UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-50464
------------------------
NETRIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 54-1345159
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
13595 DULLES TECHNOLOGY DRIVE, HERNDON, VIRGINIA 20171
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 742-6000
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock,
$0.05 Par Value
Indicate by check mark 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 ______ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[ ]
Aggregate market value of Common Stock (par value $.05 per share) held by
non-affiliates of Registrant on March 25, 2000: $736,300,181
The number of shares of Registrant's Common Stock (par value $.05 per share)
outstanding as of March 25, 2000: 31,668,825
DOCUMENTS INCORPORATED BY REFERENCE
The information required under Part III is incorporated by reference from the
Netrix Corporation Proxy Statement for the Annual Meeting of Stockholders,
which will be filed on or before April 29, 2000.
ITEM 1. BUSINESS
Netrix Corporation- doing business as Nx Networks
Nx Networks (the "Company"), is a worldwide provider of Internet telephony and
data networking solutions. The Company, together with its subsidiaries, delivers
a high performance, scalable product suite that serves today's voice and data
convergence needs while anticipating tomorrow's demands for secure packet and
cell based telephony solutions. The Company combines patented switched,
compressed voice and data technology with advanced packet data networking
capabilities to provide networking solutions that improve network performance
and deliver an array of tangible network services.
The Company has distinguished itself as a pioneer in the data communications
industry and as a leader in packetized voice, data networking and connectivity.
Currently, the Company is pioneering next generation softswitch and intelligent
service technologies that will simplify networking provisioning and will provide
a platform for application services. Nx Networks customers include service
providers, multinational corporations and government agencies in over 60
countries.
On December 22, 1999, the Company acquired OpenROUTE Networks, Inc., a provider
of network connectivity products and solutions that are designed to meet the
needs of Internet service providers and corporate enterprises. On March 16,
2000, the Company merged with AetherWorks Corporation ("AetherWorks"), a
provider of innovative softswitch technology for the telecommunications
industry. In connection with the OpenROUTE merger, the Company began conducting
business under the name Nx Networks, Inc., and it is expected that the name
change will be formally voted upon at the Company's 2000 annual meeting of
stockholders.
CORPORATE OBJECTIVES
The Company's goal is to be a leading provider of Internet telephony solutions.
The Company recognizes that Internet telephony is driving the communications
industry to achieve an intelligent, feature rich and all-encompassing network.
The Company intends to deliver solutions that offer secure, seamless end-to-end
interoperability for integrated voice and data services in this market.
Nx Networks acquisition of AetherWorks provides the Company with superior
softswitch technology and the resources to significantly expand the Company's
penetration of the rapidly growing Internet telephony services market.
Specifically, the Company believes this technology allows it to bring
differentiated services to customers faster than its competitors. The Company
will capitalize on its services segment by introducing innovative new products.
The Company believes that its products enhance the growth and deployment of
multi-service networks, the adoption of virtual private networking ("VPN") and
the implementation of voice over virtual private networking ("VoVPN"). Its
tactical development projects also reflect service provider deregulation and
competition, the growth of e-commerce and the increased demand for comprehensive
Internet protocol services.
During 2000, the Company plans to deliver the following solutions to service
providers, corporations and carriers in the market segments indicated:
o VIRTUAL PRIVATE NETWORKING - Nx Networks GT and GTX Series is an award
winning full-featured VPN edge router product.
o VOICE OVER VIRTUAL PRIVATE NETWORKING (VOVPN) - Nx Networks 3000 Series
combines voice and data within a VPN.
o CARRIER CLASS VOIP GATEWAY - The upcoming Nx Networks 6000 Series delivers
carrier class voice over IP gateways that are standards based and scalable.
2
o CARRIER GRADE SOFTSWITCH TECHNOLOGY - The Company's superior softswitch
technology runs on virtually all Unix platforms and is easily enhanced.
This technology will debut in the Nx Networks 6000 Series, presently under
development.
o CUSTOMER PREMISE EQUIPMENT - Through the series 2200 and 2500 product
lines, the Company offers a complete series of edge products - both voice
and data with full feature sets and robust quality.
BACKGROUND
The convergence of Internet standards for, voice over Internet protocol ("VoIP")
and virtual private networking ("VPN") makes the combining of voice and data,
(long treated as separate technologies), a sound business decision. As network
infrastructures converge and consolidate, fewer networks and protocols support
an increasing number of applications. The Internet protocol ("IP") for the local
area network ("LAN"), along with frame relay and asynchronous transfer mode
("ATM") for wide area networks ("WAN") are the leading technologies in this
market space, displacing previous technologies.
These technological trends, combined with the proliferation of global trade,
have created a growing reliance on secure converged telecommunications to
facilitate commerce. In an environment where wide area networking is critical to
daily operations, secure voice and data communications over different network
media types represent a significant and increasing component of operating costs
for enterprises. The Company has focused its new products to support the needs
of this new network model.
The varying traffic characteristics of different types of networking
applications, together with the need to transmit voice, data and video has
created the need for vendors to supply multi-service platforms to meet the user
requirements within a single network fabric. Technologies in use today include
IP, frame relay, integrated services digital network ("ISDN") and ATM.
Multi-service platforms, such as Nx Network Exchange products, enable its
customers to support multiple applications across a single network, thereby
resulting in improved connectivity, generally reduced communications costs and
improved network performance.
The increasing availability of IP and ATM services on the public networks has
fueled a trend toward building corporate networks that access these services on
an as-needed basis. Nx Networks products can be used to implement voice and data
networks based upon private lines, public services or a combination of private
and public services. The Company believes that the trend toward the use of
services will continue to grow, especially with global telecommunications
deregulation. The proliferation of the Internet will also cultivate acceptance
of packetized voice and fax applications.
On March 19, 1999, Mr. Steve Francesco was appointed as Chairman of the Board of
Directors to reposition the Company as an end-to-end solution provider for
Internet-based networking of voice/data/fax for the service provider market.
In November 1999, the Company launched a comprehensive equipment leasing program
through a strategic partnership with First Venture Leasing Corporation. The
program allows the Company to offer emerging and established carriers the
financial tools needed to build a complete Nx Networks Internet telephony
infrastructure without the traditional large up-front capital expenditures.
On December 22, 1999, the Company completed the acquisition of OpenROUTE.
OpenROUTE provides network connectivity products and solutions that are designed
to meet the needs of Internet service providers and corporate enterprises. The
integration of OpenROUTE's technology with the Company's technologies
facilitated the development of the Series 3000 product line.
In December 1999, the Company introduced the 3000 Series, which delivers a
secure solution for converged Internet telephony and data. The 3000 Series
combines high quality IP voice and routing into a single end-to-end solution for
secure voice and data communications. The 3000 Series positions the Company
firmly in the VoIP and VoVPN telephony market space, which is emerging as the
next wave of network consolidation and which leverages the vast worldwide IP
3
infrastructures already deployed. It also positions the Company for the emerging
service provider space by enabling it to offer low cost telephony solutions
while realizing a short-term return on its equipment investment.
With the introduction and continued development of the Series 3000, the Company
is moving toward the ability to deliver secure voice and data integration over
almost any carrier infrastructure, with the goal of making the products as easy
to configure and provision as possible. In addition to the products' ability to
shape traffic, prioritize applications, and customize bandwidth utilization on
demand to suit end users needs, the 3000 is an ideal platform for service
providers looking to differentiate themselves through the delivery of next
generation services. Whether provisioning service or selling customer premise
equipment ("CPE") to end users, the Company's range of products will be well
positioned for the service provider market.
The Company believes it is positioned to be among the leaders in IP voice/data
wide area networking equipment in 2000 and beyond. Internet telephony, in
particular, represents a short-term opportunity for the Company to gain
substantial service provider market share. The Company believes that its current
product offering provides several advantages over existing competing products in
the areas of performance, security, scalability, flexibility, cost, channel
capacity and bandwidth efficiency. The Company has recently been able to offer
carrier quality voice over packet solutions to service providers over wide area
networks at significant reductions in per minute operating costs. Particularly
with regard to bandwidth allocation, its capability to bundle multiple voice
samples from different calls in a single packet allows improved bandwidth
management over long distances.
On December 31, 1999 the Company entered into an agreement to acquire
AetherWorks Corporation, a provider of innovative softswitch technology for the
telecommunications industry. The Company believes that the addition of
AetherWorks' technology provides it with a distinct competitive advantage in
developing solutions its customers need to succeed in the Internet telephony
arena. Specifically, AetherWorks provides the technology which will enable an
intelligent, feature-rich and all encompassing network to emerge. In addition,
this acquisition moves the Company from the customer premise "edge" to the telco
and carrier "edge". The Company believes the combination of its existing
technologies and AetherWorks' technologies will serve a growing converged market
and allow secure, seamless end-to-end interoperability while providing feature
rich services at a significant cost savings. The acquisition of Aetherworks was
completed on March 16, 2000.
PRODUCTS
The Company currently offers four types of networking products:
o Voice and Data Gateway Routers - 3000 Series
o Voice Gateways - 2200 Network Exchange Series
o Backbone Switches - 2500 Network Exchange Series
o Data Networking Routers - GT and GTX
Nx Networks Network Exchange products provide flexible and scaleable network
solutions for small to large voice/data networks. The products are used together
to provide coverage from the access level through to the network backbone. Nx
Networks products provide integrated voice and data network solutions that use
state of the art networking technology.
VOICE AND DATA GATEWAY ROUTERS
3000 SERIES. The 3000 Series is a modular voice over virtual private network
(VoVPN) gateway router. It is a voice gateway and data router combined to work
over WAN and LAN connections. With the 3000 Series, data and voice transmission
are secure using industry standard firewalls, encryption and authentication
protocols. This product enables companies to combine their voice and data
networks within a VPN.
4
VOICE GATEWAYS
The Company has two platforms that comprise the Voice Gateway product line, the
2210 and the 2201. The products scale from a gateway consisting of as few as
four voice ports to larger central sites comprising hundreds of ports. This
scaleable product offering permits the customer to choose the most appropriate
platform for each site based upon functionality and performance requirements.
All are designed to enhance the efficiency and cost effectiveness of the
communications infrastructure.
NETWORK EXCHANGE 2210. The Network Exchange 2210 is a voice gateway that
combines switched compressed voice and data switching in a single platform. The
2210 incorporates the Company's Vodex voice gateway software, one of the
industry's first voice gateways to simultaneously deliver high quality voice
over IP and voice over frame relay with the ability to gateway between the two.
This scaleable product, designed to take advantage of available IP and frame
relay facilities/services, is based upon enhanced voice over frame capabilities
the Company has developed. The 2210 has a complete set of features which support
switched compressed voice and LAN traffic, as well as the traditional
capabilities found in typical access level products. The 2210 is also available
with redundant AC or DC power supplies. This configuration is called the Network
Exchange 2214.
NETWORK EXCHANGE 2201. Nx Networks Network Exchange 2201 was introduced mid-1998
as the entry-level product in the 2200 series of voice gateways. The 2201 is a
voice over data switching platform that delivers the benefits of Internet
telephony and WAN switching together with multi-protocol data support. The 2201
offers a unique combination of switched compressed voice and data switching
support in a single compact platform. As a stand alone voice and data access
switch, or in conjunction with other Network Exchange 2000 series products, it
gives networks flexibility, scalability and efficiency.
BACKBONE SWITCHES
The Company has two platforms that comprise the backbone switch product line,
the 2550 and the 2510 series. Software selectable transmission technologies
allow the 2500 series to provide superior cost-effective leased line, public or
hybrid networking solutions for data, voice and image applications.
NETWORK EXCHANGE 2550. The Network Exchange 2550 performs as a central site
voice/data switch to provide a resilient fault-tolerant hub. The 2550 interworks
with the 2210 to provide complete multi-service networking support for
compressed voice traffic as well as all existing network technologies. With the
2550, networks can be constructed to provide support for voice over IP, frame
relay and ATM using narrowband or high speed broadband interfaces running at
speeds up to DS3 (45 Mbps) and E3 (34 Mbps) rates.
NETWORK EXCHANGE 2510. The Network Exchange 2510 is the entry-level switch in
the Network Exchange 2500 series of high-performance, multi-service switching
platforms. It combines ATM, frame relay, X.25, TDM, and ISDN for data, voice and
image applications. Functioning as either an enterprise backbone or a carrier
edge switch, the 2510 provides cost-effective bandwidth management of public,
private, and hybrid networks, with extensive network management and diagnostic
capabilities.
NX NETWORKS NETWORK MANAGEMENT SYSTEM (NMS)
Each of the products listed above is managed by Nx Networks' Network Management
System (NMS). The NMS provides a full graphical user interface and remote
diagnostics, allowing nodes at several different locations to be viewed and
managed by the network manager at one central location. The NMS has the
capability to monitor attached simple network management protocol ("SNMP")
devices, such as a router, and to participate in global network management
architecture with other SNMP managers. Built into the NMS is the capability to
support virtual private networks, remote diagnostics, and extensive "gatekeeper"
functionality such as call detail records for accounting and performance
statistics for on-going capacity planning/tuning. The NMS provides extensive
capabilities to insure non-stop operation with the lowest personnel costs. The
Company supplies network management software for operation with Windows 95 and
Sun Sparc platforms.
5
DATA NETWORKING ROUTERS
The Company's GT Series is designed to provide customers with a secure, highly
efficient data router. The product line includes six platforms and scales from a
fixed configuration supporting one Ethernet and one WAN connection to a modular
device supporting multiple Ethernet and WAN connections. All of the routers
include a standards based design that assures interoperability. In addition, the
GT Series includes award winning software that delivers proven reliability and
performance.
GT 60 & 70. Both the GT 60 & 70 are customer premise data routers that combine
VPN capabilities, multi-protocol routing and software encryption into a cost
effective easily managed solution. The GT 60 & 70 are fixed configuration
platforms.
