<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
NX NETWORKS, INC.
(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 August 7, 2000 there were 35,339,175 shares of the registrant's Common Stock,
$.05 par value per share, outstanding.
<PAGE>
NX NETWORKS, INC.
FORM 10-Q/A
June 30, 2000
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
This Quarterly Report on Form 10-Q/A is being filed by Nx Networks Inc. (the
"Company") to amend and restate Items 1 and 2 of Part I and Item 6 of Part II of
the Company's Form 10-Q as of June 30, 2000 and for the three and six months
then ended filed with the Securities and Exchange Commission on August 14, 2000
to reflect the Company's reversal of sales transactions to certain value added
resellers. See Note 1 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C>
PART I -- FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the six
and the three months ended June 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 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 14
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET
RISK 17
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 18
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEMS 3 THROUGH 5 18
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
---------------- ------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Product $ 13,477 $9,932 $ 6,424 $4,503
Service and other 3,896 3,395 2,006 1,508
--------- --------- ---------- ---------
Total revenues 17,373 13,327 8,430 6,011
Cost of revenues:
Product 8,362 4,880 4,179 2,212
Service and other 2,497 2,508 1,193 1,057
--------- --------- ---------- ---------
Total cost of revenues 10,859 7,388 5,372 3,269
Gross profit 6,514 5,939 3,058 2,742
Operating expenses:
Sales and marketing (exclusive of stock
compensation of $147 and $124 in the six
and three months ended June 30, 2000, respectively) 7,772 3,032 3,799 1,407
Research and development (exclusive of stock
compensation of $2,280 and $1,681
in the six and three months ended
June 30, 2000, respectively) 7,641 3,358 4,966 1,713
General and administrative (exclusive of
stock compensation of $6,989 and $1,116
in the six and three months ended
June 30, 2000, respectively and $97 for the six
months ended June 30, 1999) 4,571 2,088 2,222 1,152
In-process research and development 30,800 -- -- --
Amortization of acquired intangibles 13,274 132 8,131 66
Stock compensation expense 9,416 97 2,921 --
Restructuring charge 427 900 -- 900
---------- ------ ------- -------
Total operating expenses 73,901 9,607 22,039 5,238
Loss from operations (67,387) (3,668) (18,981) (2,496)
Interest expense (190) (204) (12) (48)
Interest income 310 27 239 13
Other income (expense), net 219 4 142 2
---------- ------- ------- -------
Net loss (67,048) (3,841) (18,612) (2,529)
Dividend on preferred stock -- (40) -- (40)
--------- ------- -------- -------
Net loss attributable to common stockholders $(67,048) $(3,881) $(18,612) $(2,569)
========= ======== ========= ========
Basic and diluted loss per common share $ (2.03) $(0.34) $ (0.53) $(0.22)
========= ======== ========= ========
Weighted average common shares outstanding 33,037 11,493 34,846 11,496
========= ======== ========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
NX NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
As of As of
June 30 December 31
2000 1999
--------------------- -------------------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 15,315 $ 5,930
Accounts receivable, net 6,963 9,697
Inventories 4,051 4,304
Other current assets 948 531
------------ -----------
Total current assets 27,277 20,462
Property and equipment, net 4,961 4,560
Goodwill and intangibles, net 114,843 70,153
Deposits and other assets 276 78
------------ ----------
TOTAL ASSETS $ 147,357 $ 95,253
============ ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Line of credit $ -- $ 1,059
Accounts payable 7,804 6,703
Accrued liabilities 5,992 4,680
Obligations under capital leases--current portion 917 --
------------ -----------
Total current liabilities 14,713 12,442
------------ -----------
Other liabilities:
Obligations under capital leases--long-term 258 --
Other 150 352
---------- -----------
TOTAL LIABILITIES 15,121 12,794
---------- -----------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.05 par value; 55,000,000 and
36,800,000 shares authorized;
35,339,000 and 29,260,000 shares
issued and outstanding,
respectively. 1,767 1,463
Additional paid-in capital 283,443 151,694
Deferred compensation (14,499) --
Accumulated deficit (139,491) (72,443)
Warrants 2,357 2,041
Shareholder note receivable (1,000) --
Accumulated other comprehensive loss (341) (296)
------------ ----------
Total stockholders' equity 132,236 82,459
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 147,357 $ 95,253
============ ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
