UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-50464
Nx NETWORKS, INC.
(Exact name of registrant as specified in charter)
DELAWARE 54-1345159
(State of Incorporation) (IRS Employer Identification No.)
13595 DULLES TECHNOLOGY DRIVE
HERNDON, VIRGINIA 20171
(Address of principal executive offices) (Zip Code)
(703) 742-6000
(Registrant's telephone number, including area code)
Indicate by check number whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
____________ _____________
At May 15, 2001, there were 44,412,000 shares of the registrant's
Common Stock, $.05 par value per share, outstanding.
Nx NETWORKS, INC.
FORM 10-Q
MARCH 31, 2001
INDEX
Page No.
________
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 3
PART I -- FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 -- FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2001 and March
31, 2000 4
Unaudited Condensed Consolidated Balance Sheets as of March
31, 2001 and December 31, 2000 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and March
31, 2000 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET
RISK 26
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 26
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS 28
ITEMS 3 THROUGH 5 29
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURE
EXHIBIT INDEX
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the information set forth in this quarterly report includes
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, from time to time, we may publish
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act or make oral statements that constitute
forward-looking statements. These forward-looking statements may relate to
matters such as anticipated financial performance, future revenues or earnings,
business prospectus, projected ventures, new products, anticipated market
performance and similar matters. The words "budgeted," "anticipate," "project,"
"estimate," "expect," "may," "believe," "potential" and similar statements are
intended to be among the statements that are forward looking statements. Because
these statements reflect the reality of risk and uncertainty that is inherent in
our business, actual results may differ materially from those expressed or
implied by the forward-looking statements. You are cautioned not to place undue
reliance on these forward-looking statements, which are made as of the date of
this quarterly report.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, we caution you that a variety of factors could cause our actual
results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. These risks and uncertainties, many
of which are beyond our control, include, but are not limited to those set forth
under the caption "Certain Factors Which May Affect Future Results" on page 21
of this quarterly report and in our filings with the SEC.
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Nx NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
_________
2001 2000
____ ____
Revenues:
Product $1,869 $7,053
Service and other 1,500 1,890
________ ________
Total revenues 3,369 8,943
________ ________
Cost of revenues:
Product 1,434 4,184
Service and other 919 1,304
_______ ________
Total cost of revenues 2,353 5,488
_______ ________
Gross profit 1,016 3,455
Operating expenses:
Sales and marketing (exclusive of stock compensation of $192 and $23 in the three 2,661 3,518
months ended March 31, 2001 and March 31, 2000)
Research and development (exclusive of stock compensation of $2,068 and $599 3,211 2,675
in the three months ended March 31, 2001 and March 31, 2000)
General and administrative (exclusive of stock compensation of $926 and $5,873 3,225 2,776
in the three months ended March 31, 2001 and March 31, 2000)
Bad debt expense 116 455
In-process research and development - 30,800
Amortization of acquired intangibles 2,277 5,143
Stock compensation expense 3,186 6,495
________ _______
Total operating expenses 14,676 51,862
________ _______
Loss from operations (13,660) (48,407)
Interest and other expense, net (604) (30)
________ _______
Net loss (14,264) (48,437)
Dividends and accretion on preferred stock (1,461) -
_________ _________
Net loss attributable to common stockholders $ (15,725) $ (48,437)
========= =========
Basic and diluted loss per common share $ (0.38) $ (1.57)
========= =========
Basic and diluted weighted average common shares outstanding 41,131 30,901
========= =========
See notes to unaudited condensed consolidated financial statements.
4
Nx NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
As of As of
March 31, December 31,
2001 2000
_____________________ ___________________
(unaudited)
Assets
______
Current assets:
Cash and cash equivalents $2,876 $4,659
Accounts receivable, net 1,382 1,604
Stock subscription receivable, subsequently collected - 1,147
Inventories 4,187 4,928
Other current assets 785 512
_______ ________
Total current assets 9,230 12,850
Property and equipment, net 3,131 3,508
Goodwill and intangibles, net 26,015 28,292
Deposits and other assets 375 605
_______ _______
TOTAL ASSETS $38,751 $45,255
======= =======
Liabilities and Stockholders' Equity
____________________________________
Current liabilities:
Accounts payable $7,405 $7,391
Accrued liabilities 6,093 6,704
Note payable to vendor 4,940 6,353
_______ _______
Total current liabilities 18,438 20,448
_______ _______
Long-term liabilities 173 735
_______ _______
TOTAL LIABILITIES $18,611 $21,183
_______ _______
Series B redeemable, convertible preferred stock, $0.05
par value; 640,000 shares authorized; 333,333 shares
issued and outstanding (aggregate liquidation preference
of $2,117 as of December 31, 2000) - 2,117
Commitments and contingencies
Stockholders' equity:
Series B convertible preferred stock, $0.05 par value; 2,262 -
640,000 shares authorized; 333,333 shares issued and
outstanding (aggregate liquidation preference of $2,262)
Series C convertible preferred stock, $0.05 par value; 2,543 -
15,400 shares authorized, issued and outstanding
(aggregate liquidation preference of $2,543)
Series D convertible preferred stock, $0.05 par value; 1,355 -
11,734 shares authorized, issued and outstanding
(aggregate liquidation preference of $1,659)
Common stock, $0.05 par value; 85,000,000 and 55,000,000 2,219 2,030
shares authorized, respectively; 44,382,000 and 40,606,000
shares issued and outstanding, respectively
Additional paid-in capital 282,595 277,778
Deferred compensation (6,916) (8,460)
Accumulated deficit (268,837) (253,112)
Warrants 5,968 4,749
Note receivable from stockholder (1,000) (1,000)
Accumulated other comprehensive loss (49) (30)
_______ _______
Total stockholders' equity 20,140 21,955
_______ _______
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,751 $45,255
======= =======
See notes to unaudited condensed consolidated financial statements.
5
Nx NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended March 31
______________________________________
2001 2000
____ ____
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,264) $(48,437)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,746 5,811
Non-cash interest expense pursuant to issuance of warrants 501 --
In-process research and development -- 30,800
Stock compensation expense 3,186 6,495
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable 222 15
Inventories 741 979
Other assets (43) (246)
Note payable to vendor (1,413) --
Accounts payable 14 (1,803)
Accrued liabilities (700) 1,056
Other liabilities 15 (56)
________ ________
Net cash used in operating activities (8,995) (5,386)
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of Aetherworks, net of cash acquired -- (9,558)
Purchases of property and equipment (93) (519)
Payments on capital leases (103) --
________ ________
Net cash used in investing activities (196) (10,077)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit, net -- (1,058)
Proceeds from the issuance of preferred stock 4,153 --
Proceeds from issuance of common stock 2,000 25,086
Proceeds from exercise of stock options 127 3,044
Proceeds from employee stock purchase plan -- 65
Collection of stock subscription receivable 1,147 --
________ ________
Net cash provided by financing activities 7,427 27,137
________ ________
Effect of foreign currency exchange rate changes on cash and cash
equivalents (19) (11)
________ _______
Net (decrease) increase in cash and cash equivalents (1,783) 11,663
Cash and cash equivalents, beginning of period 4,659 5,930
________ ________
Cash and cash equivalents, end of period $2,876 $17,593
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $163 $178
======== ========
See notes to unaudited condensed consolidated financial statements.
6
Nx NETWORKS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
BASIS OF PRESENTATION
The accompanying condensed unaudited financial statements included
herein have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") for
reporting on Form 10-Q. Accordingly, certain information and footnote
disclosures required for complete financial statements are not included herein.
It is recommended that these condensed financial statements be read in
conjunction with the financial statements and related notes as reported in our
Annual Report Form 10-K for the year ended December 31, 2000 filed with the SEC
in April 2001.
In the opinion of management all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
condensed consolidated financial position, results of operations, and cash flows
at the dates and for the periods presented have been included. The results of
operations for the three months ended March 31, 2001 may not be indicative of
the results that may be expected for the year ending December 31, 2001 or any
other period within calendar year 2001.
BUSINESS DESCRIPTION
Nx Networks, Inc. ("Nx Networks" or the "Company") a Delaware
Corporation (formerly Netrix Corporation), is a provider of internet telephony
and data networking solutions. The Company combines patented, switched,
compressed voice and data technology with advanced packet data networking
capabilities to provide networking solutions that improve network performance
and deliver an array of tangible network services. The Company is headquartered
in Herndon, Virginia and conducts operations out of its locations in the United
States and the United Kingdom. The Company's customers include service
providers, multinational corporations and government agencies.
