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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 March 31, 1999
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 April 30, 1999 there were 11,490,000 shares of the registrant's Common
Stock, $.05 par value per share, outstanding.
<PAGE>
NETRIX CORPORATION
FORM 10-Q
MARCH 31, 1999
INDEX
PART I -- FINANCIAL INFORMATION PAGE NO.
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 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 13
SIGNATURE 17
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<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Product......................................................... $ 5,429 $ 4,995
Service......................................................... 1,887 2,246
--------- ----------
Total revenues............................................ 7,316 7,241
-------- ----------
Cost of revenues:
Product......................................................... 2,667 2,109
Service......................................................... 1,452 1,414
-------- ----------
Total cost of revenues.................................... 4,119 3,523
-------- ----------
Gross profit......................................................... 3,197 3,718
Operating Expenses:
Sales and marketing............................................. 1,625 2,049
Research and development........................................ 1,646 1,568
General and administrative...................................... 1,098 1,094
-------- ----------
Loss from operations................................................. (1,172) (993)
Interest and other income, net....................................... (140) (12)
Foreign currency exchange gain (loss)................................ -- 53
-------- ----------
Loss before income taxes............................................. (1,312) (952)
Provision for income taxes........................................... -- --
---------- ----------
Net loss............................................................. (1,312) (952)
Other comprehensive income (losses), net of income tax:.............. (28) (71)
----------- -----------
Comprehensive loss................................................... $ (1,350) $ (1,023)
=========== ===========
Basic and diluted net loss per share................................. $ (0.11) $ (0.10)
Weighted average number of shares outstanding........................ 11,451 9, 643
See notes to unaudited condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
NETRIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
------ --------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 157 $ 2,488
Accounts receivable, net of allowance for doubtful
accounts of $816 and $796, respectively..................... 7,685 7,499
Inventories................................................... 4,850 5,265
Other current assets.......................................... 477 472
---------- ----------
Total current assets........................... 13,169 15,724
Property and equipment, net of accumulated
depreciation of $20,841 and $20,473,
respectively.................................................. 3,668 3,823
Deposits and other assets.............................................. 235 165
Goodwill, net of accumulated amortization of $1,778
and $1,712, respectively...................................... 463 529
---------- ---------
$ 17,535 $ 20,241
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit................................................ $ 939 $ 2,167
Accounts payable.............................................. 2,729 3,011
Accrued liabilities........................................... 2,992 2,946
----------- -----------
Total liabilities 6,660 8,124
----------- -----------
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; 11,490,000 and 11,490,000
shares issued and outstanding, respectively............. 575 575
Warrants 354 257
Additional paid-in capital.................................... 57,679 57,679
Accumulated other comprehensive income........................ (148) (120)
Accumulated deficit........................................... (47,585) (46,274)
----------- -----------
Total stockholders' equity.................................... 10,875 12,117
----------- -----------
$ 17,535 $ 20,241
=========== ===========
See notes to unaudited condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1999 1998
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (1,312) $ (952)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................. 434 601
Non cash interest expense..................................... 97 --
Changes in assets and liabilities -
Accounts receivable...................................... (186) (907)
Inventories.............................................. 415 (228)
Other current assets..................................... (5) 362
Deposits and other assets................................ (70) 204
Accounts payable......................................... (282) 273
Other liabilities........................................ -- (73)
Accrued liabilities...................................... 46 (527)
--------- --------
Net cash used in operating activities.................... (863) (1,247)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (212) (334)
Purchases of short-term investments........................... -- --
Sales of short-term investments............................... -- --
--------- --------
Net cash (used in) provided by investing activities...... (212) (334)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) line of credit.................... (1,228) 586
Proceeds from exercise of stock options....................... -- --
Proceeds from employee stock purchase plan.................... -- 45
Payments on long-term debt.................................... -- --
-------- --------
Net cash provided by (used in) financing activities....... (1,228) 631
--------- --------
Effect of foreign currency exchange rate changes on
cash and cash equivalents..................................... (28) (40)
Net decrease in cash and cash equivalents.............................. (2,331) (990)
Cash and cash equivalents, beginning of period......................... 2,488 2,758
-------- --------
Cash and cash equivalents, end of period............................... $ 157 $1.768
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ 140 $ 45
Cash paid during the period for income taxes.................. -- --
See notes to unaudited condensed consolidated financial statements.