GT 90 & 900. The GT90 and 900 are flexible, secure and cost-effective routers
designed for cable, wireless and xDSL applications. The 900 includes a "packet
accelerator" security processor for higher speed encryption that delivers
unequaled performance to meet the needs of the most demanding VPN. Both are
deployed as Customer Premise Equipment (CPE) solution through Internet service
providers.
GTX 1000. This modular router allows the mix and match of LAN/WAN protocols and
media. It is VPN complete and offers a unique combination of performance, price,
interface flexibility and security.
GTX 1500. This modular router is the industry's first router to include a VPN
"packet accelerator," a security processor for higher speed compression and
encryption, allowing network managers can provide the security provided for a
VPN without sacrificing performance.
MARKETING AND SALES
Nx Networks customers include service providers, multi-national corporations and
government agencies in over 60 countries. To address these markets throughout
the world, the Company has established a multi-channel distribution and sales
network. The Company's products provide voice/data solutions and are marketed
through indirect channels, either via carriers or enterprise focused partners
worldwide. In addition, the Company has a direct sales force, which sells to
large corporations worldwide. Service providers resell Nx Networks products as
part of their service offerings as well. Marketing programs to support these
channels center around advertising, direct lead generation programs and industry
analyst cultivation.
The Company's breadth of voice and data products, now enhanced by the
acquisition of AetherWorks softswitch technology, has strengthened its position
as a leading worldwide provider of Internet telephony and data networking
solutions. Specifically, the Company's strategy to move from the customer edge
to the carrier edge is now firmly in place, with product development underway.
In addition, the Nx Networks 3000 Series has combined voice and data security
technologies and is positioned to capture the convergence of these markets.
CUSTOMER SUPPORT AND SERVICE
A significant element of Nx Networks strategy has been to provide service,
repair and technical support for its customers throughout the world. A
substantial portion of its service and support activity relates to software and
network configuration and is provided by 24-hours per day, 7-days per week
telephone support through the Nx Networks Technical Assistance Center ("TAC").
Nx Networks products are designed to allow the TAC to be online with any Nx
Networks' network in the world to diagnose problems and to respond with
solutions. In addition, Nx Networks hardware is designed to facilitate
replacement of failed boards. In many cases, the customer's personnel can
replace a board themselves under the direction of the TAC. TAC service is
provided directly to end users and as a backup service to its international
distributors.
6
Nx Networks personnel and third party providers perform most domestic hardware
maintenance and installation. For customers outside the United States, these
services are generally provided by its international Value Added Resellers
("VARs"). The Company typically offers its customers a hardware warranty ranging
from 90 days to one year and offers an optional annually renewable hardware
maintenance and software support contract with the network.
With the acquisition of OpenROUTE's line of VPN/Data routers, the Company added
a line of routers that are easily managed either locally or remotely. Due to the
strength of product engineering, the Company offers a lifetime warranty on these
units.
The Company offers support contracts to its customers with optional levels of
support. Each level of support is individually priced. In addition, the Company
provides technical consulting and training both to end-users and to
distributors. Many of its customers currently have support and maintenance
contracts with the Company. Customer service as a percent of revenue was 22% in
1999, 31% in 1998, and 32% in 1997.
RESEARCH AND DEVELOPMENT
The Company believes its future success depends on its ability to continue to
enhance its products to improve performance and functionality and to develop new
products that address emerging networking market niches. Research and
development as a percent of revenue was 23%, 22%, and 25% for the years ended
December 31, 1999, 1998, and 1997, respectively.
MANUFACTURING
The Company's manufacturing operations are a combination of system level
integration and testing, and full turnkey. The Company has strategic
relationships with The SMT Centre of Charlotte, North Carolina ("SMTC"), U.S.
Assemblies of Taunton, Massachusetts (U.S. Assemblies) and Venture Manufacturing
Ltd. Of Singapore (Venture).
Effective October 1, 1999, the Company entered into an agreement with SMTC to
outsource all manufacturing and test operations for current products. SMTC is a
contract manufacturer that offers a cost-effective, high volume, manufacturing,
distribution and repair capability worldwide. Historically SMTC has produced
various sub-assemblies for the Company, but the new agreement provides for them
to manufacture, test and ship final products. The Company's employees associated
with manufacturing, distribution and repair operations were transferred to SMTC
effective October 1, 1999.
U.S. Assemblies and Venture manufacture Nx Networks board assemblies for certain
router products and provide turnkey manufacturing for certain other router
products. SMTC provides full turnkey manufacturing for Nx Networks' voice
products. The Company believes that in the event of an interruption in
manufacturing at any of its subcontractors, the Company will be able to shift
its production needs to an unaffected facility and continue to meet expected
demand. Each of Nx Networks' subcontractors operates a number of other plants in
the United States or Asia.
The Company performs some final assembly and testing of routers at its
Westborough facility. A repair depot is also located at the Westborough
facility, coordinating service requirements for its router products.
COMPETITION
The Company encounters substantial competition in the marketing of its products
and many of its competitors have greater financial, marketing and technical
resources. Important competitive factors in its markets are established customer
base, product performance and features, service and support, as well as price.
The Company believes that it competes favorably with respect to these factors.
However, there can be no assurance that its products will compete successfully
with competitors' current or future products, or that aggressive pricing will
not adversely impact profitability.
7
PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secret, copyright and
trademark law, non-disclosure agreements and technical measures to establish and
protect its proprietary rights in its products. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of its products
or to obtain and use information that it regards as proprietary. The laws of
some foreign countries in which it sells or may sell its products do not protect
its proprietary rights to the same extent as do the laws of the United States.
The Company believes that due to the rapid pace of technological change in the
networking industry, patent and copyright protection, while important, are less
significant to its competitive position than factors such as the knowledge,
ability and experience of its personnel, new product development, market
recognition, and ongoing product maintenance and support.
The Company believes that its products and trademarks do not infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future. To protect its
intellectual property rights in the "voice over" market space, the prime patents
held by the Company in packetized compressed voice networking have been brought
to the attention of both the voice over Internet protocol and frame relay forum
organizations. The Company also uses various licensed products of other
companies in certain of its products.
EMPLOYEES
The Company had 271 employees at December 31, 1999. None of the employees are
represented by collective bargaining agreements. The Company has never
experienced any work stoppage. The Company believes that its employee relations
are satisfactory.
ITEM 2. PROPERTIES
The Company's principal administrative and research and development facilities
consist of approximately 56,000 square feet located in Herndon, Virginia and
approximately 44,000 square feet in Westborough, Massachusetts. The Herndon
premises are occupied under a lease agreement that was negotiated for a ten year
term expiring April 30, 2009. The Westborough premises are occupied under a
lease expiring in April 2002. In connection with cost savings initiatives the
Company undertook in 1999, the Company subleased approximately 24,000 square
feet of the Herndon facility, thereby reducing rent expense by approximately
$50,000 per month. A separate facility of 8,600 square feet is under lease in
Longmont, Colorado for product development operations. Additionally, the Company
maintains six sales and support offices in the United States and abroad. The
Company believes its facilities are adequate for its current needs.
ITEM 3. LITIGATION
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of its management, resolution of these matters will
not have a material adverse effect upon the Company's financial condition or
future operating results, and adequate provision for any potential losses have
been made in its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On December 22, 1999 a special meeting of stockholders was held to consider and
vote upon the merger with OpenROUTE Networks, Inc. At the meeting, the holders
of 7,366,508 shares voted for the merger, the holders of 24,750 shares voted
against the merger and the holders of 7,801 shares abstained.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
MARKET INFORMATION FOR COMMON STOCK
Nx Networks' common stock is traded on the NASDAQ National Market under the
symbol NTRX. The following table reflects the range of high and low selling
prices as reported by NASDAQ for the quarters indicated.
High Low
---- ---
1998
First $ 2-1/8 $ 1-1/16
Quarter............................................
Second $ 3-3/8 $ 2-1/16
Quarter.........................................
Third $ 3-1/4 $ 1-3/32
Quarter...........................................
Fourth $ 2-25/32 $ 1-1/16
Quarter..........................................
1999
First $ 3-3/16 $ 1-3/4
Quarter............................................
Second $ 3-31/32 $ 2-5/16
Quarter.........................................
Third $ 4-3/16 $ 2-1/2
Quarter...........................................
Fourth $ 17-1/16 $ 2-1/2
Quarter..........................................
HOLDERS
At March 17, 2000, there were approximately 625 holders of record of Common
Stock and an estimated 12,500 total holders
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company paid
cash dividends on preferred stock of $108,000 during the year ended December 31,
1999.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the fiscal years
ended December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from the
Company's consolidated financial statements.
For the Year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of operations data:
Total revenues.......................... $ 31,245 $ 31,482 $ 33,087 $ 43,635 $ 48,891
Gross profit............................ 14,710 15,388 14,647 21,572 25,225
Operating expenses:
Sales and marketing................... (6,468) (9,292) (10,120) (11,632) (14,162)
Research and development.............. (7,043) (6,771) (8,323) (11,079) (10,776)
General and administrative............ (5,573) (4,324) (4,002) (4,266) (4,787)
Stock compensation.................... (18,778) -- -- (900) --
Restructuring charge.................. (900) -- (875) -- --
Bad debt expense...................... (540) (1,489) (100) -- --
Loss from operations.................... (24,592) (6,488) (8,773) (6,305) (4,500)
Net loss................................ (26,169) (6,517) (8,577) (5,968) (3,795)
Basic and diluted net loss per share (2.17) (0.60) (0.90) (0.63) (0.40)
Balance sheet data (end of period):
Working capital......................... 8,020 7,600 10,271 17,782 21,790
Total assets............................ 95,253 20,241 24,024 34,493 41,985
Total long-term liabilities............. 352 -- 97 614 943
Stockholders' equity.................... 82,459 12,117 16,480 24,847 30,396
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS RECENT DEVELOPMENTS
On March 25, 1999, the Company announced that it was making significant changes
to its Board of Directors (the "Board"). Steven T. Francesco was appointed to
the position of Chairman of the Board and John M. Faccibene was named to fill
one of the four vacancies on the Board.
On April 21, 1999, the Company announced the appointment of Douglas J. Mello and
Richard Yalen , two senior telecommunications executives, to its Board. The
appointments reflected a recruitment strategy adopted by the Company's new
Chairman to attract to the Board senior executives with significant
telecommunications industry experience and contacts. Both Mr. Mello and Mr.
Yalen, formerly of The Bell Atlantic Corporation (NYSE: BEL) and Cable and
Wireless, USA (NYSE: CWP), respectively, led telecommunications service
providers that are deploying voice and data networks based on ATM, frame relay
and voice over Internet protocol.
On April 26, 1999, the Company announced that its newly elected Board would
oversee an immediate operational restructuring as part of an overall plan to
return to profitability. The effort focused on a reduction of fixed costs,
outsourcing non-critical manufacturing and services, and an accelerated
phase-out of older/low margin products. In addition, the Company aggressively
expanded its direct sales force to focus on service providers such as ISP's,
CLEC's and telecommunication carriers.
On May 11, 1999, the Company announced that Steven T. Francesco, Chairman, was
appointed CEO, and Lynn C. Chapman as President and COO.
On May 14, 1999, the Company completed a private placement by selling 298,187
shares of Series A 8% Convertible Preferred Stock, par value $.05 per share, at
a price of $13.75 per share. The Company received net proceeds of $4.0 million
to be used to fund operations, severance and other restructuring activities, and
marketing and sales initiatives.
On June 16, 1999, the Company announced the appointment of Mr. Greg McNulty, a
senior Microsoft executive, to the Board. Mr. McNulty has over 23 years of
experience in the high technology sales and marketing environment and was Senior
Group Manager of Business Development for Microsoft-Web TV Network Services
managing Web TV's relationships with RBOC's, ILEC's, CLEC's, and ISP's.
On July 12, 1999, the Company issued a joint press release with Sonus
Communications, Inc. announcing a significant milestone in the development of
the Voice Over Internet Protocol (VoIP) telephony market. The VoIP services that
Sonus Communications provides for telecommunications carriers to China using Nx
Networks 2210 Series Gateways is now comparable in terms of voice quality,
connect rates and dial tone delay with direct service from China Telecom, at an
average 30 percent lower base cost to carriers.
On July 27, 1999, the Company announced the appointment of Sean Rooney as Senior
Vice President of Sales. Mr. Rooney, formerly General manager of Diversified
markets for Sony Electronics, Inc., leads a sales staff including newly hired
professionals from industry competitors.
On August 5, 1999, the Company announced the appointment of Peter J. Kendrick as
Vice president and Chief Financial Officer, replacing Norman Welsch. Mr.
Kendrick joins the Company with 16 years experience as a CFO and former
investment banker with a background in financial operations, initial public
offerings and mergers and acquisitions.
On December 22, 1999, the Company completed the acquisition of OpenROUTE
Networks. The Company issued one share of its common stock for each share of
OpenROUTE common stock. This resulted in the issuance of 15,989,566 shares of
common stock to the former OpenROUTE stockholders.
11
On December 31, 1999, the Company entered into an agreement to acquire
AetherWorks Corporation. The acquisition was effected, upon closing on March 16,
2000, through the merger of AetherWorks with and into Nx1 Acquisition Corp., a
wholly owned subsidiary of the Company.
On February 10, 2000, the Company filed form S-3 offering 1.0 million shares of
common stock. The offering generated net proceeds of $25.1 million. The proceeds
were used to satisfy an $8.0 million AetherWorks obligation, which was a
condition to closing the acquisition of AetherWorks. The remaining proceeds will
be used for general corporate and working capital purposes.
On February 23, 2000, the Company announced the appointment of Bill Yundt to the
Board of Directors. Mr. Yundt is currently Vice President of Network Operations
for Microsoft Corporation.