GOING CONCERN AND OTHER IMPORTANT RISK FACTORS
The Company has reported a net loss in each of the last six years. The
Company's ability to generate operating income is in large part dependent on its
success at increasing sales of its products and/or controlling costs. The
Company's plan to increase revenue through sales of our products continues to
evolve; however, due to market conditions, competitive pressures and other
factors beyond its control there can be no assurance that the Company will be
able to adequately increase product sales in the future. The Company's success
is also dependent on its ability to generate adequate cash for operations and
capital needs. For the quarter ended March 31, 2001, the Company's operating
activities used cash of approximately $9.0 million, primarily due to continued
losses from operations. As of March 31, 2001, the Company had approximately $2.9
million in cash and cash equivalents. Total current liabilities as of March 31,
2001 were approximately $18.4 million and exceeded current assets by
approximately $9.2 million. Since year-end, the Company has raised approximately
$8.6 million in equity financing. The Company will require additional funding by
July 2001 to continue operations. If such sources of financing are insufficient
or unavailable, or the Company experiences shortfalls in anticipated revenues or
increases in anticipated expenses, the Company would further reduce headcount,
defer vendor payments, sell operating assets and/or seek protection under the
bankruptcy code.
As of March 31, 2001, the Company has a payment obligation of
approximately $4.9 million to SMTC, its third party contract manufacturer of
substantially all of its products. A majority of the Company's inventory is at
SMTC's premises. The Company has agreed upon a payment schedule with SMTC and
delivered an unsecured promissory note to SMTC. Until SMTC has been repaid, the
Company is required to pay in advance for all fabrication costs. If the Company
does not adhere to the payment schedule, SMTC has informed the Company that they
7
will not ship any products on its behalf. If the Company is unable to raise
sufficient capital to adhere to the payment schedule and the manufacturer ceases
to ship products on the Company's behalf, then a material and adverse result to
the Company's operations could occur.
To meet its operating requirements for the remainder of 2001, the
Company will have to generate additional equity or cash through other means,
which may include the sale of assets, including intellectual property and
proprietary technology, the sale of equity, additional borrowings, the sale of
selected operations, or establishing one or more strategic partnerships.
Although the Company believes it has the ability to generate additional equity
and cash through such sales and borrowings, such sales may be dilutive and there
can be no assurances that adequate funds will be available, or available on
terms that are reasonable or acceptable to the Company. If the Company is unable
to generate additional equity and adequate cash, there will be a material and
adverse effect on the business and financial condition of the Company, to the
extent that a sale, liquidation or restructuring of the Company will be
required, in whole, or in part. The Company's return to profitability also
depends upon the Company's ability to improve its customer service, operational,
financial and management information systems, including its contract management,
inventory management and other systems.
The above factors raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company'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
economic conditions. As the market for the Company's products is characterized
by rapidly changing technology, the development, introduction and evolution of
the competitive products may require a significant investment of financial
resources. While the Company has generally been able to obtain adequate supplies
of components to date, the interruptions or termination of the Company's current
manufacturing relationship could have an adverse effect on the Company's
operating results.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
ACQUISITION OF AETHERWORKS
On March 16, 2000, the Company completed the merger of AetherWorks
Corporation ("AetherWorks"), a development stage company with no revenue since
its inception in 1993, with and into a wholly-owned subsidiary of ours pursuant
to the terms of the Agreement and Plan of Acquisition ("Agreement") dated
December 31, 1999. The acquisition was accounted for under the purchase method
of accounting.
Under the terms of the AetherWorks transaction, the holders of
AetherWorks common stock, warrants and stock options converted at a rate of 1.38
shares of Nx Networks common stock, warrants, and stock options. The Company
issued 2,301,436 shares of common stock and 867,687 warrants and options to
acquire the outstanding AetherWorks common stock. The Company's shares were
valued at $22.94, the average of closing prices for three days before and after
March 16, 2000. The warrants and options issued were valued at approximately
$18.0 million using the Black-Scholes model assuming 130 percent volatility, a
risk free interest rate of 6.3 percent and an expected life of three years.
Pursuant to the Agreement, the Company settled an $8.0 million obligation of
AetherWorks upon the closing of the acquisition.
8
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 quarterly until January 1, 2002.
The Company recorded deferred compensation expense of $16.1 million for the
difference between the exercise price and the fair market value of the stock on
the date of grant. This expense will be amortized over the options vesting
period of which approximately $1.7 million and $0.6 million was expensed in the
quarters ended March 31, 2001 and March 31, 2000.
Pursuant to the Agreement, the Company was required to issue additional
shares of common stock if the average closing price of our common stock for the
fifteen-day trading period ending October 31, 2000, did not equal or exceed
$22.50 per share, provided that the total number of shares of common stock
issued would not exceed 19.9% of the total of our outstanding common stock on
March 16, 2000. Under the Agreement, the Company was also required to make an
equivalent adjustment to the warrants and options to proportionately increase
the number of shares and reduce the per share exercise price. The Company's
common stock had an average closing price of $2.93 during the fifteen-day
trading period ended October 31, 2000.
On December 29, 2000, the Company entered into a settlement agreement
(the "Settlement") with the former owners of AetherWorks, to issue 4,777,973
additional shares of the Company's common stock, as well as additional options
and warrants to acquire 1,846,551 shares of our common stock. Pursuant to the
Agreement and the Settlement, the exercise price of the majority of the options
and warrants was reduced to $1.60 per share. The listing requirements of the
NASDAQ Stock Market prohibit the Company from issuing more than 19.9% of its
common stock in a merger transaction without obtaining the consent of our
stockholders. As of December 31, 2000, 3,262,160 of the additional 4,777,973
common shares were issued and outstanding. The remaining 1,515,813 shares were
issued upon stockholder approval on March 6, 2001.
The purchase price of AetherWorks, including transaction costs of $0.4
million was $79.1 million. A summary of assets and liabilities acquired, at
estimated fair market value was as follows (in thousands):
Current assets $ 99
Property and equipment 1,403
Assembled workforce 300
In-process research and development 30,800
Goodwill 50,229
Current liabilities (3,700)
________
Total $79,131
========
The amount allocated to acquired intangibles and goodwill is being
amortized over their estimated useful lives of 4 years using the straight-line
method.
The unaudited pro forma information presented for the three months
ended March 31, 2000, reflects the acquisition of AetherWorks as if the
acquisition had occurred on January 1, 2000, excluding the one time $30.8
million IPR&D charge in connection with the AetherWorks acquisition. The results
are not necessarily indicative of future operating results or of what would have
occurred had the acquisition actually been consummated on that date (in
thousands, except per share data):
Three months ended
March 31, 2000
______________
Revenues $ 8,943
Net loss attributable to common stockholders (23,352)
Net loss per share attributable to common stockholders (.61)
9
2. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company determined that the adoption of SFAS No. 133 on January 1, 2001, had
no material effect on its financial statements.
3. INVENTORIES:
Inventories consisted of the following (in thousands):
As of As of
March 31, 2001 December 31, 2000
______________ _________________
Raw materials $ 1,354 $ 1,164
Work-in-process 153 40
Finished goods 2,680 3,724
_______ _______
Total inventories $ 4,187 $ 4,928
======= =======
Our products are subject to technological change and changes in the our
respective competitive markets. Management has provided reserves for excess and
obsolete inventories. It is possible that new product launches could result in
unforeseen changes in inventory requirements for which no reserve has been
provided.
4. EQUITY:
PRIVATE PLACEMENT
On March 28, 2001, the Company completed a private placement by issuing
and selling 2,207,018 shares of common stock at $0.9062 per share.
PREFERRED STOCK
On December 29, 2000, the Company completed a private placement by
selling and issuing 333,333 shares of Series B 8% redeemable, convertible
preferred stock (the "Series B Preferred Stock"), par value $0.05 per share, at
a price of $7.50 per share, and by issuing warrants to purchase 666,667 shares
of common stock at an exercise price of $0.90 per share. Each share of Series B
Preferred Stock has a liquidation preference equal to its purchase price, plus
accrued and unpaid dividends. Dividends are cumulative and compound quarterly.
Dividends will be paid semi-annually on May 31 and November 30 of each year, and
are payable in cash or shares of common stock at the option of the Company.