NX NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (67,048) $ (3,841)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 14,395 918
In-process research and development charge 30,800 --
Stock compensation expense 9,416 97
Changes in assets and liabilities, net of
effect of acquisition:
Accounts receivable 2,734 1,571
Inventories 252 553
Other current assets (441) 196
Deposits and other assets (198) (54)
Accounts payable 1,039 (455)
Accrued liabilities 304 303
Other liabilities (201) --
-------- ---------
Net cash used in operating activities (8,948) (712)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of Aetherworks, net
of cash acquired (9,558) --
Purchases of property and equipment (156) (121)
Note receivable from shareholder (1,000) --
-------- --------
Net cash used in investing activities (10,714) (121)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit, net (1,058) (1,739)
Proceeds from private placement, net of placement cost -- 4,012
Proceeds from stock sale, net of offering costs 25,086 --
Proceeds from exercise of stock options 5,158 4
Payment of capital lease obligations (159) --
Proceeds from employee stock purchase plan 65 48
------- ------
Net cash provided by financing activities 29,092 2,325
------- ------
Effect of foreign currency exchange rate
changes on cash and cash equivalents (45) (101)
------ -----
Net increase in cash and cash equivalents 9,385 1,391
Cash and cash equivalents, beginning of period 5,930 2,488
----------- -----------
Cash and cash equivalents, end of period $ 15,315 $ 3,879
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 12 $ 204
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
NX NETWORKS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
BUSINESS DESCRIPTION
Nx Networks, Inc. (the "Company"), 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.
RESTATEMENT
Management has determined to restate its previously issued unaudited condensed
consolidated financial statements as of June 30, 2000 and for the three and six
months then ended with respect to its accounting treatment for certain sales to
value added resellers.
The effect of the restatement on the Company's previously reported unaudited
condensed consolidated financial statements as of June 30, 2000 and for the
three and six months then ended is as follows (in thousands expect per share
amounts):
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS Six Months Ended Three Months Ended
June 30, 2000 June 30, 2000
--------------------------- ----------------------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Product revenues $ 15,404 $ 13,477 $ 8,351 $6,424
Total revenues 19,300 17,373 10,357 8,430
Cost of product revenues 8,819 8,362 4,635 4,179
Total cost of revenues 11,316 10,859 5,828 5,372
Gross profit 7,984 6,514 4,529 3,058
Loss from operations (65,917) (67,387) (17,510) (18,981)
Net loss (65,578) (67,048) (17,141) (18,612)
Net loss attributable to common stockholders (65,578) (67,048) (17,141) (18,612)
Basic and diluted loss per common share $ (1.98) $ (2.03) $ (0.49) $ (0.53)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET As of June 30, 2000
As Reported Restated
----------- --------
ASSETS
<S> <C> <C>
Accounts receivable, net $ 8,890 $ 6,963
Inventories 3,594 4,051
Total current assets 28,747 27,277
Total Assets 148,827 147,357
STOCKHOLDERS' EQUITY
Accumulated deficit (138,021) (139,491)
Total stockholders' equity $ 148,827 $ 147,357
</TABLE>
6
<PAGE>
MERGERS AND ACQUISITIONS
Acquisition of OpenROUTE:
On December 22, 1999, the Company completed the merger of OpenROUTE Networks
("OpenROUTE") with and into the Company. The transaction has been accounted for
under the purchase method of accounting and the operating results of OpenROUTE
have been included in the accompanying condensed consolidated financial
statements 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 its inception in 1993. 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.
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
Nx Networks common stock, warrants, and stock options. The Company issued
2,622,278 shares of common stock and warrants and options to acquire the
outstanding Aetherworks common stock. The Company's shares were valued at
$22.94, average of closing prices for three days before and after March 16,
2000. The warrants and options issued 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 the Company's 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 the Company's
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 the Company's common stock issued in the
merger will not exceed 19.9% of the total of the Company's then outstanding
shares. Had this contingency been resolved on June 30, 2000, when the Company's
stock price was $12.31, the Company would have issued approximately 2.2 million
more shares to the former Atherworks stockholders.
