UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 20171
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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
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At October 31, 1997 there were 9,593,253 shares of the registrant's Common
Stock, $.05 par value per share, outstanding.
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NETRIX CORPORATION
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FORM 10-Q
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SEPTEMBER 30, 1997
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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
nine and three
months ended September 30, 1997 and 1996 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURE 10
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited - In thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
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1997 1996 1997 1996
------- ------- ------ -------
Revenues:
Product.............................. $17,861 $23,966 $6,170 $ 7,604
Service.............................. 8,004 8,283 2,787 2,910
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Total revenues................. 25,865 32,249 8,957 10,514
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Cost of revenues:
Product.............................. 9,095 10,644 3,384 3,751
Service.............................. 5,335 5,245 1,579 1,789
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Total cost of revenues......... 14,430 15,889 4,963 5,540
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Gross profit............ 11,435 16,360 3,994 4,974
Operating expenses:
Sales and marketing.................. 8,067 8,763 2,167 2,719
Research and development............. 6,630 8,294 1,791 2,706
General and administrative.......... 3,084 3,165 1,025 1,005
Restructuring reserve................ 875 900 - -
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Loss from operations...... (7,221) (4,762) (989) (1,456)
Interest income, net...................... 336 350 146 87
Foreign exchange loss..................... (271) (56) (121) (10)
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Loss before income taxes.. (7,156) (4,468) (964) (1,379)
Provision for income taxes................ 40 69 0 33
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Net loss.................................. $(7,196) $(4,537) $ (964) $(1,412)
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Loss per common and equivalent share..... $(0.75) $(0.48) $(0.10) $(0.15)
======= ======= ====== =======
Shares used in per share calculation...... 9,539 9,458 9,575 9,491
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See notes to condensed consolidated financial statements.
3
NETRIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
September 30, December 31,
1997 1996
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(Unaudited) (Audited)
Current assets:
Cash and cash equivalents.............. $ 2,550 $ 687
Short-term investments................. -- 5,350
Accounts receivable, net............... 7,946 11,649
Inventories -
Raw materials..................... 622 326
Work in process................... 1,095 869
Finished goods.................... 7,106 7,208
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Total Inventory................... 8,823 8,403
Other current assets................... 650 1,011
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Total current assets.. 19,969 27,100
Property and equipment, net................. 4,903 6,023
Deposits and other assets................... 231 244
Goodwill, net............................... 874 1,412
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TOTAL ASSETS $ 25,977 $ 34,779
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit......................... $ 999 $ 754
Accounts payable....................... 3,623 3,459
Accrued liabilities.................... 2,885 4,864
Other current liabilities.............. 257 241
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Total current liabilities.... 7,764 9,318
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Other liabilities........................... 330 614
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TOTAL LIABILITIES 8,094 9,932
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Stockholders' equity:
Common stock........................... 480 476
Additional paid-in capital............. 55,774 55,603
Equity adjustments..................... 3 (52)
Accumulated deficit.................... (38,374) (31,180)
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TOTAL STOCKHOLDERS' EQUITY.................. 17,883 24,847
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,977 $ 34,779
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See notes to condensed consolidated financial statements.
4
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Nine Months Ended
September 30,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (7,196) $ (4,537)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................... 2,528 2,979
Noncash compensation expense............................ -- 129
Decrease in deferred rent credit........................ (183) (161)
Decrease in goodwill.................................... 262 --
Changes in assets and liabilities -
Accounts receivable.................................. 3,703 756
Inventories.......................................... (995) 20
Other current assets................................. 361 97
Other................................................ 149 31
Accounts payable..................................... 164 (1,668)
Accrued liabilities.................................. (2,000) (226)
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Net cash used in operating activities................ (3,183) (2,580)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments..................... (2,473) (5,330)
Sales of short-term investments......................... 7,827 5,378
Purchases of property and equipment..................... (554) (822)
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Net cash provided by (used in) investing activities.. 4,801 (774)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit............................ 245 4
Proceeds from exercise of stock options................. 136 280
Payments on long-term debt.............................. (224) (20)
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Net cash provided by financing activities............. 196 264
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Effect of foreign currency exchange rate changes on
cash and cash equivalents............................... (49) (26)
Net increase (decrease) in cash and cash equivalents....... 1,863 (3,116)
Cash and cash equivalents, beginning of period............. 687 4,370
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Cash and cash equivalents, end of period................... $ 2,550 $ 1,254
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest................ $ 109 $ 108
Cash paid during the period for income taxes............ 11 --
Capitalization of inventories into manufacturing and
test equipment......................................... $ 575 $ 504
See notes to condensed consolidated financial statements.
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NETRIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements, which should
be read in conjunction with the Annual Report on Form 10-K for the year
ended December 31, 1996, apply to the Company and its wholly-owned
subsidiaries and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the Company's consolidated
financial position as of September 30, 1997, and the results of operations
for the nine months ended September 30, 1997 and 1996. The results of
operations for such periods, however, are not necessarily indicative of the
results to be expected for a full fiscal year.
