<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-50464
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)
(703) 742-6000
(Registrant's telephone number, including area code)
Indicate by check number 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
--- ---
At October 31, 1998 there were 11,450,654 shares of the registrant's
Common Stock, $.05 par value per share, outstanding.
<PAGE>
NETRIX CORPORATION
------------------
FORM 10-Q
---------
SEPTEMBER 30, 1998
------------------
INDEX
-----
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION (UNAUDITED) Page No.
--------
<S> <C>
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the nine
and three months ended September 30, 1998 and 1997 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
</TABLE>
1
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product........................... $16,272 $17,861 $ 5,849 $ 6,170
Service........................... 7,111 8,004 2,462 2,787
------- ------- ------- -------
Total revenues.............. 23,383 25,865 8,311 8,597
------- ------- ------- -------
Cost of revenues:
Product........................... 7,543 9,095 2,847 3,384
Service........................... 4,024 5,335 1,264 1,579
------- ------- ------- -------
Total cost of revenues...... 11,567 14,430 4,111 4,963
------- ------- ------- -------
Gross profit........ 11,816 11,435 4,200 3,994
Operating expenses:
Sales and marketing............... 7,774 8,067 1,788 2,167
Research and development.......... 4,939 6,630 1,696 1,791
General and administrative........ 3,080 3,084 912 1,025
Restructuring reserve............. - 875 - -
------- ------- ------- -------
Loss from operations........ (3,977) (7,221) (196) (989)
Interest and other income, net......... (20) 336 16 146
Foreign exchange gain (loss)........... 87 (271) 40 (121)
------- ------- ------- -------
Loss before income taxes.... (3,910) (7,156) (140) (964)
Provision for income taxes............. - 40 - -
------- ------- ------- -------
Net Loss............................... (3,910) (7,196) (140) (964)
Other comprehensive losses,
net of income tax..................... (257) 55 (199) 85
------- ------- ------- -------
Comprehensive loss..................... (4,167) $(7,141) (339) $ (879)
======= ======= ======= =======
Basic and diluted loss per share....... $ (0.37) $ (0.75) $(0.01) $ (0.10)
======= ======= ====== =======
Shares used in per share calculation... 10,702 9,539 11,451 9,575
======= ======= ====== =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
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NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 1,885 $ 2,758
Accounts receivable, net of allowance for doubtful
accounts of $646 and $1,505, respectively............... 7,423 6,212
Inventories, net........................................... 6,596 8,035
Other current assets....................................... 399 713
------- -------
Total current assets..................................... 16,303 17,718
Property and equipment, net of accumulated depreciation of
$19,693 and $18,016, respectively.......................... 4,211 4,969
Deposits and other assets................................... 283 543
Goodwill, net of accumulated amortization of $1,452
and $1,254, respectively................................... 594 794
------- -------
$21,391 $24,024
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Line of credit............................................. $ 1,700 $ 1,147
Accounts payable........................................... 2,582 3,002
Accrued liabilities........................................ 2,614 3,298
------- -------
Total current liabilities.............................. 6,896 7,447
Other liabilities........................................... - 97
------- -------
6,896 7,544
------- -------
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; zero issued and zero outstanding.............. - -
Common stock, $0.05 par value; 15,000,000
shares authorized; 11,450,654 and 9,593,253
shares issued and outstanding, respectively............... 572 480
Additional paid-in capital................................. 57,862 55,774
Accumulated other comprehensive loss....................... (274) (17)
Accumulated deficit........................................ (43,685) (39,757)
------- -------
Total stockholders' equity................................ 14,495 16,480
------- -------
$21,391 $24,024
======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
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NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1997
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss........................................ $(3,910) $(7,196)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,876 2,528
Decrease in deferred rent credit.............. (96) (183)
Decrease in goodwill.......................... - 262
Changes in assets and liabilities -
Accounts receivable......................... (1,211) 3,703
Inventories................................. 1,439 (995)
Other current assets........................ 314 361
Deposits and other assets................... 260 173
Accounts payable............................ (420) 164
Accrued liabilities......................... (684) (2,000)
------- -------
Net cash used in operating activities....... (2,432) (3,183)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (918) (553)
Sales of short-term investments................. - (2,473)
Purchases of short-term investments............. - 7,827
------- -------
Net cash (used in) provided by
investing activities..................... (918) 4,801
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement................. 2,076 -
Payments on line of credit, net................. 553 245
Proceeds from employee stock purchase
plan........................................... 90 -
Proceeds from exercise of stock options......... 14 175
Payments on long-term debt...................... - (224)
------- -------
Net cash provided by (used in)
financing activities..................... 2,733 196
------- -------
Effect of foreign currency exchange rate
changes on cash and cash equivalents............ (256) 49
------- -------
Net (decrease) increase in cash and cash
equivalents..................................... (873) 1,863
Cash and cash equivalents, beginning
of period....................................... 2,758 687
------- -------
Cash and cash equivalents, end of period......... $ 1,885 $ 2,550
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period
for interest................................ $ 136 $ 109
Cash paid during the period for income
taxes........................................ - 11
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
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NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
----------------------
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. These unaudited condensed consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany transactions have been eliminated.
