<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 March 31, 2000
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 May 3, 2000 there were 34,218,307 shares of the registrant's Common Stock,
$.05 par value per share, outstanding.
<PAGE>
NETRIX CORPORATION
FORM 10-Q
MARCH 31, 2000
INDEX
PAGE NO.
PART I -- FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET
RISK 16
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 16
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEMS -- 3, 4, AND 5 16
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------------
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Product $7,053 $ 5,429
Service and other 1,890 1,887
------------- --------------
Total revenues 8,943 7,316
Cost of revenues:
Product 4,184 2,667
Service and other 1,304 1,452
------------- --------------
Total cost of revenues 5,488 4,119
Gross profit 3,455 3,197
Operating expenses:
Sales and marketing (exclusive of stock compensation of $23 in 2000) 3,973 1,625
Research and development (exclusive of stock compensation of $599 in 2000)
2,675 1,646
General and administrative (exclusive of stock compensation of $5,873 in 2000)
2,349 1,032
In process research and development 30,800 --
Amortization of acquired intangibles 5,143 66
Stock compensation expense 6,495 --
Restructuring charge 427 --
------------- --------------
Total operating expenses 51,862 4,369
Loss from operations (48,407) (1,172)
Interest and other expense, net (30) (140)
--------------- -------------
Loss from operations $ (48,437) $ (1,312)
=============== =============
Basic and diluted loss per common share $ (1.57) $ (0.11)
=============== =============
Weighted average common shares outstanding 30,901 11,451
=============== =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
NETRIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
As of As of
March 31 December 31
2000 1999
--------------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,593 $ 5,930
Accounts receivable, net 9,682 9,697
Inventories 3,326 4,304
Other current assets 698 531
--------------------- -------------------
Total current assets 31,299 20,462
--------------------- -------------------
Property and equipment, net 5,814 4,560
Goodwill and intangibles, net 121,093 70,153
Deposits and other assets 132 78
--------------------- -------------------
TOTAL ASSETS $ 158,338 $ 95,253
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 1,059
Accounts payable 5,696 6,703
Accrued liabilities 6,076 4,680
Obligations under capital leases--current portion 850 --
--------------------- -------------------
Total current liabilities 12,622 12,442
--------------------- -------------------
Other liabilities:
Obligations under capital leases--Long-term 417 --
Other 296 352
Commitments and Contingencies
--------------------- -------------------
TOTAL LIABILITIES 13,335 12,794
--------------------- -------------------
Stockholders' equity:
Common stock 1,730 1,463
Additional paid-in capital 277,950 151,694
Deferred compensation (15,531) --
Accumulated deficit (120,880) (72,443)
Warrants 2,041 2,041
Accumulated other comprehensive loss (307) (296)
--------------------- -------------------
Total stockholders' equity 145,003 82,459
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 158,338 $ 95,253
===================== ===================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (48,437) $ (1,312)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,811 434
Non-cash expense pursuant to issuance of warrants -- 97
In-process research and development charge 30,800 --
Stock compensation expense 6,495 --
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable 15 (186)
Inventories 979 415
Other current assets (191) (5)
Deposits and other assets (55) (70)
Accounts payable (1,803) (282)
Accrued liabilities 1,056 46
Other liabilities (56) --
---------- ---------
Net cash used in operating activities (5,386) (863)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of Aetherworks, net of cash acquired (9,558) --
Purchases of property and equipment (519) (212)
---------- ---------
Net cash used in investing activities (10,077) (212)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit, net (1,058) (1,228)
Proceeds from stock sale, net of offering costs 25,086 --
Proceeds from exercise of stock options 3,045 --
Proceeds from employee stock purchase plan 65 --
---------- ---------
Net cash provided by (used in) financing activities 27,137 (1,228)
---------- ---------
Effect of foreign currency exchange rate changes on cash and cash
equivalents (11) (28)
---------- ---------
Net increase (decrease) in cash and cash equivalents 11,662 (2,331)
Cash and cash equivalents, beginning of period 5,930 2,488
Cash and cash equivalents, end of period $ 17,593 $ 157
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $178 $140
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
BUSINESS DESCRIPTION
Netrix Corporation doing business as Nx Networks, (the "Company" or "Nx
Networks"), is a worldwide provider of internet telephony and data networking
solutions. The Company combines patented, switched, compressed voice and data
technology with advanced packet data networking capabilities to provide
networking solutions that improve network performance and deliver an array of
tangible network services. The Company is headquartered in Herndon, Virginia and
conducts operations out of its locations in the United States, United Kingdom,
Hong Kong, France and Italy. The Company's customers include service providers,
multinational corporations and government agencies in over 60 countries.