During March 2000, the Company terminated its line of credit agreement with
Coast Business Credit. The Company is in negotiation with various financial
institutions for a new line of credit. Due to the Company's current cash
balance, management does not believe that securing a line of credit is required
to fund operations for the foreseeable future.
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results".
RESULTS OF OPERATIONS
The results of operations for the year ended December 31, 1999 reflect a less
than 1% decrease in revenues, a 3% decrease in cost of revenues, and a 6%
decrease in operating expenses, prior to accounting for an $18.8 million
non-cash charge for stock compensation expense, compared to the year ended
December 31, 1998. During 1999, Nx Networks experienced a decline in service
revenues by $2.9 million and an increase in revenue of its 2200 series product
line by $4.7 million. The results of operations for the year ended December 31,
1999 include the operations of OpenROUTE for the period from December 23, 1999
to December 31, 1999.
REVENUES
Total revenues decreased $0.2 million or 0.75% to $31.2 million for the year
ended December 31, 1999 from $31.5 million for the year ended December 31, 1998.
Product revenues increased $2.6 million or 12% to $24.5 million for the year
ended December 31, 1999 from $21.8 million for the year ended December 31, 1998.
The decrease in total revenues for the year ended December 31, 1999 was
primarily a result of the decrease in service revenues, which were partially
offset by an increase in product revenues. The increase in product revenues for
1999 resulted from increased sales of the 2200 series product line. The 2200
series offers technological advances that with improved performance and greater
functionality than the legacy generation of products, and thus enhanced value to
customers. The Nx Networks Exchange product sales were generated by new, as well
as existing customers who are upgrading their networks to modern technology.
Total revenues decreased $1.6 million or 5% to $31.5 million for the year ended
December 31, 1998 from $33.1 million for the year ended December 31, 1997.
Product revenues decreased $0.6 million or 3% to $21.8 million for the year
ended December 31, 1998 from $22.5 million for the year ended December 31, 1997.
The decrease in product revenues was a result of the decrease in sales of the
legacy Telcom product line, while sales of the new 2200 series product had not
yet increased sufficiently to offset the loss. The trend of declining sales of
older Telcom products and increasing sales of Nx Networks Exchange products is
12
the result of technological advances that offer improved performance and greater
functionality than the current generation of products.
Service revenues decreased $2.9 million or 30% to $6.7 million for the year
ended December 31, 1999 from $9.6 million for the year ended December 31, 1998,
and decreased $1.0 million or 9% to $9.6 million for the year ended December 31,
1998 from $10.6 million for the year ended December 31, 1997. For the year ended
December 31, 1999, $0.7 million of the service revenue decline can be accounted
for by the loss of two major customers through mergers, $1.0 million through the
loss of non-renewal of legacy Telcom product service and $0.4 million through
networks that were decommissioned. Service revenues are primarily the result of
the renewal of existing maintenance contracts as well as the negotiation of new
equipment service contracts. Overall, service revenues have decreased as a
result of the elimination of legacy equipment and non-renewal of maintenance
contracts by customers using such equipment.
COST OF REVENUES
Total cost of revenues increased $0.4 million or 3% to $16.5 million for the
year ended December 31, 1999 from $16.1 million for the year ended December 31,
1998. Product cost of revenues increased $0.8 million or 7% to $11.8 million for
the year ended December 31, 1999 from $10.9 million for the year ended December
31, 1998. The increase in total cost of revenue is a direct result of increased
product revenues.
Total cost of revenues decreased $2.3 million or 13% to $16.1 million for the
year ended December 31, 1998 from $18.4 million for the year ended December 31,
1997. Product cost of revenues decreased $0.5 million or 4% to $10.9 million for
the year ended December 31, 1998 from $11.4 million for the year ended December
31, 1997. The decrease in cost of revenues during 1998 was a result of decreased
product revenues.
Service cost of revenues decreased $0.4 million or 7% to $4.8 million for the
year ended December 31, 1999 from $5.2 million for the year ended December 31,
1998 and decreased $1.9 million or 27% to $5.2 million for the year ended
December 31, 1998 from $7.0 million for the year ended December 31, 1997. The
decrease in service cost of revenues during both years was a result of reduction
in personnel and the elimination of support service costs outsourced to contract
maintenance organizations.
GROSS PROFIT
Total gross profit decreased $0.7 million or 4% to $14.7 million for the year
ended December 31, 1999 from $15.4 million for the year ended December 31, 1998.
Total gross profit as a percentage of total revenue decreased to 47% for the
year ended December 31, 1999 compared to 49% for the year ended December 31,
1998. This was a result of increased product gross profit offset by decreased
service gross profit. Product gross profit increased $1.8 million or 17% to
$12.7 for the year ended December 31, 1999 from $10.9 million for the year ended
December 31, 1998. Product gross profit as a percentage of product sales
increased by 2% to 52% for the year ended December 31, 1999 compared to 50% for
the year ended December 31, 1998. The increase in product gross profit during
1999 is a result of higher margin product mix.
Total gross profit increased $0.7 million or 5% to $15.4 million for the year
ended December 31, 1998 from $14.7 million for the year ended December 31, 1997.
Total gross profit as a percentage of total revenue was 49% for the year ended
December 31, 1998 compared to 44% for the year ended December 31, 1997. Product
gross profit decreased $0.2 million or 2% to $10.9 for the year ended December
31, 1998 from $11.1 million for the year ended December 31, 1997. Product gross
profit as a percentage of product sales did not change from 1998 to 1997.
13
Service gross profit decreased $2.5 million or 56% to $2.0 million for the year
ended December 31, 1999 from $4.5 million for the year ended December 31, 1998.
Service gross profit as a percentage of service revenue was 29% for the year
ended December 31, 1999 compared to 47% for the year ended December 31, 1998,
the decrease of 18% was primarily the result of a decrease in service revenue of
$2.9 million while costs decreased by only $0.4 million or 7%. Service gross
profit increased $0.9 million or 26% to $4.5 million for the year ended December
31, 1998 from $3.6 million for the year ended December 31, 1997. The net margin
improvement during 1998 was the combined result of a decrease of $0.8 million in
personnel and infrastructure costs and elimination of $1.0 million in support
service costs outsourced to contract maintenance organizations.
SALES AND MARKETING
Sales and Marketing expenses decreased $2.8 million or 30% to $6.5 million for
the year ended December 31, 1999 from $9.3 million for the year ended December
31, 1998. The decrease in sales and marketing expense during the year ended
December 31, 1999 is a combined result of a decreased marketing materials
expense of $0.3 million, decreased salaries and associated payroll tax expense
of $1.0 million, decreased travel and entertainment expenses of $0.5 million,
decreased rent expense of $0.2 million and decreased general office expense of
$0.7 million.
Sales and Marketing expenses decreased $0.8 million or 8% to $9.3 million for
the year ended December 31, 1998 from $10.1 million for the year ended December
31, 1997. The decrease in sales and marketing expense during the year ended
December 31, 1998 was a combined result $1.1 million decrease in personnel and
infrastructure costs attributed to the 1997 restructuring partially offset by
$0.4 million increase of consignment inventory reserve for obsolete sales
equipment. Increases in the provisions for consignment equipment expense was
$1.8 million for the year ended December 31, 1998 compared to $1.5 million for
the year ended December 31, 1997. Charges to the consignment equipment reserve
account was $1.7 million during the year ended December 31, 1998 compared to
$0.6 million during the year ended December 31, 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses increased $0.2 million or 4% to $7.0 million
for the year ended December 31, 1999 from $6.8 million for the year ended
December 31, 1998. The increase in research and development cost of $0.2 million
during 1999 is primarily a result of increased engineering consulting services
costs related to product enhancement and new product development.
Research and development decreased $1.5 million or 19% to $6.8 million for the
year ended December 31, 1998 from $8.3 million for the year ended December 31,
1997. The $1.5 million change was a result of a decrease of $0.9 million in
personnel and infrastructure costs and a $0.6 million decrease in materials and
contract engineering services associated with various research and development
projects.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $1.3 million or 29% to $5.6
million for the year ended December 31, 1999 from $4.3 million for the year
ended December 31, 1998. The increase is a result of an additional $0.4 million
of amortization of goodwill, accounting and legal expenses of $0.4 million
associated with the repositioning of operations and the re-negotiation of the
line of credit and consulting fees and software upgrade costs of $0.4 million
associated with Y2K compliance of the Company's accounting system.
General and administrative expenses increased $0.3 million or 8% to $4.3 million
for the year ended December 31, 1998 from $4.0 million at December 31, 1997. The
increase was primarily the result of an increase in professional fees of $0.2
million, and increases of $0.1 million in other expenses.
14
RESTRUCTURING CHARGE
For the year ended December 31, 1999, the Company incurred restructuring charges
of $0.9 million which included $0.8 million of accrued severance and benefit
costs associated with a reduction-in-force of 36 employees across all functional
areas of the company, and $0.1 million of accrued facility costs resulting from
consolidation of facilities and premature termination of various office leases.
The Company implemented a restructuring of operations to reduce and economize
its work force as part of an overall plan to return to profitability. All of
these accrued expenses were paid by December 31, 1999.
In April 1997, the Company implemented a restructuring of operations to reduce
and economize its work force in response to declining revenues and the
discontinuance of its micro.pop product. The restructuring resulted in an
overall reduction of personnel and related compensation and other associated
operating costs of the Company. The reduction-in-force occurred over
approximately a one-year period and severance payments were generally made in
lump sum in February 1997. The 1997 restructuring charges of $0.9 million
resulted from approximately $0.4 million of accrued severance and outplacement
costs associated with a reduction-in-force of approximately 37 employees across
all functional areas of the Company, approximately $0.4 million of fixed asset
write-offs and facility relocation charges for unrecoverable lease obligations
associated with the consolidation of the Longmont, Colorado and Herndon,
Virginia operations facilities into one facility leased in Charlotte, North
Carolina, and other associated costs of approximately $0.1 million. During the
year ended December 31, 1999, the Company paid $0.1 million of final severance
payments to certain international employees that resulted from an April 1997
restructuring of operations. All of these accrued expenses were paid by December
31, 1999.
In March 2000, the Company implemented a consolidation program to reduce and
economize its work force as part of its acquisition integration program. The
restructuring will result in an overall reduction of personnel and related
compensation and other associated operating costs of the Company. The
reduction-in-force will occur over approximately a three-month period and
severance payments will generally be made in lump sum in June 2000. The 2000
restructuring charges are expected to be approximately $0.3 million of severance
costs.
BAD DEBT EXPENSE
Bad debt expense was $0.5 million for the year ended December 31, 1999, compared
to $1.5 million for the year ended December 31, 1998, and $0.1 million for the
year ended December 31, 1997. As a percentage of revenues, the provision for bad
debt was approximately 2% for the year ended December 31, 1999, 5% for the year
ended December 31, 1998, and negligible for the year ended December 31, 1997.
The increase of $1.4 million in the 1998 bad debt expense was the result of
writing off aged accounts receivable that were previously deemed collectible,
but which had continued to age beyond a period deemed reasonable for
realization.
STOCK COMPENSATION
For the year ended December 31, 1999, the Company incurred non-cash stock
compensation expenses of $18.8 million. These charges resulted from key
employees employment contract provisions, stock option grants, accelerated
options upon a change in control, accelerated vesting of terminated employees
options, and options granted below fair market value.
Based on provisions of the chief executives officer's employment contract, the
acquisition of OpenROUTE constituted a change in control. As a result of the
change in control, the Company is obligated to issue 1.0 million shares of
common stock options resulting in compensation charges of $16.4 million. The
stock compensation expense for the issuance of common shares has been recorded
in the accompanying consolidated statement of operations based on the stock
price at the acquisition date.
During the year ended December 31, 1999, the stock compensation expense for
options granted to employees below market value, approximated $1.4 million. At
December 31, 1999 there is no remaining deferred compensation expense related to
15
these grants as these options vested upon the close of the OpenROUTE
acquisition.
In connection with the termination of certain employees during the year ended
December 31, 1999, the Company vested stock options that would have otherwise
been forfeited. In accordance with APB Opinion No. 25 and the related
interpretations, the Company recorded stock compensation expense of $1.0
million.
In 2000, the Company expects to incur approximately $10.0 million of stock
compensation charges associated with the acceleration of options for terminated
personnel.
INTEREST AND OTHER, NET
Net interest expense increased $52,000 to $81,000 for the year ended December
31, 1999 from $29,000 for the year ended December 31, 1998 prior to accounting
for a $97,000 charge related to the fair value of warrants issued to the
Company's lending institution. Net interest expense increased $225,000 to
$29,000 for the year ended December 31, 1998, from net interest income of
$196,000 for the year ended December 31, 1997 as a result of increased borrowing
during 1998.
ACCOUNTS RECEIVABLE, NET
Net accounts receivable increased $2.2 million or 29% to $9.7 million for the
year ended December 31, 1999 from $7.5 million for the year ended December 31,
1998. The increase in accounts receivable is primarily a result of increased
sales of $1.8 million during the fourth quarter of 1999. For the year ended
December 31, 1998 net accounts receivable increased $1.3 million or 21% to $7.5
million from $6.2 million for the year ended December 31, 1997. The increase in
accounts receivable is primarily a result of increased sales of $0.9 million
during the fourth quarter of 1998. As a percentage of total revenues, net
accounts receivable for the year ended December 31, 1999 was 31% compared to 24%
for the year ended December 31, 1998 and 19% for the year ended December 31,
1997.
16
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1999, 1998, and 1997 the Company experienced
declining revenues and net losses of approximately $24.8 million, $6.5 million,
and $8.6 million, respectively, due to declining sales of the Company's mature
products which were partially offset by increases in sales of new products.
At December 31, 1999, the Company had approximately $5.9 million in cash and
cash equivalents compared to $2.5 million at December 31, 1998. For the year
ended December 31, 1999, the Company generated $1.0 million of cash from
operations. Non-cash items consisting of depreciation and amortization of $2.6
million and stock compensation expense of $18.8 million contributed to the loss
of $24.8 million. Inventory levels at December 31, 1999 were $4.3 million
compared to $5.3 million at December 31, 1998. This reduction is the result of
efforts during 1999 to bring inventories in line with current sales volume and
the expected phase out of older products.
