UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1996
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
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(Exact name of registrant as specified in charter)
Delaware 54-1345159
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(State of Incorporation) (IRS Employer Identification No.)
13595 Dulles Technology Drive, Herndon, Virginia 22071
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(Address of principal executive offices) (Zip Code)
(703) 742-6000
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(Registrant's telephone number, including area code)
Indicate by check number whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
-
At April 30, 1996 there were 9,435,476 shares of the registrant's Common
Stock, $.05 par value per share, outstanding.
NETRIX CORPORATION
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FORM 10-Q
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MARCH 31, 1996
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INDEX
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Page No.
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 13
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
NETRIX CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
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1996 1995
--------- ---------
Revenues:
Product........................................ $ 8,633 $11,531
Service........................................ 2,564 2,442
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Total revenues.......................... 11,197 13,973
Cost of revenues:
Product........................................ 3,875 4,545
Service........................................ 1,715 1,739
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Total cost of revenues.................. 5,590 6,284
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Gross profit..................... 5,607 7,689
Operating Expenses:
Sales and marketing............................ 3,194 3,609
Research and development....................... 2,894 2,664
General and administrative..................... 1,096 1,326
Restructuring charge........................... 900 --
- - - --------------------------------------------------- ------- -------
(Loss) Income from operations...... (2,477) 90
Interest and other income, net..................... 178 147
Foreign currency exchange (loss) gain.............. (12) 140
- - - --------------------------------------------------- ------- -------
(Loss) Income before income taxes.. (2,311) 377
Provision for income taxes......................... 17 37
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Net (loss) income.................................. $(2,328) $ 340
======= =======
(Loss) Earnings per share.......................... $(0.25) $0.04
======= =======
Weighted average number of shares outstanding...... 9,435 9,524
======= =======
See notes to unaudited condensed consolidated financial statements.
2
NETRIX CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
March 31, December 31,
1996 1995
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(Unaudited)
Current assets:
Cash and cash equivalents........................... $ 3,724 $ 4,370
Short-term investments.............................. 6,525 7,357
Accounts receivable, net of allowance for doubtful
accounts of $1,498 and $1,530, respectively........ 9,641 11,052
Inventories......................................... 8,955 9,016
Other current assets................................ 910 962
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Total current assets.............................. $29,755 $32,757
Property and equipment, net of accumulated
depreciation of $13,037 and $12,131,
respectively........................................ 6,606 7,130
Deposits and other assets............................ 271 282
Goodwill, net of accumulated amortization of $790
and $707, respectively.............................. 1,713 1,816
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$ 38,345 $ 41,985
========= =========
See notes to unaudited condensed consolidated financial statements.
3
NETRIX CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
March 31, December 31,
1996 1995
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(Unaudited)
Current liabilities:
Line of credit...................................... $ 1,315 $ 1,311
Accounts payable.................................... 3,483 4,944
Accrued liabilities................................. 4,950 4,712
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Total current liabilities........................ 9,748 10,967
Capital lease obligations, net of current portion.... -- --
Deferred rent, net of current portion................ 565 622
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10,313 11,589
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Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; none issued and outstanding............ -- --
Common stock, $0.05 par value; 15,000,000
shares authorized; 9,435,476 and 9,435,268
shares issued and outstanding, respectively....... 472 472
Additional paid-in capital.......................... 55,148 55,105
Unrealized investment holding (loss) gain........... (21) 42
Cumulative translation adjustment................... (28) (11)
Accumulated deficit................................. (27,539) (25,212)
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Total stockholders' equity.......................... 28,032 30,396
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$ 38,345 $ 41,985
========== ==========
See notes to unaudited condensed consolidated financial statements.
4
NETRIX CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
---------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(2,328) $ 340
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization.......................... 1,009 1,025
Noncash compensation expense........................... 43 --
Decrease in deferred rent credit....................... (50) (43)
Changes in assets and liabilities -
Accounts receivable.................................. 1,412 2,056
Inventories.......................................... (10) (454)
Other current assets................................. 51 (101)
Deposits and other assets............................ 11 (54)
Accounts payable..................................... (1,460) (1,232)
Accrued liabilities.................................. 230 219
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Net cash (used in) provided by operating activities.. (1,092) 1,756
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.................... (3,075) (774)
Sales of short-term investments........................ 3,844 2,096
Purchases of property and equipment.................... (311) (556)
Cash acquired from IDS acquisition..................... -- 35
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Net cash provided by investing activities............ 458 801
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit........................... 4 --
Proceeds from exercise of stock options................ -- 66
Payments under capital lease obligations............... - - (7)
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Net cash provided by financing activities............ 4 59
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Effect of foreign currency exchange rate changes on
cash and cash equivalents.............................. (15) (16)
Net (decrease) increase in cash and cash equivalents........ (645) 2,600
Cash and cash equivalents, beginning of period.............. 4,370 6,000
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Cash and cash equivalents, end of period.................... $ 3,725 $ 8,600
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............... $ 35 $ 13
Cash paid during the period for income taxes........... -- --
Capitalization of inventories into manufacturing and
test equipment........................................ $ 71 $ 108
See notes to unaudited condensed consolidated financial statements.