The unaudited condensed financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and include, in the opinion of management,
all adjustments, consisting of normal, recurring adjustments, necessary for a
fair presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results for such interim periods are not necessarily indicative of results to be
expected for the full year.
Certain reclassifications have been made to the prior year financial
statements to conform with current year presentation.
RISKS AND LIQUIDITY FACTORS
RISKS
-----
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. It may also include additional business and
competitive differentiation. Aside from the well-known calculation problems
with the use of 2-digit date formats as the year changes from 1999 to 2000, the
Year 2000 is a special case leap year and in many organizations using older
technology, dates were used for special programmatic functions.
The problem exists for many kinds of software and hardware, including
mainframes, mini computers, PCs, and embedded systems. Netrix is in the process
of gathering, testing, and producing information about Netrix technologies
impacted by the Year 2000 transition. First, Netrix will classify its core
products into categories of compliance: compliant, compliant with minor issues,
and not compliant while assessing the related costs. Second, if a product is
stated to be non-compliant, Netrix will provide information to a customer as to
how an organization could bring that product into compliance.
The Year 2000 issue also affects the Company's internal systems. Netrix
is assessing the readiness of its systems for handling the Year 2000. Although
the assessment is still underway, management currently believes that all
signficant systems will be compliant by the Year 2000 and that the cost to
address the issues is not material. Nevertheless, Netrix is creating contingency
plans for certain internal systems.
All organizations dealing with the Year 2000 must address the effect this
issue will have on their third-party supply chain. Netrix is undertaking steps
to identify its vendors and to formulate a system of working with key third-
parties to understand their ability to continue providing services and products
through the change to 2000. Netrix will work directly with its key vendors and
partner with them if necessary, to avoid any business interruptions in 2000.
For these key third-parties, contingency plans will be developed.
Resolving Year 2000 issues is a worldwide phenomenon that will likely
absorb a substantial portion of IT budgets and attention in the near term. The
impact of the Year 2000 on future Netrix revenue is difficult to discern
5
<PAGE>
but is a risk to be considered in evaluating future growth of the Company.
LIQUIDITY FACTORS
-----------------
For the nine and three months ended September 30, 1998, the Company
incurred net losses of approximately $3.9 million and $140,000, respectively.
When compared to the nine and three months ended September 30, 1997, declining
sales of the Company's mature products were partially offset by increases in
sales of new products. On a consecutive quarter basis during 1998, revenues
have increased each quarter since the quarter ended December 31, 1997.
For the nine and three months ended September 30, 1998, the Company's
operating activities used cash of approximately $2.4 million and contributed
cash of approximately $1.2 million, respectively. The cash used by operations
was primarily due to continued net losses from operations and an increase in
accounts receivable. The cash contributed by operations for the quarter ended
September 30, 1998 was the combined result of a smaller net loss from
operations, a decrease in inventories, and improved cash collections from
receivables. The success of the Company is dependent on its ability to generate
adequate cash for operations and capital needs. At September 30,1998, the
Company had approximately $1.9 million in cash and cash equivalents,
approximately $1.9 million in eligible borrowing availability under the line of
credit and approximately $1.7 million outstanding under its line of credit. At
November 10, 1998, the Company had approximately $640,000 in cash and cash
equivalents, and approximately $1.4 million outstanding under its line of
credit. The Company's cash and borrowing position may fluctuate significantly on
a daily basis because all cash receipts are used to pay down the outstanding
line of credit, and borrowings are generally made on a weekly or less frequent
basis as needed.
The Company relies primarily on financing from its line of credit to meet
its obligations. The funding from the Company's line of credit is dependent on
future sales to generate eligible receivables to use as collateral for borrowing
under its line of credit and the collection of its accounts receivable to keep
accounts current and eligible for borrowing collateral. The Company has also
raised cash through a private equity placement. To date, the Company has been
able to generate adequate cash to meet its obligations either
through sales and collections, or through private equity placements. The
Company expects to be able to continue to generate adequate cash through such
working capital or equity financing arrangements in the foreseeable future,
although there can be no assurances of the Company's ability to generate
adequate cash.