MERGERS AND ACQUISITIONS
ACQUISITION OF OPENROUTE
On December 22, 1999, the Company completed the merger with OpenROUTE Networks
("OpenROUTE") with and into Netrix Corporation. The transaction has been
accounted for under the purchase method of accounting for business combinations
and the operating results of OpenROUTE have been included in the accompanying
condensed consolidated financial statement from the date of acquisition.
ACQUISITION OF AETHERWORKS
On December 31, 1999, the Company entered into an agreement (the "Agreement") to
acquire AetherWorks Corporation ("AetherWorks"), a development stage company
with no revenue since it's inception in 1993. AetherWorks is developing voice
and data carrier class convergence solutions for the telecommunications
industry. The acquisition was effected, on March 16, 2000, through the merger of
AetherWorks with and into a wholly-owned subsidiary of the Company. The
acquisition was accounted for under the purchase method of accounting for
business combinations and the operating results of AetherWorks have been
included in the accompanying condensed consolidated financial statements from
the date of acquisition.
Under the terms of the AetherWorks transaction, the holders of AetherWorks
common stock, warrants, and stock options converted at a rate of 1.38 shares of
Netrix Common Stock, warrants, and stock options. The Company issued 2,622,278
shares of common stock and warrants and options to acquire 867,722 shares of
common stock. The shares were valued at $22.94, average of closing prices for
three days before and after March 16, 2000. The warrants and options were valued
at approximately $16.2 million using the Black-Scholes model assuming 130
percent volatility, a risk free interest rate of 6.32 percent and an exercise
period of three years. Pursuant to the Agreement, the Company settled an $8.0
million obligation of AetherWorks upon the closing of the acquisition.
Under the terms of the Agreement, an adjustment will be made to the merger
consideration if the closing price of its common stock on the Nasdaq Stock
Market for the 15 trading day period ended October 31, 2000 does not equal or
exceed $22.50 per share. In such event, additional shares of its common stock
will be issued such that the consideration per share of AetherWorks common stock
is equal to $22.50 per share based upon that average closing price; provided the
total number of shares of its common stock issued in the merger will not exceed
19.9% of the total of the Company's then outstanding shares. At closing, the
Company also issued to AetherWorks' employees options to acquire a total of 1.0
million shares of its common stock. The options have an exercise price of $6.81
per share and vest over a two to three year period. The Company recorded
deferred compensation expense of $16.1 million for the difference between the
exercise price and the fair market of the stock on the date of grant. This
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<PAGE>
expense will be amortized over the options vesting period of which approximately
$0.6 was expensed in the quarter ended March 31, 2000.
The purchase price of Aetherworks, including transaction costs of $0.3 million
was $87.2 million. A summary of assets and liabilities acquired, at estimated
fair market value was as follows (in thousands):
Current assets $ 99
Property and equipment 1,403
Assembled workforce 300
In-process R&D 30,800
Goodwill 55,745
Current liabilities (1,157)
-------
$87,190
The amount allocated to assembled workforce and goodwill is being amortized over
their estimated useful life of 4 years using the straight-line method.
The Company valued in process research and development "IPR&D" acquired in the
acquisition at $30.8 million based upon an independent appraisal of the
development project for which technological feasibility had not been established
and no alternative future uses exist. The acquired IPR&D project is targeted at
the telecommunications market. This product is being developed specifically for
and is intended to have substantial incremental functionality, greatly improved
speed and wider range of interfaces than NX Networks then current technology.
The value of the IPR&D project identified was determined by estimating the
future cash flows from the project, once commercially feasible, discounting the
net cash flows back to their present value and then applying a percentage of
completion to the calculated value. The percentage of completion for the project
was determined using milestones representing management's estimate of effort,
value added and degree of difficulty of the portion of the project completed as
of March 16, 2000, as compared to the remaining research and development to be
completed to bring the project to technical feasibility. The development process
was grouped into three phases with each phase containing between one and five
milestones. The three phases were: (i) researching the market requirements and
the engineering architecture and feasibility studies; (ii) design and
verification; and (iii) prototyping and testing the product (both internal and
customer testing). Aetherworks project started in 1998, as of March 16, 2000 the
Company estimated that the project was 75% complete.
