute actions
against, or defend actions by, Account Debtors; commence, intervene in, or
defend any action or proceeding; initiate any complaint to be relieved of the
automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy
claim, third-party claim, or other claim; examine, audit, copy, and inspect any
of the Collateral or any of Borrower's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce Coast's security interest
in, the Collateral; and otherwise represent Coast in any litigation relating to
Borrower. If either Coast or Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its costs and attorneys' fees (including attorneys'
fees and expenses incurred pursuant to bankruptcy), including (but not limited
to) attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. Borrower shall also pay Coast's
standard charges for returned checks and for wire transfers, in effect from time
to time. All attorneys' fees, costs and charges (including attorneys' fees and
expenses incurred pursuant to bankruptcy) and other fees, costs and charges to
which Coast may be entitled pursuant to this Agreement may be charged by Coast
to Borrower's loan account and shall thereafter bear interest at the same rate
as the Receivable Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
--------
however, that Borrower may not assign or transfer any of its rights under this
- - -------
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights
and delegate its duties hereunder by the sale of assignment or participation
interests, all without the consent of Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY
19
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- - --------------------------------------------------------------------------------
CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
COAST OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.
BORROWER:
NETRIX CORPORATION
By /s/Richard D. Rose
---------------------------
President or Vice President
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By /s/Susan Kramer
-----------------------------
Title: Vice President
----------------------------
20
<PAGE>
- - --------------------------------------------------------------------------------
COAST
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: NETRIX CORPORATION
ADDRESS: 13595 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 22071
DATE: NOVEMBER 18, 1997
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the above-
borrower of even date.
- - --------------------------------------------------------------------------------
SECTION 2 - CREDIT FACILITIES
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SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time outstanding not to exceed the lesser of a total of Three
Million Dollars ($3,000,000) at any one time outstanding (the "Maximum Dollar Amount")
provided that the Maximum Dollar Amount may be increased to $5,000,000 ("Increased Maximum")
under the terms and conditions set forth below, or the sum of (a) and (b) below:
(a) Receivable Loans in an amount not to exceed 80% of the amount of Borrower's Eligible
Receivables, except for Eligible Foreign Receivables (as defined in Section 1 of the
Agreement) unless insured or backed by a letter of credit assigned to and otherwise
acceptable in form and substance to Coast in its discretion, Receivable Loans not to
exceed 65% of the amount of other Eligible Foreign Receivables provided that all
advances against Eligible Foreign Receivables shall not exceed $1,000,000 at any one
time; plus
----
(b) Equipment Acquisition Loans, in minimum advances of One Hundred Thousand Dollars
($100,000), with a three (3) month drawdown period for each advance, commencing on the
day such advance is made by Coast, at interest only followed by a forty eight (48) month
amortization of principal plus interest with the remaining balance due on November 31,
1999, in a total amount not to exceed the lesser of:
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(1) 80% of the invoice cost of new Equipment
(after subtracting taxes and installation
charges), or 80% of the appraised
liquidation value of used Equipment
acquired by Borrower (after subtracting
taxes and installation charges), or
(2) Five Hundred Thousand Dollars ($500,000]
The Equipment Acquisition Loans shall not be
available unless Borrower has achieved and
maintained a Total Debt Service Coverage Ratio
of not less than 1.25:1, measured on a fiscal
quarterly basis.
Total Debt Service Coverage Ratio shall mean
the quotient of (x) EBITDA less all capital
expenditures except that portion which is
financed, less taxes paid during such period,
divided by (y) the sum of all principal,
interest and other payments made or required to
be made by Borrower on indebtedness during such
period, including any fees and charges owed by
Borrower in connection with any such
indebtedness.
"EBITDA" shall mean, for any period, the net
income for such period of Borrower determined
in accordance with GAAP (excluding any
extraordinary income items, including, without
limitation, gain on sale of assets, income
relating to foreign exchange, swap or other
derivative transactions and changes in GAAP),
plus the following items, to the extent
deducted from the revenues of Borrower in the
calculation of net income or loss: (i)
depreciation, (ii) amortization of intangibles
and any other non-cash items, (iii) cash
interest expense (excluding any interest paid-
in-kind) and (iv) tax expense.