The Company's ability to generate adequate cash is in large part
dependent on its success at increasing sales of its new products. The Company's
plan is to continue to increase revenues through sales of its Network Exchange
product line and to exploit new marketing channels; however, due to market
conditions, competitive pressures, and other factors beyond its control, the
Company has been unable to achieve sufficient incremental growth in new product
sales to offset the decline in mature product sales in order to achieve year-
over-year revenue growth. The Company has been able to achieve three consecutive
quarters of revenue growth, and the Company expects that new product sales will
continue to expand in the foreseeable future; however, there can be no
assurances that the Company will be able to adequately increase new product
sales in the future.
If the Company cannot generate adequate financing through its line of
credit, the Company may have to generate additional cash through other means,
which may include the sale of assets, including intellectual property and
proprietary technology, the sale of equity, additional borrowings, the sale of
selected operations, or one or more strategic partnerships. The Company
estimates that in the absence of adequate financing, it has sufficient cash and
borrowing ability to operate for approximately three months, although there can
be no assurances of the Company's ability to continue to operate without
adequate financing, and the Company may be unable to meet its obligations as
they become due and may be required to curtail its operations. If the Company
is required to curtail its operations there can be no assurances that the
Company's assets will be fully realized. Although the Company believes it has
the ability to generate additional cash through such financing activities, 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 or borrow adequate cash, there will be a material and adverse
effect on the business and financial condition of the Company.
In August 1998, the Company mandated certain cost control measures, and
is continually evaluating various business processes, such as credit
administration, order fulfillment, and asset management, in order to mitigate
its liquidity risk.
6
<PAGE>
The Company's line of credit agreement requires it to maintain a tangible
net worth of at least $13.5 million. At September 30, 1998, the Company's
tangible net worth was approximately $13.9 million. Management intends to seek a
waiver of, and renegotiate, this covenant, but there can be no assurances that a
waiver will be received, or that a renegotiation will be successful, or that the
outstanding loan balance will not be called by the Company's lending institution
upon violation of this covenant.
In August 1998, as a result of concerns about the deterioration of aged
foreign accounts receivable, the Company's current lending institution
eliminated foreign receivables as qualified accounts receivable for borrowing
collateral. In September 1998, the lending institution reinstated a sub-line of
credit up to an amount of $600,000 for selected foreign accounts receivable. As
of November 10, 1998, the Company's domestic accounts receivable have generated
adequate borrowings for operations, and the Company has not had to use the
foreign sub-line of credit. In August 1998, the lending institution also
increased the interest rate for outstanding loan amounts to prime plus 3 1/2%,
from prime plus 2%. The Company is in discussion with another financial
institution regarding a new line of credit agreement that includes the
possibility of utilizing the Export-Import Bank loan guarantee program to
finance international inventory and receivables.
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 global economic conditions. Because the market for the Company's
products is characterized by rapidly changing technology, the development,
introduction, and evolution of competitive products may require a significant
investment of financial resources. Additionally, the Company relies on reseller
channels that 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 liquidity and operating results.
2. 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
implemented SFAS No. 130 in the first quarter of 1998, and it did not have a
material impact on the 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.
3. 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.
4. INVENTORIES:
------------
<TABLE>
<CAPTION>
Inventories consisted of the following (in thousands):
September 30, December 31,
------------- -------------
1998 1997
------ ------
<S> <C> <C>
Raw materials...... $ 360 $ 462
Work in process.... 864 772
Finished goods..... 5,372 6,801
------ ------
Total inventories.. $6,596 $8,035
====== ======
</TABLE>
7
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5. COMMITMENTS AND CONTINGENCIES:
------------------------------
Line of Credit
In November 1997, the Company negotiated a revolving $3.0 million line of
credit agreement with a lending institution to be used for working capital.
This agreement provided for interest at a per annum rate equal to the lender's
prime rate plus 2%. In August 1998, the lending institution increased the
interest rate to prime plus 3 1/2%. Effective August 31, 1998, the line of
credit agreement was amended to exclude eligible foreign receivables from the
borrowing base, and in October 1998, a sub-line of credit for selected foreign
receivables up to an amount of $600,000 was approved for selected foreign
receivables. The line of credit agreement includes a covenant that requires the
Company to maintain tangible net worth of at least $13.5 million. At
September 30, 1998, the Company's tangible net worth was approximately $13.9
million. The Company intends to seek a waiver of, and renegotiate, this
covenant, but there can be no assurances that a waiver will be received, or that
a renegotiation will be successful, or that the outstanding loan balance will
not be called by the Company's lending institution upon violation of this
covenant. The credit facility, which matures on November 30, 1999, is
collateralized by all of the Company's assets, including copyrights and
intellectual property that may not be reflected in the Company's financial
statements. Borrowings under the line are based on qualified accounts
receivable, as previously discussed in Footnote 1. At September 30, 1998, the
Company had approximately $1.9 million of total eligible borrowing availability
(based exclusively on eligible domestic receivables) and approximately $1.7
million outstanding under the line of credit. At December 31, 1997, the Company
had approximately $2.1 million of eligible borrowing availability (approximately
$1.1 million of domestic and $1.0 million of international eligible receivables)
and approximately $1.1 million outstanding under the line of credit. At November
10, 1998, the Company had approximately $1.6 million of total eligible borrowing
availability (based exclusively on eligible domestic receivables) and
approximately $1.4 million outstanding under the line of credit.