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 expense will be amortized over the options vesting period of which
approximately $1.7 million and $2.3 million was expensed in the three and six
months ended June 30, 2000.
The purchase price of Aetherworks, including transaction costs of $0.3 million
was $89.0 million. A summary of assets and liabilities acquired, at estimated
fair market value at June 30, 2000 was as follows (in thousands):
Current assets $ 99
Property and equipment 1,403
Assembled workforce 300
In-process R&D 30,800
Goodwill 57,590
Current liabilities (1,157)
---------
$ 89,035
=========
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
7
<PAGE>
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 the Company's 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):
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
(unaudited) (unaudited)
2000 1999 2000 1999
---- -------- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 17,373 $ 20,905 $ 8,430 $ 10,028
Net Loss (41,963) (28,750) (18,612) (14,642)
Net Loss per share $ (1.27) $ (0.95) $ (0.53) $ (0.49)
</TABLE>
RISKS AND OTHER IMPORTANT FACTORS
The Company has reported a net loss in each of the last five years and for the
three and six months ended June 30, 2000. The Company reported net losses of
$18.6 million for the three months ended June 30, 2000 compared to $2.6 million
for the three months ended June 30, 1999. For the six months ended June 30, 2000
the Company reported a net loss of $67.0 million inclusive of IPR&D charges of
$30.8 million compared to a net loss of $3.9 million for the six months ended
June 30, 1999. The success and the future of the Company are 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 negotiations for a new line of credit.
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
8
<PAGE>
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.
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 six months ended June 30, 2000
the Company's operating activities used $9.1 million compared to $712,000 used
for the six months ended June 30, 1999. The cash used by operations was
primarily due to continued loss from operations. At June 30, 2000, the Company
had $15.3 million in cash and cash equivalents. The Company is relying on such
cash and cash equivalents, together with future sales and the collection of the
related accounts receivable to meet its cash obligations.
To meet operating needs for the balance of 2000 and for fiscal 2001, the Company
will 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.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has been advised by its
independent public accountants that if the Company has not raised sufficient
capital to meet its projected obligations for 2001 prior to the completion of
their audit of the Company's financial statements for the year ending December
31, 2000, their auditors' report on those financial statements will be modified
to reflect this contingency.
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. 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 unaudited financial statements included herein have
been prepared by the Company in accordance with generally 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 filed with the SEC in March 2000.
9
<PAGE>
In the opinion of management all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the condensed
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 six and three months ended June 30, 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial statements." SAB No.
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company is required to
adopt the guidance in SAB No. 101 no later than the fourth quarter of fiscal
year 2000, with the guidance being effective January 1, 2000. The Company is
currently assessing, and has not yet determined, the impact of SAB No. 101 on
its financial statements. The Company understands that the SEC staff may issue
additional interpretive guidance on SAB No. 101. This additional guidance may
impact the Company's assessment of the impacts of SAB No. 101.
4. CASH EQUIVALENTS:
Cash equivalents are primarily bank deposits. These investments are carried at
cost which approximates market value.
5. INVENTORIES:
Inventories consisted of the following:
As of June 30 As of December 31
------------- -----------------
(in thousands)
2000 1999
---- ----
Raw materials $ 467 $ 546
Work-in-process 180 353
Finished goods 3,404 3,405
--------- ---------
Total inventories $ 4,051 $ 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 and six months ended June 30, 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
June 30, 2000 and 1999, is $18.6 million and $2.6 million respectively.
Comprehensive loss for the six months ended June 30, 2000 and 1999, is $67.1
million and $3.9 million respectively.
10
<PAGE>
7. SEGMENT INFORMATION:
The Company's two reportable segments are products and services. The Company
evaluates the performance of its segments based on gross profit. The Company
provides enterprise-wide disclosures about revenues by segment, long-lived
assets by geographic area and revenues from major customers.