On January 17, 2001, the Company completed a private placement by
selling and issuing 15,400 shares of Series C 8% redeemable, convertible
preferred stock (the "Series C Preferred Stock"), par value $0.05 per share, at
a price of $162.50 per share. Each share of Series C Preferred Stock has a
liquidation preference equal to its purchase price, plus accrued and unpaid
dividends. Dividends are cumulative and compound quarterly. Dividends will be
paid semi-annually on May 31 and November 30 of each year, and are payable in
cash or shares of common stock at the option of the Company.
The Series B and C Preferred Stock are convertible at any time after
stockholder approval to increase the Company's authorized common shares by at
least 10 million (the "Conversion Date"). After the Conversion Date and prior to
redemption, the Series B Preferred Stock is convertible into common stock at a
10
conversion rate equal to ten shares of common stock for each share of Series B
Preferred Stock. The shares are redeemable at the option of the holder for cash
equal to $7.50 per share of Series B Preferred Stock plus an amount equal to
110% of the difference between the conversion price and the current market price
per share of the Company's common stock if the Conversion Date does not occur
before September 30, 2001. After the Conversion Date and prior to redemption,
the Series C Preferred Stock is convertible into common stock at a conversion
rate equal to 100 shares of common stock for each share of Series C Preferred
Stock. The shares are redeemable at the option of the holder for cash equal to
$162.50 per share of Series C Preferred Stock plus an amount equal to 110% of
the difference between the conversion price and the current market price per
share of the Company's common stock if the Conversion Date does not occur before
September 30, 2001.
On March 6, 2001, the Company's stockholders approved an increase in
the Company's authorized common shares from 55 million to 85 million, and as of
March 6, 2001, the Conversion Date, the Series B and C Preferred Stock are no
longer redeemable at the option of the holder. The market value of the Company's
common stock on the date of issuance of the Series C Preferred Stock was $2.25
per share. The fair value of the Series C Preferred Stock's beneficial
conversion feature, reflective of the difference between the conversion price of
the Series C Preferred Stock and the market value of the underlying common stock
on the date of issuance, constitutes for accounting purposes, a dividend by the
Company. A beneficial conversion feature of $1.0 million has been reflected as a
non-cash dividend charge to earnings in the consolidated statement of operations
in the first quarter of 2001.
On March 6, 2001, the Company completed a private placement by selling
and issuing 11,734 shares of Series D 8% convertible preferred stock (the
"Series D Preferred Stock"), par value $0.05 per share, at a price of $140.62
per share, and by issuing warrants to purchase 234,676 shares of common stock at
an exercise price of $2.11 per share. Each share of Series D Preferred Stock has
a liquidation preference equal to its purchase price, plus accrued and unpaid
dividends. Dividends are cumulative and compound quarterly. Dividends will be
paid semi-annually on June 30 and December 31 of each year, and are payable in
cash or shares of common stock at the option of the Company. Prior to
redemption, the Series D Preferred Stock is convertible into common stock at a
conversion rate equal to 100 shares of common stock for each share of Series D
Preferred Stock. The market value of the Company's common stock on the date of
issuance of the Series D Preferred Stock was $1.4062 per share. The fair value
of the Series D Preferred Stock's beneficial conversion feature, reflective of
the difference between the conversion price of the Series D Preferred Stock and
the market value of the underlying common stock on the date of issuance,
constitutes for accounting purposes, a dividend by the Company. A beneficial
conversion feature of $0.3 million has been reflected as a non-cash dividend
charge to earnings in the consolidated statement of operations in the first
quarter of 2001.
During the three months ended March 31, 2001, the Company has accrued
dividends of approximately $0.1 million at a rate of 8 percent per annum on the
Series B, C and D Preferred Stock.
On May 14, 2001, the Company completed a private placement by selling
and issuing 19,000 shares of Series E 8% convertible preferred stock (the
"Series E Preferred Stock"), par value $0.05 per share, at a price of $126.50
per share, and by issuing warrants to purchase 380,000 shares of common stock at
an exercise price of $1.438 per share. Each share of Series E Preferred Stock
has a liquidation preference equal to its purchase price, plus accrued and
unpaid dividends. Dividends are cumulative and compound quarterly. Dividends
will be paid annually on April 30 of each year, and are payable in cash or
shares of common stock at the option of the Company. Prior to redemption, the
Series E Preferred Stock is initially convertible into common stock at a
conversion rate equal to 100 shares of common stock for each share of Series E
Preferred Stock. However, after an initial period the conversion price of the
Series E Preferred Stock will be fixed by reference to the volume weighted
average sales price ("VWAP") of the Company's common stock. Specifically, the
Series E Preferred Stock will have a conversion price per share equal to the
lesser of (1) $1.265 or (2) 87% of the VWAP during the five days preceding a
notice of conversion, subject to a minimum conversion price of $0.575 per share.
Accordingly, between the common stock prices of $1.46 and $0.66, the number of
shares of common stock the Company will have to issue upon conversion of the
Series E Preferred Stock will fluctuate. The range is between 1.9 million shares
at a VWAP of $1.46 (reflecting a conversion price of $1.265 per share) to 4.2
million shares at a VWAP of $0.66 (reflecting a conversion price of $0.575 per
share).
11
WARRANTS
On December 29, 2000, in connection with the sale of the Series B
Preferred Stock, the Company issued redeemable warrants to purchase 666,667
shares of common stock at an exercise price of $0.90 per share. The warrants
were valued at $0.4 million, using the Black-Scholes pricing model. The warrants
are redeemable at the option of the holder for cash equal to 110% of the
difference between the exercise price and the current market price per share of
the Company's common stock if the Conversion Date, as previously defined, does
not occur before September 30, 2001. As a result of the redemption provision, as
of December 31, 2000, the warrants are classified as a long-term liability in
the accompanying balance sheet. On March 6, 2001, the Company's stockholders
approved an increase in the Company's authorized common shares from 55 million
to 85 million, and as of March 6, 2001, the Conversion Date, the warrants are no
longer redeemable at the option of the holder. As of March 6, 2001, the warrants
were valued at $0.9 million, using the Black-Scholes pricing model. A charge of
$0.5 million (representing the difference between the fair value at December 31,
2000, and the fair value on March 6, 2001) has been included in other expense in
the accompanying statement of operations for the quarter ended March 31, 2001.
5. COMPREHENSIVE LOSS:
Comprehensive income (loss) is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Other comprehensive income (loss) refers to revenue,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income (loss), but excluded from net income
(loss). For the three months ended March 31, 2001 and March 31, 2000, the
elements within other comprehensive income, net of tax, consist solely of
foreign currency translation adjustments. Comprehensive loss for the three
months ended March 31, 2001 and March 31, 2000, is $14.3 million and $48.4
million respectively.
6. SEGMENT INFORMATION:
The Company's two reportable segments are products and services. The
Company evaluates the performance of our segments based on gross profit. The
Company provides enterprise-wide disclosures about revenues by segment,
long-lived assets by geographic area and revenues from major customers.
Revenues consisted of the following (in thousands):
Three months ended
March 31,
__________
2001 2000
____ ____
Product Group
_____________
2200 $ 664 $1,544
2500 557 3,227
3000 81 --
S1000 18 --
S10 -- 176
Telecom -- 46
Internet Access 500 1,791
LAN 49 269
________ ________
Total product revenues 1,869 7,053
Service revenues 1,500 1,890
________ ________
Total revenues $ 3,369 $ 8,943
======== ========
GEOGRAPHIC INFORMATION
The Company sells its products and services through its locations in
the United States and our foreign affiliates in the United Kingdom, Hong Kong,
12
France and Italy. Information regarding revenues and long-lived assets
attributable to the United States and to all foreign countries is stated below.
The geographic classification of product and service revenues is based upon the
location of the customer.
The Company's product and service revenues for the three months ended
March 31, 2001 and March 31, 2000 were generated in the following geographic
regions (in thousands):
Three months ended
March 31,
2001 2000
____ ____
United States $ 1,365 $ 4,840
Europe, Middle East and Africa 1,318 3,019
Pacific Rim, Latin America and South America 686 1,084
_______ _______
Total $ 3,369 $ 8,943
======= =======
Included in domestic product and service revenues are sales through
systems integrators and distributors to the Federal Government of $0.3 million
and $0.5 million for the three months ended March 31, 2001 and March 31, 2000,
respectively.