6. PRODUCT REVENUES:
-----------------
<TABLE>
<CAPTION>
The Company's product revenues were generated in the following geographic
regions:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic............... $ 6,462 $ 6,431 $2,705 $2,208
Europe................. 6,524 7,094 1,668 2,582
Pacific Rim and other.. 3,286 4,347 1,477 1,380
------- ------- ------ ------
Total.................. $16,272 $17,872 $5,850 $6,170
======= ======= ====== ======
</TABLE>
Sales are primarily denominated in US dollars.
7. RESTRUCTURING CHARGE:
---------------------
In March 1997, the Company recorded a restructuring charge of
approximately $1.4 million before income taxes, which was reduced in May 1997 to
a net restructuring charge of approximately $875,000. The net charge included
anticipated costs associated with an overall reduction in work force and the
discontinuance of the Company's micro.pop product.
8
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8. FOREIGN CURRENCY EXCHANGE GAINS (LOSSES):
-----------------------------------------
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 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. For the nine and three
months ended September 30, 1998, the Company reported approximately $87,000 and
$40,000 in translation gains, respectively. For the nine and three months ended
September 30, 1997, translation losses were approximately $271,000 and $121,000,
respectively.
9. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
--------------------------------------------
Basic earnings (loss) per share amounts are computed using the weighted
average number of common shares. Diluted earnings (loss) per share amounts are
computed using the weighted average number of common shares and common
equivalent shares having a dilutive effect during the periods. For the nine and
three months ended September 30, 1998 and 1997 the effect of options has not
been considered as they would have been antidilutive.
10. STOCKHOLDERS EQUITY:
--------------------
In April 1998, the Company completed a private placement by issuing and
selling 1,750,000 shares of common stock at a price of $1.25 per share and by
issuing warrants to purchase an additional 140,000 shares of common stock at an
exercise price of $1.75 per share. In connection with the private placement, the
Company received net proceeds of approximately $2.1 million that were used for
working capital and other corporate purposes. The shares issued in the private
placement and issuable upon exercise of the warrants were registered for resale
pursuant to a registration statement declared effective by the Securities and
Exchange Commission on June 12, 1998.
9
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NETRIX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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. The
factors include without limitation, those set forth below under the captions
"Liquidity and Capital Resources" and "Certain Factors That May Affect Future
Results."
RESULTS OF OPERATIONS
- ---------------------
RECENT DEVELOPMENTS. In August, the Company established a
distribution agreement with Packet Engines, a worldwide leader in gigabit
networking solutions. As specified in the agreement, Packet Engines will market
and sell the Company's range of Voice over data products for use in special
projects such as integrated services metropolitan area networks (MANs). The
products specified include the new Network Exchange 2201 for branch/remote
offices, the mid-range Network Exchange 2210, and the multi-service Network
Exchange 2550.
Also in August, the Network Exchange 2210 Voice over IP/Frame Relay
Internet telephony gateway received the coveted Editor's Choice Award from
Internet Telephony magazine.
In September, the Company announced plans to integrate the H.323
Version 2 Protocol Stack from RADVision into Vodex Voice Gateway software, which
is deployed in the Company's Network Exchange 2210 and 2201 gateways.
In October, the Company issued a press release that detailed a major
IP and voice OEM and development agreement with Motorola's Internet and
Networking Group (ING). Under the terms of the OEM agreement, Motorola will
market the Network Exchange as a high speed networking solution for enterprise
headquarters and other applications requiring high performance solutions.
The Company also announced the completion of subjective conversation
testing which compared the voice quality of the NETRIX Network Exchange 2200
using 8K ACELP voice compression with the Public Switched Telephone Network. In
the double-blind experiment, telephone users in quiet, acoustically isolated
rooms were unable to distinguish between a NETRIX 8K voice compression circuit
and a circuit provided by the local PSTN (Public Switched Telephone Network).
The experiment was performed at the U.S. Department of Commerce's (DoC)
Institute for Telecommunication Sciences (ITS) in Boulder, Colorado in
conjunction with NETRIX under the terms of a five-year Cooperative Research and
Development Agreement.