Development of the technology remains a substantial risk to the Company due to
factors including the remaining effort to achieve technical feasibility, rapidly
changing customer needs and competitive threats from other companies.
Additionally, the value of the other intangible assets acquired may become
impaired. Failure to bring these products to market in a timely manner could
adversely affect future sales and profitability of the combined company.
The unaudited pro forma information presented below reflects the acquisition of
Aetherworks and OpenROUTE as if it had occurred on January 1, 2000 and 1999,
excluding the one time $30.8 million IPR&D charge in connection with the
Aetherworks acquisition. The results are not necessarily indicative of future
operating results or of what would have occurred had the acquisition actually
been consummated on that date (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31
-----------------------------
2000 1999
-------------- -------------
(unaudited)
Revenues $ 8,943 $ 10,877
Net Loss (23,352) (14,108)
Net Loss per share $ (.70) $ (.47)
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<PAGE>
RISKS AND OTHER IMPORTANT FACTORS
The Company has reported a net loss in each of the last five years and for the
three months ended March 31, 2000. The Company reported net losses of $48.4
million inclusive of IPR&D charges of $30.8 million. The success and the future
of the Company is dependent on its ability to generate operating income. The
Company's ability to generate operating 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 new products is
continuing to evolve; however, due to market conditions, competitive pressures,
and other factors beyond its control there can be no assurances that the Company
will be able to adequately increase new product sales in the future.
During March 2000, the Company terminated its line of credit agreement with
Coast Business Credit. The Company is in negotiation with various financial
institutions for a new line of credit. Due to the Company's current cash
balance, management does not believe that securing a line of credit is required
to fund operations for the foreseeable future.
In March 2000, the Company completed an offering of 1.0 million shares of common
stock. The offering generated proceeds of $25.1 million net of issuance costs of
$0.9 million. $8.0 million of the proceeds were used to satisfy an AetherWorks
obligation, which was a condition to closing the acquisition. The Company closed
the AetherWorks acquisition on March 16, 2000. The remaining proceeds will be
used for general corporate and working capital purposes. Management believes
that these proceeds and future sales and the collection of the related account
receivables are sufficient to meet the Company's cash obligations throughout
2000.
The Company regularly reviews opportunities to further its business strategy
through strategic alliances with investment in, or acquisitions of businesses
that the Company believes are complementary to its current and planned
operations. The Company's ability to consummate strategic alliances and
acquisitions, and to make investments that may be of strategic significance may
require the Company to obtain additional debt and/or equity financing. There can
be no assurance that the Company will be successful in arranging such financing
on terms management considers acceptable or at all.
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 success of the Company is also dependent on its ability to generate adequate
cash for operations and capital needs. For the three months ended March 31, 2000
the Company's operating activities used $5.4 million compared to $0.9 million
operating activities used for the three months ended March 31, 1999. The cash
used by operations was primarily due to continued loss from operations. At March
31, 2000, the Company had $17.6 million in cash and cash equivalents. The
Company is relying on future sales and the collection of the related accounts
receivable to meet its cash obligations.
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.
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<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 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 that
are not under its control for a significant portion of its revenues,
particularly in its international regions. Additionally, the Company relies on
sales to a leasing company and reseller channels that are not under its control
for a portion of its revenues, particularly in its international regions. During
the three months ended March 31, 2000, the Company recognized $0.2 million in
revenues from sales to a leasing company. 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. BASIS OF PRESENTATION:
The accompanying condensed consolidated unaudited financial statements included
herein have been prepared by the Company in accordance with general accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") for
reporting on Form 10-Q. Accordingly, certain information and footnote
disclosures required for complete financial statements are not included herein.
It is recommended that these condensed financial statements be read in
conjunction with the financial statements and related notes of the Company as
reported on the Company's Form-10K files with the SEC in March 2000.
In the opinion of management all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the condensed
consolidated financial position, results of operations, and cash flows at the
dates and for the periods presented have been included. The condensed balance
sheet presented as of December 31, 1999 has been derived from the financial
statements that have been audited by the Company's independent public
accountants. The results of operations for the three months ended March 31, 2000
may not be indicative of the results that may be expected for the year ending
December 31, 2000 or any other period within calendar year 2000.
3. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. The Company
does not expect this standard to have a material effect on its financial
statements.
4. CASH EQUIVALENTS:
Cash equivalents are primarily bank deposits. These investments are carried at
cost which approximates market value.
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<PAGE>
5. INVENTORIES:
Inventories consisted of the following:
AS OF MARCH 31 AS OF DECEMBER 31
-------------- -----------------
(in thousands)
2000 1999
---- ----
Raw materials $ 443 $ 546
Work in process 159 353
Finished goods
2,724 3,405
------------ -----------
Total inventories $ 3,326 $ 4,304
============= ===========
6. COMPREHENSIVE LOSS:
Comprehensive income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income (loss) refers to revenue,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income (loss), but excluded from net income
(loss). For the three months ended March 31, 2000 and 1999, the elements within
other comprehensive income, net of tax, consist solely of foreign currency
translation adjustments. Comprehensive loss for the three months ended March 31,
2000 and 1999, is $48.4 million and $1.4 million respectively.
7. 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 consisted of the following:
THREE MONTHS ENDED MARCH 31
---------------------------
(in thousands)
PRODUCT GROUP 2000 1999
- ------------- ---- ----
2200 $ 1,544 $ 2,925
2500 3,227 1,521
S1000 -- 439
S10 176 364
Telecom 46 180
Internet Access 1,791 --
LAN 269
------------ ------------
--
Total product revenues 7,053
5,429
Service revenues 1,890
------------ ------------
1,887
Total revenues $ 8,943 $ 7,316
============ ===========
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GEOGRAPHIC INFORMATION
The Company sells its products and services through its foreign affiliates in
the United Kingdom, Hong Kong, France 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 is based upon the location of the customer.
The Company's product and service revenues for the three months ended March 31,
2000 and March 31, 1999 were generated in the following geographic regions:
THREE MONTHS ENDED MARCH 31
---------------------------
(in thousands)
2000 1999
---- ----
United States $ 4,840 $ 3,582
Europe, Middle East and Africa 3,019 2,579
Pacific Rim, Latin America
and South America 1,084 1,155
--------- ----------
Total $ 8,943 $ 7,316
========== ==========
Included in domestic product and service revenues are sales through systems
integrators and distributors to the Federal Government of $508,000 for the three
months ended March 31, 2000 and $486,000 for the three months ended March 31,
1999.
The Company's long-lived assets were located as follows:
AS OF MARCH 31
--------------
(in thousands)
2000 1999
---- ----
United States $ 126,730 $ 4,083
United Kingdom 162 226
Italy 12 43
France
3 --
------------ ------------
Total long-lived assets $ 126,907 $ 4,352
============ ============
SIGNIFICANT CUSTOMERS
There were two customers that accounted for greater than 10% of total revenues
for the three months ended March 31, 2000 and one customer for the three months
ended March 31, 1999.
THREE MONTHS ENDED MARCH 31
---------------------------
(in thousands)
2000 1999
---- ----
Distributor 1
Product 1,184 956
Service * *
Distributor 2
Product 882 *
Service 45 *
* Revenue accounted for less than 10% of total revenues for the period.
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8. STOCK COMPENSATION EXPENSE:
Based on the termination agreement with the former chief executive officer of
OpenROUTE, the Company issued the former executive 100,000 shares of common
stock and 100,000 options to acquire common stock at $6.00 per share. During the
three months ended March 31, 2000, the Company recognized stock compensation
expense of $5.1 million for the fair value of the shares and options issued.
In connection with the termination of certain employees during the three months
ended March 31, 2000 the Company vested stock options that would have otherwise
been forfeited, resulting in stock compensation expense of $670,000.
In conjunction with the acquisition of AetherWorks, the Company issued 1.0
million options to acquire common stock at $6.81, to former AetherWorks
employees. The Company recorded compensation charges of $16.1 million related to
the difference between the option exercise price and the market value of the
underlying common stock. The expense will be recognized over the respective
vesting period of the options. During the three months ended March 31, 2000, the
Company recognized compensation expense of $599,000.