5
NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
----------------------
Netrix Corporation (the "Company") was formed in 1985 to develop,
manufacture, market and support a family of high performance, integrated network
switching and network management products for use in enterprise-wide
communications networks. During 1989, the Company formed a wholly-owned
subsidiary, Netrix International Corporation (a Delaware corporation). On
January 1, 1995, the Company's wholly-owned subsidiary, Netrix Telcom Systems
Corporation, was merged with and into the Company. Also on January 1, 1995, the
Company acquired the equipment, inventory, and contract rights of InterData
Systems GmbH ("IDS"), relating to its corporate network business. All
significant intercompany transactions have been eliminated.
The unaudited condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include, in the opinion of
management, all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of interim period results. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes, however, that its disclosures are adequate to make the information
presented not misleading. The results for such interim periods are not
necessarily indicative of results to be expected for the full year.
Certain reclassifications have been made to the prior year financial
statements to conform with current year presentation.
2. ACQUISITIONS:
IDS
On January 1, 1995, the Company acquired the equipment, inventory, and
contract rights of IDS, relating to its corporate network business. Prior to
this acquisition, IDS was a distributor of the Company and provided sales and
service of the Company's products in Germany. The purchase price for the assets
acquired in this transaction was $545,000. All of the assets acquired were
transferred to Netrix GmbH, a wholly-owned subsidiary of the Company, which was
established coincidentally with the acquisition of the assets of IDS.
3. CASH EQUIVALENTS:
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Cash equivalents are primarily bank deposits, commercial paper, and
government agency securities, with original maturities of three months or less.
These investments are carried at cost, which approximates market.
4. SHORT-TERM INVESTMENTS:
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Short-term investments consist primarily of commercial paper with
maturities of more than three months and less than twelve months and longer-term
investments which are primarily US government obligations with maturities
between twelve and eighteen months. Longer-term investments are bought and held
principally for the purpose of selling them in the near term. Short-term
investments are reported at fair value.
6
In January 1994, the Company adopted Statement of Financial Accounting
Standards, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"). Under SFAS No. 115, debt securities that are classified as
available-for-sale are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. The effect of
adopting SFAS No. 115 on the Company's financial position and results of
operations was not material. At March 31, 1996 and December 31, 1995, the
holding gain/loss on short-term investments was a loss of approximately $21,000
and a gain of approximately $42,000, respectively, and is reported as a separate
component of stockholders' equity.
5. INVENTORIES:
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Inventories consisted of the following (in thousands):
March 31, 1996 December 31, 1995
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Raw materials...... $ 384 $ 335
Work in process.... 876 798
Finished goods..... 7,695 7,883
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Total inventories.. $8,955 $9,016
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6. LINE OF CREDIT:
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In January 1996, the Company renegotiated its existing line of credit with
a lending institution to provide working capital. The agreement provides for a
$2.0 million line of credit for working capital and includes covenants that
require the Company to maintain certain levels of liquidity and tangible net
worth. In addition, the Company has utilized approximately $561,000 of
available draws under an equipment line of credit with the same lending
institution. Both lines provide for interest at a rate per annum equal to the
lender's prime rate plus 3/4% (9.0% at March 31, 1996). The working capital
line of credit matures with unpaid principal amounts due and payable on January
3, 1997. The equipment line of credit began amortization in January 1996 in
accordance with the terms of the agreement and matures with unpaid principal
amounts due and payable on June 5, 1998. At March 31, 1996 and December 31,
1995, the Company had approximately $754,000 and $750,000, respectively,
outstanding under the working capital line of credit, and approximately $561,000
outstanding under the equipment line of credit.