</TABLE>
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 conducts operations in the United Kingdom and Hong Kong 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 condensed consolidated
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany transactions have been eliminated.
The Company's operations are subject to certain risks and uncertainties
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technological, production and
marketing resources, reliance on certain sole source suppliers and third party
contract manufacturers, and dependence on key management personnel.
The unaudited condensed financial statements included herein have been
prepared by the Company, without audit, 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.
RISKS AND OTHER IMPORTANT FACTORS
For the three months ended March 31, 1999 and 1998, the Company
experienced equivalent revenues, and net losses of approximately $1.3 million
and $1.0 million, respectively. As a result, the Company's tangible net worth
decreased from approximately $11.2 million at December 31, 1998 to approximately
$10.0 million at March 31, 1999. The Company's initial line of credit agreement
required it to maintain a tangible net worth of at least $13.5 million measured
at the end of each month. Since October 31, 1998 the Company has been in
violation of this covenant. This covenant violation allows the Company's lending
institution to call for collection of the outstanding loan balance. On April 12,
1999 the lending institution granted the Company a waiver of past covenant
violations and waived its right to call the line of credit for these covenant
violations. The lending institution amended the line of credit agreement to
measure the Company's tangible net worth on a quarterly basis effective January
1, 1999, and set the minimum tangible net worth covenant at $9.8 million as of
March 31, 1999 and $9.0 million for all subsequent quarters. As of March 31,
1999, the Company was in compliance with the new covenant, and management
believes that this new covenant will be adequate for the Company to operate
under in the foreseeable future. However, there can be no assurances that the
Company will not violate the new covenant or that the outstanding loan balance
will not be called by the lending institution upon violation of the new
covenant.
The success and the future of the Company is dependent on its ability
to generate net income or to increase its net worth by the sale of additional
equity. The Company's ability to generate net income is in large part dependent
on its success at increasing sales of its new products and/or controlling costs.
The Company's plan to increase revenues through sales of its Network Exchange
product line is continuing to evolve in order to exploit new marketing channels;
5
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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 generate net income and there can be
no assurances that the Company will be able to adequately increase new product
sales and generate net income in the future.
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 at increasing sales of
its products. The Company's plan is 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 sale 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. The
Company has implemented cost control measures and is continually evaluating
expense levels to mitigate its liquidity risk.
For the three months ended March 31, 1999 and 1998, the Company's
operating activities used approximately $863,000 and $1.2 million of cash,
respectively. The cash used by operations was primarily due to continued net
losses from operations. The success of the Company is also dependent on its
ability to generate adequate cash for operations and capital needs. At March 31,
1999, the Company had approximately $157,000 in cash and cash equivalents with
approximately $939,000 outstanding of the $2.1 million available under the line
of credit agreement. The Company is relying on future sales and the collection
of the related accounts receivable to meet its cash obligations. The Company may
be unable to meet these 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 carrying value of the Company's assets will
be fully realized.
The Company may have to generate additional equity or 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. Although
the Company believes it has the ability to generate additional equity and 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 additional
equity and adequate cash, there will be a material and adverse effect on the
business and financial condition of the Company, to the extent that a sale,
liquidation or restructuring of the Company will be required, in whole or in
part.
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, introduction and
evolution 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.
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 adopted SFAS No. 131 for the year ended December 31, 1998.