During the three months ended March 31, 2000, the Company issued warrants to
purchase 16,000 shares of common stock to non-employees for services provided
resulting in stock compensation charges of $133,000 based upon a Black Scholes
valuation.
9. RESTRUCTURING CHARGE:
In March 2000, the Company announced and implemented a consolidation program to
reduce and economize its work force as part of its acquisition integration
program. The restructuring will result in an overall reduction of personnel and
related compensation and other associated operating costs of the Company. The
reduction-in-force will occur over approximately a three-month period and
severance payments will generally be made in lump sum in June 2000. The
restructuring charges of $427,000 resulted from $307,000 of accrued severance
and benefit costs associated with a reduction-in-force of 13 former OpenROUTE
employees and approximately $100,000 of accrued facility costs resulting from
the consolidation of facilities and premature termination of various office
leases.
10. 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 Accumulated other comprehensive loss 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 or losses for the three months ended March 31, 2000 and
the three months ended March 31, 1999.
11. 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, 2000 and March 31, 1999, the effect of common stock equivalents has
not been considered as they would have been antidilutive.
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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. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results".
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS. On February 10, 2000, the Company filed form S-3 offering
1.0 million shares of common stock. The offering generated net proceeds of $25.1
million. The proceeds were used to satisfy an $8.0 million AetherWorks
obligation, which was a condition to closing the acquisition of AetherWorks. The
remaining proceeds will be used for general corporate and working capital
purposes.
On February 23, 2000, the Company announced the appointment of Bill Yundt to the
Board of Directors. Mr. Yundt is currently Vice President of Network Operations
for Microsoft Corporation.
During March 2000, the Company terminated its line of credit agreement with
Coast Business Credit. The Company is in negotiation with various financial
institutions for a new line of credit. Due to the Company's current cash
balance, management does not believe that securing a line of credit is required
to fund operations for the foreseeable future.
On March 16, 2000, the Company completed the acquisition of Aetherworks. The
transaction has been accounted for under the purchase method of accounting for
the business combination and the operating results of Aetherworks have been
included in the accompanying condensed consolidated financial statement from the
date of acquisition.
On December 22, 1999, the Company completed the merger with OpenROUTE Networks
("OpenROUTE") with and into Netrix Corporation. The transaction has been
accounted for under the purchase method of accounting for the business
combination and the operating results of OpenROUTE have been included in the
accompanying condensed consolidated financial statement from the date of
acquisition.
NET LOSS. On March 16, 2000 the Company completed the acquisition of
Aetherworks. The results of operations for the three months ended March 31, 2000
include the results of Aetherworks from the date of acquisition. For the three
months ended March 31, 2000, the Company had a net loss of $48.4 million,
compared to a net loss of $1.3 million for the three months ended March 31,
1999. The increase in net loss resulted from non-cash charges for in-process R&D
expense of $30.8 million, stock compensation expense of $6.5 million, G&A
expenses of $0.5 million, R&D expenses of $1.0 million, restructuring expense of
$0.4 million, and amortization of acquired intangibles of $5.1 million. The
three month changes in net loss resulted from additional expense associated with
the acquisition of Aetherworks and OpenROUTE. The Company has instituted an
on-going acquisition integration program of expense reduction to eliminate
duplicated functions at the acquired companies.
-13-
<PAGE>
REVENUES. For the three months ended March 31, 2000, revenues increased $1.6
million or 22% to $ 8.9 million, from $7.3 million for the three months ended
March 31, 1999. The increase in revenues was due primarily to the acquisition of
OpenROUTE in December 1999. For the three months ended March 31, 2000, product
revenues increased $1.6 million, or 30% to $7.0 million, from $5.4 million for
the three months ended March 31, 1999. For the three months ended March 31, 2000
service revenues remained essentially the same compared to the three months
ended March 31, 1999. The increase in product revenues is primarily the result
of the merger with OpenROUTE.
GROSS PROFIT. For the three months ended March 31, 2000, gross profit increased
by $289,000, or 9%, to $3.5 million, from $3.2 million for the three months
ended March 31, 1999. As a percentage of revenues, gross profit decreased to 39%
for the three months ended March 31, 2000, from 44% for the three months ended
March 31, 1999. The decrease in gross profit as a percentage of revenue is due
to the product mix as result of the merger with OpenROUTE. For the three months
ended March 31, 2000 gross profit for product revenue increased $138,000 or 5%
to $2.9 million from $2.8 million for the three months March 31, 1999. For the
three months ended March 31, 2000 gross profit for service revenues increased
$151,000 or 35% to $586,000 from $435,000 for the three months ended March 31,
1999. 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 three month
increase in service gross profit is primarily the result cost saving measures.