10
<PAGE>
BACKGROUND. The results for the nine and three months ended
September 30, 1998, when compared to the same periods in 1997, reflect an
overall decrease in the revenues and expenses of the Company. Although revenues
have decreased, expenses have decreased at a substantially greater
portion, resulting in smaller losses. On a consecutive quarter basis, the
Company's revenues have increased each quarter since December 31, 1997. The
Company's plan is to increase revenues through sales of its Network Exchange
product line and to exploit new marketing channels; however, due to market
conditions, competitive pressures, and other factors beyond its control, the
Company has been unable to achieve sufficient incremental growth in new product
sales to offset the decline in mature product sales in order to achieve year-
over-year and quarter-over-quarter revenue growth. During this nine month
period, Netrix continued to experience a decline in revenues in its mature
product lines, and an increase in its new products, the 2210, which combines the
Republic Telecom technology with Netrix switching capability, and the 2550,
Netrix' enhanced switching platform. In April 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. During the first half of
1998, the Company experienced an increase in marketing and product
implementation costs in order to introduce and deploy its new products. In
addition, in the second quarter of 1998, the Company incurred specific expenses
associated with an increase in the allowance for doubtful accounts of
approximately $1.1 million. In August 1998, the Company mandated certain cost
control measures which resulted in expense reductions during the third quarter
that, when combined with higher revenues and gross margin, resulted in narrowing
the quarterly loss to approximately $140,000.
REVENUES. For the nine months ended September 30, 1998, total
revenues decreased by approximately $2.5 million, or 9.6%, compared to the nine
months ended September 30, 1997. Total revenues decreased approximately
$645,000, or 7.2%, in the third quarter of 1998 compared to the third quarter of
1997. Product revenues decreased approximately $1.6 million, or 8.9%, for the
first nine months of 1998 compared to same period in 1997. Product revenues
decreased approximately $320,000, or 5.2%, for the third quarter of 1998
compared to the same period in 1997. The decrease in product revenues was due
primarily to the decline in mature product sales, partially offset by
incremental growth in new product sales, as the mix of products sold continued
to transition from the mature products to the 2210 and 2550. Service revenues
decreased by approximately $893,000, or 11.2%, for the nine months ended
September 30, 1998 when compared to the nine months ended September 30, 1997.
For the third quarter of 1998, service revenues decreased by approximately
$325,000, or 11.7%, when compared to the third quarter of 1997. In the nine and
three months ended September 30, 1998, the lower volume of service revenues
remained fairly consistent with the discontinuation of older products from the
installed base, which was partially offset by an increase in service on new
product installations and new customer arrangements.
GROSS PROFIT. For the first nine months of 1998, gross profit
increased by approximately $381,000, or 3.3%, when compared to the first nine
months of 1997, and increased as a percentage of total revenues from 44.2% to
50.5%. For the third quarter of 1998, gross profit increased approximately
$206,000, or 5.2%, when compared to the third quarter of 1997, and increased as
a percent of total revenues from 44.6% to 50.5%. Product gross margin increased
to 53.6% in the first nine months of 1998, from 49.1% in the first nine months
of 1997. Product gross margin increased to 51.3% in the third quarter of 1998,
from 45.1% in the third quarter of 1997. The year-over-year and quarter-over-
quarter increases were primarily the result of a higher proportion of products
sold through less competitive channels that require lower discounts, combined
with a more favorable mix of higher margin product shipments. The gross profit
in any particular quarter is dependent upon the mix of products sold and the
channels of distribution. As a result, the gross profit on a quarter-to-quarter
comparative basis can vary within a wide range. Due to this variable mix,
margins earned in the three and nine months ended September 30, 1998 are not
necessarily indicative of margins that will be earned in the future. The gross
margin for service revenues increased from 33.3% in the first nine months of
1997 to 43.44% in the first nine months of 1998. The gross margin for service
revenues increased from 43.43% in the third quarter of 1997 to 48.7% in the
third quarter of 1998. The higher service margin is a result of generally
consistent levels of service revenues in the first half of 1998 combined with
lower service costs due to the restructuring discussed below.
11
<PAGE>
SALES AND MARKETING. Sales and marketing expenses for the first nine
months of 1998 decreased by approximately $293,000, or 3.6% when compared to the
first nine months of 1997. For the third quarter of 1998, sales and marketing
expenses decreased by approximately $380,000, or 17.5%, when compared to the
third quarter of 1997. These net decreases were primarily attributable to the
restructuring of operations discussed below and the cost control mandate
implemented in August 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
by approximately $1.7 million, or 25.5%, for the first nine months of 1998 when
compared to the first nine months of 1997. For the third quarter of 1998,
expenses decreased approximately $94,000, or 5.3%, when compared to the third
quarter of 1997. The nine month and three month decreases were principally due
to decreased expenses of salaries and related personnel costs from the
restructuring that occurred in March of 1997. All of the Company's research and
development costs are charged to operations as incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in for
the first nine months of 1998 were approximately equivalent to those for the
same period in 1997. General and administrative expenses decreased approximately
$113,000, or 11.1%, for the third quarter in 1998 compared to the same period in
1997. The decrease in the third quarter of 1998 was primarily due to decreases
in a variety of costs.