The Maximum Dollar Amount shall be increased to
the Increased Maximum so long as (i) no Event
of Default has occurred and is continuing and
Borrower has achieved for two consecutive
fiscal quarters and has maintained (a) a
Tangible Net Worth of not less than $14,500,000
and (b) a net profit. Advances under the
Increased Maximum shall be under the same
criteria as set forth above provided that the
maximum loans against Eligible Foreign
Receivables shall be increased from $1,000,000
to $1,500,000.
</TABLE>
================================================================================
SECTION 3 - INTEREST AND FEES
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SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus 2%
per annum (reducing to Prime Rate plus
1.5% so long as Borrower has achieved and
maintained a Tangible Net Worth of not
less than $17,500,000 and no Event of
Default has occurred and is continuing),
calculated on the basis of a 360-day year
for the actual number of days elapsed.
The interest rate applicable to all Loans
shall be adjusted monthly as of the first
day of each month, and the interest to be
charged for each month shall be based on
the highest Prime Rate in effect during
the prior month, but in no event shall
the rate of
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<PAGE>
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<S> <C>
interest charged on any Loans in any mon th be less than 9% per annum.
SECTION 3.1 - MINIMUM MONTHLY based on 40% utilization of the Maximum Dollar Amount or Increased Amount,
INTEREST: as applicable per month, measured on a daily basis.
SECTION 3.2 - LOAN FEE: 1.50% of the Maximum Dollar Amount, such amount being fully earned on the
Closing Date, and payable .75% on the Closing Date and .75% on the first
anniversary of the Closing Date. Upon the activation of the Increased
Maximum, Borrower shall pay an additional fee of $20,000. All fees
hereunder shall be earned on the Closing Date and shall not be refundable
for any reason.
SECTION 3.2 - FACILITY FEE: $2,200 per quarter, payable on the Closing Date (prorated for any partial
quarter at the beginning of the term of this Agreement) and on the first
day of each quarter thereafter.
SECTION 9.1 - RENEWAL FEE: .5% of the Maximum Dollar Amount per year.
--
SECTION 9.2 - EARLY TERMINATION An amount equal to three percent (3%) of the Maximum Dollar Amount or
FEE: Increased Maximum, as applicable (as defined in the Schedule), if
termination occurs on or before the first anniversary of the effective
date of this Agreement and one percent (1%) of the Maximum Dollar Amount
or Increased Maximum, as applicable if termination occurs after the first
anniversary of the effective date of this Agreement.
</TABLE>
================================================================================
SECTION 5 - CONDITIONS PRECEDENT
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<S> <C>
SECTION 5.2 - MINIMUM $250,000 on the Closing Date.
AVAILABILITY:
OTHER
CONDITIONS: 1. All applicable taxes shall be current.
2. Borrower shall have hired a qualified chief financial officer or
equivalent.
3. Restrictions on intercompany transfers as Coast shall require.
4. All remittances shall be collected through a lock box in form and
substance acceptable in the discretion of Coast.
SECTION 5.13 - OTHER 1. UCC-1 financing statements, fixture filings and termination
DOCUMENTS AND statements;
AGREEMENTS:
2. Security Agreements (including those covering copyrights, patents and
trademarks);
</TABLE>
-3-
<PAGE>
================================================================================
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
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SECTION 6.2 - PRIOR NAMES OF Netrix Telecom Systems Corp. (formerly Republic Telcom Systems Corp.)
BORROWER:
SECTION 6.2 - PRIOR TRADE Netrix Systems Corporation and Netrix Telcom Systems Corporation
NAMES OF
BORROWER:
SECTION 6.2 - EXISTING TRADE None
NAMES OF
BORROWER:
SECTION 6.3 - OTHER LOCATIONS 5601-A Wilkinson Blvd., Charlotte, North Carolina 28208, 2402-A Clover
AND ADDRESSES: Basin Drive, Longmount, Colorado 80503, 666 Fifth Avenue, New York , New
York 10103 and Harbour Side Financial Center, 600 Plaza 2, Jersey City,
New Jersey, 07311
SECTION 6.10 - MATERIAL As described in the public filings made by Borrower with the Securities
ADVERSE and Exchange Commission.
