SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Netrix Corporation
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - --------------------------------------------------------------------------------
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(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
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[logo]
NETRIX CORPORATION
13595 Dulles Technology Drive
Herndon, Virginia 20171
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
ON TUESDAY, OCTOBER 13, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Netrix
Corporation, a Delaware corporation (the "Company"), will be held on October 13,
1998 at 13595 Dulles Technology Drive, Herndon, Virginia, at 2:00 p.m., local
time (the "Annual Meeting"), to consider and act upon the following matters:
1. To elect two Class III Directors to serve for the ensuing three years.
2. To ratify the selection by the Board of Directors of Arthur Andersen
LLP as the Company's independent accountants for the current fiscal
year.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
A copy of the Company's Annual Report on Form 10-K and Form 10-K/A for the
year ended December 31, 1997, which contains financial statements and other
information of interest to stockholders, accompanies this Notice and the
enclosed Proxy Statement.
Stockholders of record at the close of business on August 26, 1998 will be
entitled to notice of and to vote at the meeting or any adjournment thereof.
The stock transfer books of the Company will remain open following the record
date.
The Board of Directors has no knowledge of any other business to be
transacted at the Annual Meeting.
All stockholders are cordially invited to attend the meeting.
By Order of the Board of Directors,
/s/ David Sylvester
David Sylvester, Secretary
Herndon, Virginia
September 11, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE IN ORDER TO ENSURE
REPRESENTATION OF YOUR SHARES AT THE MEETING. NO POSTAGE NEED BE AFFIXED IF THE
PROXY IS MAILED IN THE UNITED STATES.
NETRIX CORPORATION
13595 Dulles Technology Drive
Herndon, Virginia 20171
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 13, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Netrix Corporation (the "Company") for the
Annual Meeting of Stockholders (the "Annual Meeting") to be held on October 13,
1998 and at any adjournments of that meeting. All proxies will be voted in
accordance with the stockholders' instructions. If no choice is specified, the
proxies will be voted in favor of the matters set forth in the accompanying
Notice of Meeting. Any proxy may be revoked by a stockholder at any time before
its exercise by delivery of written revocation or a subsequently dated proxy to
the Secretary of the Company or by voting in person at the Annual Meeting.
Attendance at the Annual Meeting will not itself be deemed to revoke a proxy
unless the stockholder gives affirmative notice at the Annual Meeting that the
stockholder intends to revoke the proxy and vote in person.
The Notice of Meeting, this Proxy Statement, the enclosed proxy and the
Company's Annual Report on 10-K and Form 10-K/A for the fiscal year ended
December 31, 1997 was mailed to stockholders, along with these proxy materials,
on or about September 11, 1998.
Copies of the exhibits to the Company's Annual Report on Form 10-K and
Form 10-K/A for the fiscal year ended December 31, 1997 as filed with the
Securities and Exchange Commission will be furnished to any stockholder upon
written request and payment of an appropriate processing fee to Investor
Relations, Netrix Corporation, 13595 Dulles Technology Drive, Herndon, Virginia
20171.
VOTES REQUIRED AND TABULATION OF VOTES
At the close of business on August 26, 1998, the record date for the
determination of stockholders entitled to vote at the Annual Meeting, there were
outstanding and entitled to vote an aggregate of 11,450,654 shares of common
stock, $.05 par value per share, of the Company (the "Common Stock").
Stockholders are entitled to one vote per share.
Under the Company's Amended and Restated By-laws, the holders of a majority
of the votes represented by the shares of Common Stock issued, outstanding and
entitled to vote on any matter shall constitute a quorum with respect to that
matter at the Annual Meeting. Shares of Common Stock present in person or
represented by proxy (including shares which abstain or do not vote with respect
to one or more of the matters presented for stockholder approval) will be
counted for purposes of determining whether a quorum is present at the Annual
Meeting.
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Annual Meeting is required for the election
of directors. The affirmative vote of the holders of a majority of the shares
of Common Stock voting on the matter is required for the ratification of the
selection of the Company's independent auditors.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter, and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on a matter
that requires the affirmative vote of a certain percentage of the votes cast or
shares voting on a matter.
2
SECURITY OWNERSHIP OF COMMON STOCK
The following table sets forth certain information, as of July 31, 1998,
regarding the beneficial ownership of shares of the Company's Common Stock by
(i) each person or entity known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each director of the Company and
director nominee, (iii) the Named Executive Officers (as defined in the Summary
Compensation Table below), and (iv) all directors and executive officers of the
Company as a group:
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
BENEFICIAL OWNER OWNED(1) OUTSTANDING(2)
- - ----------------------------------------- ----------------- --------------
5% STOCKHOLDERS (3)
Kopp Investment Advisors 606,813 (4) 5.3 %
6600 France Avenue South
Suite 672
Edina, MN 55435
New Enterprise Associates, 782,009 (5) 6.8
Limited Partnerships
1119 St. Paul Street
Baltimore, MD 21202
Dimensional Fund Advisors, Inc. 548,600 (6) 4.8
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
DIRECTORS
Lynn C. Chapman 113,076 (7) *
Arthur J. Marks 797,039 (8) 7.0
V. Orville Wright 35,696 (9) *
William T. Rooker, Jr. 12,060 (10) *
John F. Burton 9,000 (11) *
OTHER NAMED EXECUTIVE OFFICERS
Richard D. Rose 13,750 *
J. Gerard Cregan 37,035 *
G. Brent Wilson 45,160 (12) *
Karl W. Finkelnburg 40,037 (13) *
3
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
BENEFICIAL OWNER OWNED(1) OUTSTANDING(2)
- - ----------------------------------------- ----------------- --------------
Charles W. Stein 22,233 *
All Directors and executive officers as
a group (10 persons) 1,121,356 (14) 9.6
- - ------------------------
* Less than 1%
(1) The number of shares of Common Stock beneficially owned by each person or
entity known by the Company to own beneficially more than 5% of the
outstanding voting stock is determined under the rules promulgated by the
Securities and Exchange Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the individual
has sole or shared voting power or investment power and also any shares of
Common Stock which the individual has the right to acquire within 60 days
after July 31, 1997 through the exercise of any stock option or other
right. The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of beneficial ownership
of those shares. Unless otherwise indicated, the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Number of shares deemed outstanding includes 11,450,654 shares outstanding
as of July 31, 1998 plus any shares subject to options held by the person
or entity in question that are currently exercisable or exercisable within
60 days after July 31, 1998.