The Company's long-lived assets including goodwill and acquired
intangibles were located as follows (in thousands):
As of As of
March 30, 2001 December 31, 2000
______________ _________________
United States $ 29,030 $ 31,686
United Kingdom 116 114
________ ________
Total long-lived assets $ 29,146 $ 31,800
======== ========
Approximately $26.0 million and $28.3 million of the Company's
long-lived assets as of March 31, 2001 and December 31, 2000, respectively,
relate to goodwill and intangibles recorded in connection with our acquisitions
in 1999 and 2000.
SIGNIFICANT CUSTOMERS
No customer accounted for greater than 10% of total revenues for the
three months ended March 31, 2001. Two customers accounted for greater than 10%
of total revenue for the three months ended March 31, 2000 (in thousands).
Three months ended
March 31,
_________
2001 2000
____ ____
Distributor 1
Product * $1,184
Service * *
Distributor 2
Product * $ 882
Service * 45
* Revenue accounted for less than 10% of total revenues for the period.
13
7. STOCK COMPENSATION EXPENSE:
The expense for the three months ended March 31, 2001 is for below
market stock options granted to former AetherWorks employees in 2000 of $1.7
million, acceleration and modification of stock options of terminated employees
of $0.2 million, stock options granted below market value to members of the
Board of Directors and CEO of $0.4 million, stock options granted to outside
advisors of $0.5 million, compensation charge for the promissory note with an
employee collateralized by the Company's common stock of $0.3 million and the
charge associated with re-pricing employee stock options in December 2000 of
$0.1 million. The expense for the three months ended March 30, 2000 is for below
market stock options granted to former AetherWorks employees of $0.6 million,
acceleration of stock options of terminated employees of $0.7 million, issuance
of stock and stock options to a terminated employees of $5.1 million and stock
options granted to outside advisors of $0.1 million.
8. FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES:
Generally, assets and liabilities denominated in foreign currencies are
translated into US dollars at current exchange rates. Operating results are
translated into US dollars using the average rates of exchange prevailing during
the period. Gains or losses resulting from translation of assets and liabilities
are included in the accumulated other comprehensive loss account in
stockholders' equity, except for the translation effect of intercompany balances
that are anticipated to be settled in the foreseeable future. The Company had no
foreign exchange gains or losses for the three months ended March 31, 2001 and
March 31, 2000.
9. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share amounts are computed using the weighted
average number of common shares. Diluted earnings (loss) per share amounts are
computed using the weighted average number of common shares and common
equivalent shares having a dilutive effect during the periods; however, for the
three months ended March 31, 2001 and March 31, 2000, the effect of common stock
equivalents has not been considered as they would have been antidilutive.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In November 2000, the Company was served with complaints in purported
class action proceedings. The complaints allege violation of the federal
securities laws in connection with statements and disclosures made by certain of
the Company's executives between December 8, 1999 and April 24, 2000. The
complaints seek unspecified damages. The Company believes the allegations in the
complaints are without merit, and intends to vigorously defend its position in
this litigation.
In November 2000, the Company was served with a complaint in a
purported class action proceeding. The complaint alleges that between July 27
and November 2, 2000 the Company breached securities laws in connection with the
circumstances that led the Company to restate the financial statements for the
quarter ended June 30, 2000. The complaint seeks unspecified damages. The
Company believes it has meritorious defenses and intends to vigorously defend
this litigation.
In addition to the legal proceedings discussed above, the Company is
periodically involved in 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.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
The Securities and Exchange Commission has commenced an investigation
into the matters surrounding the Company's restatement of revenues for its
quarter ended June 30, 2000. For the quarter ended June 30, 2000, the Company
restated revenues from $10.4 million to $8.4 million for sales made to two of
its value added resellers ("VARs"). These sales were dependent upon the payment
to the VARs from their customers.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations for the quarter ended March 31, 2001, reflect
a 62% decrease in revenues, a 57% decrease in cost of revenues and a 72%
decrease in the loss from operations over the results for the quarter ended
March 31, 2000. Our first quarter performance was adversely impacted by a number
of factors including:
o A downturn in the capital market and the telecommunications industry
that adversely impacted the demand for our products.
o Delays in bringing our 3000 and 6000 series products to market.
o Re-direction of the sales force towards Tier 1 CLEC's and ILEC's and
away from Tier 2 and 3 customers. The development of those
relationships will take longer to solidify.
Improvements in future performance is dependent upon our ability to
raise financing to fund our revised business strategy. Our marketing and sales
strategy will focus upon:
o Leveraging our expertise in the Voice over Packet industry to gain a
leading market share in IP Centrex solutions for RBOCs looking to
migrate customers off a traditional voice transmission infrastructure
onto a data transmission infrastructure without the risk of them
losing the voice traffic and revenue to an alternative provider.
o Leveraging our position in the Managed Router Services sector by
providing an attractive alternative solution to the Cisco's CPE
Routers (or become a second source vendor to enterprises who have an
existing deployment of Cisco Routers).
o Realigning our sales organization from a geographic focus to a
carrier-centered sales effort and increase marketing focus on
Carriers (e.g, Verizon) and Tier 1 ISPs (e.g., UUNet).
RECENT DEVELOPMENTS
NEW CHIEF EXECUTIVE OFFICER
On November 10, 2000, Steven Francesco resigned as our chief executive
officer. Mr. Francesco had been chief executive officer since April 1999, and
was responsible for the merger with OpenROUTE and the acquisition of
AetherWorks. Mr. Francesco continued to serve as Chairman of the Board of
Directors until February, 2001, when John DuBois succeeded him in that position.
On December 28, 2000, John DuBois entered into an employment to become
our Chief Executive Officer effective in January 2001. In connection with
accepting the position, Mr. DuBois entered into a three-year employment
agreement with us and he also became a member of our Board of Directors. In
February 2001, he succeeded Mr. Francesco as our Chairman of the Board.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
The Securities and Exchange Commission has commenced an investigation
into the matters surrounding our restatement of revenues for the quarter ended
June 30, 2000. For the quarter ended June 30, 2000, we restated revenues from
$10.4 million to $8.4 million for sales made to two of our value added resellers
("VARs"). These sales were made to VARs whose payment to Nx Networks was
dependent upon payment from their customers.
15
REDUCTION IN FORCE
In March 2001, we reduced our workforce by approximately 40 employees,
representing approximately 22% of our workforce. A portion of the positions were
eliminated for the purpose of reducing expenses and the remainder were
eliminated because they related to products and initiatives that are not part of
our business plans on a going-forward basis.
CLOSING CALIFORNIA OFFICE
In May 2001 we closed our California office and released the majority
of the personnel. We were successful in negotiating a release from a long-term
lease saving us approximately $60,000 per month.
NET LOSS
For the three months ended March 31, 2001, net loss decreased $34.1
million or 71% to $14.3 million, from $48.4 million for the three months ended
March 31, 2000. The decrease primarily resulted from the in-process R&D charge
of $30.8 million the Company included in the results for the three months ended
March 31, 2000. The balance of the decrease came from an overall reduction in
sales and marketing expenses of $0.9 million and general and administrative
expenses of $0.4 million offset by an increase in research and development
expenses of $0.5 million.
REVENUES
For the three months ended March 31, 2001, revenues decreased $5.5
million or 62% to $3.4 million, from $8.9 million for the three months ended
March 31, 2000. For the three months ended March 31, 2001 product revenues
decreased $5.2 million or 74% to $1.9 million from $7.1 million for the three
months ended March 31, 2000. The decrease in product revenue is a result of the
general decline in the demand for telecom equipment particularly from Tier 2 and
Tier 3 CLEC's which were a primary sales target for the Company in 2000. That
decline combined with late product delivery for the Company's next generation
product contributed to an overall product sales decline. During the first
quarter the sales team was revamped to direct their efforts to Tier 1 CLEC's and
ILEC's. In addition, product changes are being made to insure the Company's
products are attractive to the newly defined market.
For the three months ended March 31, 2001, service revenues decreased
$0.4 million or 21% to $1.5 million from $1.9 million for the three months ended
March 31, 2000. The decrease is primarily a result of a program instituted last
year and canceled in 2001 that built in one year of service into the product
cost. In addition the overall decline in product sales results in the lower
potential customer base for service contracts and therefore lower service
revenue. The Company has implemented a program to require service contracts on
all product shipped which should have the result of increasing service revenue
as product sales increase.
GROSS PROFIT
For the three months ended March 31, 2001, gross profit decreased $2.5
million, or 71%, to $1.0 million, from $3.5 million for the three months ended
March 31, 2000. As a percentage of revenues, gross profit decreased to 30% for
the three months ended March 31, 2001, from 39% for the three months ended March
31, 2000.