7. PRODUCT REVENUES:
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The Company's product revenues were generated in the following geographic
regions:
Three Months Ended March 31,
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1996 1995
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Domestic..................... $2,864 $ 5,915
Europe, Middle East, Africa.. 3,332 2,852
Pacific Rim and other........ 2,437 2,764
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Total........................ $8,633 $11,531
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All of the Company's products are manufactured and shipped out of its
facilities in Herndon, Virginia and Longmont, Colorado. Sales are primarily
denominated in US dollars.
7
8. RESTRUCTURING CHARGE:
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In March 1996, the Company recorded a restructuring charge of $900,000
before income taxes. The charge includes anticipated costs associated with the
consolidation and relocation of facilities and the reduction of personnel levels
as part of management's restructuring plan for the Company. This reserve will
be used through the fourth quarter of 1996.
9. FOREIGN CURRENCY EXCHANGE (LOSS) GAIN:
-------------------------------------
Generally, assets and liabilities denominated in foreign currencies are
translated into US dollars at current exchange rates. Operating results are
translated into US dollars using the average rates of exchange prevailing during
the period. Gains or losses resulting from translation of assets and
liabilities are included in the cumulative translation adjustment account in
stockholders' equity, except for the translation effect of intercompany balances
that are anticipated to be settled in the foreseeable future. Included in
condensed consolidated statement of operations for the quarter ended March 31,
1996 and 1995 is approximately $12,000 in translation losses and $140,000 in
translation gains, respectively.
10. (LOSS) EARNINGS PER SHARE:
-------------------------
Earnings per share amounts have been computed using the weighted average
number of common shares and common equivalent shares having a dilutive effect
during the periods. For the three months ended March 31, 1996, the effect of
options have not been considered as they would have been antidilutive, and fully
diluted earnings per share are not shown, as such amounts are antidilutive.
Fully diluted earnings per share for the three months ended March 31, 1995 were
$0.04.
8
NETRIX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
BACKGROUND. The results for first quarter of 1996 reflect a decrease in
revenues over the comparable period in 1995. The decline is primarily a result
of decreased domestic sales. Domestic sales decreased $3.0 million in the
first quarter of 1996 from the first quarter of 1995.
In January 1995, the Company acquired the equipment, inventory, and
contract rights of IDS, relating to its corporate network business. Prior to
this acquisition, IDS was a distributor of the Company and provided sales and
service of the Company's products in Germany. The purchase price for the
assets acquired in this transaction was $545,000. See Notes 1 and 2 to the
Unaudited Condensed Consolidated Financial Statements for further discussion.
The reported results include the operations of IDS since the acquisition date
of January 1, 1995.
REVENUES. Total revenues decreased by $2.8 million, or 19.9%, from the
three months ended March 31, 1995 to the three months ended March 31, 1996.
The decrease in revenues was due primarily to a decrease in product volume
mainly in the domestic territory. Product revenues decreased by $2.9 million,
or 25.1%, from the first quarter of 1995 to the first quarter of 1996. Service
revenues increased slightly by approximately $0.1 million, or 5.0%, over the
same period. The improved service revenues are due mainly to an increase in
the installed base of customers.
GROSS PROFIT. Gross profit decreased by $2.1 million, or 27.1%, from the
first quarter of 1995 to the comparable period of 1996, and decreased as a
percentage of total revenues from 55.0% to 50.1%. Product gross profit
decreased from 60.6% in the first quarter of 1995 to 55.1% in the first
quarter of 1996. This decrease primarily results from a combination of a
higher proportion of products sold through channels with higher discounts
along with a lower margin product mix of shipments. The gross profit in any
particular quarter is dependent upon the mix of products sold and the channels
of distribution. As a result, the gross profit on a quarter to quarter basis
can vary within a wide range. Because of a favorable mix of products and
channels in the first quarter of 1995, margins were at the high end of the
range when compared to previous quarters and the first quarter of 1996. The
gross profit for service revenues increased from 28.8% in the first quarter of
1995 to 33.1% in the first quarter of 1996. The higher gross margin is a
result of lower service costs mainly in the areas of outside services and
compensation and travel expenses.
SALES AND MARKETING. Sales and marketing expenses decreased by $0.4
million, or 11.5%, from the first quarter of 1995 to the first quarter of
1996. The decrease was primarily due to decreased expenses related to
compensation, travel and entertainment and marketing programs which included
trade shows and public relations.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$0.2 million, or 8.6%, from the first quarter of 1995 to the comparable period
of 1996. The increase was due principally to increased expenses related to
project parts and outside services. Currently, all of the Company's research
and development costs are charged to operations as incurred.