(3) Based on a Schedule 13G dated August 12, 1998, Gilder, Gagnon, Howe & Co.,
located at 1775 Broadway, 26th Floor, New York, NY 10019, beneficially owns
992,150 shares of Common Stock, which would equal 8.7% of the Common Stock
outstanding as of July 31, 1998.
(4) This information is based on a Schedule 13G dated February 12, 1998.
(5) This information is based on a Schedule 13G for New Enterprise Associates
IV, Limited Partnership ("NEA IV") dated February 17, 1998. Includes
582,009 shares held by NEA IV and 200,000 shares held by New Enterprise
Associates V, Limited Partnership ("NEA V"). NEA IV and NEA V are
affiliated limited partnerships.
(6) This information is based on a Schedule 13G dated February 10, 1998.
(7) Consists of 113,076 shares issuable upon exercise of outstanding stock
options held by Mr. Chapman, which are exercisable within 60 days after
July 31, 1998.
(8) Includes 582,009 shares held by NEA IV and 200,000 shares held by NEA V.
NEA IV and NEA V are affiliated limited partnerships. Mr. Marks is a
general partner of the general partner of New Enterprise Associates IV,
Limited Partnership and of the general partner of New Enterprise
Associates V, Limited Partnership. Mr. Marks disclaims beneficial ownership
of such shares. Also includes 15,030 shares issuable upon the exercise of
outstanding stock options held by Mr. Marks, which are exercisable within
60 days after July 31, 1998.
(9) Includes 20,666 shares held by V. Orville Wright TTEE. Also includes
15,030 shares issuable upon the exercise of outstanding stock options held
by Mr. Wright, which are exercisable within 60 days after July 31, 1998.
4
(10) Includes 12,060 shares issuable upon the exercise of outstanding stock
options held by Mr. Rooker, which are exercisable within 60 days after
July 31, 1998.
(11) Consists of 9,000 shares issuable upon the exercise of outstanding stock
options held by Mr. Burton, which are exercisable within 60 days after
July 31, 1998.
(12) Includes 44,884 shares issuable upon the exercise of outstanding stock
options held by Mr. Wilson, which are exercisable within 60 days after
July 31, 1998.
(13) Includes 8,067 shares issuable upon the exercise of outstanding stock
options held by Mr. Finkelnburg, which are exercisable within 60 days after
July 31, 1998.
(14) Includes and excludes shares as indicated in footnotes (6) through (13)
above. Also includes shares issuable upon the exercise of outstanding
stock options exercisable within 60 days after July 31, 1998 held by other
executive officers.
ELECTION OF DIRECTORS
The Company's Amended and Restated Certificate of Incorporation, as
amended, provides that the Board of Directors is classified into three classes
(designated Class I Directors, Class II Directors and Class III Directors), with
members of each class holding office for staggered three-year terms. There are
currently authorized two Class I Directors, two Class II Directors and three
Class III Directors. There are currently one Class I Director, whose term
expires at the 1999 Annual Meeting of Stockholders, one Class II Director, whose
term expires at the 2000 Annual Meeting of Stockholders, and three Class III
Directors, whose terms expire at the 1998 Annual Meeting of Stockholders (in all
cases subject to the election and qualification of their successors and to their
earlier death, resignation or removal). The current Class II Director has
indicated that he will resign from the Board of Directors in October 1998 and
one Class III Director has declined to stand for reelection as a Director of the
Company. It is currently expected that the Board, in conjunction with its
Nominating Committee, will identify suitable candidates and fill the one
Class I, two Class II and one Class III vacancies at some time after the Annual
Meeting.
Mr. Burton and Mr. Chapman, current Class III Directors whose terms expire in
1998, will stand for reelection as Class III Directors of the Company. The
persons named in the enclosed proxy will vote to elect Mr. Burton and Mr.
Chapman as Class III Directors unless authority to vote for the election of any
such nominee is withheld by marking the proxy to that effect. If a stockholder
returns a proxy without contrary instructions, the persons named as proxies will
vote to elect as directors Mr Burton and Mr. Chapman. The Class III Directors
will be elected to hold office until the 2001 Annual Meeting of Stockholders,
holding office until his successor is duly elected and qualified. The enclosed
proxy may not be voted for more than one Director. The nominees have indicated
their willingness to serve, if elected, but if any nominee should be unable or
unwilling to serve, proxies may be voted for a substitute nominee designated by
the Board of Directors.
DIRECTORS AND NOMINEES
The following table sets forth, for each Director of the Company (including
the nominees for Class III Director), his name and age, his positions with the
Company, his principal occupation and business experience during the past five
years, the names of the other publicly held corporations of which he serves as a
director and the year during which he first became a Director of the Company.
Information with respect to the number of shares of Common Stock beneficially
owned by each
5
director, directly or indirectly, as of July 31, 1998 appears under the heading
"Beneficial Ownership of Common Stock."
NOMINEES FOR CLASS III DIRECTORS (TERM TO EXPIRE IN 2001)
NAME, OFFICES AND POSITIONS WITH
THE COMPANY, PRINCIPAL OCCUPATION, FIRST BECAME A
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE DIRECTOR
- - ------------------------------------- --- ----------------
John F. Burton 47 1995
Since March 1997, Mr. Burton has been managing director of Updata Group, an
investment banking firm. From October 1996 to March 1997, Mr. Burton was
managing director of Burton Technology Partners, a technology investment and
consulting company. From September 1995 to September 1996, Mr. Burton was the
President and Chief Executive Officer of NatSystems Inc., a client server
software company. From February to August 1995, Mr. Burton was an independent
consultant. Mr. Burton was employed by Legent Corporation, a systems management
software company, from 1989 through 1995, as President and Director, and from
1992 through 1995 as Chief Executive Officer. Mr. Burton was a cofounder of
Business Software Technology in 1984, which was acquired by Legent Corporation
in 1989. He is currently a director of Banyan Systems Inc., a networking
software company, Mapinfo Corp., a desktop mapping software company, and Axent
Technologies Inc., a network security company and Network Imaging Inc..