SALES AND MARKETING. For the three months ended March 31, 2000 sales and
marketing expenses increased by $2.4 million, or 144%, to $4.0 million from $1.6
million for the three months ended March 31, 1999. The increase represents
marketing expenses of $1.0 million, sales commission expenses of $0.4 million,
wages and salaries of $0.5 million and travel expenses of $0.3 million. The
increase in marketing expenses is primarily due to advertising, increased
participation in trade shows and the production of marketing materials
associated with the new Nx Networks logo and name.
RESEARCH AND DEVELOPMENT. For the three months ended March 31, 2000, research
and development expenses increased $1.0 million or 62% to $2.6 million from $1.6
million for the three months ended March 31, 1999. The increase represents wages
and salaries of $0.3 million due to the merger with OpenROUTE, consulting fees
and other engineering expense of $0.5 million, depreciation expense of $0.1
million and other expense such as rent, telephone, travel and recruiting fees.
GENERAL AND ADMINISTRATIVE. For the three months ended March 31, 2000 general
and administrative expenses increased $1.3 or 127% to $2.3 million from $1.0 for
the three months ended March 31, 1999. The increase represents $0.3 million in
wages and salaries, legal and accounting fees of $0.5 million, rent expense of
$0.1 million, depreciation expense of $0.1 million and other general operating
expenses of $0.3 million. The majority of the increase are directly associated
with the newly merged companies.
AMORTIZATION OF ACQUIRED INTANGIBLES. For the three months ended March 31, 2000
amortization expense increased $5.0 million to $5.1 million from $0.1 million
for the three months ended March 31, 1999. The increase represents in goodwill
associated with the OpenROUTE merger in December 1999 and the acquisition of
Aetherworks in March 2000.
STOCK COMPENSATION. The Company incurred stock compensation expense of $6.5
million as a result of stock issued to and accelerated vesting of stock options
to a former executives of OpenROUTE, acceleration of stock options of employees
terminated as part of restructuring and stock options issued below market to
certain employees in connection with the acquisition of Aetherworks.
IN-PROCESS RESEARCH AND DEVELOPMENT. For the three months ended March 31, 2000
the Company incurred a one-time charge of $30.8 million associated with the
acquisition of Aetherworks. The Company valued in process research and
development (IPR&D) acquired in the acquisition at $30.8 million based upon an
independent appraisal of the development project for which technological
feasibility had not been established and no alternative future uses exist. The
Company acquired IPR&D project is targeted at the telecommunications market.
This product is being developed specifically for and is intended to have
substantial incremental functionality, greatly improved speed and wider range of
interfaces than NX Networks then current technology.
-14-
<PAGE>
The value of the IPR&D project identified was determined by estimating the
future cash flows from the project, once commercially feasible, discounting the
net cash flows back to their present value and then applying a percentage of
completion to the calculated value. The percentage of completion for the project
was determined using milestones representing management's estimate of effort,
value added and degree of difficulty of the portion of the project completed as
of March 16, 2000, as compared to the remaining research and development to be
completed to bring the project to technical feasibility. The development process
was grouped into three phases with each phase containing between one and five
milestones. The three phases were: (I) researching the market requirements and
the engineering architecture and feasibility studies; (ii) design and
verification; and (iii) prototyping and testing the product (both internal and
customer testing). Aetherworks project started in 1998, as of March 16, 2000 the
Company estimated that the project was 75% complete.
RESTRUCTURING RESERVE. In March 2000, the Company announced and implemented a
consolidation program to reduce and economize its work force as part of its
acquisition integration program. The restructuring will result in an overall
reduction of personnel and related compensation and other associated operating
costs of the Company. The reduction-in-force will occur over approximately a
three-month period and severance payments will generally be made in lump sum in
June 2000. The restructuring charges of $0.4 million resulted from $0.3 million
of accrued severance and benefit costs associated with a reduction-in-force of
13 former OpenROUTE employees, and $0.1 million of accrued facility costs
resulting from the consolidation of facilities and premature termination of
various office leases. As of March 31, 2000 no payments have been made related
to the restructuring charge.