9
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by $0.2 million, or 17.3%, from the first quarter of 1995 as compared to the
same period in 1996. The decrease in these expenses was due principally to a
decrease in headcount. Other factors contributing to the lower level of
expenses were decreased travel and entertainment costs and a lower level of
capital expenditures which resulted in lower depreciation for this group.
RESTRUCTURING CHARGE. In March 1996, the Company recorded a
restructuring charge of $900,000 before income taxes. The charge includes
anticipated costs associated with the consolidation and relocation of
facilities and the reduction of personnel levels as part of management's
restructuring plan for the Company. This reserve will be used through the
fourth quarter of 1996.
INTEREST AND OTHER INCOME, NET. The Company generated net interest and
other income of approximately $178,000 in the first quarter of 1996 compared
to approximately $147,000 in the same period in 1995. The increase in net
interest income is due primarily to higher investment levels maintained in
short-term investments, offset in part by increased interest expense on the
Company's borrowings under an equipment line of credit.
FOREIGN CURRENCY EXCHANGE (LOSS) GAIN. Included in foreign exchange
income for the first quarter of 1996 is approximately $12,000 in translation
losses as compared to $140,000 of translation gains in the first quarter of
1995.
NET INCOME (LOSS). For the first quarter of 1996, the Company had a net
loss of approximately $2.3 million compared to net income of approximately
$0.3 million in the same period of 1995. The decrease in earnings for the
first quarter was due primarily to the restructuring charge, a decrease in
revenues and the other factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At March 31, 1996, the Company had approximately $3.7 million of cash and
cash equivalents on hand, short-term investments of $6.5 million, and net
working capital of $20.0 million.
For the three months ended March 31, 1996 and 1995, the Company used
approximately $1.1 million and generated approximately $1.8 million of cash
from operating activities, respectively. In the first quarter of 1996, the
cash used by operations was primarily due to the negative cash flow from
operations and the reduction in accounts payable levels over the December 31,
1995 balances. In the first quarter of 1995, the cash provided by operations
was principally due to increased cash collections from accounts receivable.
For the quarter ended March 31,1996 the Company generated approximately
$0.5 million from investing activities. This was the result of a $0.8 million
net decrease in short-term investments offset by capital expenditures during
the period. For the quarter ended March 31, 1995, the Company generated $0.8
million from investing activities. This was primarily a result of a $1.3
million net decrease in short-term investments, offset by capital expenditures
of $0.6 million. Capital expenditures in both periods were financed with cash
on hand and funds generated from operations. The expenditures were primarily
for additional research and development and test equipment required to support
the expanded product base at the Company.
10
In January 1996, the Company renegotiated its existing line of credit
with a lending institution to provide working capital. The agreement provides
for a $2.0 million line of credit for working capital and includes covenants
that require the Company to maintain certain levels of liquidity and tangible
net worth. In addition, the Company has utilized approximately $561,000 of
available draws under an equipment line of credit with the same lending
institution. Both lines provide for interest at a rate per annum equal to the
lender's prime rate plus 3/4% (9.0% at March 31, 1996). The working capital
line of credit matures with unpaid principal amounts due and payable on
January 3, 1997. The equipment line of credit began amortization in January
1996 in accordance with the terms of the agreement and matures with unpaid
principal amounts due and payable on June 5, 1998. At March 31, 1996 and
December 31, 1995, the Company had approximately $754,000 and $750,000,
respectively, outstanding under the working capital line of credit, and
approximately $561,000 outstanding under the equipment line of credit.
Cash generated by financing activities was approximately $4,000 for the
first quarter of 1996, compared to $60,000 for the first quarter of 1995.
The Company believes that existing cash resources, together with
internally generated funds, will be sufficient to meet its cash requirements
through fiscal 1996.
11
PART II -- OTHER INFORMATION
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Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports of Form 8-K
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(a) Exhibits
Exhibit No. Description
----------- -----------
11 Computation of Earnings Per Share.
(b) Reports on Form 8-K
A report on Form 8-K was filed March 18, 1996, announcing the
Company's plan to reduce and redeploy its US sales force, to geographically
restructure its operations, and to accelerate its product development efforts
related to public network access switching.
12
SIGNATURE:
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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 15, 1996 By: /s/ Richard G. Tennant
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Richard G. Tennant
Vice President - Finance and
Administration,
Chief Financial Officer and Secretary
(Principal Financial Officer)
13
EXHIBIT INDEX
Exhibit
No. Description
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11 Computation of Earnings Per Share
14