6
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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:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials........................................ $ 308 $ 350
Work in process...................................... 429 364
Finished goods....................................... 4,113 4,551
--------- ---------
Total inventories.................................... $ 4,850 $ 5,265
======== ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
LINE OF CREDIT
In November 1997, the Company negotiated a $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 international accounts receivable, the Company's lending institution
eliminated international receivables as qualified accounts receivable for
borrowing collateral. The lending institution also increased the interest rate
for outstanding loan amounts to prime plus 3 1/2% from prime plus 2%. In October
1998, the lending institution reinstated a sub-line of credit up to an amount of
$600,000 for selected foreign accounts receivable.
The Company's initial line of credit agreement required it to maintain
a tangible net worth covenant of at least $13.5 million measured at the end of
each month. Since October 31, 1998 the Company has been in violation of this
covenant. This covenant violation allows the Company's lending institution to
call for collection of the outstanding loan balance. On April 12, 1999 the
lending institution granted the Company a waiver of past covenant violations and
waived its right to call the line of credit for these covenant violations. The
lending institution amended the line of credit agreement to measure the
Company's tangible net worth on a quarterly basis effective January 1, 1999, and
set the minimum tangible net worth covenant at $9.8 million as of March 31, 1999
and $9.0 million for all subsequent quarters. At March 31, 1999, the Company was
in compliance with the new covenant, and management believes that this new
covenant will be adequate for the Company to operate under in the foreseeable
future. However, there can be no assurances that the Company will not violate
the new covenant or that the outstanding loan balance will not be called by the
Company's lending institution upon violation of the new covenant. Concurrent
with the April 1999 waiver of default, the lending institution extended the line
of credit agreement to May 31, 2001. In connection with the waiver of default
and extension of the line of credit agreement, the Company granted the lending
institution 50,000 warrants at an exercise price of $2.00 per share. During the
quarter ended March 31, 1999, the Company recognized additional interest charges
of $97,000 in relation to these warrants, which were granted below market value.
Borrowings under the line are based on qualified domestic accounts
receivable and are collateralized by the Company's assets. At March 31, 1999,
the Company had approximately $939,000 outstanding of the approximately $2.1
million available under the line of credit agreement. At December 31, 1998, the
Company had approximately $2.2 million outstanding of the approximately $2.4
million available under the line of credit.
7
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6. SEGMENT INFORMATION:
For the year ended December 31, 1998, the Company adopted the Statement
on Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company's two reportable segments
are products and services. The Company evaluates the performance of its segments
based on gross profit. Under SFAS No. 131, the Company is required to provide
enterprise-wide disclosures about revenues by segment, long-lived assets by
geographic area and revenues from major customers.
REVENUES
Revenues consisted of the following (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
PRODUCT GROUP 1999 1998
------------- ---- ----
2200 $ 2,925 $ 1,163
2500 1,521 1,026
S1000 439 934
S10 364 1,507
Telecom 180 365
--------- --------
Total product revenues 5,429 4,995
Service revenues 1,887 2,246
--------- ---------
Total revenues $ 7,316 $ 7,241
========= ==========
GEOGRAPHIC INFORMATION
The Company sells its products and services through its foreign
affiliates in the United Kingdom, Germany and Italy. Information regarding
revenues and long-lived assets attributable to the United States and to all
foreign countries is stated below. The geographic classification of product and
service revenues was based upon the location of the customer.
The Company's product and service revenues for 1999, 1998 and 1997 were
generated in the following geographic regions (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
United States....................... $ 3,582 $ 2,823
Europe, Middle East and Africa...... 2,579 3,344
Pacific Rim, Latin America and .....
South America.................. 1,155 1.074
--------- ---------
Total............................... $ 7,316 $ 7,241
========= =========
Included in domestic product revenues are sales through systems
integrators and distributors to the Federal Government of approximately $486,000
and $1,110,000 in 1999 and 1998, respectively.