Revenues consisted of the following (in thousands):
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
2000 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product Group
-------------
2200 $ 4,442 $ 4,820 $ 2,929 $ 2,030
2500 5,475 3,413 2,248 1,781
3000 105 -- 105 --
S1000 -- 641 -- 257
S10 213 829 8 387
Telecom 53 229 5 48
Internet Access 2,869 -- 1,078 --
LAN 320 -- 51 --
-------- ---------- --------- ---------
Total product revenues 13,477 9,932 6,424 4,503
Service revenues 3,896 3,395 2,006 1,508
-------- ---------- --------- ---------
Total revenues $ 17,373 $ 13,327 $ 8,430 $ 6,011
======== ========== ========= =========
</TABLE>
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 six and three months ended
June 30, 2000 and 1999 were generated in the following geographic regions (in
thousands):
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States $ 9,023 $ 6,891 $ 4,257 $ 3,308
Europe, Middle East and Africa 5,238 4,544 2,219 2,005
Pacific Rim, Latin America
and South America 3,112 1,892 1,954 698
--------- --------- -------- ---------
Total $ 17,373 $ 13,327 $ 8,430 $ 6,011
========= ========= ======== =========
</TABLE>
Included in domestic product and service revenues are sales through systems
integrators and distributors to the Federal Government of $524,000 and $188,000
for the six months ended June 30, 2000 and 1999, respectively. For the three
months ended June 30, 2000 and 1999 these sales were $16,000 and $11,000,
respectively.
The Company's long-lived assets were located as follows (in thousands):
As of As of
June 30, 2000 December 31, 1999
------------------- ------------------
United States $ 119,661 $ 74,497
United Kingdom 132 201
Italy 11 12
Germany -- 3
----------- ----------
Total long-lived assets $ 119,804 $ 74,713
=========== ==========
11
<PAGE>
SIGNIFICANT CUSTOMERS
One customer accounted for greater than 10% of total revenues for the six months
ended June 30, 2000 and 1999. For the three months ended June 30, 2000, three
customers accounted for greater than 10% of total revenue and none for the three
months ended June 30, 1999.
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
(in thousands) (in thousands)
2000 1999 2000 1999
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Distributor 1
Product $ 2,383 $ 1,897 $ 1,427 *
Service 24 * 84 *
Distributor 2
Product 1,184 * 1,082 *
Service 292 * * *
</TABLE>
-------------
* Revenue accounted for less than 10% of total revenues for the period.
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 and six
months ended June 30, 2000 the Company vested stock options that would have
otherwise been forfeited, resulting in stock compensation expense of $670,000
and $1.4 million, respectively.
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 periods of the options. During the three and six months ended June 30,
2000, the Company recognized compensation expense of $1.7 million and $2.3
million, respectively.
During the three months ended June 30, 2000, the Company issued warrants to
purchase 45,000 shares of common stock to non-employees for services provided
resulting in stock compensation charges of $316,000 based upon a Black Scholes
valuation. During the six months ended June 30, 2000, the Company issued
warrants to purchase 61,000 shares of common stock to non-employees for services
provided resulting in stock compensation charges of $449,000 based upon a Black
Scholes valuation.
In April 2000, the Company granted options to purchase 200,000 shares of common
stock to members of its Board of Directors. The options were issued below the
market value on the date of the grant. In accordance with APB Opinion No. 25 and
the related interpretations, the Company recorded stock compensation charges of
approximately $864,000 to be recognized over the option vesting period. These
options are vested quarterly over one year. At June 30, 2000 the remaining
deferred compensation related to these grants was $648,000.
12
<PAGE>
9. RESTRUCTURING CHARGE:
In March 2000, the Company implemented and announced a consolidation program to
reduce and economize its work force as part of its acquisition integration
program. The restructuring resulted in an overall reduction of personnel and
related compensation and other associated operating costs of the Company. The
reduction-in-force occurred over approximately a three-month period and
severance payments were generally made in lump sum in June 2000. The
restructuring charges of $427,000 resulted from $327,000 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. As of June 30, 2000, severance of $230,000 have been paid, and the
remaining severance payments of $97,000 will occur over the next three months.
Costs incurred for restructuring of facility of approximately $100,000 will
occur over the next six months.
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 six and three months ended June 30,
2000 and 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 and six
months ended June 30, 2000 and 1999, the effect of common stock equivalents has
not been considered as they would have been antidilutive.