Capital expenditures for the year ended December 31, 1999 were $1.1 million
compared to $1.3 million for the year ended December 31, 1998, and $1.7 million
for the year ended December 31, 1997. These expenditures included software and
equipment used for research and development purposes, computer and test
equipment and leasehold improvements.
On May 14, 1999, the Company completed a private placement by selling 298,187
shares of Series A 8% Convertible Preferred Stock, par value $.05 per share, at
a price of $13.75 per share. The Company received net proceeds of $4.0 million
to be used to fund operations, severance and other restructuring activities, and
marketing and sales initiatives.
In March 2000, the Company completed its offering of 1.0 million shares of
common stock. The offering generated proceeds of $25.1 million net of issuing
costs of $ 0.9 million. $8.0 million of the proceeds were used to satisfy an
AetherWorks obligation, which was a condition to closing the acquisition. The
Company closed the AetherWorks acquisition during March 2000. The remaining
proceeds will be used for general corporate and working capital purposes.
Management believes that these proceeds and future sales and the collection of
the related accounts receivables are sufficient to meet the Company's cash
obligations throughout 2000.
The Company regularly reviews opportunities to further its business strategy
through strategic alliances with investment in, or acquisitions of businesses
that the Company believes are complementary to its current and planned
operations. The Company's ability to consummate strategic alliances and
acquisitions, and to make investments that may be of strategic significance may
require the Company to obtain additional debt and/or equity financing. There can
be no assurance that the Company will be successful in arranging such financing
on terms management considers acceptable or at all.
YEAR 2000
The Year 2000 presents concerns for business and consumer computing. Aside from
the well-known problems with the use of certain 2-digit date formats as the year
changes from 1999 to 2000, the Year 2000 is a special case leap year, and dates
such as 9/9/99 were used by certain organizations for special functions. The
problem exists for many kinds of software and hardware, including mainframes,
mini-computers, PCs and embedded systems.
During the year ended December 31, 1999, the Company completed a coordinated
Company-wide review of each business unit to identify dependent systems and to
evaluate the potential exposure to the Y2K issue. The Company completed the
upgrade and replacement of systems potentially exposed to the Y2K issue. The
Company did not experience an immediate adverse impact from the transition to
the Year 2000. However, the Company cannot provide assurance that the Company or
its suppliers and customers have not been affected in a manner that is not yet
apparent. In addition, some computer programs that were date sensitive to the
Year 2000 may not have been programmed to process the Year 2000 as a leap year,
and any negative consequential effects remain unknown. As a result, the Company
will continue to monitor its Year 2000 compliance and the Year 2000 compliance
of their suppliers and customers.
17
The Company estimates that the total cost of its Y2K program, including auditing
and monitoring its vendors, inspecting its own systems and, where necessary,
migrating or converting its existing systems to new systems, has been $0.5
million.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause the Company's actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report and presented elsewhere by management from time to
time. In this Section, references to "we," "us" and "our" are to the Company,
and references to "you" are to the reader.
TO DATE, WE HAVE INCURRED SUBSTANTIAL NET LOSSES, AND IF THIS CONTINUES, WE MAY
BE UNABLE TO MEET OUR WORKING CAPITAL REQUIREMENTS
For the years ended December 31, 1999 and 1998, respectively, we incurred net
losses of approximately $26.2 million and $6.5 million and, on a pro forma
basis, after giving effect to the mergers with OpenROUTE and AetherWorks, we
would have had a net loss of approximately $95.6 million for the year ended
December 31, 1999. These losses present a significant risk to our stockholders.
We expect to recognize efficiencies in the future and to benefit from better
marketing opportunities and product offerings as a result of the mergers,
however, we cannot assure you that after the mergers we will achieve or sustain
profitability or positive cash flows from operating activities. If we cannot
achieve profitability or positive cash flows from operating activities, we may
be unable to meet our working capital and future debt service requirements,
which would have a material adverse effect on our business, financial condition
and results of operation and the price of our common stock. In addition, if we
cannot return to sustained profitability we will be forced to sell all or part
of our business, liquidate or seek to reorganize.
WE MAY REQUIRE ADDITIONAL CAPITAL TO FULLY IMPLEMENT OUR BUSINESS PLAN, AND WE
CANNOT BE CERTAIN THAT THE NECESSARY FUNDS WILL BE AVAILABLE
Our ability to return to and maintain profitability is largely dependent upon
our ability to introduce new products and technologies and expand our sales
efforts in new geographic and product markets. These activities require
substantial capital, and if we do not have access to sufficient funds, either
from our own operations or through third party financing, our ability to make
these necessary expenditures will be limited. As described in the preceding
paragraph, there can be no assurance that we will be able to obtain these
necessary funds from our own operations. If we are required to seek third party
financing, we cannot assure you that we will be able to obtain financing on
terms favorable to us, or at all. If we obtain additional funds by selling any
of our equity securities, the percentage ownership of our stockholders will be
reduced, stockholders may experience additional dilution, or the equity
securities may have rights, preferences or privileges senior to the common
stock. If adequate funds are not available to us or available to us on
satisfactory terms, we may be required to limit our marketing and product
development activities or other operations, or otherwise modify our business
strategy. These actions, if taken, could increase the difficulties we face in
returning to sustained profitability.
WE MAY ENCOUNTER DIFFICULTIES IN COMBINING OPERATIONS WITH OPENROUTE AND
AETHERWORKS AND REALIZING SYNERGIES FROM THE MERGERS
We merged with OpenROUTE and AetherWorks with the expectation that the mergers
will result in certain benefits including operating efficiencies, cost savings,
synergies and other benefits. Achieving the benefits of the mergers will depend
in part upon the integration of our businesses with OpenROUTE and AetherWorks in
an efficient manner, which we believe will require considerable effort. In
addition, the consolidation of operations will require substantial attention
from management. The diversion of management attention and any difficulties
encountered in the transition and integration process could have a material
adverse effect on the combined company. We cannot assure you that we will
succeed in integrating our operations with those of OpenROUTE and AetherWorks in
a timely manner or that the expected efficiencies, cost savings and synergies of
the mergers will be realized.
18
WE WILL INCUR SIGNIFICANT MERGER-RELATED CHARGES
As a result of the mergers, we have incurred and we will incur integration costs
associated with:
o consolidating corporate headquarters and other administrative functions;
o terminating certain leases and severance and facility closing costs
associated with consolidating certain product lines; and
o merger-related costs such as financial advisory, legal and accounting fees
and financial printing and other related charges.
OUR ABILITY TO USE OUR AND OPENROUTE AND AETHERWORKS' NET OPERATING LOSS
CARRYFORWARDS MAY BE LIMITED
As of December 31, 1999, the Company had net operating losses of approximately
$89.9 million available for carryforward to offset future income for Federal
income tax purposes. Approximately $46.5 million of these net operating losses
will be limited due to the change in ownership that occurred prior to the
OpenROUTE acquisition. These carryforwards are subject to limitation of the
amount available to be used in any given year due to significant changes in
ownership interests. In addition, the Company has research and development
credit carryforwards of approximately $3.7 million, which are available to
offset future Federal income taxes with certain limitations. In addition, as of
September 30, 1999, AetherWorks' had federal income tax net operating loss
carryforwards of approximately $18.5 million that begin to expire in 2010. A tax
asset related to this loss carryforward does not appear on AetherWorks' balance
sheet because it is unclear if AetherWorks will generate taxable income prior to
the expiration of the net operating loss carryforwards. The extent to which we
may use AetherWorks' net operating loss carryforwards to reduce our future tax
liability may be limited. As a result of these limitations, our future tax
liability may be greater than the combined tax liabilities of Netrix, OpenROUTE
and AetherWorks in the absence of the mergers.
WE RELY TO A LARGE EXTENT ON INDEPENDENT DISTRIBUTION CHANNELS AND THE LOSS OF A
SIGNIFICANT NUMBER OF DISTRIBUTORS COULD ADVERSELY EFFECT US
We rely on reseller channels, including distributors and systems integrators,
for a significant portion of our revenues. In particular, in foreign markets we
often have one distributor designated for an entire country, and that
distributor provides local support and service for our products. The loss of one
or more significant resellers could adversely affect our business in terms of:
o lost revenues;
o lost market presence; and
o the difficulties we would encounter in servicing customers introduced to us
by our resellers if we do not have other resellers in that geographic area.
WE ARE EXPOSED TO POTENTIAL DELAYS IN PRODUCT SHIPMENTS BECAUSE WE CONTRACT OUT
PRODUCT MANUFACTURING AND SOME COMPONENTS FOR OUR PRODUCTS ARE AVAILABLE ONLY
FROM A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS
We rely on others to manufacture our products and product components and this
dependence exposes us to potential interruptions or delays in product delivery.
An interruption could have a short term effect on our revenues and a longer term
effect on our ability to market our products. Currently, we rely on a single
contract manufacturer to assemble and test our voice products. Also, some of the
components we use in our products are available from only one source or a
limited number of suppliers. Although we have been able to obtain our products
and these components to date, our inability to develop alternative sources if
and as required in the future, or to obtain sufficient sole source or limited
source components as required, could result in delays or reductions in product
shipments.
19
OUR BUSINESS WILL SUFFER IF WE LOSE CERTAIN KEY PERSONNEL OR FAIL TO ATTRACT AND
RETAIN OTHER QUALIFIED PERSONNEL
The success of our business will be dependent, to a significant extent, upon the
abilities and continued efforts of our management, marketing, engineering and
technical personnel, many of whom would be difficult to replace. We do not have
employment contracts with all of our key employees and we do not have "key man"
life insurance on any of our officers or directors.
Our success will also depend on our ability to attract, retain and motivate
qualified management, marketing, technical and sales executives and other
personnel who are in high demand and who often have multiple employment options.
In addition, as a result of the changes to Netrix resulting from the OpenROUTE
and AetherWorks mergers, many employees that we would like to retain may decide
to pursue other opportunities or we may be forced to increase their compensation
to retain them. The loss of the services of key personnel, or the inability to
attract, retain and motivate qualified personnel, could have a material adverse
effect on our business, financial condition, results of operations and the price
of Netrix common stock.
OUR INTELLECTUAL PROPERTY RIGHTS ARE AN IMPORTANT PROTECTION FOR OUR PRODUCTS,
AND WE COULD BE ADVERSELY AFFECTED IF OUR RIGHTS ARE CHALLENGED OR CIRCUMVENTED
BY COMPETITORS
Our ability to compete successfully within our industry is dependent in part
upon:
o patents and nondisclosure agreements that we have obtained;
o technical measures that we take to protect confidential information; and
o trade secret, copyright and trademark laws that we rely on to establish and
protect our proprietary rights.
If any of our proprietary rights are successfully challenged or circumvented by
competitors, or if other companies are able to market functionally similar
products, systems or processes without infringing our proprietary rights, then
our results of operations and the value of our common stock could be materially
and adversely affected.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE
The market price of the Netrix common stock has been and can be expected to be
significantly affected by factors such as:
o quarterly variations in our results of operations;
o the announcement of new services or service enhancements by us or our
competitors;
o technological innovations by us or our competitors;
o changes in earnings estimates or buy/sell recommendations by analysts;
o the operating and stock price performance of other comparable companies; and
o general market conditions or market conditions specific to particular
industries.
In particular, the stock prices for many companies in the telecommunications
equipment sector have experienced wide fluctuations that have often been
unrelated to their operating performance. We have been, and we are likely to
continue to be, subject to such fluctuations.
OUR CERTIFICATE OF INCORPORATION AND BY-LAWS CONTAIN PROVISIONS THAT COULD DELAY
OR PREVENT A CHANGE IN CONTROL
Provisions of our certificate of incorporation and by-laws may have the effect
of discouraging, delaying or preventing a take-over attempt that could be in the
best interests of Netrix stockholders. These include provisions that:
20
o separate our board of directors into three classes;
o limit the ability of our stockholders to call special stockholder meetings;
o require advance notice of nominations for directors and stockholder
proposals to be considered at stockholder meetings; and
o require a vote greater than two-thirds to remove directors from office or
amend many of the provisions of our certificate of incorporation and
by-laws.
Our board of directors also has the right, without further action of the
stockholders, to issue and fix the terms of preferred stock, which could have
rights senior to the common stock. We are also subject to the "business
combination" provisions of the Delaware General Corporate Law, which impose
procedures impeding business combinations with "interested stockholders" that
are not approved of by our board of directors.
RAPIDLY CHANGING TECHNOLOGY MAY MAKE OUR PRODUCTS OBSOLETE OR UNMARKETABLE
We have focused our products on the edge of the Internet and telephony. The
markets for our products are characterized by rapid technological change,
frequent new product introduction and evolving industry standards. The
introduction of products embodying new technologies by our competitors and the
emergence of new industry standards could render our existing products obsolete
and could cause new products to be unmarketable. Under these circumstances, our
revenue would be adversely effected.
Our success will depend on the ability to address the increasingly sophisticated
needs of customers, to enhance existing products and to develop and introduce,
on a timely basis, new competitive products that keep pace with technological
development and emerging industry standards. If we cannot successfully identify,
manage, develop, manufacture or market products enhancements or new products,
our business will be materially and adversely effected.