RESTRUCTURING CHARGE. In March 1997, the Company recorded a
restructuring charge of approximately $1.4 million before income taxes which was
reduced in May 1997 to a net restructuring charge of approximately $875,000. The
charge included anticipated costs associated with an overall reduction in work
force, the discontinuance of its micro.pop product, and the discontinuance of
its direct operation in Germany. The net reduction in May was due mainly to the
decision not to discontinue its operation in Germany.
INTEREST AND OTHER INCOME, NET. For the first nine months of 1998,
the Company incurred net interest and other expense of approximately $20,000,
compared to approximately $336,000 in net interest and other earnings for the
same period of 1997. This net decrease in interest and other income during the
first nine months of 1998 increased the net loss before taxes by approximately
$356,000. For the third quarter of 1998, the Company earned approximately
$16,000 of net interest and other earnings, compared to net interest and other
earnings of approximately $146,000 for the same period in 1997, a decrease of
approximately $130,000. The year-to-year and quarter-to-quarter decreases are
due primarily to lower investment levels maintained in short-term investments,
combined with increased interest expense on the Company's borrowings.
FOREIGN EXCHANGE GAIN (LOSS). The foreign exchange translation gain
for the nine and three months ended September 30, 1998, was approximately
$87,000, and $40,000, respectively. For the nine and three months ended
September 30, 1997, the foreign exchange translation loss was approximately
$271,000 and $121,000, respectively. The foreign exchange translation gains were
primarily the result of the dollar falling versus the currencies of the foreign
subsidiaries, resulting in losses translated for the current year and quarter
that were less than those previously reported when the dollar was higher.
NET INCOME (LOSS). For the first nine months of 1998, the Company
generated a net loss of approximately $3.9 million, compared to a net loss of
$7.2 million for the same period in 1997, a favorable change of approximately
$3.3 million. The net loss for the third quarter of 1998 was approximately
$140,000, compared to a net loss of approximately $964,000 in the third quarter
of 1997, a favorable change of approximately $824,000. The changes in net income
were the result of the factors discussed above.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The results for the nine and three months ended September 30, 1998,
when compared to the same periods in 1997, reflect an overall decrease in the
revenues and expenses of the Company. Although revenues have decreased, expenses
have decreased in greater proportion, resulting in smaller losses. For the nine
and three months ended September 30, 1998, the Company experienced net losses of
approximately $3.9 million and $140,000, respectively.
On a consecutive quarter basis, the Company's revenues have increased
each quarter since December 31, 1997. The Company's plan is to increase revenues
through sales of its Network Exchange product line and to exploit new marketing
channels; however, due to market conditions, competitive pressures, and other
factors beyond its control, the Company has been unable to achieve sufficient
incremental growth in new product sales to offset the decline in mature product
sales in order to achieve year-over-year growth revenue growth. During this nine
month period, Netrix continued to experience a decline in revenues in its mature
product lines, and an increase in its new products, the 2210, which combines the
Republic Telecom technology with Netrix switching capability, and the 2550,
Netrix' enhanced switching platform.
In April 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. During the first half of 1998, the Company experienced an
increase in marketing and product implementation costs in order to introduce and
deploy its new products. In addition, in the second quarter of 1998, the Company
incurred specific expenses associated with an increase in the allowance for
doubtful accounts of approximately $1.1 million. In August 1998, the Company
mandated certain cost control measures which resulted in expense reductions
during the third quarter that, when combined with higher revenues and gross
margin, resulted in narrowing the quarterly loss to approximately $140,000.
For the nine and three months ended September 30, 1998, the Company's
operating activities used cash of approximately $2.4 million and contributed
cash of approximately $1.2 million, respectively. The cash used by operations
was primarily due to continued net losses from operations and an increase in
accounts receivable. The cash contributed by operations for the quarter ended
September 30, 1998 was the combined result of a smaller net loss from
operations, a decrease in inventories, and improved cash collections from
receivables. The success of the Company is dependent on its ability to generate
adequate cash for operational and capital needs. At September 30,1998, the
Company had approximately $1.9 million in cash and cash equivalents,
approximately $1.9 million of eligible borrowing availability, and approximately
$1.7 million outstanding under its line of credit. At November 10, 1998, the
Company had approximately $640,000 in cash and cash equivalents, and
approximately $1.4 million outstanding under its line of credit. The Company's
cash and borrowing position may fluctuate significantly on a daily basis because
all cash receipts are automatically used to pay down the outstanding line of
credit, and borrowings are generally made on a weekly or less frequent basis as
needed.