For the three months ended March 31, 2001, gross profit from product
revenues decreased $2.5 million or 85% to $0.4 million from $2.9 million from
the three months ended March 31, 2000. As a percentage of product revenues,
gross profit from product revenues decreased to 23% for the three months ended
March 31, 2001, from 41% for the three months ended March 31, 2000.
For the three months ended March 31, 2001, gross profit from service
revenues decreased less than 1% from the three months ended March 31, 2000. As a
percentage of service revenues, gross profit from service revenues increased to
39% for the three months ended March 31, 2001, from 31% for the three months
ended March 31, 2000. The decrease in service revenue was offset by a decrease
16
in cost of sales from a reduction in labor of $0.2 million and reduced outside
services costs of $0.1 million during the three months ended March 31, 2001.
The gross profit in any particular quarter is dependent upon the mix of
products sold and the channels of distribution. As a result, the gross profit on
a quarter to quarter basis can vary within a wide range.
SALES AND MARKETING
For the three months ended March 31, 2001, sales and marketing expenses
decreased by $0.9 million, or 24%, to $2.7 million from $3.5 million for the
three months ended March 31, 2000. The decreases resulted from a reduction in
commission, travel, advertising and promotion expenses.
RESEARCH AND DEVELOPMENT
For the three months ended March 31, 2001, research and development
expenses increased $0.5 million or 20% to $3.2 million from $2.7 million for the
three months ended March 31, 2000. The increase is primarily a result of an
increase in labor and opening an engineering office in California. We expect the
labor costs to continue until the new products are delivered late in the third
quarter or early in the fourth quarter. We have closed the California office and
anticipate a reduction in rent expense on a going forward basis. All of the
Company's research and development costs are expensed to operations as incurred
during the periods reported.
GENERAL AND ADMINISTRATIVE
For the three months ended March 31, 2001, general and administrative
("G&A") expenses increased $0.4 million or 16% to $3.2 million from $2.8 million
for the three months ended March 31, 2000. The increase is primarily a result of
an increase in legal fees of $0.6 million and other professional services of
$0.3 million for the three months ended March 31, 2001, which has been offset
by a restructuring charge of $0.4 million for the three months ended March 31,
2000. The increase in legal fees for the three months ended March 31, 2001, is a
direct result of an increase in our litigation as described previously.
AMORTIZATION OF ACQUIRED INTANGIBLES
For the three months ended March 31, 2001 amortization expense
decreased $2.9 million to $2.3 million from $5.1 million for the three months
ended March 31, 2000. The decrease in amortization expense is associated with
the reduction in goodwill as a result of the impairment charge the Company
incurred at December 31, 2000.
17
STOCK COMPENSATION
For the three months ended March 31, 2000, the stock compensation
expense decreased $3.3 million to $3.2 million from $6.5 million for the three
months ended March 31, 2000. The expense for the three months ended March 31,
2001 is primarily associated with stock options granted at below market value to
former AetherWorks employees in conjunction with the closing of the merger for
$1.7 million, acceleration and modification of stock options of terminated
employees of $0.2 million, stock options granted below market value to members
of the Board of Directors and CEO of $0.4 million, stock options granted to
outside advisors of $0.5 million, compensation charge for the promissory note
with an employee collateralized by the Company's common stock of $0.3 million
and the charge associated with re-pricing employee stock options in December
2000 of $0.1 million. The expense for the three months ended March 30, 2000 is
primarily associated with below market stock options granted to former
AetherWorks employees in conjunction with the closing of the merger for $0.6
million, acceleration of stock options of terminated employees of $0.7 million,
issuance of stock and stock options to a terminated employees of $5.1 million
and stock options granted to outside advisors of $0.1 million.
INTEREST AND OTHER INCOME, NET
For the three months ended March 31, 2001, interest and other income,
net, included expense resulting from the issuance of warrants totaling $0.5
million. For the three months ended March 31, 2001, net interest expense
increased $11,000 or 10% to $117,000 from $106,000 for the three months ended
March 31, 2000. For the three months ended March 31, 2001, other income, net
decreased $61,000 or 80% to $15,000 from $76,000 for the three months ended
March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
RECENT DEVELOPMENTS
On January 17, 2001 we raised $2.5 million through a private placement
of Series C preferred stock. The Series C preferred stock bears a dividend of 8%
per annum, which we can elect to pay in cash or shares of common stock, and the
Series C preferred stock has a liquidation preference equal to the purchase
price per share plus the amount of any accrued but unpaid dividends. The Series
C preferred stock is convertible into 1,540,000 shares of common stock at a
conversion price of $1.625 per share.
On March 6, 2001 we raised $1.65 million through a private placement of
Series D preferred stock and warrants. The Series D preferred stock bears a
dividend of 8% per annum, which we can elect to pay in cash or shares of common
stock, and the preferred stock has a liquidation preference equal to the
purchase price per share plus the amount of any accrued but unpaid dividends.
The preferred stock is convertible into 1,173,373 shares of common stock at a
conversion price of $1.41 per share. The warrants are exercisable for 234,676
shares of common stock at an exercise price of $2.11 per share.
On March 28, 2001 we raised $2.0 million through a private placement of
common stock. We sold 2,207,018 shares of common stock at $0.9062 per share, the
last reported sales price on the day the financing closed.
18
On May 15, 2001 we raised $2.4 million through a private placement of
Series E preferred stock. The Series e preferred stock bears a dividend of 8%
per annum, which we can elect to pay in cash or shares of common stock, and the
Series E preferred stock has a liquidation preference equal to the purchase
price per share plus the amount of any accrued but unpaid dividends. Each share
of the Series E preferred stock has an initial conversion price of $1.265 per
share, and the number of shares of common stock initially issuable under the
terms of the Series E preferred stock is 1.9 million shares. However, after an
initial period the conversion price of the Series E preferred stock will be
fixed by reference to the volume weighted average sales price (VWAP) of our
common stock. Specifically, the Series E preferred stock will have a conversion
price per share equal to the lesser of (1) $1.265 or (2) 87% of the VWAP during
the five days preceding a notice of conversion, subject to a minimum conversion
price of $0.575 per share. Accordingly, between the common stock prices of $1.46
and $0.66, the number of shares of common stock we will have to issue upon
conversion of the Series E preferred stock will fluctuate. The range is between
1.9 million shares at a VWAP of $1.46 (reflecting a conversion price of $1.265
per share) to 4.2 million shares at a VWAP of $0.66 (reflecting a conversion
price of $0.575 per share).
As of March 31, 2001, we had approximately $2.9 million in cash and
cash equivalents. Total current liabilities as of March 31, 2001 were
approximately $18.4 million and exceeded current assets by approximately $9.2
million. Since year-end, we have raised approximately $8.6 million in equity
financing. We will require additional financing by July 2001 to continue
operations. If financing are insufficient or unavailable or if we experience
shortfalls in anticipated revenues or increases in anticipated expenses, we
would further reduce headcount, defer vendor payments, sell operating assets
and/or seek protection under the bankruptcy code.
We have a payment obligation of approximately $4.9 million to SMTC, a
contract manufacturer of substantially of all our products. A majority of our
inventory is at SMTC's premises. In 2001, we negotiated a payment schedule with
SMTC and delivered an unsecured promissory note to them. The note requires
principal payments through December 2001 together with interest at an annual
rate of 12%. Until SMTC has been repaid, we are required to pay in advance for
all fabrication costs. If we do not adhere to the payment schedule, SMTC has
informed us that they will not ship any products on our behalf. If we are unable
to raise sufficient capital to adhere to the payment schedule and the
manufacturer ceases to ship products on our behalf, then a material and adverse
result to our revenues could occur.
To meet our operating requirements for 2001, we will have to generate
additional equity or cash through other means, which may include the sale of
assets, including intellectual property and proprietary technology, the sale of
equity, additional borrowings, the sale of selected operations, or one or more
strategic partnerships. Although we believe we have the ability to generate
additional equity and cash through such sales, such sales may be dilutive and
there can be no assurances that adequate funds will be available, or available
on terms that are reasonable or acceptable. If we are unable to generate
additional equity and adequate cash, there will be a material and adverse effect
on our business and financial condition, to the extent that a sale, liquidation
or restructuring will be required, in whole or in part. We have implemented cost
control measures and we are continually evaluating expense levels to mitigate
our liquidity risk. Our return to profitability is also dependent on our ability
to improve our customer service, operational, financial and management
information systems, including our contract management, inventory management and
other systems.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should we be unable to
continue as a going concern. In their report on our December 31, 2000 financial
statements, our independent public accountants expressed substantial doubt as to
our ability to continue as a going concern.