Lynn C. Chapman 45 1997
Since February 1997, Mr. Chapman has been the President and Chief Executive
Officer and a Director of the Company. From November 1992 to January 1997,
Mr. Chapman served as a Vice President of the Company, including Vice President
of Engineering and Vice President of Network Products. From 1991 to 1992,
Mr. Chapman served as Director of Engineering for the Telecommunications
Division of Data General Corporation and from 1989 to 1991, Mr. Chapman served
as Director of Marketing for Data General Corporation.
CLASS I DIRECTOR
NAME, OFFICES AND POSITIONS WITH
THE COMPANY, PRINCIPAL OCCUPATION, FIRST BECAME A
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE DIRECTOR
- - ------------------------------------- --- ----------------
William T. Rooker, Jr. 64 1994
Mr. Rooker has been a Director of the Company since July 1994. Mr. Rooker
retired from IBM Corporation ("IBM") at the end of 1992 after 37 years of
service and has since served as a private consultant. During his tenure at IBM
he held a variety of marketing and executive management positions. From 1974 to
1990, Mr. Rooker was Vice President and General Manager of Federal Marketing
Programs at IBM and from 1990 to 1992 he was Corporate Director of Government
Relations at IBM.
6
CLASS II DIRECTOR
NAME, OFFICES AND POSITIONS WITH
THE COMPANY, PRINCIPAL OCCUPATION, FIRST BECAME A
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE DIRECTOR
- - ------------------------------------- --- ------------------
V. Orville Wright 78 1991
Mr. Wright has been a Director of the Company since 1991. From 1975 to 1985, he
served as President and Chief Operating Officer of MCI Communications
Corporation ("MCI") and from 1987 to 1991 as Vice Chairman and Co-Chief
Executive Officer of MCI. From 1985 to 1987, Mr. Wright served as Vice Chairman
of MCI. Mr. Wright has also held senior executive positions at IBM, RCA
Corporation, Amdahl Corporation and Xerox Corporation. Mr. Wright serves as
director of Calpine Corporation, an independent power producing company.
CLASS III DIRECTOR
NAME, OFFICES AND POSITIONS WITH
THE COMPANY, PRINCIPAL OCCUPATION, FIRST BECAME A
BUSINESS EXPERIENCE AND DIRECTORSHIPS AGE DIRECTOR
- - ------------------------------------- --- ------------------
Arthur J. Marks 54 1987
Mr. Marks has been a Director of the Company since 1987. He has been a General
Partner of New Enterprise Associates, a venture capital firm, since 1984. Mr.
Marks serves as director of Progress Software Corp., an application development
software company, Platinum Software Corp., an enterprise software company, and
Object Design Corp., a software company.
BOARD AND COMMITTEE MEETINGS
The Company has a standing Audit Committee of the Board of Directors, which
provides the opportunity for direct contact between the Company's independent
accountants and the Board. The Audit Committee met three times during 1997, to
review the effectiveness of the accountants during the annual audit, to discuss
the Company's internal accounting control policies and procedures and to
consider and recommend the selection of the Company's independent accountants.
The current members of the Audit Committee are Messrs. Marks and Wright.
The Company also has a standing Compensation Committee of the Board of
Directors, which makes recommendations to the Board regarding the executive and
employee compensation programs of the Company and administers the Company's
stock option and other employee stock plans. The Compensation Committee did not
meet during 1997. The current members of the Compensation Committee are Messrs.
Rooker and Marks. See "Report of the Compensation Committee" below.
The Company has a standing Nominating Committee of the Board of Directors,
which makes recommendations to the Board regarding qualified candidates for
nomination to the Board. The Nominating Committee will consider nominees
recommended by stockholders who submit such recommendations in writing prior to
the time stockholder proposals are due to be submitted for inclusion in proxy
materials. The current members of the Nominating Committee are Messrs. Marks
and Wright. The Nominating Committee did not meet during 1997.
7
The Board of Directors met nine times during 1997. Each Director attended
at least 75% of the aggregate of the number of Board meetings and the number of
meetings held by all committees on which he then served.
DIRECTORS' COMPENSATION
Each member of the Board of Directors who is not an employee of the Company
is paid a retainer of $12,000 per year plus $250 for each day of attendance of a
meeting of the full Board or any committee thereof (other than the Executive
Committee) and $500 for each day of attendance of a meeting of the Executive
Committee. In addition, the Company reimburses all of its Directors for all
reasonable expenses incurred by them in connection with their attendance at
Board or committee meetings.
Pursuant to the Company's 1992 Director Stock Option Plan, each of Messrs.
Coit, Marks and Wright were granted an initial option to purchase 9,000 shares
of Common Stock with an exercise price of $12.75 per share on October 1, 1992.
On July 20, 1994, Mr. Rooker was granted an initial option to purchase 9,000
shares of Common Stock with an exercise price of $4.00 per share and on May 31,
1995, Mr. Burton was granted an initial option to purchase 9,000 shares of
Common Stock with an exercise price of $7.13 per share. Each option vests in
three equal installments beginning on the first anniversary of the date of
grant. Under the 1992 Director Stock Option Plan, additional options to
purchase 9,000 shares of Common Stock are automatically granted at fair market
value on the date three years after grant of the initial option. On October 1,
1995, each of Messrs. Coit, Marks and Wright received an option to purchase
9,000 shares of Common Stock with an exercise price of $4.69 per share. On
July 21, 1997, Mr. Rooker was granted an option to purchase 9,000 shares of
Common Stock with an exercise price of $2.19 per share. On May 31, 1998, Mr.
Burton was granted an option to purchase 9,000 shares of Common Stock with an
exercise price of $2.75 per share.