A PORTION OF OUR REVENUES ARE DERIVED FROM INTERNATIONAL SALES, WHICH ARE
SUBJECT TO FOREIGN REGULATORY STANDARDS AND CURRENCY EXCHANGE RATE FLUCTUATIONS
International sales accounted for 47% and 53% of our total revenues in 1999 and
1998, respectively, and international sales will continue to be significant to
us after the mergers with OpenROUTE and AetherWorks. The conduct of
international operations subjects us to certain risks. Foreign regulatory bodies
continue to establish standards different from those in the United States, and
our products are designed generally to meet those standards. Our inability to
design products in compliance with such foreign standards could have an adverse
effect on our operating results. Also, our international business may be
affected by changes in demand resulting from fluctuation in currency exchange
rates and tariffs, and difficulties in obtaining export licenses. We do not
expect that we will hedge against fluctuations in currency exchange rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not a party to any market risk sensitive instrument that is
material to the Company, its financial position or results of operations, either
for trading purposes or otherwise.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Netrix Corporation:
We have audited the accompanying consolidated balance sheets of Netrix
Corporation (a Delaware corporation) and its subsidiaries, (together the
"Company") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Netrix Corporation and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 16, 2000
22
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------
1999 1998 1997
------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Product $24,505 $21,840 $22,474
Service 6,740 9,642 10,613
---------- ----------- ----------
Total revenues 31,245 31,482 33,087
---------- ---- ------ ----------
Cost of revenues:
Product 11,758 10,939 11,395
Service 4,777 5,155 7,045
---------- ----------- ----------
Total cost of revenues 16,535 16,094 18,440
---------- ----------- ----------
Gross profit 14,710 15,388 14,647
---------- ----------- ----------
Operating expenses:
Sales and marketing 6,468 9,292 10,120
Research and development 7,043 6,771 8,323
General and administrative 5,573 4,324 4,002
Stock compensation 18,778 - -
Restructuring charge 900 - 875
Bad debt expense 540 1,489 100
---------- ----------- ----------
Loss from operations (24,592) (6,488) (8,773)
Interest and other, net (178) (29) 196
---------- ----------- ----------
Loss before income taxes (24,770) (6,517) (8,577)
---------- ----------- ----------
Provision for income taxes - - -
---------- ----------- ----------
Net loss (24,770) (6,517) (8,577)
Dividends and accretion of preferred stock 1,399 - -
----------- ---------- ----------
Net loss attributable to common stockholders $ (26,169) $ (6,517) $ (8,577)
============ ========== ==========
Basic and diluted net loss per share $ (2.17) $ (0.60) $ (0.90)
============ =========== ==========
Basic and diluted weighted average shares outstanding 12,074 10,891 9,553
=========== ==== ====== =========
The accompanying notes are an integral part of these consolidated financial statements.
23
NETRIX CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31,
---------------------------
1999 1998
------------- --------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents $5,930 $2,488
Accounts receivable, net of allowance for doubtful accounts
of $2,902 and $796, respectively 9,697 7,499
Inventories 4,304 5,265
Other assets 531 472
------------ ------------
Total current assets 20,462 15,724
------------ ------------
Property and equipment, net of accumulated depreciation
and amortization of $9,959 and $20,473, respectively 4,560 3,823
Deposits and other assets 78 165
Intangible assets and goodwill, net of accumulated
amortization of $2,348 and $1,712, respectively 70,153 529
----------- -----------
TOTAL ASSETS $ 95,253 $ 20,241
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,059 $ 2,167
Accounts payable 6,703 3,011
Accrued liabilities 4,680 2,946
----------- ----------
Total current liabilities 12,442 8,124
------------ ----------
Other liabilities 352 -
------------ ----------
Total liabilities 12,794 8,124
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares authorized; none
issued and outstanding -- --
Common stock, $0.05 par value; 36,800,000 and 15,000,000 shares
authorized; 29,260,000 and 11,490,000 shares issued and
outstanding, respectively 1,463 575
Warrants 2,041 257
Additional paid-in capital 151,694 57,679
Accumulated deficit (72,443) (46,274)
Accumulated other comprehensive loss (296) (120)
------------ --------
Total stockholders' equity 82,459 12,117
------------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,253 $20,241
============= ========
The accompanying notes are an integral part of these consolidated financial statements.
24
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Additional
Comprehensive Preferred Common Capital Deferred Accum. Accum.
Loss Stock Stock Paid-in Compensation Warrants Compr. Loss Deficit Total
---- ----- ----- -------- ------------ -------- ----------- ------- -----
Balance, December 31, 1996 $ -- $ 476 $ 55,603 $ -- $ -- $ (52) $(31,180) $24,847
Stock options exercised 3 134 -- -- -- -- 137
Employee stock purchase plan -- 1 37 -- -- -- 38
Net loss $(8,577) -- -- -- -- -- -- (8,577) (8,577)
Net change in unrealized --
investment holding gain 7 -- -- -- -- -- 7 -- 7
Cumulative translation
adjustment 28 -- -- -- -- -- 28 -- 28
Comprehensive loss $ (8,542) -- -- -- -- -- -- -- --
========= -------- ------- ----------- ------ ----- ----- ------ -----
Balance, December 31, 1997 480 55,774 -- -- (17) (39,757) 16,480
Stock options exercised -- 2 59 -- -- -- -- 61
Proceeds from private -- 88 1,988 -- -- -- -- 2,076
placement, net
Warrants issued in connection
with private placement -- -- (257) -- 257 -- -- --
Employee stock purchase plan -- 5 115 -- -- -- -- 120
Net loss $(6,517) -- -- -- -- -- -- (6,517) (6,517)
Cumulative translation (103) -- -- -- -- -- (103) -- (103)
adjustment -----
Comprehensive loss $(6,620) -- -- -- -- -- -- -- --
Balance, December 31, 1998 -- 575 57,679 -- 257 (120) (46,274) 12,117
Issuance of preferred stock and
warrants, net 3,713 -- -- -- 251 -- -- 3,964
Dividends and accretion on
preferred stock 1,399 -- -- -- -- -- (1,399) --
Dividends paid on preferred (108) -- -- -- -- -- --
stock (108)
Conversion of preferred stock
to common stock (5,004) 74 4,930 -- -- -- -- --
Stock options exercised -- 14 865 -- -- -- 879
Employee stock purchase plan -- 1 47 -- -- -- 48
Deferred compensation -- 1,400 (1,400) -- -- -- --
Amortization of deferred
compensation -- -- -- 1,400 -- -- -- 1,400
Stock compensation upon option
acceleration -- -- 1,003 -- -- -- -- 1,003
Stock compensation expense
pursuant to employment
agreement -- -- 16,375 -- -- -- -- 16,375
Warrants issued for services provided 179 179
Warrants issued in connection
with acquisition of OpenROUTE -- -- -- -- 1,354 -- -- 1,354
Stock and options issued for
acquisition of OpenROUTE -- 799 69,395 -- -- -- -- 70,194
Net loss $(24,770) -- -- -- -- -- -- (24,770) (24,770)
Cumulative translation adjustment (176) -- -- -- -- -- (176) -- (176)
----------
Comprehensive loss $(24,946) --
========= ----- ------ -------- --
Balance, December 31, 1999 $ -- $1,463 $151,694 $ -- $2,041 $ (296) $ (72,443) $ 82,459
===== ====== ======== ==== ======= ======= ========== ========
The accompanying notes are an integral part of these consolidated
financial statements.
25
NETRIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- --------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,770) $(6,517) $ (8,577)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,599 2,722 3,338
Non-cash expense pursuant to issuance of warrants 179 -- --
Stock compensation expense 18,778 -- --
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable (443) (1,287) 5,437
Inventories 2,821 2,770 82
Other current assets -- 241 298
Deposits and other assets 180 378 (299)
Accounts payable 1,845 9 (457)
Accrued liabilities (522) (352) (1,280)
Other liabilities 352 (97) (278)
----------- -------------- ------------
Net cash provided by (used in) operating activities 1,019 (2,133) (1,736)
----------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments -- -- (2,473)
Cash acquired from acquisition of OpenROUTE 643 -- --
Cash payments for acquisition costs (611) -- --
Sales and maturities of short-term investments -- -- 7,823
Purchases of property and equipment (1,107) (1,311) (1,665)
------------ -------------- -----------
Net cash (used in) provided by investing activities (1,075) (1,311) 3,685
------------ -------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit, net (1,109) 1,020 393
Principal payments of long-term debt -- -- (481)
Proceeds from private placement, net -- 2,076 --
Proceeds from preferred stock, net 3,964 -- --
Cash dividends paid on preferred stock (108) -- --
Proceeds from exercise of stock options 879 61 137
Proceeds from employee stock purchase plan 48 120 38
----------- ------------- -----------
Net cash provided by financing activities 3,674 3,277 87
---------- ------------- ------------
Effect of foreign currency exchange rate changes on cash and cash (176) (103) 35
equivalents
Net increase (decrease) in cash and cash equivalents 3,442 (270) 2,071
Cash and cash equivalents, beginning of period 2,488 2,758 687
----------- ------------- -----------
Cash and cash equivalents, end of period $5,930 $2,488 $ 2,758
=========== ============= ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $390 $ 183 $117
The accompanying notes are an integral part of these consolidated financial statements.
26
NETRIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
BUSINESS DESCRIPTION
Netrix Corporation, doing business as Nx Networks, (the "Company" or "Netrix"),
is a worldwide provider of internet telephony and data networking solutions. The
Company combines patented, switched, compressed voice and data technology with
advanced packet data networking capabilities to provide networking solutions
that improve network performance and deliver an array of tangible network
services. The Company is headquartered in Herndon, Virginia.
The Company conducts operations in the United Kingdom and Hong Kong through its
wholly owned subsidiary, Netrix International Corporation (a Delaware
Corporation), and in Germany and Italy through its wholly owned subsidiaries
Netrix GmbH and Netrix S.r.l., respectively. The Company's customers include
service providers, multinational corporations and government agencies in over 60
countries.
MERGERS AND ACQUISITIONS
ACQUISITION OF OPENROUTE
On December 22, 1999, the Company completed the merger of OpenROUTE Networks
("OpenROUTE") with and into Netrix, pursuant to the terms of the Agreement and
Plan of Merger dated September 30, 1999. Under the terms of the transaction, the
holders of OpenROUTE common stock and stock options received one share of Netrix
common stock for each OpenROUTE share converted. This resulted in the issuance
of 15,989,566 shares of common stock to the former OpenROUTE stockholders. The
issued shares were valued at $3.90 per share, which is the average of the
closing prices for the three days before and after the public announcement of
the merger. Options to acquire 2,387,175 shares of common stock were issued to
OpenROUTE employees for options to acquired OpenROUTE common stock. These
options were valued at approximately $7.9 million using the Black-Scholes model
assuming 130 percent volatility, a risk free interest rate of 6.30 percent and
an exercise period of three years and have been included in the purchase price
of OpenROUTE. The transaction has been accounted for under the purchase method
of accounting and the operating results of OpenROUTE have been included in the
accompanying consolidated statements of operations from the date of acquisition
(December 22, 1999). For accounting purposes, the Company is deemed to be the
acquiring corporation in the merger. Immediately following the merger, Netrix
shares held by Netrix stockholders represented approximately 45 percent of the
outstanding shares of Netrix. The board of directors of the combined companies
consist of six former Netrix directors and two OpenROUTE directors with the
Chief Executive Officer of Netrix, serving as Chairman of the Board of the
combined companies' board of directors.
The valuation of OpenROUTE, including transaction costs of $1.9 million was
$72.2 million. A summary of assets and liabilities acquired, at estimated fair
market value was as follows (in thousands):
Current assets $ 4,558
Property and equipment 1,482
Goodwill 62,922
Intangibles 7,300
Current liabilities (4,103)
-----------
$72,159
===========
The value assigned to intangible assets consisted of the following (in
thousands):
Assembled workforce 1,000
Service contracts 1,000
Software license 5,300
Goodwill 62,922
------------
Total $70,222
============
27
The unaudited pro forma information presented below reflects the acquisition of
OpenROUTE as if it had occurred on January 1, 1998. The results are not
necessarily indicative of future operating results or of what would have
occurred had the acquisition actually been consummated on that date (in
thousands, except per share data):
Year Ended
December 31,
---------------------------
1999 1998
------------- ----------
(unaudited)
Revenues $43,624 $ 45,808
Loss attributable to common stockholders (66,231) (35,932)
Loss per share attributable to common stockholders $ (2.26) $ (1.34)
AGREEMENT TO ACQUIRE AETHERWORKS
On December 31, 1999, the Company entered into an agreement (the "Agreement") to
acquire AetherWorks Corporation ("AetherWorks"). AetherWorks provides voice and
data carrier class convergence solutions for the telecommunications industry.
The acquisition was effected, on March 16, 2000, through the merger of
AetherWorks with and into a wholly-owned subsidiary of the Company.
Under the terms of the AetherWorks transaction, the holders of AetherWorks
common stock, warrants, and stock options converted at a rate of 1.38 shares of
Netrix Common Stock, warrants, and stock options. The Company issued 2,622,278
shares of common stock and warrants and options to acquire 867,722 shares of
common stock. The shares were valued at $22.94, average of closing prices for
three days before and after March 16, 2000. The warrants and options were valued
at approximately $16.2 million using the Black-Scholes model assuming 130
percent volatility, a risk free interest rate of 6.32 percent and an exercise
period of three years. Pursuant to the Agreement, the Company settled an $8.0
million obligation of AetherWorks upon the closing of the acquisition. The
conversion ratio of the 3.49 million shares was subject to adjustment based upon
the 320,826 of Netrix shares required to satisfy an $8.0 million obligation of
AetherWorks, which was required to be redeemed upon the closing of the proposed
merger.
Under the terms of the Agreement, an adjustment will be made to the merger
consideration if the closing price of its common stock on the Nasdaq Stock
Market for the 15 trading day period ended October 31, 2000 does not equal or
exceed $22.50 per share. In such event, additional shares of its common stock
will be issued such that the consideration per share of AetherWorks common stock
is equal to $22.50 per share based upon that average closing price; provided the
total number of shares of its common stock issued in the merger will not exceed
19.9% of the total of the Company's then outstanding shares. At closing, the
Company also issued to AetherWorks' employees options to acquire a total of 1.0
million shares of its common stock. The options have an exercise price of $6.81
per share and vest over a two to three year period. The Company will record
compensation expense of $16.8 million for the difference between the exercise
price and the fair market of the stock on the date of grant. This expense will
be amortized over the options vesting period.