For the quarter ended March 31, 2001, we used $9.0 million of cash in
operations compared to $5.4 million for the quarter year ended March 31, 2000.
This decrease in cash from operations was due to the Company's operating losses.
Non-cash items consisted of depreciation and amortization of $2.7 million, stock
compensation expense of $3.2 million, and interest expense pursuant to the
issuance of the warrants totaling $0.5 million. Inventory levels at March 31,
2001, decreased $0.7 million to $4.2 million compared to $4.9 million at
19
December 31, 2000. This decrease is the result of lower product purchases and
the ability to fill orders from existing inventory. With the exception of
certain strategic purchases needed to complete work in process and complete
items for finished goods, we anticipate that purchases will remain flat through
the second quarter as we use in-house inventory to fulfill sales orders.
Capital expenditures for the three months ended March 31, 2001 were
$0.1 million and $0.5 million for the three months ended March 31, 2000.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause our actual
results to differ materially from those indicated by forward-looking statements
made in this Quarterly Report and presented elsewhere by management from time to
time.
TO DATE, WE HAVE INCURRED SUBSTANTIAL NET LOSSES, AND IF THIS CONTINUES, WE MAY
BE UNABLE TO MEET OUR WORKING CAPITAL REQUIREMENTS
For the quarters ended March 31, 2001 and 2000, respectively, we
incurred net losses of approximately $14.3 million and $48.4 million. Our
cumulative losses are $269 million. These losses present a significant risk to
our stockholders. If we cannot achieve profitability or positive cash flows from
operating activities, we may be unable to meet our working capital and other
payment obligations, 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 REQUIRE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS, 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. Our current available cash
and our anticipated cash from operations are insufficient to fund our operations
until we are able to attain profitability. Accordingly, we will require third
party financing in order to continue our operations. 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 we obtain additional funds by selling
assets, there can be no assurance that we will be able to negotiate a favorable
price for those assets or that the loss of those assets will not affect our
future business prospects. 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 HAVE SIGNIFICANT ACCOUNTS PAYABLE TO CERTAIN OF OUR VENDORS, AND WE MUST
MANAGE OUR AVAILABLE CASH UNTIL WE HAVE SUFFICIENT CASH TO SATISFY ALL OF THE
DEMANDS FOR PAYMENT.
Over the past six months, we have sought to raise capital in relatively
small increments in an effort to minimize the dilution to our stockholders
resulting from our capital raising efforts. Given the current state of the
financial markets and our own expectations regarding our ability to continue to
raise funds over the next several months, we continue to believe that this
approach is in the best interests of our creditors, customers and stockholders.
However, as a consequence of our decision to raise capital in small increments,
our accounts payable balance at any given date is significant in relation to our
available cash balance. This makes it more difficult to satisfy the payment
demands of all of our vendors on a timely basis and it makes it more difficult
to convince vendors that they will be paid all amounts to which they are
entitled despite our low balance of available cash. If a large number of our
20
vendors demand payment in advance or demand payment of all currently outstanding
amounts payable, our business could be disrupted because we do not have
sufficient cash to fund all these obligations unless we raised additional funds
and accordingly we would have to immediately raise additional funds to satisfy
these payment demands in addition to disrupting our business. Seeking to raise
capital under such circumstances would be even more difficult than the
circumstances now facing us.
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 HAVE A SIGNIFICANT PAYMENT OBLIGATION TO OUR PRIMARY MANUFACTURER, AND IF WE
DO NOT MAINTAIN OUR PAYMENT SCHEDULE THE MANUFACTURER MAY CEASE SHIPPING OUR
PRODUCTS
We authorized our primary manufacturer to purchase a substantial amount
of parts, materials and long lead-time items during 2000 in anticipation of a
significant increase in product sales during the year. Our sales did not reach
the levels we expected, and we have not utilized a substantial amount of the raw
materials. Accordingly, we have a payment obligation of approximately $4.9
million to the manufacturer to pay for the cost of these materials. We have
agreed upon a payment schedule with the manufacturer, and during the period we
are paying down the obligation the manufacturer is requiring us to pay in
advance for all fabrication costs. If we do not adhere to the payment schedule
or if we do not pay fabrication costs in advance, the manufacturer has expressed
its intent not to ship any products on our behalf. We must raise additional
capital to maintain this payment schedule and pay the fabrication costs. If we
are unable to raise sufficient capital to adhere to the schedule and the
manufacturer ceases to ship products on our behalf, then a material and adverse
result to our revenues could occur. Also, if the manufacturer brings a legal
action to collect the outstanding amount, we do not have sufficient current
financial resources to pay this obligation.
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.
OUR BUSINESS WILL SUFFER IF WE LOSE CERTAIN KEY PERSONNEL OR FAIL TO ATTRACT AND
RETAIN OTHER QUALIFIED PERSONNEL
The success of our business is dependent, to a significant extent, upon
the abilities and continued efforts of our management, sales and engineering
personnel, many of whom would be difficult to replace. We do not have employment
21
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, sales and engineering 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 technology-based industries, and
particularly telecommunications companies, over the past year, 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 our 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. In addition, legal proceedings
to enforce intellectual property rights are expensive given the technical nature
of the legal and functional analysis. Given our current financial condition, we
could experience difficulty funding enforcement of our intellectual property
rights.
THE MARKET PRICE OF OUR COMMON STOCK IS VOLATILE
The market price of our 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.
22
OUR SERIES E CONVERTIBLE PREFERRED STOCK HAS A FLOATING CONVERSION PRICE, AND
THIS COULD RESULT IN DILUTION TO OUR STOCKHOLDERS AND DOWNWARD PRICE PRESSURE ON
OUR STOCK
In May 2001 we sold 19,000 shares of Series E 8% convertible preferred
stock for an aggregate purchase price of $2.4 million. Each share of the Series
E preferred stock has an initial conversion price of $1.265 per share, and the
number of shares of common stock initially issuable under the terms of the
Series E preferred stock is 1.9 million shares. However, after an initial period
the conversion price of the Series E preferred stock will be fixed by reference
to the volume weighted average sales price (VWAP) of our common stock.
Specifically, the Series E preferred stock will have a conversion price per
share equal to the lesser of (1) $1.265 or (2) 87% of the VWAP during the five
days preceding a notice of conversion, subject to a minimum conversion price of
$0.575 per share. Accordingly, between the common stock prices of $1.46 and
$0.66, the number of shares of common stock we will have to issue upon
conversion of the Series E preferred stock will fluctuate. The range is between
1.9 million shares at a VWAP of $1.46 (reflecting a conversion price of $1.265
per share) to 4.2 million shares at a VWAP of $0.66 (reflecting a conversion
price of $0.575 per share).
If the price of our common stock decreases over time, the number of
shares we will have to issue upon conversion of the Series E preferred stock
will increase. Sales of an increased number of shares of common stock issued
upon conversion of the Series E preferred stock as a result of a decline in our
common stock price can cause the market price of our common stock to decline
further.
Short sales of our common stock may be attracted by or accompany the
sale of converted Series E preferred stock, which in the aggregate could cause
downward pressure upon the price of our common stock, regardless of our
operating results, market conditions or other factors. A decline in the price of
our common stock, in turn, could attract additional short sales of our common
stock and would result in additional shares becoming eligible for sale upon
conversion of the Series E preferred stock. This would put further downward
pressure on the price of our common stock.
OUR STOCK PRICE IS CURRENTLY BELOW THE MINIMUM THRESHOLD REQUIRED BY THE NASDAQ
STOCK MARKET, AND, UNDER CURRENT NASDAQ RULES IF OUR STOCK PRICE DOES NOT RISE
AND/OR OUR TANGIBLE NET ASSETS DO NOT REACH $4.0 MILLION, WE MAY BE DELISTED BY
THE NASDAQ STOCK MARKET
On May 18, 2001, the last reported bid price of our common stock on the
Nasdaq Stock Market was $0.95 per share, and our tangible net value per share
was less than $4.00. Under the current listing requirements of the Nasdaq
National Market, on which our common stock is listed for trading, our common
stock may be delisted if (1) we do not have a closing bid price of at least
$1.00 per share and tangible net assets per share of at least $4.0 million or
(2) we do not have a closing bid price of at least $5.00 per share. We do not
currently meet either of these listing requirements.