8
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation. The following table sets forth the compensation for
the last three fiscal years of the Company's former Chief Executive Officer, the
Company's current Chief Executive Officer and the Company's other four most
highly compensated executive officers (other than the Chief Executive Officer)
whose total salary and bonus exceeded $100,000, for the year ended December 31,
1997 (together, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
Name and Principal ---------------------------------------- -------------------
Position Year Salary(s) Bonus($) Other(1)(2) Awards Options (#)
- - ------------------------------- --------- ----------- ---------- --------------- -------------------
Charles W. Stein(3)............ 1997 225,592 -- 693 --
Former President and Chief 1996 204,789 -- 1,125 150,000
Executive Officer 1995 203,542 22,710 -- 60,000
Lynn C. Chapman(4)............. 1997 156,546 21,750 2,375 29,000
President and Chief 1996 140,578 -- 1,125 75,000
Executive Officer 1995 141,928 11,355 -- 25,000
Richard D. Rose (5)............ 1997 120,000 4,000 -- 45,000
Vice President, Finance 1996 -- -- -- --
and Chief Financial Officer 1995 -- -- -- --
J. Gerard Cregan............... 1997 115,946 9,063 -- 9,000
Vice President, Operations 1996 143,948 -- -- 50,000
1995 147,744 11,355 -- 25,000
G. Brent Wilson................ 1997 114,815 14,500 -- 12,000
Vice President 1996 109,701 -- -- 25,000
Engineering Services 1995 96,796 -- -- 20,000
Karl W. Finkelnburg............ 1997 197,230 -- 1,544 13,000
Vice President, Sales 1996 219,180 -- 750 7,000
American Operations 1995 366,356 -- -- --
_____________________
(1) Represents matching 401(k) plan contributions by the Company.
(2) Other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10
percent of the total salary and bonus for the Named Executive Officer for
such year.
(3) Mr. Stein resigned as President and Chief Executive Officer of the Company
and was elected to serve as Chairman of the Board of Directors of the
Company in January 1997. He resigned as Chairman of the Board of
Directors of the Company in March 1997.
(4) Mr. Chapman became President and Chief Executive Officer of the Company in
February 1997.
(5) Mr. Rose joined the Company as Chief Financial Officer in October 1997.
Salary amount represents annualized compensation.
9
Option Grants. The following table summarizes option grants during the year
ended December 31, 1997 to the Named Executive Officers:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
PERCENT
OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE
SECURITIES GRANTED AT ASSUMED ANNUAL RATES
UNDERLYING TO OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE MARKET FOR OPTION TERM (C)
GRANTEDV IN FISCAL PRICE ($/SHARE) EXPIRATION ----------------------------
NAME (#)(A) YEAR ($/SHARE) (B) DATE 0%($) 5%($) 10%($)
- - --------------------------- ---------- ----------- ----------- ----------- ------------ ------- ------- --------
Charles W. Stein........... -- -- -- -- -- -- -- --
Lynn C. Chapman............ 29,000(D) 7.3% $2.33 $2.33 3/12/07 -- $42,494 $107,689
Richard D. Rose............ 45,000(E) 11.3 1.63 1.63 11/20/07 -- 46,129 116,901
J. Gerard Cregan........... 9,000(D) 2.3 2.33 2.33 3/12/07 -- 13,188 33,421
G. Brent Wilson............ 12,000(D) 3.0 2.33 2.33 3/12/07 -- 17,584 44,561
Karl W. Finkelnburg........ 13,000(D) 3.3 2.33 2.33 3/12/07 -- 19,049 48,274
- - ------------------
(A) Under the terms of the Company's incentive stock option plan, the Board of
Directors retains discretion, subject to plan limits, to modify the terms
of the outstanding options and to reprice the options. The options were
granted for a term of 10 years, subject to earlier termination in the event
of termination of employment. The options were granted with tandem tax
withholding rights.
(B) Equals fair market value of Common Stock on the date of grant.
(C) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 0%, 5% and 10%
compounded annually from the date of grant to their expiration date. The
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock and the date on which the options are
exercised.
(D) Options were granted on March 11, 1997, and become exercisable in equal
monthly installments on the 11th day of each calendar month following the
date of grant, with full vesting occurring on the fifth anniversary date.
(E) Options were granted on November 19, 1997, and became exercisable in equal
monthly installments on the 19th day of each calendar month following the
date of grant with full vesting occurring on the fifth anniversary date.
Option Exercises and Year-End Values. The following table summarizes
option exercises during the year ended December 31, 1997 by the Named Executive
Officers and the value of the unexercised options held by such persons at the
end of December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
EXERCISE REALIZED ------------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------- --------- ---------- ------------- --------------- ----------- -------------
Charles W. Stein..... 44,048 $(13,743) 91,327 101,625 -- --
Lynn C. Chapman...... -- -- 66,996 74,004 -- --
Richard D. Rose...... -- -- 750 44,250 -- --
J. Gerard Cregan..... -- -- 65,425 42,658 -- --
G. Brent Wilson...... -- -- 31,247 36,779 -- --
Karl W. Finkelnburg.. -- -- 4,325 16,175 -- --
- - ----------------
(1) Value is based on the closing sales price of the Company's Common Stock on
December 31, 1997 ($1.06), the last trading day of 1997, less the
applicable option exercise price.