LITIGATION:
SECTION 6.10 - FUTURE CLAIMS Borrower will promptly inform Coast in writing of any claim, proceeding,
AND LITIGATION: litigation or investigation in the future threatened or instituted by or
against Borrower involving any single claim of Two Hundred Fifty Thousand
Dollars ($250,000) or more, or involving Five Hundred Thousand Dollars
($500,000) or more in the aggregate.
</TABLE>
================================================================================
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
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SECTION 8.1 - OTHER TANGIBLE NET WORTH: Borrower shall at all times have a Tangible Net Worth
PROVISIONS: of not less than $13,500,000.
LANDLORD WAIVER: Borrower shall provide landlord waivers in form requested by Coast for all
of Borrower's locations and for Atlantic Design within 30 days of the Closing Date. Pending
receipt of the landlord waivers, Coast may create a reserve for up to one month's rent for
each affected location.
ATLANTIC DESIGN: Within 60 days of the Closing Date, Coast shall have
a perfected first priority security interest in the inventory of Borrower
located at Atlantic Design. A failure of the foregoing shall have to be an
Event of Default.
COPYRIGHTS: Within 60 days of the Closing Date (or immediately if
Borrower is in violation of the Tangible Net Worth covenant above),
Borrower shall have filed for registration all the copyrights in its
computer software programs, together with the registration of a first
priority lien in said copyrights in favor of Coast. A failure of the
foregoing shall be an
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<PAGE>
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Event of Default.
SECTION 8.2 - INSURANCE: Subject to the limitations set forth in Section 8.2 of the Agreement,
Coast shall release to Borrower insurance proceeds with respect to
Equipment totaling less than Fifty Thousand Dollars ($50,000).
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the following:
1. Monthly Receivable agings, aged by invoice date, within ten (10) days
after the end of each month.
2. Monthly accounts payable agings, aged by invoice date, and outstanding
or held check registers within ten (10) days after the end of each month.
3. Monthly internally prepared financial statements, as soon as
available, and in any event within thirty (30) days after the end of each
month.
4. Quarterly internally prepared financial statements, as soon as
available, and in any event within forty-five (45) days after the end of
each fiscal quarter of Borrower.
5. Quarterly customer lists, including customer name, address, and phone
number, provided that Coast shall take reasonable steps to keep
confidential such information but Coast shall have the right to disclose
any such information to its auditors, regulatory agencies and attorneys
and pursuant to any subpoena or other legal process.
6. Annual consolidated and consolidating financial statements, as soon as
available, and in any event within ninety (90) days following the end of
Borrower's fiscal year, containing the unqualified opinion of, and
certified by, an independent certified public accountant acceptable to
Coast.
7. All public filings with the Securities and Exchange Commission
including 10K and 10Q's promptly after the filing thereof.
SECTION 8.5 - NEGATIVE Five Hundred Thousand Dollars ($500,000) in the aggregate.
COVENANTS
(ACQUIRED
ASSETS):
</TABLE>
================================================================================
SECTION 9 - TERM
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<S> <C>
SECTION 9.1 - MATURITY DATE: November 30, 1999, subject to automatic renewal as provided in Section 9.1
of the Agreement, and early termination as provided in Section 9.2 of the
Agreement.
</TABLE>
-5-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Netrix International Corporation, Delaware
Netrix GmbH, Germany
Netrix S.r.l., Italy
Netrix (Australia) Pty Limited, Australia
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports dated February 27, 1998, 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 26, 1998
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,758
<SECURITIES> 0
<RECEIVABLES> 6,212
<ALLOWANCES> 1,505
<INVENTORY> 8,035
<CURRENT-ASSETS> 17,718
<PP&E> 4,969
<DEPRECIATION> 18,016
<TOTAL-ASSETS> 24,024
<CURRENT-LIABILITIES> 7,447
<BONDS> 0
0
0
<COMMON> 480
<OTHER-SE> 16,480
<TOTAL-LIABILITY-AND-EQUITY> 24,024
<SALES> 22,474
<TOTAL-REVENUES> 33,087
<CGS> 11,395
<TOTAL-COSTS> 18,440
<OTHER-EXPENSES> 23,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 196
<INCOME-PRETAX> (8,577)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,577)
<EPS-PRIMARY> (.90)
<EPS-DILUTED> (.90)
</TABLE>