RISKS AND OTHER IMPORTANT FACTORS
The Company has reported a net loss in each of the last five years and for the
year ended December 31, 1999, the Company reported net losses of $24.8 million
inclusive of a stock compensation charge of $18.8 million. The success and the
future of the Company is dependent on its ability to generate operating income.
The Company's ability to generate operating income is in large part dependent on
its success at increasing sales of its new products and/or controlling costs.
The Company's plan to increase revenues through sales of its new products is
continuing to evolve; however, due to market conditions, competitive pressures,
and other factors beyond its control there can be no assurances that the Company
will be able to adequately increase new product sales in the future.
The success of the Company is also dependent on its ability to generate adequate
cash for operations and capital needs. At December 31, 1999, the Company had
approximately $5.9 million in cash and cash equivalents with approximately $1.0
28
million outstanding of the $1.2 million available under the line of credit
agreement. In March 2000, the Company completed an offering of 1.0 million
shares of common stock. The offering generated proceeds of $25.1 million, net of
issuance costs of approximately $0.9 million. $8.0 million of the proceeds were
used to satisfy an AetherWorks' obligation, which was a condition to closing the
acquisition of AetherWorks. The Company is relying on these proceeds and future
sales and the collection of the related accounts receivable to meet its cash
obligations. The Company may have to generate additional cash, which may include
the sale of additional equity or borrowings. There can be no assurance that such
new financing will be available on terms management finds acceptable or at all.
The Company's operations are subject to certain risks and uncertainties
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technological, production and
marketing resources, reliance on certain sole source suppliers and third party
contract manufacturers, and dependence on key management personnel.
Future operating results may be affected by a number of other factors including,
the timing of new products in the market place, competitive pricing pressures
and global economic conditions. The market for the Company's products is
characterized by rapidly changing technology, the development, introduction, and
evolution of competitive products may require a significant investment of
financial resources. Additionally, the Company relies on sales to a leasing
company and reseller channels that are not under its control for a significant
portion of its revenues, particularly in its international regions. During the
year ended December 31, 1999, the Company recognized $3.2 million from revenues
to sales to a leasing company. The leasing company transaction is a new
distribution channel, which is not under the control of the Company and revenue
from such distributor could vary significantly from period to period. Also,
while the Company has generally been able to obtain adequate supplies of
components to date, the interruption or termination of the Company's current
manufacturing relationships could have an adverse effect on the Company's
liquidity and operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
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 fair market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosures of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. SFAS No. 107
excludes certain financial instruments and all non-financial instruments from
these disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The carrying
amounts reported in the balance sheet approximate the fair value for cash and
cash equivalents, accounts receivable, accounts payable and borrowings under the
line of credit agreement.
INVENTORIES
Inventories are valued at the lower of cost or market, using the first-in,
first-out ("FIFO") method.
29
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a straight-line
basis over the following estimated useful lives:
Manufacturing and test equipment.....................3-5 years
Office furniture and equipment.......................5 years
Purchased software...................................3 years
Leasehold improvements...............................shorter of useful
life or remaining lease term
INTANGIBLES AND GOODWILL
Acquired intangible assets including assembled workforce, service contracts and
software licenses together with goodwill are amortized over their expected
useful lives of four years.
REVENUE RECOGNITION
The Company recognizes revenue both from sales of products and from service
contracts. Revenue from product sales is generally recognized upon shipment.
Where sales contracts provide for customer acceptance, or other contingencies,
the Company recognizes revenue upon acceptance of the product by the customer or
when the contingency is satisfied. Revenue from service contracts is deferred
and recognized ratably over the period covered by the contract. Revenue for
product installation is recognized upon completion of the installation. Product
sales accounted for 78% of total revenues for the year ended December 31, 1999,
69% of total revenues for the year ended December 31, 1998, and 68% of total
revenues for the year ended December 31, 1997.
Revenues on long-term contracts are recognized under the percentage of
completion method of accounting based upon the ratio of the costs incurred to
total estimated costs. Estimates to complete are revised periodically based on
changes in facts. Any losses on contracts are recognized in the period when the
loss is estimated.
WARRANTY
The Company generally warrants its products for periods ranging from 90 days to
one year and sells an optional, annually renewable, maintenance contract with
most networks. Certain router products have a seven year limited warranty.
Estimated future warranty obligations related to certain products are provided
by charges to operations in the period in which the related revenue is
recognized.
FOREIGN EXCHANGE GAIN/LOSS
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 the 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.
EARNINGS (LOSS) PER SHARE
The Company follows Statement of Financial Accounting Standards "Earnings Per
Share (SFAS No. 128"). Under SFAS No. 128, Basic Earnings Per Share ("EPS")
excludes the effect of any dilutive options, warrants, or convertible securities
and is computed by dividing the net income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised. Options to
purchase approximately 6.7 million, 1.4 million and 1.2 million shares of common
stock were excluded from the computation of diluted loss per share in 1999, 1998
and 1997, respectively. Warrants to purchase approximately 0.2 million and 0.1
30
million shares of common stock were excluded from the computation of diluted
loss per share in 1999 and 1998, respectively. Inclusion of these options and
warrants would have an anti-dilutive effect on loss per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year financial statements to
conform with the current year presentation.
LONG-LIVED ASSETS
The Company reviews its long-lived assets, including property and equipment,
identifiable intangibles and goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the future, undiscounted, net cash flows compared to the
carrying amount of the assets.
The Company's estimates of anticipated net revenues, the remaining estimated
lives of intangible assets, or both, could be reduced significantly in the
future due to changes in technologies, regulation, available financing or
intense competition. As a result the carrying amount of long-lived assets could
be reduced materially in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities"("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The Company
has not yet evaluated the effect of this standard in the financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," ("SOP 98-1"). SOP 98-1 requires the
Company to capitalize internal computer software costs once the capitalization
criteria are met. SOP 98-1 is effective January 1, 1999, and is applied to all
projects in progress upon initial application. Based on the adoption of SOP
98-1, the Company capitalized approximately $70,000 related to the Company's
internal systems during the year ended December 31, 1999. Capitalized software
is included in property and equipment and is amortized on a straight-line basis
over a three year period.
3. BALANCE SHEET DETAILS (IN THOUSANDS):
INVENTORIES
As of December 31,
------------------------
1999 1998
------- -------
Raw materials........................................ $ 546 $ 350
Work-in-process...................................... 353 364
Finished goods....................................... 3,405 4,551
-------- ---------
Total inventories............................... $ 4,304 $ 5,265
======= ========
31
PROPERTY AND EQUIPMENT
As of December 31,
-------------------------
1999 1998
--------- ---------
Manufacturing and test equipment..................... $ 9,000 $ 14,634
Office furniture and equipment....................... 4,872 6,667
Purchased software................................... 647 2,995
----------- -----------
Total property and equipment.................... 14,519 24,296
Accumulated depreciation and amortization............ (9,959) (20,473)
Net property and equipment...................... $ 4,560 $ 3,823
=========== ============
ACCRUED LIABILITIES
As of December 31,
-------------------------
1999 1998
---------- --------
Payroll and related compensation..................... $ 1,360 $ 627
Sales and state taxes................................ 803 758
Professional fees.................................... 658 102
Other................................................ 1,859 1,459
--------- --------
Total accrued liabilities..................................... $ 4,680 $ 2,946
========= ========
4. COMMON STOCK AND STOCK PLANS:
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company maintains three stock option plans, which are described below,
whereby employees and directors of the Company are granted the opportunity to
acquire an equity interest in the Company. SFAS No. 123, "Accounting for
Stock-Based Compensation" defines a "fair value based method" of accounting for
an employee stock option or similar equity instrument. Under the fair value
based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period. The Company has
historically accounted for employee stock options or similar equity instruments
under the "intrinsic value method" as defined by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value method.
However, entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting had been applied. The Company has elected
to apply APB Opinion No. 25 and the related interpretations in accounting for
its stock-based compensation. Had compensation cost for the Company's three
stock-based compensation plans been determined based upon the fair value method
at the grant dates for awards under those plans, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below.
Year Ended December 31,
------------------------------------------
1999 1998 1997
----------- ---------- -----------
Net loss attributable to
common stockholders As reported $(26,169) $ (6,517) $ (8,577)
Pro forma $(30,324) $ (7,203) $(10,377)
Per share As reported $ (2.17) $ (0.60) $ (0.90)
Pro forma $ (2.51) $ (0.66) $ (1.08)
32
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1999, 1998, and 1997, respectively: no dividend yield; expected
volatility of 130 percent, 98 percent, and 98 percent; risk free interest rates
approximating 6.30 percent, 5.5 percent, and 5.5 percent; and an average
expected life of approximately 5 years. The per share weighted average fair
value of the options granted during the year ended December 31, 1999, 1998 and
1997 was $2.89, $2.26, and $1.75, respectively.
1996 STOCK OPTION PLAN
Under the terms of the Company's 1996 Stock Option Plan, either incentive stock
options or nonstatutory options may be granted. The purchase price of shares
subject to any incentive option granted will not be less than the fair market
value at the date of grant. Stock options granted generally expire five to ten
years from the grant date and typically vest 20% to 25% per year. Compensation
expense recorded for options granted to employees at less than fair value on the
date of the grant is recognized on a straight-line basis over the performance
period.
1999 STOCK OPTION PLAN
Under the terms of the Company's 1999 Stock Option Plan (the "1999 Plan"),
either incentive stock options or nonstatutory stock options may be granted. The
purchase price of shares subject to any incentive stock option granted will not
be less than the fair value at the date of grant. Stock options granted
generally expire ten years from the grant date and typically vest 50% per year.
Compensation expense recorded for options granted to employees at less than the
fair value on the date of grant is recognized on a straight-line basis over the
performance period, unless accelerated based upon certain events.
On September 30 1999, the Company re-priced the exercise price of 200,000
options issued to members of the Board of Directors to $2.50 per share from an
exercise price of $3.31 on the date of grant in July 1999. In accordance with
the proposed amendment to APB No. 25, the Company will record compensation
expense on the change in fair value of the re-priced options prospectively from
July 1, 2000.
In connection with the acquisition of OpenROUTE, the Company issued 2.4 million
options under the 1999 Plan to former OpenROUTE option holders with identical
terms to the original OpenROUTE options. In accordance with EITF Issue No. 90-9,
"Changes to Fixed Employee Stock Option Plans as a Result of Equity
Restructuring" the fair value of options in the Company issued in exchange for
options in OpenROUTE are included as part of the purchase price of OpenROUTE.
The OpenROUTE stock option plans generally provide for the granting to employees
of incentive stock options to purchase shares of Common Stock at the fair market
value as defined by the plan on the date of grant and of non-qualified stock
options at no less than 50% of the fair market value as defined by the plan on
the date of the grant. Generally, options become exercisable at the rate of 25%
at the end of each of the first four anniversaries of the grant. Options
generally expire ten years from the date of grant, or ninety days from the date
of termination of employment.
DIRECTOR OPTION PLAN
Under the terms of the Director Option Plan directors of the Company who are not
officers or employees of the Company each receive nonstatutory options to
purchase 9,000 shares of Common Stock of the Company. During the year ended
December 31, 1998 and 1997. Independent members of the Board of Directors were
granted options to purchase a total of 9,000 of common stock during each of the
years ended December 31, 1998 and 1997, at a weighted average price per share of
$2.19, and $4.69, respectively. No options were issued under this plan in the
year ended December 31, 1999.
33
The following table summarizes the changes in common stock options under common
stock option plans described above;
Weighted Average
Number Option Price Option Price
of Shares Per Share Per Share
Outstanding, December 31, 1996....................... 1,486,148 $1.68-$17.25 $5.92
Granted at market value................. 396,940 $ 1.25-$3.25 $2.30
Exercised............................... (63,077) $ 1.68-$6.25 $2.18
Canceled................................ (594,786) $ 1.68-$7.88 $5.57
---------
Outstanding, December 31, 1997....................... 1,225,225 $ 1.25-$8.69 $2.93
---------
Granted at market value................. 659,200 $ 1.09-$3.13 $2.96
Exercised............................... (3,441) $ 3.00-$3.13 $2.85
Canceled................................ (508,937) $ 1.68-$7.88 $3.65
-----------
Outstanding, December 31, 1998....................... 1,372,047 $ 1.25-$8.69 $2.92
-----------
Granted at market value................. 2,056,140 $2.50-$12.44 $3.52
Granted below market value.............. 1,619,700 $1.50 -$2.75 $2.43
Granted in connection with
acquisition of OpenROUTE................ 2,387,175 $ 0.81-$7.50 $1.79
Exercised............................... (292,270) $ 0.91-$4.13 $2.57
Canceled................................ (470,539) $ 1.09-$7.13 $3.01
------------- ------------- -----
Outstanding, December 31, 1999...................... 6,672,253 $ 0.81-$12.44 $2.10
============ ============= =====
Exercisable, December 31, 1999.................... 4,124,306 $ 0.81-$7.50 $2.13
========= ============= =====
Exercise price for employee stock options outstanding at December 31, 1999 are
as follows:
Weighted
Average Weighted
Number Outstanding Remaining Average
as of Contractual Exercise
RANGE OF EXERCISE PRICE December 31, 1999 Life-Years Price
- ----------------------- ----------------- ---------- -----
$ 0.81-$ 1.13 1,069,144 8.15 0.62
1.14- 2.33 1,432,264 8.22 1.64
2.37- 2.80 3,357,058 9.67 2.61
2.81- 4.37 583,287 8.71 3.25
7.50- 7.50 20,000 1.98 7.50
12.44- 12.44 210,500 9.92 12.44
--------- ----- ------
Total 6,672,253 9.02 2.10
========= ===== ======
STOCK COMPENSATION TO EMPLOYEES
Based on provisions of the chief executives officer's employment contract, the
acquisition of OpenROUTE constituted a change in control. As a result of the
change in control, the Company is obligated to issue 1.0 million shares of
common stock. The Company recognized as compensation expense, $16.4 million for
the fair value of the shares to be issued.