10
Option Repricing
The following table sets forth certain information concerning all
repricings of options held by any executive officer of the Corporation since
October 24, 1996 (the date on which the Corporation became a reporting company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")):
10-YEAR OPTION REPRICINGS
Number of Exercise Price Length of Original
Shares per Share at Option Term
Subject to Time of New Exercise Remaining at Date
Option Repricing or Price Per Share of Repricing or
Executive Officer Date Repriced (#) Amendment ($) ($)(1) Amendment
- - -------------------------- --------- -------------- --------------- ---------------- -------------------
Stephen J. Byars......... 7/11/97 730 $5.75 $2.33 5.9 years
7/11/97 10,000 4.13 2.33 8.3 years
7/11/97 4,000 7.87 2.33 8.9 years
7/11/97 19,000 3.25 2.33 9.7 years
Lynn C. Chapman.......... 12/17/97 5,000 5.75 2.33 5.4 years
12/17/97 10,000 6.25 2.33 6.4 years
12/17/97 10,000 8.69 2.33 7.2 years
12/17/97 15,000 2.56 2.33 7.5 years
12/17/97 72,000 4.75 2.33 8.3 years
12/17/97 29,000 3.25 2.33 9.3 years
Nicholas Doyle........... 7/11/97 5,000 5.13 2.33 8.2 years
7/11/97 8,833 4.13 2.33 8.3 years
7/11/97 2,000 7.87 2.33 9.7 years
7/11/97 7,000 3.25 2.33 10.8 years
J. Gerard Creegan........ 7/11/97 2,083 1.68 2.33 3.8 years
7/11/97 5,000 6.72 2.33 4.5 years
7/11/97 8,000 5.75 2.33 5.9 years
7/11/97 9,000 6.25 2.33 6.8 years
7/11/97 10,000 8.69 2.33 7.6 years
7/11/97 15,000 2.56 2.33 8.2 years
7/11/97 50,000 4.75 2.33 8.7 years
7/11/97 9,000 3.25 2.33 9.7 years
11
Number of Exercise Price Length of Original
Shares per Share at Option Term
Subject to Time of New Exercise Remaining at Date
Option Repricing or Price Per Share of Repricing or
Executive Officer Date Repriced (#) Amendment ($) ($)(1) Amendment
- - -------------------------- --------- -------------- --------------- ---------------- -------------------
Karl W. Finkelnburg...... 7/11/97 7,500 7.87 2.33 8.9 years
7/11/97 13,000 3.25 2.33 9.7 years
Glenn Hunt............... 7/11/97 2,075 5.75 2.33 5.9 years
7/11/97 1,500 6.25 2.33 6.8 years
7/11/97 12,000 4.13 2.33 8.3 years
7/11/97 2,500 7.87 2.33 8.9 years
7/11/97 18,000 3.25 2.33 9.7 years
Damon W. Kenison......... 7/11/97 1,724 5.75 2.33 5.9 years
7/11/97 2,000 6.25 2.33 6.8 years
7/11/97 8,000 4.13 2.33 8.3 years
7/11/97 5,500 7.87 2.33 8.9 years
7/11/97 2,390 3.25 2.33 9.7 years
Steven J. Rebovich....... 7/11/97 8,000 5.13 2.33 8.2 years
7/11/97 7,000 4.13 2.33 8.3 years
7/11/97 2,000 7.87 2.33 8.9 years
7/11/97 17,000 3.25 2.33 9.7 years
G. Brent Wilson.......... 7/11/97 1,666 1.68 2.33 3.7 years
7/11/97 6,360 5.75 2.33 5.9 years
7/11/97 3,000 6.25 2.33 6.8 years
7/11/97 20,000 4.13 2.33 8.3 years
7/11/97 25,000 4.75 2.33 8.7 years
7/11/97 12,000 3.25 2.33 9.7 years
(1) The exercise price per share is equal to 120% of the market price per share
of the Common Stock at the time of the repricing.
REPORT OF COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
composed of two non-employee Directors. The Committee is responsible for
establishing and administering the policies which govern both annual
compensation with respect to the Company's executive officers and equity
ownership programs. All decisions by the Committee relating to the compensation
of the Company's executive officers are reviewed by the full Board of Directors.
This report is submitted by the Committee and addresses the Company's policies
for 1997 as they apply to the President and Chief Executive Officer of the
Company and the other four Named Executive Officers.
12
OVERVIEW AND PHILOSOPHY
The Company's executive compensation program is designed to promote the
following objectives:
. To provide competitive compensation that will help attract, retain and
reward highly qualified executives who contribute to the long-term
success of the Company.
. To align management's interests with the success of the Company by
placing a portion of the executive's compensation at risk in relation
to the Company's performance.
. To align management's interests with stockholders by including long-term
equity incentives.
The Committee believes that the Company's executive compensation program
provides an overall level of compensation that is competitive within its
industry and among companies of comparable size and complexity. To ensure that
compensation is competitive, the Company regularly compares its compensation
practices with those of other similar companies and sets its compensation
guidelines based on this review. The Committee also seeks to achieve an
appropriate balance of the compensation paid to a particular individual and the
compensation paid to other executives both inside the Company and at comparable
companies and attempts to maintain an appropriate mix of salary and incentive
compensation. While compensation data are useful guides for comparative
purposes, the Company believes that a successful compensation program also
requires the application of judgment and subjective determinations of individual
performance.
EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program typically consists of base
salary, annual incentive compensation and long-term equity incentives in the
form of stock options. Executive officers also are eligible to participate in
certain benefit programs that are generally available to all employees of the
Company, such as life insurance benefits, the Company's Employee Stock Purchase
Plan and medical and 401(k) savings plans.
Base Salary
At the beginning of each fiscal year, the Committee establishes an annual
salary plan for the Corporation's senior executive officers based on
recommendations made by the Company's Chief Executive Officer. The Committee
attempts to set base salary compensation within the range of salaries of
executive officers with comparable qualifications, experience and
responsibilities at other companies in the same or similar businesses and of
comparable size and success. In addition to external market data, salary
determinations depend both upon the Company's financial performance and upon the
individual's performance as measured by certain subjective non-financial
objectives. These non-financial objectives include the individual's
contribution to the Company as a whole, including his or her ability to motivate
others, develop the skills necessary to grow as the Company matures, recognize
and pursue new business opportunities and initiate programs to enhance the
Company's growth and success.
13
Annual and Long-Term Incentive Compensation
The Company's bonus program is designed to provide its key employees with
cash incentives to achieve the Company's financial goals. At the beginning of
each year, the Committee typically establishes target annual bonuses for each
executive officer, which the executive will receive if the Company achieves its
target net income for the year. Cash bonuses are then paid monthly based upon
the Company's ongoing financial performance on a monthly and year-to-date basis.
In addition, the Company's sales personnel receive a monthly commission based on
sales bookings for the month and their relationship to targeted annual bookings.
The Committee established cash bonus targets for 1997 and payments were made to
executive officers based on revenues and net income of the Company for 1997.
The Company's stock option plan is designed to promote the identity of
long-term interests between the Company's employees and its stockholders and to
assist in the retention of executives. The size of option grants is generally
intended by the Committee to reflect the executive's position with the Company
and his or her contributions to the Company. Stock options generally vest over
a five-year period in order to encourage key employees to continue in the employ
of the Company.
Benefits
The Company's executive officers are entitled to receive medical and life
insurance benefits and to participate in the Company's 401(k) Retirement Savings
Plan on the same basis as other full-time employees of the Company. The
Company's 1992 Employee Stock Purchase Plan, which is available to virtually all
employees including executive officers, allows participants to purchase shares
at a discount of approximately 15% from the fair market value at the beginning
or end of the applicable purchase period.
The amount of perquisites, as determined in accordance with the rules of
the Securities and Exchange Commission relating to executive compensation, did
not exceed 10% of salary and bonus for 1997 for any of the Named Executive
Officers.