8
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The Company's long-lived assets were located as follows:
THREE MONTHS ENDED MARCH 31
--------------------------
1999 1998
---- ----
United States....................... $ 4,083 $ 5,496
United Kingdom...................... 226 48
Germany............................. - 282
Italy............................... 43 57
---------- ---------
Total long-lived assets............. $ 4,352 $ 5,583
========== =========
SIGNIFICANT CUSTOMERS
Customers that accounted for greater than 10% of total revenues in 1999
and 1998 are described below (in thousands).
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
Distributor 1.......................
Product........................ 956 *
Service........................ * *
-------- -------
Subtotal............................ 956 *
Distributor 2.......................
Product........................ * 761
Service........................ * 129
--------- --------
Subtotal........................... * 889
--------- --------
Total............................... 956 889
========= ========
* Revenue accounted for less than 10% of total revenues for the period.
REVENUES:
The Company's product revenues were generated in the following
geographic regions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Domestic............................................. $ 2,656 $ 1,763
Europe, Middle East and Africa....................... 1,768 2,512
Pacific Rim, Latin America and
South America................................... 1,005 720
--------- ----------
Total................................................ $ 5,429 $ 4,995
======== ========
</TABLE>
The Company's service revenues were generated in the following
geographic regions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Domestic............................................. $ 871 $ 1,159
Europe, Middle East and Africa....................... 867 678
Pacific Rim, Latin America and
South America................................... 149 409
------- ----------
Total................................................ $ 1,887 $ 2,246
======== ========
</TABLE>
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The Company's total revenues were generated in the following geographic
regions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Domestic............................................. $ 3,538 $ 2,923
Europe, Middle East and Africa....................... 2,583 3,134
Pacific Rim, Latin America and
South America................................... 1,194 1,183
--------- ---------
Total................................................ $ 7,316 $ 7,241
======== ========
</TABLE>
7. RESTRUCTURING CHARGE:
In March 1997, the Company recorded a restructuring charge of
approximately $1,350,000 before income taxes, which was reduced in May 1997 to a
net restructuring charge of 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. At March 31, 1999 there was approximately $100,000
remaining of the restructuring reserve. No restructuring charges were incurred
during the three months ended March 31, 1999.
8. FOREIGN CURRENCY EXCHANGE GAIN:
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. The Company had no foreign
exchange gains for the first quarter of 1999, and had a net translation gain of
approximately $53,000 for the first quarter of 1998.
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; however, for the
three months ended March 31, 1999 and 1998, the effect of common stock
equivalents has not been considered as they would have been antidilutive.
10. SUBSEQUENT EVENTS
On May 13,1999 the Company completed a private placement by selling
approximately 290,909 shares of Series A 8% Convertible Preferred Stock, par
value $.05 per share, at a price of $13.75 per share. Each share of preferred
stock has a liquidation preference equal to its purchase price, plus accrued and
unpaid dividends. Dividends are cumulative from May 13, 1999, and are payable
semi-annually, in arrears, on April 30 and October 31 of each year, commencing
October 31, 1999. Dividends are payable in cash or shares of Common Stock, at
the Company's election. The Preferred Stock is convertible at any time prior to
redemption, at the option of the holder, into Common Stock at a conversion rate
equal to five shares of Common Stock for each share of Preferred Stock, subject
to adjustment in certain circumstances. The Preferred Stock is redeemable at the
option of the Company at any time after the closing bid price for the Common
Stock on the NASDAQ Stock Market has equaled or exceeded $6.00 for 10
consecutive trading days. The redemption price is $17.50 per share plus accrued
but unpaid dividends to the date of repurchase.
10
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In connection with the private placement, the Company received net
proceeds of approximately $4.0 million to be used to fund operations, severance
and other restructuring activities, and marketing and sales initiatives. Within
30 days after the final closing of the offering, the Company is to file with the
Securities and Exchange Commission (SEC) a registration statement covering the
resale of the Common Stock underlying the Preferred Stock. The Company is to
undertake all reasonable efforts to cause the registration statement to be
declared effective by the SEC within 90 days after filing.