The Company relies primarily on financing from its line of credit to
meet its obligations. The funding from the Company's line of credit is dependent
on future sales to generate eligible receivables to use as collateral for
borrowing under its line of credit and the collection of its accounts receivable
to keep accounts current and eligible for borrowing collateral. The Company has
also raised cash through a private equity placement. To date, the Company has
been able to generate enough cash to meet its obligations either through sales
and collections, or private equity placements, and the Company expects to be
able to continue to generate adequate cash through such working capital or
equity financing arrangements in the foreseeable future. The Company has been
able to achieve three consecutive quarters of revenue growth, and the Company
expects that new product sales will continue to expand in the foreseeable
future; however, there can be no assurances that the Company will be able to
adequately increase new product sales in the future.
13
<PAGE>
If the Company cannot generate adequate financing through its line of
credit, the Company may have to generate additional cash through other means,
which may include the sale of assets, including intellectual property and
proprietary technology, the sale of equity, additional borrowings, the sale of
selected operations, or one or more strategic partnerships. The Company
estimates that in the absence of adequate financing, it has sufficient cash and
borrowing ability to operate for approximately three months, although there can
be no assurances of the Company's ability to continue to operate without
adequate financing, and the Company may be unable to meet its obligations as
they become due and may be required to curtail its operations. If the Company is
required to curtail its operations there can be no assurances that the Company's
assets will be fully realized. Although the Company believes it has the ability
to generate additional cash through such financing activities, 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
or borrow adequate cash, there will be a material and adverse effect on the
business and financial condition of the Company.
In August 1998, the Company mandated certain cost control measures,
and is continually evaluating various business processes, such as credit
administration, order fulfillment, and asset management, in order to mitigate
its liquidity risk.
In November 1997, the Company negotiated a revolving $3.0 million line
of credit agreement with a lending institution to be used for working capital.
This agreement provided for interest at a per annum rate equal to the lender's
prime rate plus 2%. In August 1998, as a result of concerns about the
deterioration of aged foreign accounts receivable, the lending institution
increased the interest rate to prime plus 31/2%, and the line of credit
agreement was amended to exclude eligible foreign receivables from the borrowing
base. In October 1998, a sub-line of credit for selected foreign receivables up
to an amount of $600,000 was approved. As of November 10, 1998, the Company's
domestic accounts receivable have generated adequate borrowings for operations,
and the Company has not had to use the foreign sub-line of credit.
The line of credit agreement includes a covenant that requires the
Company to maintain tangible net worth of at least $13.5 million. At September
30, 1998, the Company's tangible net worth was approximately $13.9 million. The
Company intends to seek a waiver of, and renegotiate, this covenant, but there
can be no assurances that a waiver will be received, or that a renegotiation
will be successful, or that the outstanding loan balance will not be called by
the Company's lending institution upon violation of this covenant.
The credit facility, which matures on November 30, 1999, is
collateralized by all of the Company's assets, including copyrights and
intellectual property that may not be reflected in the Company's financial
statements. Borrowings under the line are based on qualified accounts
receivable, as previously discussed in Footnote 1. At September 30, 1998, the
Company had approximately $1.9 million of eligible borrowing availability (based
exclusively on eligible domestic receivables) and approximately $1.7 million
outstanding under the line of credit. At December 31, 1997, the Company had
approximately $2.1 million of eligible borrowing availability (approximately
$1.1 million of domestic and $1.0 million of international eligible receivables)
and approximately $1.1 million outstanding under the line of credit. At November
10, 1998, the Company had approximately $1.6 million of eligible borrowing
availability (based exclusively on eligible domestic receivables) and
approximately $1.4 million outstanding under the line of credit. The Company is
in discussion with another financial institution regarding a new line of credit
agreement that includes the possibility of utilizing the Export-Import Bank loan
guarantee program to finance international foreign inventory and receivables.
14
<PAGE>
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 global economic conditions. Because the market for the Company's
products is characterized by rapidly changing technology, the development,
introduction, and evolution of competitive products may require a significant
investment of financial resources. Additionally, the Company relies on reseller
channels that 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 liquidity and operating results.
Capital acquisitions during the first nine months of 1998 were
approximately $918,000 compared to approximately $553,000 in the nine months of
1997. Capital acquisitions in both periods were primarily for equipment used in
research and development and computer testing activities. For the nine months
ended September 30, 1997, the Company generated approximately $4.8 million from
investing activities, as sales of investments exceeded purchases of investments
and capital equipment.
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 Quarterly Report on Form 10-Q and presented elsewhere by management
from time to time.
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. It may also include additional business and
competitive differentiation. Aside from the well-known calculation problems with
the use of 2-digit date formats as the year changes from 1999 to 2000, the Year
2000 is a special case leap year and in many organizations using older
technology, dates were used for special programmatic functions.