Nasdaq has proposed to change the listing requirements to replace the
$4.0 million net tangible asset test with a $10.0 million stockholders' equity
test, but this change requires approval by the SEC. Nasdaq has notified us that
we are not in compliance with the net tangible asset test, but we do comply with
the proposed stockholders' equity test. Nasdaq also informed us that they are
not taking any action at this time with respect to our listing, pending SEC
action on the proposed rule change. If the SEC does not approve the rule change,
and Nasdaq notifies us of the listing deficiency, we must be in compliance with
the listing requirements for at least 10 consecutive business days in the 90
calendar day period after we receive the Nasdaq notice. If we fail to meet this
standard, then our common stock may be delisted from the Nasdaq National Market.
We expect that if we are delisted from the Nasdaq National Market, and our
common stock is in compliance with the $1.00 per share bid price requirement,
then we will list our shares on the Nasdaq SmallCap Market.
If the closing bid price of our common stock is below $1.00 per share
for 30 consecutive trading days, then we expect Nasdaq will notify us we are not
in compliance with the listing requirements. If Nasdaq notifies us of a listing
deficiency related to the $1.00 minimum bid price requirement, we must be in
compliance with the listing requirements for at least 10 consecutive business
days in the 90 calendar day period after we receive the Nasdaq notice. If we
fail to meet this standard, then our common stock may be delisted from the
23
Nasdaq Stock Market. If we are delisted from the Nasdaq Stock Market, our common
stock will trade on the over-the-counter market.
We expect that if we change from the Nasdaq National Market to the
Nasdaq SmallCap Market or the over-the-counter market, there will be an adverse
effect on the liquidity and value of our common stock.
IN DECEMBER 2000 WE RE-PRICED SUBSTANTIALLY ALL OF OUR STOCK OPTIONS TO A LOWER
EXERCISE PRICE, AND THE RESULTING ACCOUNTING CHARGES MAY CAUSE OUR FUTURE
EARNINGS TO FLUCTUATE WIDELY
As part of a program to retain our employees, we adopted a program to
re-price the options of our current employees. We also re-priced the options
issued to our board of directors and to our former chairman of the board. Under
the program, each of these persons exchanged their current stock options for
newly issued stock options with an exercise price of $0.75 per share.
Approximately 7.3 million options were exchanged to obtain the lower exercise
price. Under applicable accounting rules, we will have to account for future
variations in the price of our common stock above $0.75 per share as
compensation expense until the re-priced options are either exercised, cancelled
or expire. As of March 31, 2001, $0.1 million of compensation expense was
recorded based on the performance of our common stock in that quarter.
Accordingly, our operating results and earnings per share will be subject to
potentially significant fluctuations based upon changes in the market price of
our common stock.
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 our stockholders. These include provisions that:
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.
This market is 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 affected.
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
affected.
24
OUR INDEPENDENT PUBLIC ACCOUNTANTS HAVE IDENTIFIED WEAKNESSES IN OUR FINANCIAL
SYSTEMS AND CONTROLS, AND IF WE DO NOT REMEDY THE WEAKNESSES, WE MAY HAVE
DIFFICULTY EFFECTIVELY MANAGING OUR BUSINESS AND PREPARING TIMELY FINANCIAL
REPORTS
In connection with conducting the audit of our year 2000 financial
statements, our independent public accountants identified a number of
deficiencies in design and operation of our internal accounting controls.
Although our accountants did not qualify their audit opinion with respect to
these matters, they advised us that we must remedy the identified problems. If
we are unable to remedy the deficiencies identified by our accountants, we could
have difficulties in preparing and maintaining the systems and reports we need
to effectively manage our business and ensure timely financial reporting. These
difficulties could result in adverse effects on our business.
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 59% and 46% of our total revenues in
the first quarter of 2001 and 2000, respectively, and international sales will
continue to be significant to us. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our results of operations will be adversely impacted by increases in
the price of our stock as a result of additional stock compensation expense
associated with the re-pricing of approximately 7.3 million of our employees'
stock options. Alternatively, should our stock price fall we may be required to
distribute additional shares pursuant to our Series E convertible preferred
stock which has a floating conversion price. A significant portion of our
revenues are derived from international sales which could be adversely affected
by foreign currency exchange rate fluctuations. We are not a party to any other
market risk sensitive instruments that are material to the Company, its
financial position or results of operations, either for trading purposes or
otherwise.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Cabletron Systems, Inc. filed a civil complaint against AetherWorks
Corporation, OpenROUTE Networks, Inc. and Netrix Corporation (the Defendants) on
June 5, 2000 in the United States District Court for the District of
Massachusetts. Docket # 00-CV-11105 RWZ is assigned to this matter. In its
complaint, Cabletron alleges that the Defendants have infringed seven Cabletron
patents and Cabletron seeks monetary damages against the Defendants. We answered
the complaint by denying the allegations contained therein. Discovery is
underway. Cabletron has sought permission of the Court to amend its complaint to
increase the number of patents it alleges have been infringed, but this was
denied. We have notified certain of our equipment providers that we claim
indemnification from them because the infringements alleged by Cabletron appear
to relate to the equipment those suppliers provided to us. Based upon
discussions with counsel and the information currently available to us, we
believe we have meritorious defenses to the claims by Cabletron, and we will
continue to vigorously defend this action.
In November 2000 we were served with complaints in purported class
action proceedings captioned TRACY REESE AND CHRISTINE JOYCE V. BRYAN HOLLEY,
STEVEN T. FRANCESCO AND NX NETWORKS, INC., Civil Action No. 00-CV-11850-JLT and
MARC JACOBSEN V. BRYAN HOLLEY, STEVEN T. FRANCESCO AND NX NETWORKS, INC.,
Civil Action No. 00-CV-11999-JLT. Each complaint was originally filed September
2000 in the United States District Court for the District of Massachusetts. In
May 2001, the plaintiffs filed an amended complaint consolidating the two
actions and dropping Mr. Holley as a defendant. The amended complaint alleges
25
violation of the federal securities laws in connection with statements and
disclosures made between December 8, 1999 and April 24, 2000. The complaints
seek unspecified damages. We believe the allegations in the amended complaint
are without merit, and we intend to vigorously defend ourselves in this
litigation. We have notified our insurance carrier regarding the claims.
In November 2000, we were served with a complaint in a purported class
action proceeding captioned ROY WERBOWSKI V. NX NETWORKS, INC., STEVEN FRANCESCO
AND PETER KENDRICK, Civil Case No. 00-1967-A. The complaint was originally filed
in November 2000 in the United States District Court, Eastern District of
Virginia. In May 2001, the plaintiffs filed an amended complaint. The amended
complaint alleges that between July 27 and November 2, 2000 we breached
securities laws in connection with the circumstances that led us to restate our
financial statements for the quarter ended June 30, 2000. The amended complaint
seeks unspecified damages. We believe we have meritorious defenses in this
litigation, and we intend to vigorously defend ourselves. We have notified our
insurance carrier regarding the claims.
In January, 2001 we were served with a complaint captioned MANAGEMENT
INFORMATION CONSULTING, INC. ("MIC") V. NX NETWORKS, INC. This action was filed
in the Alexandria Division Court for the Commonwealth of Virginia, and the case
is assigned No. CL01-45. In the complaint, MIC claims entitlement to
approximately $150,000 in payment for web site development services performed by
it. We dispute that this amount is due, based upon the quality and quantity of
services provided by MIC. We have filed an answer denying the claims and we
intend to vigorously defend ourselves in this litigation.
An action captioned K.S. TELECOM, INC. ("K.S. TELECOM") V. NX NETWORKS,
INC. was commenced in July, 2000 in the Southern District of New York, and it is
assigned case number 00 Civ. 3375 (KMW). In this action, we are named as a third
party defendant by K.S. Telecom under a number of legal theories in an action
brought against K.S. Telecom by Netrix Leasing, LLC, an unrelated entity. Netrix
Leasing LLC had purchased equipment from us and leased it to K.S. Telecom.