11
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NETRIX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
RECENT DEVELOPMENTS. The Company announced on April 7, 1999 that it
will integrate support for the iNOW! (interoperability NOW!) Profile into its
family of Internet telephony gateways. The iNOW Profile was developed by Lucent,
VocalTec and ITXC. The Profile is designed to facilitate interoperability
between gateways from different vendors and gatekeepers from different vendors.
Service providers, including next-generation telephony providers, CLECs, ISPs,
and ITSPs, are looking for ways to differentiate their services beyond offering
units of bandwidth or transport. Interoperability initiatives such as iNOW! will
enable competitive service providers to build infrastructures based on media
gateways like NETRIX's to provision next generation services. Those services,
based on a mixture of voice, fax and data, will be able to interoperate with
next generation central office equipment.
The company announced on April 21, 1999 the appointment of two senior
telecommunications executives to its board of directors. The additions of
Douglas J. Mello and Richard Yalen, formerly of The Bell Atlantic Corporation
(NYSE: BEL) and Cable and Wireless, USA (NYSE: CWP), respectively, expands the
NETRIX board from 4 to 6 members. The appointments reflect a recruitment
strategy adopted by the Company's new Chairman, Steven T. Francesco, to attract
to the Board of Directors senior executives with significant telecommunications
industry experience and contacts. Both Mello and Yalen have led
telecommunications service providers that are deploying voice and data networks
based on ATM, frame relay and voice over Internet protocol.
The board also formed two new oversight committees. Board members
Richard Yalen and William T. Rooker, Jr. will head the audit committee, and John
Faccibene and Douglas Mello will direct the company's compensation committee.
The Company announced on April 26, 1999 that its newly elected Board of
Directors is overseeing an immediate operational restructuring as part of an
overall plan to return to profitability. The effort is focusing on a reduction
of fixed costs, outsourcing non-critical manufacturing and services, and an
accelerated phase-out of older/low margin products. In addition, NETRIX is
aggressively expanding its direct sales force and focusing on service providers
such as ISP's, CLEC's and telecommunication carriers.
12
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In connection with the operational restructuring, the Company has
implemented a reduction-in-force that, when combined with previous actions, has
reduced headcount approximately 25% across all functional areas since the
beginning of 1999. The plan includes additional cost reduction measures, further
consolidation of domestic and international operations, initiatives to outsource
various operational activities, and an aggressive campaign to further penetrate
target markets and grow revenue. This austerity program will shift a substantial
portion of overhead from a fixed to a variable cost basis. The Company has
already finalized an office space renewal, projected to lower cash expenses by
approximately $3.0 million over the next ten years. In addition, a 20% reduction
in corporate business insurance premiums has been negotiated.
The Company announced on May 11, 1999, that Stephen T. Francesco,
Chairman, was appointed CEO, and that Lynn C. Chapman will maintain his position
as President and assume the role of COO.
On May 13,1999 the Company completed a private placement by selling
approximately 290,909 shares of Series A 8% Convertible Preferred Stock, par
value $.05 per share, at a price of $13.75 per share. In connection with the
private placement, the Company received net proceeds of approximately $4.0
million to be used to fund operations, severance and other restructuring
activities, and marketing and sales initiatives.
BACKGROUND. The results for first quarter of 1999 reflect an overall
increase in the revenues and expenses of the Company from the comparable period
in 1998. During the first quarter of 1999, 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.
REVENUES. For the three months ended March 31, 1999, total revenues
were approximately $7.3 million, an increase of approximately $75,000, or 1%,
over revenues of approximately $7.2 million for the three months ended March 31,
1998. The net increase in revenues was due primarily to an increase in product
revenues of approximately $434,000, or 9%, to $5.4 million, up from
approximately $5.0 million in the year earlier quarter, which was partially
offset by a decrease of approximately $359,000 in service revenues, or 16%, to
approximately $1.9 million, down from approximately $2.2 million in the year
earlier period. The increase in product revenues is the result of higher
revenues from the 2210 and 2550 series products, which was partially offset by a
decrease in revenues from older products. The decrease in service revenues is
the result of cancellations and non-renewals of maintenance contracts by various
customers using legacy equipment.