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 a
single contract manufacturer, and dependence on key management personnel.
Certain reclassifications have been made to the prior year financial
statements to conform with current year presentation.
2. 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.
Debt securities that are classified as available-for-sale are reported at
fair value, with unrealized gains and losses reported as a component of
stockholders' equity. At December 31, 1996, the unrealized net holding
loss of $7,000 is included in equity adjustments of stockholders' equity.
As of September 30, 1997, the Company had liquidated all short-term
investments and therefore had no unrealized gain or loss.
3. Effective May 3, 1997, the Company renegotiated its line of credit
agreement with a lending institution to provide for a $1.0 million line of
credit at an interest rate of prime plus 1%. The agreement includes
covenants that require the Company to maintain certain levels of liquidity
and tangible net worth. The facility expires on January 3, 1998. At
September 30, 1997. the Company had fully utilized the line.
Subsequent to September 30, 1997, the Company received a commitment from
another lending
institution for a line of credit. This commitment provides the Company
with a $3 million line of credit with borrowings based on qualified
accounts receivable and secured by substantially all the Company's assets.
Interest accrues at the prime rate plus 2% reducing to the prime rate plus
1.5% upon achievement and maintenance of certain net worth minimums. The
line will automatically increase to a maximum of $5 million when the
Company reaches profitability and certain other criteria are met.
4. In March 1997, the Company recorded a restructuring charge of approximately
$1,350,000 before income taxes. The charge included anticipated costs
associated with an overall reduction in work force, the discontinuance of
its micro.pop product, and the discontinuance of its direct operation in
Germany. In May 1997, the Company reduced the restructuring charge by
$475,000. This reduction was due mainly to the Company's decision to
maintain its operation in Germany. At September 30, 1997, $108,000 of the
accrual remains to cover severance payments and legal fees.
6
In March 1996, the Company recorded a restructuring charge of approximately
$900,000 before income taxes. The charge included 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. As part of this plan, the Company vacated leased office
space in Herndon, Virginia, and Longmont, Colorado. At September 30, 1997,
$99,000 of the accrual remains to cover anticipated losses from the Herndon
and Longmont lease commitments.
Subsequent to September 30, 1997, the Company signed a sublease agreement
for the vacated Herndon facility. The sub-tenant is expected to take
possession of the facility in November 1997 with the sub-let running for
the remainder of the lease. Although the sub-lease is below the lease
obligations of the Company, the Company believes the amount currently
accrued is adequate to provide for the shortfall.
5. 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 the condensed consolidated statements of
operations for the three and nine months ending September 30, 1997 is
$91,000 and $162,000 in translation losses, respectively, and for the three
and nine months ending September 30, 1996 is $10,000 and $56,000 in
translation losses, respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
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BACKGROUND. The results for the three and nine months ended September
30, 1997 reflect a decrease in revenues over the comparable periods in 1997 and
include a significant restructuring charge. The decline in revenues is primarily
a result of decreased sales of the legacy products in all of the Company's
sales territories, offset in part by the increased revenue generated by the
Company's new products. Beginning in the third quarter, revenues showed an
increase over the revenues of the second quarter of 1997.
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.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 in the company's
Annual Report on Form 10-K under the caption "Certain Factors That May Affect
Future Results."
REVENUES. Total revenues decreased by $6.4 million or 19.8%, in the
nine months ended September 30, 1997 compared to the nine months ended September
30, 1996. Total revenues also decreased $1.6 million, or 14.8%, in the third
quarter of 1997 compared to the third quarter of 1996. The decrease in revenues
was primarily due to a higher than expected decrease in product volume of the
older legacy products. Revenues for the newer products, which include the
Network Exchange 2550, 2410 and 2210 products have increased over the comparable
periods of 1996 and compared to the second quarter of 1997. These products now
represent over 60% of total revenues. Service revenues were almost flat
compared to the same periods in 1996. The Company has experienced slow growth
in the installed based which has resulted in no service revenue growth .
GROSS PROFIT. The gross profit percentage for the first nine months
of 1997 was 44.2% compared to 50.7% for the first nine months of 1996, or a
decrease of 6.5 percentage points. In the third quarter of 1997, the gross
profit percentage was 44.6% compared to 47.3% in the compared 1996 quarter, or a
decrease of 2.7 percentage points. The decreases in both periods is the result
of start up costs associated with the introduction of the new products in 1997
combined with the faster than expected decline in older products which made it
necessary for the Company to provide for higher inventory obsolescence in 1997
as compared to 1996.