SUMMARY OF COMPENSATION OF CHIEF EXECUTIVE OFFICER
In 1997, Mr. Chapman, the Company's President and Chief Executive Officer,
received salary compensation of $156,546 and a bonus compensation of $21,750.
OPTION REPRICING
As noted above, the Board of Directors of the Company uses stock options as
a significant element of the compensation package of executive officers, because
they align the motivations and rewards of executive officers with those of the
Company's stockholders and because of the important retentive value served by
the vesting schedule of the options. The Board of Directors believes that for
these same reasons, stock options are a critical component of the compensation
package of all key employees of the Company. Moreover, in light of the intense
competition among companies for highly skilled high technology, sales and
managerial personnel, the Board of Directors believes that it is extremely
difficult to attract and retain high quality employees without a meaningful
stock option package to offer such employees.
The market value of the Common Stock of the Company, which reached $20.00
per share in January 1993, generally moved between about $5.00 per share to
$10.00 per share from February 1993 to February 1997, steadily decreased to
$1.80, and generally hovered around $2.00 and $4.00 per share during
14
late May and June 1997. As a result of this decline, virtually all of the
outstanding stock options of the Company had exercise prices in excess of the
market value of the Common Stock. After several meetings and discussions with
members of management, the Board of Directors concluded that the motivational
and retentive value of the outstanding stock options of the Company had been
significantly diminished, and that it was critical for the Company to restore
the value of outstanding stock options as a means of motivating and retaining
employees in order to promote the successful implementation of the Company's
growth strategies.
Accordingly, on July 11, 1997, the Board of Directors approved a stock
option exchange program, pursuant to which employees of the Company holding
stock options under the Company's 1992 Stock Option Plan and 1996 Stock Option
Plan were given the opportunity to exchange the unexercised portion of such
options for new options covering an equal number of shares and having an
exercise price of $2.33 per share (120% of the fair market value of the Common
Stock on such date). Other than the exercise price and a blackout period for
exercise, these new options had the same terms as the options cancelled in
exchange therefor.
In its deliberations over whether to authorize this stock option exchange
program, the Committee and the Board of Directors considered at length the
potential disadvantages of such an exchange program, including its dilutive
effect on, and possible negative reactions among, the existing stockholders of
the Company. While fully cognizant of the potential disadvantages of the stock
option exchange program, it was the conclusion of the Board of Directors that,
given the dependence of the Company on skilled employees and the intense
competition for such employees, the Company could not realistically hope to
implement its new business strategies and return to profitability unless the
stock option exchange program was implemented.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), enacted in 1993, generally disallows a tax deduction to public
companies for compensation over $1,000,000 paid to its chief executive officer
and its four other most highly compensated executive officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. In this regard, the Company has limited the
number of shares subject to stock options which may be granted to Company
employees in a manner that complies with the performance-based requirements of
Section 162(m). Based on the compensation awarded to the executive officers of
the Company, it does not appear that the Section 162(m) limitation will have a
significant impact on the Company in the near term. While the Committee does
not currently intend to qualify its incentive awards as a performance-based
plan, it will continue to monitor the impact of Section 162(m) on the Company.
COMPENSATION COMMITTEE
Arthur J. Marks
William T. Rooker, Jr.
15
CHANGE IN CONTROL ARRANGEMENTS
The Board of Directors has adopted an Employee Retention Policy which
provides that, in the event of a change in control of the Company, (i) Messrs.
Chapman and Wilson shall receive severance pay equal to the last twelve months
compensation if within one year after such a change in control such executive is
terminated other than for cause, his compensation is substantially reduced, or
he is forced to relocate to a new area; (ii) acceleration of one half of the
unvested stock options under the 1992 Stock Option Plan for options granted
initially to Messrs. Chapman and Wilson in March 1996; and (iii) acceleration of
the unvested non-statutory stock options under the 1992 Stock Option Plan for
the non-statutory stock options granted to Messrs. Chapman and Wilson in
September 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Arthur J. Marks and
William T. Rooker, Jr. No member of the Compensation Committee was at any time
during 1997, or formerly, an officer or employee of the Company or any
subsidiary of the Company, nor has any member of the Compensation Committee had
any relationship with the Company requiring disclosure under Item 404 of
Regulation S-K under the Exchange Act.
No executive officer of the Company has served as a director or member of
the Compensation Committee (or other committee serving an equivalent function)
of any other entity, one of whose executive officers served as a director of or
member of the Compensation Committee of the Company.
COMPARATIVE STOCK PERFORMANCE
The graph below compares cumulative total stockholder return on the
Company's Common Stock during the period from September 21, 1992 (the date on
which the Company's Common Stock was first registered under the Exchange Act)
through December 31, 1997 with the cumulative total return over the same period
of (i) the Russell 2000 Index and (ii) a peer group of publicly-traded
companies* selected by the Company for purposes of this comparison (the "Peer
Group"). This graph assumes the investment of $100 at the close of trading on
September 21, 1992 in the Company's Common Stock, the Russell 2000 Index and the
Peer Group and assumes reinvestment of dividends. Measurement points are at
September 21, 1992, December 31, 1992, December 31, 1993, December 31, 1994,
December 31, 1995, December 31, 1996 and December 31, 1997.
16
COMPARATIVE STOCKHOLDER RETURNS
NETRIX CORPORATION, RUSSELL 2000 INDEX AND PEER GROUP*
(Performance results from 9/21/92 through 12/31/97)
[ PERFORMANCE CHART APPEARS HERE ]
1992 1993 1994 1995 1996 1997
- - --------------------------------------------------------------------------------------------------------
NETRIX $100.00 $25.63 $46.25 $23.13 $23.75 $5.31
- - --------------------------------------------------------------------------------------------------------
Russell 2000 $100.00 $118.91 $116.74 $149.94 $174.67 $213.73
- - --------------------------------------------------------------------------------------------------------
Peer Group $100.00 $119.52 $132.81 $227.31 $318.26 $379.75
- - --------------------------------------------------------------------------------------------------------
Assumes $100 invested at the close of trading on the last trading day preceding
the first day of the fifth preceding fiscal year in Netrix common stock, Russell
2000, and Peer Group.