GROSS PROFIT. Gross profit decreased by approximately $521,000, or 14%,
to approximately $3.2 million for the most recent quarter, down from
approximately $3.7 million for the first quarter of 1998. As a percentage of
revenues, gross profit was approximately 44% and 51% for the quarters ended
March 31, 1999 and 1998, respectively, an overall decrease of approximately 7%.
Product gross profit decreased from approximately 58% in the first quarter of
1998 to 51% in the first quarter of 1999. This decrease was the combined result
a greater proportion of sales made through distributors which generally have
higher discounts than direct retail sales, a lower-margin product mix of
shipments, and higher manufacturing overhead applied to inventory cost of sales.
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 basis can vary within a wide range. The gross profit for
service revenues decreased from 37% in the first quarter of 1998 to 23% in the
first quarter of 1999. The decrease in service gross profit is a result of
decreased service revenues with equivalent service costs.
13
<PAGE>
SALES AND MARKETING. Sales and marketing expenses decreased by
approximately $424,000, or 21%, to approximately $1.6 million for the first
quarter of 1999, down from approximately $2.0 million for the first quarter of
1998. The decrease is primarily attributable to a decrease in personnel and
facility-related costs of approximately $175,000, reduced travel and
entertainment costs of approximately $138,000, lower marketing materials costs
of approximately $46,000, and a decrease in outside services of approximately
$63,000. Overall sales and marketing expenses are lower due to a combination of
staff reductions in international and domestic operations and controlled
spending.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by approximately $77,000, or 5%, to approximately $1.6 million for the three
months ended March 31, 1999, up from approximately $1.5 million from the year
earlier quarter. As a percentage of revenues, quarter over quarter R&D expenses
were unchanged at 22%. The increase in R&D expenses is due primarily to an
increase in personnel costs of approximately $125,000, which were partially
offset by a decrease in outside services of approximately $36,000. All of the
Company's research and development costs were charged to operations as incurred
during the periods reported.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by approximately $5,000 to approximately $1.1million for the most
recent quarter, which was equivalent to the year earlier period. The nominal
increase was the result of various minor variations in several expense
categories.
INTEREST AND OTHER INCOME, NET. The Company had net interest expenses
of approximately $140,000 in the first quarter of 1999 compared to approximately
$12,000 in the same period in 1998. The increase in net interest expense is the
combined result of a $97,000 accrual for the net cost of warrants to be issued
at below-market value to the Company's lending institution, higher debt levels
maintained under the line of credit, and lower interest income of approximately
$18,000 due to lower available funds invested during the first quarter of 1999.
FOREIGN EXCHANGE GAIN. The Company had no foreign exchange gains for
the first quarter of 1999, and had a net translation gain of approximately
$53,000 for the first quarter of 1998.
NET LOSS. For the first quarter of 1999, the Company had a net loss of
approximately $1.3 million, an increase of approximately $377,000 over a loss of
approximately $952.000 in the same period of 1998, due to all of the above
factors.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had approximately $157,000 of cash and
cash equivalents and net working capital of $6.5 million, compared to
approximately $2.5 million of cash and cash equivalents and net working capital
of $7.6 million at December 31, 1998. For the three months ended March 31, 1999
and 1998, total cash used by the Company was approximately $2.3 million and $1.0
million, respectively. In the first quarter of 1999, cash used in operating
activities was approximately $864,000, or approximately $344,000 less than
approximately $1.2 million used in operating activities in the year earlier
period. This decrease in cash used in operating activities during the current
quarter was primarily the result of a combination of higher net losses in the
current quarter of approximately $360,000, which were partially offset by
improvements in working capital of approximately $705,000 which was principally
the result of a comparative decrease in accounts receivable and decrease in
inventory, when compared to the activity of the year earlier quarter. In the
first quarter of 1999, cash flow was reduced by net payments on the line of
credit of approximately $1.2 million. In the first quarter of 1998, the cash
used by operations was primarily due to the negative cash flow from operations,
the increase in accounts receivable and the decrease in accrued liabilities over
the December 31, 1997 balances, which was offset by an increase in proceeds from
the line of credit by approximately $586,000.