INTEREST AND OTHER EXPENSE, NET. For the three months ended March 31, 2000, the
Company had net interest expenses of $30,000 compared to net interest expense of
$130,000 for the three months ended March 31, 1999. The decrease is a result of
the Company's termination of the loan balances with Coast Business Credit.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $17.6 million of cash and cash equivalents
and net working capital of $18.7 million, compared to $157,000 of cash and cash
equivalents and net working capital of $6.5 million at March 31, 1999. For the
three months ended March 31, 2000, the total cash used by operations was $5.4
million compared to $0.9 million for the three months ended March 31, 1999.
Non-cash items consisting of depreciation and amortization of $5.1 million,
stock compensation expense of $6.5 million and in-process R&D cost of $30.8
million contributed to the losses of $48.4 million. The cash used by operations
was primarily due to continued losses from operations.
In March 2000, the Company completed an offering of 1.0 million shares of common
stock. The offering generated proceeds of $25.1 million net of issuing costs of
$ 0.9 million. $8.0 million of the proceeds were used to satisfy an AetherWorks
obligation, which was a condition to closing the acquisition. The Company closed
the AetherWorks acquisition on March 16, 2000. The remaining proceeds will be
used for general corporate and working capital purposes. Management believes
that these proceeds and future sales and the collection of the related accounts
receivables are sufficient to meet the Company's cash obligations throughout
2000.
Capital acquisitions during the three months ended March 31, 2000 were $0.5
million compared to $0.2 million for the three months ended March 31, 1999.
These acquisitions were primarily equipment used for research and development
purposes and computer and test equipment.
-15-
<PAGE>
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not a party to any market risk sensitive instrument that is
material to the Company, its financial position or results of operations, either
for trading purposes or otherwise.
-16-
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. NOT APPLICABLE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In March 2000, we issued 2,301,436 shares of common stock in connection with the
acquisition of AetherWorks Corporation. The shares were issued to the then
stockholders of AetherWorks in exchange for all of their shares of AetherWorks,
such that AetherWorks became a wholly-owned subsidiary of ours. In connection
with this transaction, we relied upon the exemption from registration under the
Securities Act of 1933 provided by Section 4(2) of the Securities Act.
In January 2000, we issued 100,000 shares of common stock to Bryan Holley in
connection with the termination of his employment with us. In connection with
this transaction, we relied upon the exemption from registration under the
Securities Act provided by Section 4(2) of the Securities Act.
During the three month period ended March 31, 2000 we issued Warrants to
purchase 16,000 shares of common stock to non-employees for services rendered to
us. In connection with these transactions, we relied upon the exemption from
registration under the Securities Act provided by Section 4(2) of the Securities
Act.
ITEMS 3, 4 AND 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule reflecting the unaudited financial statements
of the Company for the quarter ended March 31, 2000.
(b) Reports on Form 8-K
During the quarter ended March 31, 2000, we filed Current Reports on Form 8-K on
January 14, 2000, February 23, 2000 and March 31, 2000.
-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 10, 2000
By: /S/ STEVEN T. FRANCESCO
----------------------------------------
STEVEN T. FRANCESCO
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
By: /S/ PETER J. KENDRICK
-----------------------------------------
PETER J. KENDRICK
VICE PRESIDENT FINANCE AND ADMINISTRATION AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
-18-
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF NETRIX CORPORATION FOR THE PERIOD ENDED
MARCH 31, 2000. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,593
<SECURITIES> 0
<RECEIVABLES> 9,682
<ALLOWANCES> 3,601
<INVENTORY> 3,326
<CURRENT-ASSETS> 31,299
<PP&E> 20,212
<DEPRECIATION> (14,398)
<TOTAL-ASSETS> 158,338
<CURRENT-LIABILITIES> 12,622
<BONDS> 0
0
0
<COMMON> 1,730
<OTHER-SE> 143,273
<TOTAL-LIABILITY-AND-EQUITY> 158,338
<SALES> 8,943
<TOTAL-REVENUES> 8,943
<CGS> 5,488
<TOTAL-COSTS> 5,488
<OTHER-EXPENSES> 51,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (30)
<INCOME-PRETAX> (48,407)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,407)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,407)
<EPS-BASIC> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