During the year ended December 31, 1999, the stock compensation expense for
options granted to employees below market value, approximated $1.4 million. At
December 31, 1999 there is no remaining deferred compensation expense related to
these grants as these options vested upon the close of the OpenROUTE
acquisition.
In connection with the termination of certain employees during the year ended
December 31, 1999, the Company vested stock options that would have otherwise
been forfeited. In accordance with APB Opinion No. 25 and the related
interpretations, the Company recorded stock compensation expense of $1.0
million.
34
EMPLOYEE STOCK PURCHASE PLAN
Under the 1992 Employee Stock Purchase Plan (the "Plan"), the Company is
authorized to issue semi-annual offerings of up to 50,000 shares. The number of
shares available for an offering may be increased at the election of the Board
of Directors by the number of shares of Common Stock, if any, which were made
available but not purchased during an earlier offering. Each offering is six
months in length and commences on each July 1 and January 1. Under the terms of
the Plan, employees can choose prior to each offering to have up to 10 percent
of their annual base earnings withheld to purchase the Company's common stock.
The purchase price of the stock is 85 percent of the lower of its
beginning-of-offering or end-of-offering market price. Under the Plan, the
Company sold 68,101 shares, 90,932 shares, and 20,067 shares to employees in
1999, 1998 and 1997, respectively.
PRIVATE PLACEMENT
In April 1998, the Company completed a private placement by issuing and selling
1,750,000 shares of common stock at a price of $1.25 per share. In connection
with the private placement, the Company received net proceeds of approximately
$2.1 million. The shares issued in the private placement were registered for
resale pursuant to a registration statement declared effective by the Securities
and Exchange Commission on June 12, 1998. The offering costs were accounted for
as a reduction to additional paid-in capital in the accompanying consolidated
statements of changes in stockholders' equity.
PREFERRED STOCK
In May 1999, the Company completed a private placement by selling and issuing
297,187 shares of Series A 8% Convertible Preferred Stock (the "Preferred
Stock"), par value $.05 per share, at a price of $13.75 per share, and by
issuing warrants to purchase an additional 50,000 shares of common stock at an
excise price of $2.75 per share. Each share of Preferred Stock had a
liquidation preference equal to its purchase price, plus accrued and unpaid
dividends. Dividends were cumulative from May 14, 1999 and payable
semi-annually, in arrears on April 30 and October 31, commencing October 31,
1999. Dividends were payable in cash or shares of common stock at the Company's
election. Cash dividends of $108,000 were paid on October 31, 1999. No
additional dividends are due.
The Preferred Stock was convertible at any time prior to redemption, at the
option of the holder into common stock at a conversion rate equal to five shares
of common stock for each share of preferred stock, subject to adjustment in
certain circumstances. The fair value of the preferred stock's beneficial
conversion feature, reflective of the difference between the conversion price of
the preferred stock and the market value of the underlying common stock on the
date of issue, constitutes for accounting purposes, a dividend by the Company.
The beneficial conversion feature is required to be reflected as a non-cash
charge to earning in the consolidated statement of operations as the transfer
restrictions on the underlying common stock lapse. The transfer restrictions
lapse when the average closing price for the common stock over a period of 10
consecutive trading days is at least 125 percent, 156 percent, 195 percent and
244 percent of the initial conversion price of the Preferred Stock, $2.75 per
share. All transfer restrictions lapsed in 1999, which resulted in non-cash
dividend charges to earning of approximately $1.2 million, for the year ended
December 31, 1999.
The Preferred Stock was redeemable or convertible to common stock at the option
of the Company at any time after the closing bid price for the common stock on
the NASDAQ Stock Market had equaled or exceeded $6.00 for 10 consecutive trading
days, with a redemption price of $17.50 per share. In December 1999, the shares
were converted into common stock under this provision.
WARRANTS
In April 1998, in connection with the Private Placement, the Company issued
warrants to their underwriters to purchase 140,000 shares of common stock at an
exercise price of $1.75 per share. The warrants were valued at $0.3 million,
using the Black-Sholes pricing model. The offering costs were accounted for as a
35
reduction of the net proceeds of the private placement in the accompanying
consolidated statements of changes in stockholders' equity.
In April 1999, in connection with the Company's lending institution forgiveness
of past debt covenant defaults, the Company issued warrants to purchase 50,000
shares of common stock at an exercise price of $2.00 per share. The warrants
were valued at $0.1 million, using the Black-Sholes pricing model. The financing
costs were accounted for as interest expense in the accompanying consolidated
statements of operations.
In July 1999, in connection with the Preferred Stock offering, the Company
issued warrants to professional services and corporate finance consultants to
purchase 124,818 shares of common stock at an average exercise price of $2.98
per share. The fair value of the warrants was valued at $0.3 million, using the
Black-Scholes pricing model. The offering costs were accounted for as a
reduction of the net proceeds of the preferred stock in the accompanying
consolidated statements of changes in stockholders' equity.
In August 1999, in connection with the acquisition of OpenROUTE, the Company
issued warrants to professional service providers to purchase 100,000 shares of
common stock at an exercise price of $3.00 per share. The fair value of the
warrants was valued using the Black-Scholes pricing model at the end of each
reporting period through the acquisition of OpenROUTE. The value of the warrants
became fixed on the date of the OpenROUTE acquisition, resulting in acquisition
costs of $1.4 million. The acquisition costs were accounted for as additional
purchase price for the OpenROUTE acquisition.
During the year ended December 31, 1999, in connection with general consulting
services provided during the year, the Company issued warrants to purchase
52,500 shares of common stock at an average exercise price of $4.76 per share.
The fair value of the warrants was valued at $0.1 million, using the
Black-Scholes pricing model. The compensation costs were accounted for as stock
compensation expense in the accompanying consolidated statements of operations.
Exercise price for warrants outstanding at December 31, 1999 are as follows:
Range of Number Outstanding Weighted Average Remaining Weighted Average
Exercise Price as of December 31, 1999 Contractual Life-years Exercise Price
-------------- ----------------------- -------------------------- -----------------
$ 2.75 - $3.75 202,818 4.58 $ 2.99
$ 5.00 - $7.00 17,500 4.42 $ 6.14
------- ----- ------
Total 220,318 4.51 $ 3.24
======= ===== ======
5. COMMITMENTS AND CONTINGENCIES:
LINE OF CREDIT
In February 2000, the Company entered into a $10.0 million line of credit
agreement with its chief executive officer, Steven T. Francesco. The loan
agreement provided for interest of prime plus 5% on the outstanding principal.
No amounts were borrowed under this agreement. Per the agreement, the line was
terminated in March 2000 upon the Company completing an equity offering greater
than $10.0 million.
In November 1997, the Company negotiated a $3.0 million line of credit agreement
with a lending institution to be used for working capital. Borrowings under the
line are based on qualified domestic accounts receivable and are collateralized
by the Company's assets. At December 31, 1999, the Company had approximately
$1.0 million outstanding of the $1.2 million available under the line of credit
agreement. At December 31, 1998, the Company had approximately $2.2 million
outstanding of the $2.4 million available under the line of credit.
In February 2000, the Company terminated its line of credit. The Company is
working on securing a new line of credit with various financial institutions.
Based on the Company's current cash balance, management does not believe that
securing a line of credit is required to fund operations for the foreseeable
future.
36
LONG-TERM DEBT
As of December 31, 1999 and 1998, the Company had no long-term debt.
In conjunction with the working capital line of credit obtained in November
1997, the Company repaid its equipment note payable in full. Interest expense
related to the borrowing was approximately $117,000 for the year ended December
31, 1997.
RESTRUCTURING CHARGE
In April 1999, the Company implemented a restructuring of operations to reduce
and economize its work force as part of an overall plan to return to
profitability. The restructuring charges of $0.9 million resulted from $0.8
million of accrued severance and benefit costs associated with a
reduction-in-force of 36 employees across all functional areas of the Company,
and $57,000 of accrued facility costs resulting from the consolidation of
facilities and premature termination of various office leases. As of December
31, 1999, severance of $0.8 million and lease termination costs of $57,000 have
been paid. At December 31, 1999, there is no remaining restructuring accrual
related to this restructuring charge.
In April 1997, the Company implemented a restructuring of operations to reduce
and economize its work force in response to declining revenues and the
discontinuance of its micro.pop product. The restructuring resulted in an
overall reduction of personnel and related compensation and other associated
operating costs of the Company. The reduction-in-force occurred over
approximately a one-year period and severance payments were generally made in
lump sum in February 1997. The 1997 restructuring charges of $0.9 million
resulted from approximately $0.4 million of accrued severance and outplacement
costs associated with a reduction-in-force of approximately 37 employees across
all functional areas of the Company, approximately $0.4 million of fixed asset
write-offs and facility relocation charges for unrecoverable lease obligations
associated with the consolidation of the Longmont, Colorado and Herndon,
Virginia operations facilities into one facility leased in Charlotte, North
Carolina, and other associated costs of approximately $0.1 million. During the
year ended December 31, 1999, the Company paid $0.1 million of final severance
payments to certain international employees that resulted from an April 1997
restructuring of operations. At December 31, 1999, there is no remaining
restructuring accrual related to this restructuring charge.
LEASES
The Company's principal administrative and research and development facilities
consist of approximately 56,000 square feet located in Herndon, Virginia and
approximately 44,000 square feet in Westborough, Massachusetts. The lease for
the Company's headquarters facility in Herndon, Virginia includes annual
escalations of a fixed amount during each year of the lease. The Westborough
premises are occupied under a lease expiring in April 2002. The Company leases
approximately 8,600 square feet in Longmont, Colorado, for the purpose of
continuing certain product development activities. Additionally, the Company
leases space for sales offices in the US and the UK. The Company was relieved of
its lease commitment for 48,000 square feet of space in Boulder, Colorado, in
August 1997. The Company recognizes rent expense, net of any sublease revenue,
on a straight-line basis. Net rent expense was $1.2 million, $1.8 million and
$1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.
From October 1, 1999 through December 31, 1999, the Company sub-leased 24,000
square feet in the principal Herndon, Virginia facility. From January 1, 1997
through October 1998, the Company subleased 28,000 square feet in a secondary
Herndon, Virginia facility. This lease was terminated in October 1998. Sublease
revenue of $0.1 million, $0.4 million, and $0.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively, is presented as a reduction of
rent expense in the accompanying consolidated statements of operations.
Future minimum lease payments for office space and equipment under operating
leases are as follows (in thousands):
37
Year Ending Net
December 31, Payments
------------------------- --------
2000........................... $ 1,797
2001........................... 1,711
2002........................... 1,330
2003 .......................... 1,150
2004 and thereafter............ 6,554
------------
Total............................... $ 12,542
============
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan ("401(k) plan") covering all eligible
employees. The Company matches employee contributions up to the first 6% of
eligible income at a rate of 25%. The matching funds are subject to 20% vesting
per year beginning with the employee's first day with the Company; therefore,
certain employees were 100% vested in the Company matching contributions on July
1, 1996. In 1999, 1998, and 1997, the Company contributed approximately $81,000,
$18,000, and $86,000, respectively, to the 401(k) plan.
LITIGATION
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company, and adequate provision for any potential losses has been
made in the accompanying financial statements.
6. SEGMENT INFORMATION:
For the year ended December 31, 1999, the Company adopted the Statement on
Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information ("SFAS No. 131"). The Company's two
reportable segments are products and services. The Company evaluates the
performance of its segments based on gross profit. Under SFAS No. 131, the
Company is required to provide enterprise-wide disclosures about revenues by
product and service revenues, long-lived assets by geographic area and revenues
from major customers.
REVENUES
Revenues consisted of the following (in thousands):
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------- --------- --------
PRODUCT GROUP
2200 $ 13,035 $ 8,343 $ 3,759
2500 7,870 7,210 4,492
S1000 647 1,076 1,976
S10 1,589 3,357 9,064
Telecom 246 1,854 3,183
Internet 1,113 - -
LAN 5 - -
------------ ----------- ---------------
Total product revenues 24,505 21,840 22,474
Service revenues 6,740 9,642 10,613
------------- ------------ ---------------
Total revenues $31,245 $ 31,482 $ 33,087
============= ============= ================
38
GEOGRAPHIC INFORMATION
The Company sells its products and services through its foreign affiliates in
the United Kingdom, Germany, Italy and Singapore. Information regarding revenues
and long-lived assets attributable to the United States and to all foreign
countries is stated below. The geographic classification of product and service
revenues was based upon the location of the customer.
The Company's product and service revenues for 1999, 1998 and 1997 were
generated in the following geographic regions (in thousands):
Year Ended December 31,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
United States....................... $16,441 $14,933 $12,594
Europe, Middle East and Africa...... 8,971 13,149 14,753
Pacific Rim, Latin America and .....
South America.................. 5,833 3,400 5,740
--------- --------- --------
Total............................... $31,245 $31,482 $33,087
======= ======= =======
Included in domestic product revenues are sales through systems integrators and
distributors to the Federal Government of $0.2 million, $0.5 million, and $1.1
million for the years ended December 31, 1999, 1998 and 1997 respectively.