14
<PAGE>
Inventory levels at March 31, 1999 were $415,000 lower than at December
31, 1998 and were $3.4 million lower than at March 31, 1998. This reduction is
the result of efforts that began during the second half of 1998 to bring
inventories in line with current sales volume, combined with the expected phase
out of older products.
Capital acquisitions during the first quarter of 1999 were $212,000
compared to $334,000 in the first quarter of 1998. These acquisitions were
primarily equipment used for research and development purposes and 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 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 international accounts receivable, the Company's lending institution
eliminated international receivables as qualified accounts receivable for
borrowing collateral. The lending institution also increased the interest rate
for outstanding loan amounts to prime plus 3 1/2% from prime plus 2%. In
October 1998, the lending institution reinstated a sub-line of credit up to an
amount of $600,000 for selected foreign accounts receivable. Borrowings under
the line are based on qualified domestic accounts receivable and are
collateralized by the Company's assets. At March 31, 1999, the Company had
approximately $ 2.1 million of total eligible borrowing availability and
approximately $939,000 outstanding under the line of credit. At December 31,
1998, the Company had approximately $2.4 million of eligible borrowing
availability and approximately $2.2 million outstanding under the line of
credit. As of March 31, 1999, the Company's domestic accounts receivable have
generated adequate borrowing for operations, and the Company has not had to use
the foreign sub-line of credit.
For the three months ended March 31, 1999 and 1998, the Company
experienced equivalent revenues, and net losses of approximately $1.3 million
and $1.0 million, respectively. As a result, the Company's tangible net worth
decreased from $11.2 million at December 31, 1998 to $10.0 million at March 31,
1999. The line of credit agreement negotiated in November 1997 required the
Company to maintain a tangible net worth of at least $13.5 million measured at
the end of each month. Since October 31, 1998 the Company has been in violation
of this covenant. This covenant violation allows the Company's lending
institution to call for collection of the outstanding loan balance. On April 12,
1999 the lending institution granted the Company a waiver of past covenant
violations and waived its right to call the line of credit for these covenant
violations. Concurrent with the April 1999 waiver of default, the lending
institution extended the line of credit agreement to May 31, 2001. The lending
institution amended the line of credit agreement to measure the Company's
tangible net worth on a quarterly basis effective January 1, 1999, and set the
minimum tangible net worth covenant at $9.8 million as of March 31, 1999 and
$9.0 million for all subsequent quarters. As of March 31, 1999, the Company was
in compliance with the new covenant, and management believes that this new
covenant will be adequate for the Company to operate under in the foreseeable
future. However, there can be no assurances that the Company will not violate
the new covenant or that the outstanding loan balance will not be called by the
lending institution upon violation of the new 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's plan is 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 sale 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
dilative 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. The
Company has implemented cost control measures and is continually evaluating
expense levels to mitigate its liquidity risk.
15
<PAGE>
YEAR 2000
The Year 2000 presents concerns for business and consumer computing.
Aside from the well-known problems with the use of certain 2-digit date formats
as the year changes from 1999 to 2000, the Year 2000 is a special case leap
year, and dates such as 9/9/99 were used by certain organizations for special
functions. The problem exists for many kinds of software and hardware, including
mainframes, mini-computers, PCs, and embedded systems.