12. SHAREHOLDER NOTE RECEIVABLE:
In April 2000, the Company lent $1.0 million to an officer of the Company and
received a promissory note valued at $1.0 million in return. The note, which is
due May 15, 2003, or sooner as described in the note agreement, accrues interest
at 9 percent per annum on the outstanding principal. The note has been reflected
as a decrease to shareholders' equity.
13
<PAGE>
NX NETWORKS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on Form 10-Q/A 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 May 10, 2000, the Company unveiled the Nx 6000 Series
Media Gateway Router at the NetWorld+Interop show in Las Vegas, NV. The Nx 6000
series packetizes, encrypts and routes voice traffic over IP, frame relay and
ATM networks and provides carrier-quality reception over each.
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 and
the operating results of Aetherworks have been included in the accompanying
condensed consolidated financial statement from the date of acquisition.
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.
In February 2000, the Company sold 1.0 million shares of common stock to the
public pursuant to a registration statement on SEC Form S-3. 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 are being used for general
corporate and working capital purposes.
On December 22, 1999, the Company completed the merger of OpenROUTE Networks
("OpenROUTE") with and into Nx Networks. The transaction has been accounted for
under the purchase method of accounting and the operating results of OpenROUTE
have been included in the accompanying condensed consolidated financial
statement from the date of acquisition.
Certain financial information as of June 30, 2000 and for the three and six
months then ended has been restated. See Note 1 of the condensed consolidated
financial statements.
NET LOSS. On March 16, 2000 the Company completed the acquisition of
Aetherworks. The results of operations for the three and six months ended June
30, 2000 include the results of Aetherworks from the date of acquisition. For
the three months ended June 30, 2000, the Company had a net loss of $18.6
million, compared to a net loss of $2.6 million for the three months ended June
30, 1999. The increase in net loss resulted from increases in sales and
marketing expense of $2.4 million, research and development (R&D) expense of
$3.3 million, general and administrative (G&A) expense of $0.9 million,
amortization of acquired intangibles of $8.1 million and stock compensation
expense of $2.9 million. For the six months ended June 30, 2000, the Company had
a net loss of $67.0 million, compared to a net loss of $3.9 million for the six
14
<PAGE>
months ended June 30, 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 $9.3 million, G&A expenses of $2.5 million, R&D expenses of $4.3 million,
sales and marketing expense of $4.7 million and amortization of acquired
intangibles of $13.2 million. The three and six month changes in net loss
resulted primarily 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.
REVENUES. For the three months ended June 30, 2000, revenues increased $2.4
million or 40% to $8.4 million, from $6.0 million for the three months ended
June 30, 1999. For the six months ended June 30, 2000, revenues increased $4.0
million, or 30% to $17.3 million, from $13.3 million for the six months ended
June 30, 1999. For the three months ended June 30, 2000 product revenues
increased $1.9 million or 43% to $6.4 million from $4.5 million for the three
months ended June 30, 1999. For the six months ended June 30, 2000 product
revenues increased $3.5 million or 35% to $13.5 million from $9.9 million for
the six months ended June 30, 1999. The increase in product revenues is
primarily a result of increase sales of the 2210 series product line and sales
from the combined companies resulting from the merger with OpenROUTE. For the
three months ended June 30, 2000 service revenues increased $0.5 million or 33%
to $2.0 million from $1.5 million for the three months ended June 30, 1999. For
the six months ended June 30, 2000 service revenues increased $0.5 million or
15% to $3.9 million from $3.4 million for the six months ended June 30, 1999.
These results reflect improvement in the sales of the 2200/2500 product lines
and the addition of sales from the OpenROUTE acquisition.
GROSS PROFIT. For the three months ended June 30, 2000, gross profit increased
by $0.3 million, or 12%, to $3.1 million, from $2.7 million for the three months
ended June 30, 1999. As a percentage of revenues, gross profit decreased to 36%
for the three months ended June 30, 2000, from 46% for the three months ended
June 30, 1999. For the six months ended June 30, 2000 gross profit increased
$0.6 million or 10% to $6.5 million from $5.9 million for the six months ended
June 30, 1999. As a percentage of revenues, gross profit decreased to 37% for
the six months ended June 30, 2000, from 45% for the six months ended June 30,
1999.