The Company's long-lived assets were located as follows:
As of December 31,
----- ---------------------
1999 1998
--------- --------
United States....................... $ 74,497 $ 4,055
United Kingdom...................... 201 247
Germany............................. 3 -
Italy............................... 12 50
-------------- ---------------
Total long-lived assets............. $ 74,713 $ 4,352
========== ==========
SIGNIFICANT CUSTOMERS
Customers that accounted for greater than 10% of total revenues in 1999, 1998
and 1997 are described below (in thousands):
Year Ended December 31,
---------------------------------------
1999 1998 1997
---------- --------- ----------
Distributor 1....................... * $ 2,849 $ 3,640
Product..................... * 2,235 2,994
Service..................... * 614 646
Distributor 2....................... $ 3,736 2,186 *
Product..................... 3,645 2,176 *
Service..................... 91 10 *
Distributor 3....................... $ 3,255 * *
Product..................... 3,255 * *
Service..................... * * *
* Revenue accounted for less than 10% of total revenues for the period.
39
7. INCOME TAXES
As of December 31, 1999, the Company had net operating losses of approximately
$89.9 million available for carryforward to offset future income for Federal
income tax purposes. Approximately $46.5 million of these net operating losses
will be limited due to the change in ownership that occurred prior to the
OpenROUTE acquisition.
These carryforwards expire in years 2002 through 2019 as follows:
2002.............. 1,659,251
2003.............. 4,317,781
2004.............. 2,551,507
2005.............. 1,323,189
2006 and thereafter 80,048,272
------------
$ 89,900,000
These carryforwards are subject to limitation of the amount available to be used
in any given year due to significant changes in ownership interests. In
addition, the Company has research and development tax credit carryforwards of
approximately $3.7 million, which are available to offset future Federal income
taxes with certain limitations. Temporary differences between financial
reporting and income tax reporting result primarily from the treatment of
depreciation expense, capitalization of certain inventory costs for tax purposes
and bad debt reserves.
The components of the net deferred tax asset were as follows (in thousands):
Year Ended
December 31,
---------------------------
1999 1998
------------ --------
Federal regular tax operating
loss carryforwards............... $ 34,167 $ 14,583
Research and development tax
credit carryforwards............. 3,700 2,125
Other.............................. 5,627 3,639
---------- ----------
43,494 20,347
---------- ----------
Valuation allowance................ (43,494) (20,347)
----------- ----------
Deferred tax asset................. $ -- $ --
=========== ===========
The Company has determined that the net deferred tax asset as of December 31,
1999 and 1998, do not satisfy the recognition criteria set forth in SFAS
No. 109. Accordingly, a valuation allowance was recorded against the applicable
net deferred tax assets.
8. SUBSEQUENT EVENTS
During March 2000, the Company announced the termination of certain former
OpenROUTE employees and executives. As part of their termination agreements,
each employee is entitled to severance of up to six months salary and vesting of
all unvested options as of their termination date. The Company estimates it will
incur total cash compensation charges of $250,000. Stock compensation charges
will be recorded on the date of each employee's termination based on the market
value of the underlying common stock.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
PART III
ITEMS 10 TO 13 (INCLUSIVE).
The information required by Items 10, 11, 12 and 13 will appear in the
Netrix Corporation Proxy Statement for the Annual Meeting of Stockholders, which
will be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 and is incorporated by reference in this Report pursuant to General
Instruction G(3) of Form 10-K (other than the portions thereof not deemed to be
"filed" for the purpose of Section 18 of the Securities Exchange Act of 1934).
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
Report of Independent Public Accountants 16
Consolidated Statements of Operations 17
Consolidated Balance Sheets 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
(2) FINANCIAL STATEMENT SCHEDULES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SUPPLEMENTAL PAGE
SCHEDULE
Report of Independent Public Accountants on Supplemental
Schedule.......... 43
For the three years in the period ended December 31, 1998:
Schedule II - Consolidated Valuation and
Qualifying Accounts...... 44
All other Schedules have been omitted because the required information
is either shown in the consolidated financial statements or notes thereto or
they are not applicable.
(3) EXHIBITS
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated September 30, 1999, between Netrix Corporation and
OpenROUTE Networks, Inc. (incorporated by reference to Exhibit 4.2 to Netrix's quarterly
report on Form 10-Q filed on August 16, 1999)
2.2 Amendment to Agreement and Plan of Merger between Netrix Corporation and OpenROUTE Networks,
Inc., dated November 9, 1999 (incorporated by reference to Netrix's registration statement on
Form S-4 filed on November 19, 1999).
2.3 Agreement and Plan of Merger, dated December 31, 1999 among Netrix Corporation, Nx1
Acquisition Corp. and AetherWorks Corporation (incorporated by reference to Exhibit 2.1 to
Netrix's current report on Form 8-K filed on January 14, 2000).
3.1 Amended and Restated Certificate of Incorporation of Netrix Corporation (incorporated by
reference to Exhibit 3.1 to Netrix's registration statement on Form S-1 filed on September 18,
1992, as amended, File No. 33-50464 (the "1992 S-1")).
3.2 Amendment to Certificate of Incorporation of Netrix Corporation dated August 26, 1999
(incorporated by reference to Exhibit 4.8 to Netrix's registration statement on Form S-3,
filed on June 18, 1999, as amended, File No. 333-81109 (the "1999 S-3")).
3.3 Certificate of Merger between Netrix Corporation and OpenROUTE Networks, Inc.
4.1 Specimen certificate of common stock of Netrix Corporation (incorporated by reference to
Exhibit 4.2 to Netrix's 1992 S-1).
4.2 Form of Warrant issued to Kaufman Bros., L.P. (incorporated by reference to Exhibit 4.6 of
Netrix's quarterly report on Form 10-Q, filed November 15, 1999).
43
10.1 Loan and Security Agreement, dated November 18, 1997, by and between Netrix Corporation and
Coast Business Credit, a division of Southern Pacific Bank (incorporated by reference to
Exhibit 4.2 to Netrix's quarterly report on Form 10-Q filed on August 16, 1999).
10.2 Amendment to Loan and Security Agreement, dated April 19, 1999, by and between Netrix Corporation
and Coast Business Credit, a division of Southern Pacific Bank (incorporated by reference to
Exhibit 4.2 to Netrix's quarterly report on Form 10-Q filed on August 16, 1999).
10.3* Employment Agreement between Netrix Corporation and Steven T. Francesco, dated March 22, 1999
(incorporated by reference to Exhibit 10.5 to Netrix's quarterly report on Form l0-Q, filed on
November 15, 1999).
10.4* Employment Agreement between Netrix Corporation and Peter J. Kendrick, dated August 2, 1999
(incorporated by reference to Exhibit 10.6 to Netrix's quarterly report on Form 10-Q, filed on
November 15, 1999).
10.5* Form of Retention Agreement with Executive Officers of Netrix Corporation (incorporated by
reference to Exhibit 10.7 to Netrix's quarterly report on Form 10-Q, filed on November 15,
1999).
10.6+ Manufacturing Agreement, dated September, 1999, by and between Netrix Corporation and SMT
Centre S.F. Inc. (incorporated by reference to Exhibit 10.8 to Netrix's quarterly report on
Form 10-Q, filed on November 15, 1999).
10.7* 1999 Long Term Incentive Plan of Netrix Corporation, as amended (incorporated by reference to
Exhibit 10.9 to Netrix's quarterly report on Form 10-Q filed on November 15, 1999).
10.8* Amended and Restated Incentive Stock Option plan of Netrix Corporation, as amended
(incorporated by reference to Exhibit 10.1 of the Annual Report of Form 10-K for the fiscal
year ended December 31, 1995).
10.9* 1992 Employee Stock Purchase Plan of Netrix Corporation (incorporated by reference to Exhibit
10.2 of Netrix's 1995 10-K).
10.10* 1992 Directors Stock Option Plan of Netrix Corporation (incorporated by reference to Exhibit
10.3 of Netrix's 1995 10-K).
10.11* 1996 Stock Option Plan of Netrix Corporation (incorporated by reference to Exhibit 10.4 of
Netrix's 1995 10-K).
44
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.12 Office lease, dated December 9,1988, as amended, by and between Netrix Corporation and Dulles
Technology Center Venture, for Netrix's principal executive offices at 13595 Dulles Technology
Drive, Herndon, Virginia (incorporated by reference to Exhibit 10.6 of Netrix's 1992 S-1).
10.13 Office Sublease, dated September 30, 1999, by and between Netrix Corporation and Scoreboard,
Inc. (incorporated by reference to Exhibit 10.14 to Netrix's quarterly report on Form l0-Q,
filed on November 15, 1999).
10.14 Manufacturing Services Agreement, dated August 1, 1989, by and between OpenROUTE Networks,
Inc., and Texas Instruments, Inc. (filed as Exhibit 10.3 to OpenROUTE's registration statement
on Form S-1, Commission File No. 33-40073).
10.15 Purchase Agreement, dated December 1, 1990, by and between OpenROUTE Networks, Inc., and Texas
Instruments, Inc. (filed as Exhibit 10.4 to OpenROUTE's registration statement on Form S-1).
10.16+ Software License Agreement, dated January 1, 1990, by and between OpenROUTE Networks, Inc. and
Noel Chiappa (filed as Exhibit 10.5 to OpenROUTE's registration statement on Form S-1).
10.17* 1991 Restated Stock Option Plan of OpenROUTE Networks, Inc. (filed as Exhibit 19.1 to
OpenROUTE's quarterly report on Form 10-Q for the quarter ended June 27, 1992).
10.18* 1988 Nonqualified Stock Option Plan of OpenROUTE Networks, Inc. (filed as Exhibit 10.7 to
OpenROUTE's registration statement on Form S-l).
10.19* Restated Employee Stock Award Plan of OpenROUTE Networks, Inc. (filed as Exhibit 10.8 to
OpenROUTE's registration statement on Form S-1).
10.20 Lease Agreement, dated December 19, 1994, by and between OpenROUTE Networks, Inc. and WCB
Twenty Limited Partnership (filed as Exhibit 10.31 to OpenROUTE's annual report on Form 10-K
for the year ended December 31, 1994).
10.21 Amendment to Lease Agreement, dated December 19, 1994, by and between OpenROUTE Networks, Inc.
and WCB Twenty Limited Partnership, dated May 23, 1997 (filed as Exhibit 10.18 to OpenROUTE's
annual report on Form 10-K for the fiscal year ended December 31, 1997).
10.22 Resolving Credit Facility, dated February 2, 2000, between Netrix Corporation and Steven T.
Francesco.
10.23* Employment Agreement, dated January 4, 2000, between Netrix Corporation and Greg McNulty.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
- --------------------
Filed herewith
45
o This exhibit is a compensatory plan or arrangement in which executive
officers or directors of the Registrant participate.
o Confidential treatment has been requested for portions of this document.
(b) Reports on Form 8-K
We filed two Reports on Form 8-K during the period from September 30,
1999 to December 31, 1999. The first Report was filed on October 14, 1999 and
reported the signing of the Agreement and Plan of Merger with OpenROUTE. The
second Report was filed on December 23 1999 and reported the consummation of the
merger with OpenROUTE.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to
be signed on its behalf by the undersigned, thereunto duly authorized.
NETRIX CORPORATION
Date: March 30, 2000 By:____________________________________
Steven Francesco
Chairman and Chief Executive Officer
SIGNATURE TITLE DATE
- ----------------------------------------
STEVEN T. FRANCESCO Chairman, Chief Executive March 30, 2000
(Principal Executive Officer)
- ----------------------------------------
LYNN C. CHAPMAN Vice Chairman and Director March 30, 2000
- ----------------------------------------
PETER J. KENDRICK Vice President of Finance and March 30, 2000
Administration and Chief Financial
Officer
(Principal Financial Officer)
- ----------------------------------------
JENNIFER BELL-GORDON Controller March 30, 2000
(Principal Accounting Officer)
- ----------------------------------------
DOUGLAS J. MELLO Director March 30, 2000
- ----------------------------------------
RICHARD YALEN Director March 30, 2000
- ----------------------------------------
ROBERT M. GLORIOSO Director March 30, 2000
- ----------------------------------------
THOMAS LIEBERMAN Director March 30, 2000
- ----------------------------------------
BILL YUNDT Director March 30, 2000
47
SIGNATURE TITLE DATE
- ----------------------------------------
JOHN M. FACCIBENE Director March 30, 2000
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To Netrix Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of Netrix Corporation (a Delaware
corporation) and its subsidiaries included in this Form 10-K and have issued our
report thereon dated March 16, 2000. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules included on Schedule II, Consolidated Valuation and Qualifying
Accounts are the responsibility of the Company's management and are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 16, 2000
49
SCHEDULE II
NETRIX CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance At Charges to Balance At
Beginning Costs and End of
Description of Period Expenses Other* Deductions Period
- ----------- --------- -------- ----- ---------- ---------
Doubtful Accounts
- -----------------
Year Ended December 31, 1997: $ 1,380 150 - 25 $ 1,505
Allowance for doubtful accounts
(deducted from accounts receivable)
Year Ended December 31, 1998: $ 1,505 1,402 - 2,111 $ 796
Allowance for doubtful accounts
(deducted from accounts receivable)
Year Ended December 31, 1999: $ 796 1,364 1,812 1,070 $ 2,902
Consignment Reserve**
- -------------------
Year Ended December 31, 1997:
(deducted from consignment inventory) $ 190 1,478 - 612 $ 1,056
Year Ended December 31, 1998:
(deducted from consignment inventory) $ 1,056 2,046 - 1,638 $ 1,189
Year Ended December 31, 1999:
(deducted from consignment inventory) $ 1,189 329 - 759 $ 759
Inventory Reserve**
- -----------------
Year Ended December 31, 1997:
(deducted from inventory) $ 1,837 432 - 949 $ 1,319
Year Ended December 31, 1998:
(deducted from inventory) $ 1,319 2,045 - 1,538 $ 1,727
Year Ended December 31, 1999:
(deducted from inventory) $ 1,727 2,273 - 2,548 $ 1,452
* Other represents the account balance acquired from OpenROUTE on December 22,
1999.
**Reserve is netted against inventory balance.
50