* Cumulative total return assumes reinvestment of dividends.
Source: Frank Russell Company
_______________
* The Peer Group includes the following companies: Cisco Systems, Inc. (CSCO),
CrossComm Corporation (XCOM), Network Equipment Technologies, Inc. (NWK),
Newbridge Networks Corporation (NNCXF), Northern Telecom, Inc. (NT), Proteon,
Inc. (PTON), StrataCom, Inc. (STRM), Telematics International, Inc. (TMAX), Bay
Networks, Inc. (BNET) and 3Com Corporation (COMS). The stockholder returns of
each such company have been weighted to reflect relative stock market
capitalization.
17
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors, at the recommendation of the Audit Committee, has
selected the firm of Arthur Andersen LLP as the Company's independent
accountants for the current fiscal year. Arthur Andersen LLP has served as the
Company's independent accountants since 1987. Although stockholder approval of
the Board of Directors' selection of Arthur Andersen LLP is not required by law,
the Board of Directors believes that it is advisable to give stockholders an
opportunity to ratify this selection. If this proposal is not approved at the
Annual Meeting, the Board of Directors will reconsider its selection of Arthur
Andersen LLP.
Representatives of Arthur Andersen LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement if they desire
to do so and will also be available to respond to appropriate questions from
stockholders.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1999 Annual
Meeting of Stockholders must be received by the Company at its principal office
in Herndon, Virginia, no later than May 14, 1999, for inclusion in the proxy
statement for that meeting.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and
14a-8 under the Exchange Act, written notice of stockholder proposals submitted
outside the processes of Rule 14a-8 for consideration at the 1999 Annual Meeting
of Stockholders must be received by the Company on or before July 28, 1998 in
order to be considered timely for purposes of Rule 14a-4. The persons
designated in the Company's proxy statement and management proxy card will be
granted discretionary authority with respect to any shareholder proposal with
respect to which the Company does not receive timely notice.
18
OTHER MATTERS
The Board of Directors does not know of any other matters which may come
before the Annual Meeting. However, if any other matters are properly presented
to the Annual Meeting, it is the intention of the persons named in the
accompanying proxy to vote, or otherwise act, in accordance with their judgment
on such matters.
All costs of solicitation of proxies will be borne by the Company. In
addition to solicitations by mail, the Company's Directors, officers and regular
employees, without additional remuneration, may solicit proxies by telephone,
telegraph and personal interviews, and the Company reserves the right to retain
outside agencies for the purpose of soliciting proxies. Brokers, custodians and
fiduciaries will be requested to forward proxy soliciting material to the owners
of stock held in their names, and, as required by law, the Company will
reimburse them for their out-of-pocket expenses in this regard.
By Order of the Board of Directors,
/s/ David Sylvester
David Sylvester, Secretary
September 11, 1998
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. STOCKHOLDERS WHO ATTEND
THE MEETING MAY VOTE THEIR STOCK PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR
PROXIES.
19
[NETRIX LOGO APPEARS HERE]
NTX66B
DETACH HERE
PROXY
NETRIX CORPORATION
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER 13, 19989
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned, having received notice of the meeting and the management's
proxy statement therefor, and revoking all prior proxies, hereby appoint(s) Lynn
C. chapman and Norman Welsch, and each of them, with full power of substitution,
as proxies to represent and vote as designated herein all share of stock of
Netrix Corporation (the "Company") which the undersigned would be entitled to
vote if personally present at the 1998 Annual Meeting of Stockholders of the
Company to be held at the principal executive offices of the Company at 13595
Dulles Technology Drive, Herndon, Virginia, at 2:00 p.m., local time, on October
13, 1998 and at any adjournment thereof.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS
AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
The proxy when properly executed will be voted in the manner directed herein by
the undersigned stockholder. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED
AS DIRECTED BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY
ELECTION TO OFFICE OR PROPOSAL, THIS PROXY WILL BE VOTED FOR SUCH ELECTION TO
OFFICE OR PROPOSAL. Attendance of the undersigned at the meeting or at any
adjournment thereof will not be deemed to revoke this proxy unless the
undersigned shall revoke this proxy in writing.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[SEE REVERSE SIDE] [SEE REVERSE SIDE]
[NETRIX LOGO APPEARS HERE]
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE,
DATE, SIGN AND RETURN THIS PROXY IN THE ACCOMPANYING ENVELOPE.
NTX66A
DETACH HERE
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
1. To elect two Class III Directors to serve for the ensuing three years.
Nominees: John F. Burton and Lynn C. Chapman
FOR WITHHELD
[ ] [ ]
[ ]
---------------------------------------
For both nominees except as noted above
2. To ratify the selection by the Board of Directors of Arthur Andersen LLP as
the Company's independent accountants for the current fiscal year.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To transact such other business as my properly come before the meeting or any
adjournment thereof.
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT.
[ ] MARK HERE IF YOU PLAN TO ATTEND THE MEETING.
Please sign exactly as name appears hereon. When shares are held by joint
owners, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give the full title as such. If a corporation,
please sign in full corporate name by President or other authorized officer. If
a partnership, please sign in partnership name by authorized person.
- - ------------------------ --------- ---------------------- ----------
Signature Date Signature Date
September 11, 1998
TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES,
1997 was a defining year for NETRIX. In 1997, we changed from being a
technology-oriented company to being a customer- and market-oriented company.
We returned to our roots, focusing our efforts on areas where our products and
technology have sustainable competitive advantages, and where the market
opportunities are expanding. To do that, we restructured our expenses and our
organization, refocused our products, and re-entered the US mainstream market.
Our focus is the integration of data and voice over data networks. In 1997, the
market opportunity for voice over data products converged nicely with our core
competencies and product advantages.
During 1997, we introduced the Network Exchange 2550, a backbone-switching
product that has an internal ATM architecture. In addition, we extended the
voice capabilities of our Network Exchange 2210 platform. The combination of
these two products allows us to provide complete voice over data solutions.
Early in 1998, we introduced an Internet Protocol (IP) capability on the
2210 that enables Voice over IP (VoIP). Our strategy to provide a platform that
can seamlessly integrate voice and data complements the increased market
interest in VoIP. Our flexible architecture has allowed us to enhance our market
proven platform to support IP along with other voice over data options,
including Voice over Frame Relay and Voice over ATM. In 1997, most companies
committed to delivering VoIP solutions late in 1998. We began delivering VoIP to
enterprises at the end of March 1998. In addition, we have the benefit of over
two years of proven field experience delivering Voice over Frame Relay solutions
on the Network Exchange 2210 the same platform that provides Voice over IP.