Netrix Corp has divided the year 2000 task into three areas of concern,
Netrix Product, Netrix Suppliers, and Netrix Internal Systems. The Company's
core products have been reviewed, tested and if required implemented corrective
measures to ensure no year 2000 issues. This task is complete with information
regarding the Netrix Products available via Internet access and software release
notes. NETRIX suppliers are being asked to respond to the year 2000 issue. This
will be an ongoing process and is considered a low risk to the Company. Netrix
Internal systems have been audited and corrective measures are being taken to
correct identified year 2000 issues.
At the present time Internal Systems represent the largest area of
concern for the Company. The Internal Systems category has been further broken
down into hardware and software areas, business / operations applications,
engineering applications, Unix based technologies and PC based technologies. The
Company has identified all major hardware and software components that need to
be assessed and has performed a preliminary assessment of all hardware and
software identified. The Company has updated a majority of hardware in use and
is in the process of converting all software applications that are known to have
year 2000 issues. NETRIX anticipates completion of software conversions by
September 30, 1999 leaving the fourth quarter of 1999 for testing and
contingency measures. In order to ensure proper conversion of the key financial,
manufacturing, and ERP software, the Company has engaged the main supplier of
its software to assist with the conversion and implementation of the conversion.
The initial conversion of this critical system will be accomplished by June 30,
1999 and the final conversion for live production use in the third quarter of
1999.
Vendors or other third parties that could affect the Company's
operations include suppliers of utility services, travel and hotel services,
office supply vendors, equipment and technology vendors, mail, telephone,
Internet and other communications services. Each of the Company's departmental
directors has been instructed to communicate with their major suppliers with
respect to such vendors' year 2000 compliance status. All of the Company's
departments have been directed to make arrangements with an alternative vendor
if it appears that the current vendor will not achieve compliance by the year
2000. There can be no guarantee, however, that the systems of the Company's
major vendors, including providers of public utilities, will be timely
converted, or that a failure to convert by another company or organization, or a
conversion that is incompatible with the Company's systems, would not have an
adverse effect on the Company.
Although the Company anticipates that minimal business disruptions will
occur as a result of year 2000 issues, possible consequences include loss of
communications with members, inability to conduct marketing efforts and on-site
seminars as a result of travel and communications disruptions, delay in the
production and distribution of studies and reports, inability to conduct
research and surveys, and disruption of similar normal business activities. The
Company believes that the conversion and modification efforts by the Company and
its vendors will mitigate the risks associated with year 2000 issues. If,
however, the Company or its essential vendors do not complete the necessary
modifications or conversions in a timely manner or if such modifications or
conversions fail to achieve the proper results, the Company's operations may be
adversely effected.
16
<PAGE>
The Company does not intend to develop any contingency plans to address
possible failures by the Company or its vendors to the year 2000 compliant with
respect to information technology systems. The Company does not believe that
such contingency plans are required because it believes that the Company and its
information technology suppliers will be year 2000 compliant before January
2000. The Company currently does not have any contingency plans to address
possible failures by its vendors to be year 2000 compliant with respect to
non-information technology systems, but expects to develop such plans by June
1999.
While Year 2000 issues present a potential risk to the Company's internal
systems, distribution and supply chain, and facilities, the Company is
minimizing its risk with a concentrated effort. The Company is performing an
extensive assessment and is in the process of testing and remediating mission
critical components. The current plan is to have the majority of these
components identified by June 1999, with the remaining components resolved by
September 1999. Management currently believes that all critical systems will be
ready by January 1, 2000 and that the costs to address these issues will not
exceed the budgeted amounts. Management estimates the cost to address and
resolve Year 2000 issues will approximate $0.5 million, and these costs have
been included in the Company's operating plan for 1999.
17
<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: May 14, 1999 By:/s/ Lynn C. Chapman
------------------------------------------
LYNN C. CHAPMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
18
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF NETRIX CORPORATION FOR THE QUARTER ENDED MARCH
31, 1999. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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