For the three June 30, 2000 gross profit from product revenues decreased $46,000
or 2% to $2.2 million from $2.3 million from the three months ended June 30,
1999. For the six months ended June 30, 2000, gross profit from product revenues
increased $63,000 or 1% to $5.1 million from $5.0 million for the six months
ended June 30, 1999.
For the three months ended June 30, 2000 gross profit from service revenues
increased $0.4 million or 80% to $0.8 million from $0.4 million for the three
months ended June 30, 1999. For the six months ended June 30, 2000 gross profit
from service revenue increased $0.5 million or 58% to $1.4 million from $0.9
million for the six months ended June 30, 1999.
The three and six month gross profit percentage changes are primarily a result
of a lower-margin product mix, a greater proportion of sales made through
distributors, which generally have higher discounts than direct retail sales,
and competitive pricing pressures. 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.
SALES AND MARKETING. For the three months ended June 30, 2000 sales and
marketing expenses increased by $2.4 million, or 170%, to $3.8 million from $1.4
million for the three months ended June 30, 1999. The increase includes wages
and salaries of $0.8 million, sales commission expense of $0.7 million, travel
expense of $0.2 million, marketing expense of $0.4 million and bad debt expense
of $0.3 million. Sales and marketing expenses increased $4.7 million, or 156%,
to $7.8 million for the six months ended June 30, 2000 from $3.0 million for the
six months ended June 30, 1999. The increase includes wages and salaries of $1.1
million, sales commission expense of $1.0 million, marketing expense of $1.0
million, travel expense of $0.5 million and bad debt expense of $0.8 million.
The increases resulted from advertising expenses, participation in trade shows
and the production of marketing materials associated with the new Nx Networks
logo, name and products.
15
<PAGE>
RESEARCH AND DEVELOPMENT. For the three months ended June 30, 2000, research and
development expenses increased $3.2 million or 190% to $5.0 million from $1.7
million for the three months ended June 30, 1999. For the six months ended June
30, 2000, research and development expenses increased $4.3 million or 128% to
$7.6 million from $3.4 million for the six months ended June 30, 1999. The
increase represents wages and salaries of $1.5 million due to the merger with
OpenROUTE and the acquisition of Aetherworks, new product materials of $1.1
million, consulting fees and other engineering expense of $0.4 million,
depreciation expense of $0.7 million, travel expense of $0.2 million, rent
expense of $0.1 million, and other expenses such as telephone, equipment lease
and recruiting fees. All of the Company's research and development costs are
expensed to operations as incurred during the periods reported.
GENERAL AND ADMINISTRATIVE. For the three months ended June 30, 2000 general and
administrative ("G&A") expenses increased $1.1 million or 93% to $2.2 million
from $1.2 million for the three months ended June 30, 1999. For the six months
ended June 30, 2000 G&A expenses increased $2.5 million or 119% to $4.6 million
from $2.1 million for the six months ended June 30, 1999. The increase
represents wages and salaries of $0.8 million, legal and accounting fees of $0.7
million, rent expense of $0.3 million, depreciation expense of $0.1 million and
other general operating expenses of $0.6 million. The majority of the increases
are directly associated with duplicate functions of the newly merged companies.
The Company is in the process of re-organizing its G&A functions to eliminate
duplicate expenses.
AMORTIZATION OF ACQUIRED INTANGIBLES. For the three months ended June 30, 2000
amortization expense increased $8.0 million to $8.1 million from $0.1 million
for the three months ended June 30, 1999. For the six months ended June 30, 2000
amortization expense increase $13.2 million to $13.3 million from $0.1 million
for the six months ended June 30, 1999. The increase in goodwill is associated
with the OpenROUTE acquisition in December 1999 and the acquisition of
Aetherworks in March 2000.
STOCK COMPENSATION. For the three and six months ended June 30, 2000 the Company
incurred stock compensation expense of $2.9 million and $9.4 million,
respectively. The Company incurred stock compensation expense as a result of
stock issued to and accelerated vesting of stock options to former executives of
OpenROUTE, acceleration of stock options of employees terminated as part of the
restructuring, stock options granted below market value to members of the Board
of Directors, warrants issued as compensation for legal services, and stock
options issued below market to certain employees in connection with the
acquisition of Aetherworks.