OPPORTUNITY
Our immediate goals are to return to profitable growth, and to become one
of the top three players in the voice over data market. The winners in this
market will be those companies that can demonstrate that their products work in
the field and NETRIX expects to be among the leaders of that group. We remain
focused on the market segments where we have a sustainable advantage, where the
industry trends are in our favor, and where there is a real growth opportunity.
Our key value proposition and competitive advantage is that we can reduce
the cost of voice and data communications while improving network performance
and flexibility.
Over the next twelve to eighteen months, our greatest growth opportunity
will be to bring voice and data networking together in existing corporate
networks as well as emerging and established service provider networks.
Corporate networks currently exist all over the world, and they are well
maintained and managed. With the NETRIX products, these networks can quickly and
inexpensively be adapted to accommodate high quality voice services as well. We
have already begun to see the deployment of packetized voice services in both
emerging and
Lynn Chapman, Page 2
established service provider networks. We expect this trend to continue and to
accelerate. We believe NETRIX is well positioned to benefit greatly from this
trend.
Because we're one of the first companies to actually have a revenue stream
from VoIP, we believe we have unprecedented opportunities to leverage our entire
voice over data track record with data companies trying to get into packetized
voice, and with traditional voice companies trying to integrate packetized voice
and data. At the same time, with proven products and a hot market, we also have
a window of opportunity to build strong distribution channels through both
partnering, and by strengthening our existing channels.
FINANCIAL REVIEW
During 1997 we made extensive changes in our operations. We made sharp
reductions in staff early in the year, while at the same time refocusing our R&D
investments toward the new 2000 Series product family. Our breakeven point was
substantially reduced. We made progress in reducing losses and managing
inventory over the year, and we still have little debt.
In April of 1998, we raised just over $2M in additional cash for the
Company in a private placement; the net proceeds were approximately $1.8M. These
new investors are specifically interested in our new products and in our long-
term business direction in the voice over data market. This private placement
improved our financial strength and was a milestone on the road to profitable
growth.
In our Q2 announcement, we addressed concerns about our reduced cash
availability, including the bank's decision to exclude certain international
receivables from our borrowing base. Subsequent to that announcement, we have
made progress with the bank and believe that additional receivables will be
reinstated that will improve our cash availability. Collections against
outstanding receivables have improved since the announcement as well.
Our primary financial objectives include diligence in managing cash both
in controlling expenses and expediting receivables, and continuing our efforts
to return the Company to profitable growth.
PROGRESS
During 1997 and continuing into 1998, we have undertaken important
initiatives to carry out our strategies, including expanded marketing and sales
efforts, continuing R&D and new product investments, and establishing new
alliances and partnerships.
I am pleased with the technical and marketing progress made during the past
year. Our new products are being validated in the marketplace. The Network
Exchange 2210 was recently awarded the Editor's Choice award by Internet
Telephony magazine. Our marketing programs have generated tremendous interest
and thousands of leads. We expect to be able to announce one or more strategic
relationship in the next few months, primarily in the form of distribution
channels for our products. The voice over data strategy is on target and gaining
acceptance.
OUR PERFORMANCE
Shareholders can measure our near-term performance based on two criteria:
shipment of an increasing number of voice/data networks, and significant
partnering announcements.
1998 has been the year for players in this market to demonstrate product
operation and performance in the field. Industry predictions are that 1999 will
be the year to measure success based on number of voice port shipments. We have
made a good start in this area with our Q2
Lynn Chapman, Page 3
1998 results, where we were able to announce shipment of 5,800 analog and
digital voice ports in the quarter. This represents an increase of 261% over our
shipment rate during the first quarter of 1998.
In today's networking environment, large manufacturers who control mass
channels need to sell end to end solutions. Data networking vendors are trying
to get into voice networking, and circuit switched voice equipment vendors are
trying to provide packetized voice and data solutions. Our products are able to
satisfy both of these requirements. We look to large manufacturers to provide
the sales channel we need to increase market share. Our expectation is that we
will have several name-brand channels in place by year-end. We expect to be
shipping products through these new channels by the beginning of 1999
By proving high quality performance in the field, and by achieving
increasing voice port shipments, NETRIX will be able to build and expand
distribution channels that can increase our penetration of the voice over data
market.
LOOKING FORWARD
The voice/data networking market is still very young. The winners are going
to be companies that are flexible, quick on their feet and quick to respond to
changes in the marketplace: companies like NETRIX.
Some of the challenges for NETRIX are internal and include the need to
increase revenue and continue vigilant cash management. External challenges may
include the potential for deregulation, standards changes, and tariffing issues.
But even if these threats become reality, we think the trend toward voice over
data networking will continue to move forward both domestically and
internationally. NETRIX is well positioned to respond to this increasing demand
for voice over data solutions in Wide Area Networks whether in corporate
networks or service provider networks.
NETRIX is on the right strategic and operational track. We have
successfully re-entered the mainstream market for networking solutions. We have
demonstrated the strength of our networking solutions in the most demanding of
forums live operational networks. We have done this not by abandoning our
traditional strengths, but by building on them and responding quickly to the
changing market needs of a demanding communications industry.
The business environment for NETRIX is as good as it gets. Our destiny is
in our control, and it is now up to us to execute. Thank you for your continued
support as we work towards achieving our goals.
Sincerely,
Lynn Chapman
President and CEO
This letter contains forward-looking statements that involve a number of
risks and uncertainties, including references to the success of new products and
the transition between the sale of old products and the sale of new
Lynn Chapman, Page 4
products. Readers are cautioned that all forward-looking statements are subject
to risks and uncertainties, including, without limitation, the timing of new
announcements or introductions by the Company and its competitors, the hiring
and retention of key employees, competitive pricing pressures, the manufacturing
of products, the need for capital, dependence on third parties for
manufacturing, components and products, general economic conditions in the
United States and international markets, and the risk factors detailed from time
to time in the Company's periodic reports and registration statements filed with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements that speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.