SALES AND MARKETING. For the quarter ended September 30, 1997, sales
and marketing expenses were $2.2 million compared to $2.7 million for the
comparable 1996 period, a decrease of $552,000 (20%). For the nine months ended
September 30, 1997, sales and marketing expenses were $8.1 million, a decrease
of $696,000 (8%) from the comparable period in 1996. The decrease in expenses
was principally due to the Company's planned restructuring discussed above,
which resulted in a decrease in personnel and travel costs.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
by $1.7 million or 20% from the first nine months of 1996 as compared to the
first nine months of 1997. This decrease was due principally to the
restructuring that occurred earlier this year that resulted in decreased
expenses for salaries and related personnel costs. Third quarter expenses for
1997 decreased 34% when compared to expenses for the third quarter of 1996.
Currently, all of the Company's research and development costs are charged to
operations as incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by approximately $0.1 million or 3%, for the first nine months of 1997
as compared to the same period in 1996. Third quarter of 1997 general and
administrative expenses were flat when compared to third quarter of 1996
expenses.
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RESTRUCTURING CHARGE. In March 1997, the Company recorded a restructuring
charge of $1,350,000. The charge included anticipated costs associated with an
overall reduction in work force, the discontinuance of its micro.pop product,
and the discontinuance of its direct operation in Germany. In May 1997, the
Company reduced the restructuring charge by $475,000. The reduction was due to
the Company's decision not to discontinue its operation in Germany. At
September 30, 1997, there was $108,000 in this accrual to cover remaining
severance payments and legal fees.
In March 1996, the Company recorded a restructuring charge of $900,000.
The charge included 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. As part of this plan, the
Company vacated leased office space in Herndon, Virginia, and Longmont,
Colorado. At September 30, 1997, $99,000 remained to cover anticipated losses
from the Herndon and Longmont lease commitments.
INTEREST AND OTHER INCOME, NET. For the first nine months of 1997, the
Company earned net interest and other income of $227,000 compared to $350,000 in
the comparable period of 1996. Net interest and other income for the third
quarter of 1997 was $116,000 compared to $87,000 in the third quarter of 1996.
During the third quarter of 1997, the Company liquidated its portfolio of
investments to help fund the losses incurred to date. This will reduce the
amount of interest earned in the future.
FOREIGN EXCHANGE GAIN (LOSS). Included in foreign exchange income for the
nine and three months ended September 30, 1997, is approximately $162,000 and
$91,000 in translation losses, respectively, and for the nine and three months
ended September 30, 1996, is approximately $56,000 and $10,000 in translation
losses, respectively.
NET LOSS. For the first nine months of 1997, the Company generated a net
loss of $7.2 million compared to a net loss of $4.5 million in the comparable
period of 1996. The net loss for the third quarter of 1997 was approximately
$1.0 million compared to a net loss of $1.4 million in the third quarter of
1996. The net loss for the third quarter showed improvement over the second
quarter net loss of $1.7 million. These changes are the result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
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At September 30, 1997, the Company had approximately $2.6 million in cash
and cash equivalents and working capital of $12.2 million.
For the nine months ended September 30, 1997, the Company used $3.2 million of
cash to fund $4.6 million in losses (net of non-cash items - mostly depreciation
and amortization) and to pay for the increase in inventories of $1.0 million and
the reduction of accounts payable and accrued liabilities of $1.8 million that
has occurred since December 31, 1996. Partially offsetting this was the
reduction in accounts receivable of $3.7 million due to the efforts to collect
customer receivables faster.
The increase in inventories is the result of the introduction of several new
products in 1997 coupled with the lower than anticipated sales of older
products. During the third quarter of fiscal 1997, the Company focused on
reducing inventory levels. Because of these efforts, inventory levels were
reduced during the quarter by $1.4 million. The effort to reduce inventory
levels is expected to continue into the fourth quarter of 1997.
For the nine months ended September 30, 1997, the Company liquidated investments
of $5.3 million which funded the short fall in operating activities and
contributed to the increase in cash balances from $687,000 at the beginning of
the year to $2.6 million at September 30, 1997.
9
Subsequent to September 30, 1997 the Company received a commitment for a line
of credit from a lending institution to provide for a $3 million facility at a
rate equal to the prime rate plus 2%. Among other things, the facility provides
for an increase in the line to $5 million once the Company has returned to
profitability and a lower rate of interest once certain conditions are met.
Borrowings are based on accounts receivable and are secured by substantially all
the Company's assets. Upon completion of the agreement, the Company is
required to pay off the existing line of credit which at September 30, 1997 had
an outstanding balance of $1 million.
The Company believes that cash generated from operations coupled with the
line of credit and existing cash balances will be sufficient to meet its cash
requirements for the foreseeable future.
PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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Exhibits
None
Reports on Form 8-K
None
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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: November 13, 1997 By: /s/ Richard D. Rose
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RICHARD D. ROSE
VICE PRESIDENT - FINANCE AND
ADMINISTRATION
(CHIEF FINANCIAL OFFICER)
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