The problem exists for many kinds of software and hardware, including
mainframes, mini computers, PCs, and embedded systems. Netrix is in the process
of gathering, testing, and producing information about Netrix technologies
impacted by the Year 2000 transition. First, Netrix will classify its core
products into categories of compliance: compliant, compliant with minor issues,
and not compliant while assessing the related costs. Second, if a product is
stated to be non-compliant, Netrix will provide information to a customer as to
how an organization could bring that product into compliance.
The Year 2000 issue also affects the Company's internal systems.
Netrix is assessing the readiness of its systems for handling the Year 2000.
Although the assessment is still underway, management currently believes that
all significant systems will be compliant by the Year 2000 and that the cost to
address the issues is not material. Nevertheless, Netrix will create contingency
plans for certain internal systems when deemed necessary.
All organizations dealing with the Year 2000 must address the effect
this issue will have on their third-party supply chain. Netrix is undertaking
steps to identify its vendors and to formulate a system of working with key
third-parties to understand their ability to continue providing services and
products through the change to 2000. Netrix will work directly with its key
vendors and partner with them if necessary, to avoid any business interruptions
in 2000. For these key third-parties, contingency plans will be developed.
Resolving Year 2000 issues is a worldwide phenomenon that will likely
absorb a substantial portion of IT budgets and attention in the near term. The
impact of the Year 2000 on future Netrix revenue is difficult to discern but is
a risk to be considered in evaluating future growth of the Company.
15
<PAGE>
The Company relies primarily on financing from its line of credit to
meet its obligations. The funding from the Company's line of credit is dependent
on future sales to generate eligible receivables to use as collateral for
borrowing under its line of credit and the collection of its accounts receivable
to keep accounts current and eligible for borrowing collateral. To date, the
Company has been able to generate adequate cash to meet its obligations either
through sales and collections, or private equity placements. The Company expects
to be able to continue to generate adequate cash through such working capital or
equity financing arrangements in the foreseeable future, although there can be
no assurances of the Company's ability to generate adequate cash.
The Company's ability to generate adequate cash is in large part
dependent on its success at increasing sales of its new products. The Company's
plan is to continue to increase revenues through sales of its Network Exchange
product line and to exploit new marketing channels; however, due to market
conditions, competitive pressures, and other factors beyond its control, the
Company has been unable to achieve sufficient incremental growth in new product
sales to offset the decline in mature product sales in order to achieve year-
over-year and quarter-over-quarter revenue growth. The Company has been able to
achieve three consecutive quarters of revenue growth, and the Company expects
that new product sales will continue to expand in the foreseeable future;
however, there can be no assurances that the Company will be able to adequately
increase new product sales in the future.
If the Company cannot generate adequate financing through its line of
credit, the Company may have to generate additional cash through other means,
which may include the sale of assets, including intellectual property and
proprietary technology, the sale of equity, additional borrowings, the sale of
selected operations, or one or more strategic partnerships. The Company
estimates that in the absence of adequate financing, it has sufficient cash and
borrowing ability to operate for approximately three months, although there can
be no assurances of the Company's ability to continue to operate without
adequate financing, and the Company may be unable to meet its obligations as
they become due and may be required to curtail its operations. If the Company
is required to curtail its operations there can be no assurances that the
Company's assets will be fully realized. Although the Company believes it has
the ability to generate additional cash through such financing activities, 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 or borrow adequate cash, there will be a material and adverse
effect on the business and financial condition of the Company.
The Company is currently in discussion with another financial
institution, including the possibility of utilizing the Export-Import Bank loan
guarantee program to finance international foreign inventory and receivables.
The Company believes it will be able to obtain new financing; however, there can
be no assurances that such financing can or will be obtained.
In August 1998, the Company mandated certain cost control measures,
and is continually evaluating various business processes, such as credit
administration, order fulfillment, and asset management, in order 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 global economic conditions. Because the market for the Company's
products is characterized by rapidly changing technology, the development,
introduction, and evolution of competitive products may require a significant
investment of financial resources. Additionally, the Company relies on reseller
channels that 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 liquidity and operating results.
16
<PAGE>
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. Governmental
budgetary or fiscal restraints or changes in government policy could adversely
affect the revenues generated by this government business, which is spread
across numerous agencies and departments.
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 assurances 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 assurances that
additional financing will be available on terms reasonable to the Company or at
all.
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 assurances 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
17
<PAGE>
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
assurances 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 assurances
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.
PART II -- OTHER INFORMATION
----------------------------
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
(a) Exhibits - None
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended September 30,
1998.
18
<PAGE>
SIGNATURE
---------
Pursuant to the requirements 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: November 16, 1998 By: /s/ Lynn C. Chapman
--------------------------------------
LYNN C. CHAPMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
19
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