IN-PROCESS RESEARCH AND DEVELOPMENT. For the six months ended June 30, 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 the Company's then current technology.
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 occurred over approximately a
three-month period and severance payments were generally made in a 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 June 30, 2000 payments of $0.2 million have been
made related to the restructuring charge.
16
<PAGE>
INTEREST AND OTHER INCOME, NET. For the three months ended June 30, 2000, the
Company had net interest and other income of $369,000 compared to net interest
expense of $33,000 for the three months ended June 30, 1999. For the six months
ended June 30, 2000 the Company had net interest and other income of $339,000
compared to net interest expense of $173,000 for the six months ended June 30,
1999. The net interest income for the three and six months ended June 30, 2000
is a result of the Company's termination of its loan balances with Coast
Business Credit and interest earned on the proceeds from the secondary stock
offering.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $15.3 million of cash and cash equivalents and
net working capital of $12.6 million, compared to $3.9 million of cash and cash
equivalents and net working capital of $8.6 million at June 30, 1999 and net
working capital of $8.0 million at December 31, 1999. For the six months ended
June 30, 2000, the total cash used by operations was $8.9 million compared to
$5.4 million for the six months ended June 30, 1999. Non-cash items consisting
of depreciation and amortization of $14.4 million, stock compensation expense of
$9.4 million and IPR&D cost of $30.8 million contributed to the losses of $67.0
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, however additional financing will be need to meet the Company's needs in
2001.
Capital expenditures during the six months ended June 30, 2000 and 1999 were
$0.1 million. These acquisitions were primarily equipment used for research and
development purposes and computer and test equipment.
To meet operating needs for the balance of 2000 and for fiscal 2001, the Company
will 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. The Company
has implemented cost control measures and is continually evaluating expense
levels to mitigate its liquidity risk.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has been advised by its
independent public accountants that if the Company has not raised sufficient
capital to meet its projected obligations for 2001 prior to the completion of
their audit of the Company's financial statements for the year ending December
31, 2000, their auditors' report on those financial statements will be modified
to reflect this contingency.
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.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Cabletron Systems, Inc. filed a civil complaint against the Company, AetherWorks
Corporation and OpenRoute Networks, Inc. on June 5, 2000 in the United States
District Court for the District of Massachusetts. Docket # 00-CV-11105 RWZ is
assigned to this matter. In its complaint, Cabletron alleges that the defendants
have infringed Cabletron patents and Cabletron seeks unspecified monetary
damages against the Defendants. The Company and the other defendants answered
the complaint by denying the allegations contained therein. The Company believes
the claims by Cabletron to be without merit, and it intends to vigorously defend
them.
The Company is involved in various other investigations, lawsuits, claims and
other legal proceedings incidental to the conduct of its business. While it is
not possible to determine the ultimate disposition of each of them, the Company
does not believe that their ultimate disposition will have a material adverse
effect on it.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In March 2000, the Company completed its 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.
In May 2000, Nx Networks issued 45,000 warrants to Gallagher and Associates as
compensation for legal services. All of these warrants are exercisable at $8.00
per share and expire in May 2005. In issuing these warrants, the Company relied
upon the exemption from registration under the Securities Act provided by
Section 4(2) of the Securities Act.
ITEMS 3 THROUGH 5 ARE NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Lease Agreement dated May 18, 2000 between
Water Tower Campbell LLC and Netrix Corporation
27.1 Restated Financial Data Schedule
(b) Reports on Form 8-K
On May 30, 2000, the Company filed an amendment to its Current Report on Form 8K
dated March 31, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETRIX CORPORATION
Date: November 14, 2000
By: /s/ Jerome R. Schifferli
Jerome R. Schifferli
Chief Executive Officer
and General Counsel
By: /s/ Peter J. Kendrick
Peter J. Kendrick
Vice President Finance and
Administration and
Chief Financial Officer
(Principal Financial
Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Lease Agreement dated May 18, 2000 between Water Tower Campbell
LLC and Netrix Corporation
27.1 Financial Data Schedule.