Netrix Leasing alleges that K.S. Telecom subsequently defaulted on the lease
payment obligations. In its third-party complaint, K.S. Telecom alleges that it
breached its lease because of our failure to properly prepare, install and
repair the equipment. In its complaint, K.S. Telecom seeks damages against us
equal to approximately $177,000 plus any amounts they are found to owe to Netrix
Leasing. Netrix Leasing is seeking approximately $550,000 pursuant to its
original complaint against K.S. Telecom, representing lease amounts past due of
approximately $78,000 and acceleration of future payments under the lease of
approximately $472,000. We responded to the third-party complaint of K.S.
Telecom by denying all of their allegations and we sought dismissal of the
claims in a summary judgment motion. On March 7, 2001, the court ruled that
certain of the claims against us must be dismissed, but that other claims may
proceed. Specifically, the court ruled that K.S. Telecom could proceed to try to
prove its allegation that it is a third party beneficiary of our agreements with
Netrix Leasing and that we breached obligations to K.S. Telecom under those
agreements. We believe we have meritorious defenses to the claims of K.S.
Telecom, and we intend to vigorously defend this action.
In January 2001, we were informed that a former employee in France has
obtained a trial court ruling in France related to his termination in 1997. The
amount of the award to him is approximately 800,000 French Francs, and using an
exchange rate into U.S. dollars of 7:1, this is approximately $100,000.
Approximately $25,000 of the amount represents payment of a disputed bonus, and
approximately $75,000 represents an award of punitive damages. We are appealing
this ruling because we believe the award of punitive damages is unjustified.
In May 2001, we were served with a complaint captioned MANAGEMENT
RECRUITERS - MONTICELLO, L.L.C. V. NETRIX CORPORATION, Civil Case No. 00-1867
- -1. The case was filed in the Circuit Court for the County of Albermarle in the
Commonwealth of Virginia. The complaint demands payment of approximately
$50,000 for recruiting expenses allegedly incurred by us in 2000. We are
reviewing the complaint, and expect that we will settle this matter.
In May 2001, we were served with a complaint captioned U.S. Assemblies
New England, Inc. v. OpenROUTE Networks, Inc. and Netrix Corporation d/d/a Nx
Networks, Civil Case No. BRCV 2001-00551A. The case was filed in the Superior
Court for the Commonwealth of Massachusetts in Bristol, Massachusetts. The
26
complaint alleges that we owe U.S. Assemblies approximately $1.0 million,
representing (1) claimed amounts for products delivered of $$700,000 less an
offset due us of $120,000, (2) $40,000 of work in process and (3) $360,000 for
inventory purchased on our behalf. We are reviewing the complaint, and have not
yet filed an answer. Based upon our initial review of the allegations set forth
in the complaint, we expect to deny entirely the allegations related to any
amounts for inventory purchased on our behalf and for work-in-process. We also
expect to dispute the amount claimed by U.S. Assemblies for products delivered
and to assert various other defenses to the claims by U.S. Assemblies. In
addition, we expect to assert counterclaims against U.S. Assemblies for breach
of contract related to production delays they incurred in manufacturing products
for us and for amounts payable by them to us. We will vigorously defend this
action.
In addition to the above matters, we are periodically involved in
disputes arising from normal business activities. In our opinion, resolution of
these matters will not have a material adverse effect upon our financial
condition or future operating results, and adequate provision for any potential
losses have been made in our financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In March 2001 we issued 1,515,813 shares and 50,877 warrants to the
former owners of AetherWorks Corporation. This issuance was made pursuant to a
settlement agreement with the holders and was completed when our stockholders
approved the issuance at the March 6, 2001 special meeting of stockholders.
On January 17, 2001 we raised $2.5 million through a private placement
of 15,400 shares of Series B 8% convertible preferred stock at a purchase price
of $162.50 per share. The preferred stock bears a dividend of 8% per annum,
which we can elect to pay in cash or shares of common stock. The preferred stock
has a liquidation preference equal to the purchase price per share plus the
amount of any accrued but unpaid dividends. The preferred stock is convertible
into 1,540,000 shares of common stock at a conversion price of $1.625 per share.
We can redeem the preferred stock at a price of $500.00 per share if our common
stock trades at or above $5.00 per share for 10 consecutive trading days.
On March 6, 2001 we raised $1.65 million through a private placement of
Series D 8% convertible preferred stock and warrants at a purchase price of
$141.00 per share of preferred stock. The preferred stock bears a dividend of 8%
per annum, which we can elect to pay in cash or shares of common stock, and the
preferred stock has a liquidation preference equal to the purchase price per
share plus the amount of any accrued but unpaid dividends. The preferred stock
is convertible into 1,173,373 shares of common stock at a conversion price of
$1.41 per share. We can redeem the preferred stock at a price of $500.00 per
share if our common stock trades at or above $5.00 per share for 10 consecutive
trading days. The warrants expire on March 6, 2006 and are exercisable for
234,676 shares of common stock at an exercise price of $2.11 per share.
On March 28, 2001 we raised $2.0 million through a private placement of
common stock. We sold 2,207,018 shares of common stock at $0.9062 per share, the
last reported sales price on the day the financing closed.
In January 2001, Nx Networks issued 25,000 warrants to Christian &
Timbers, an executive recruiting firm, as partial compensation related to our
hiring John DuBois as our Chief Executive Officer. The warrants expire in
January 2006 and have an exercise price of $1.20 per share.
In issuing all of the above securities, we relied upon the exemption
from registration under the Securities Act provided by Section 4(2) of the
Securities Act.
ITEM 3. NOT APPLICABLE.
27
ITEM 4. MATTERS SUBMITTED TO VOTE OF STOCKHOLDERS.
We held a special meeting of stockholders on March 6, 2001. The agenda for the
meeting was to discuss and vote upon four proposals:
1. An amendment to our restated certificate of incorporation to
increase our authorized number of shares of common stock from 55
million to 85 million.
2. An amendment to the 1999 Long Term Incentive Plan to increase the
number of shares covered by the Plan from 7,250,000 to 11,250,000.
3. Authorization to sell common stock to raise capital in one or more
private offerings in compliance with Nasdaq Stock Market listing
requirements.
4. Authorization to issue approximately 1.75 million shares of common
stock to the former shareholders of AetherWorks Corporation in
compliance with Nasdaq Stock Market listing requirements.
At the meeting, each Proposal was presented to stockholders for approval by
vote.
The results of the votes are as follows:
Proposal Votes For Votes Against Abstain Not voted
1 Increase in common stock 29,577,584 1,388,427 121,427 -
2 Increase in 1999 Plan 8,639,816 4,582,473 147,675 17,717,474
3 Authority to issue of stock for capital 11,002,950 2,193,514 173,500 17,717,474
4 Authority to issue stock to AetherWorks 29,526,179 1,352,711 208,548 -
ITEM 5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Description
_______ ___________
3.1 Amendment to Certification of Incorporation of Nx Networks, Inc.
dated March 2001 (filed as Exhibit 4.6 to our Annual Report on
Form 10-K for the year ended December 31, 2000).
4.1 Specimen certificate of common stock of Nx Networks, Inc. (filed as
Exhibit 4.1 to our Registration Statement on Form S-3 filed on
January 17, 2001 File No. 333-53852 (the "January 2001 S-3")).
4.2 Certificate of designations for the form of Series C 8% convertible
preferred stock (filed as Exhibit 4.4 to our Annual Report on Form
10-K for the year ended December 31, 2000).
4.3 Certificate of designations for the form of Series D 8% convertible
preferred stock (filed as Exhibit 4.5 to our Annual Report on Form
10-K for the year ended December 31, 2000).
4.4 Form of Warrant. (filed as Exhibit 4.3 to the January 2001 S-3).
28
Exhibit
Number Description
_______ ___________
4.5 Subscription Agreement related to the March 2001 private placement
of common stock (filed as Exhibit 4.4 to our Annual Report on
Form 10-K for the year ended December 31, 2000).
4.6 Certificate of designations for the form of Series E 8% convertible
preferred stock (filed as Exhibit 4.1 to our Current Report on
Form 8-K dated May 16, 2001).
4.7 Form of warrant related to the Series E 8% convertible preferred
stock (filed as Exhibit 10.3 to our Current Report on Form 8-K
dated May 16, 2001).
4.8 Securities Purchase Agreement related to the Series E 8%
convertible preferred stock (filed as Exhibit 10.1 to our Current
Report on Form 8-K dated May 16, 2001).
10.1 1999 Long Term Incentive Plan of Netrix Corporation, as amended
(incorporated by reference to Exhibit 10.9 to our quarterly report
on Form 10-Q filed on November 15, 1999).
10.2 Amended and Restated 1997 Stock Option Plan of AetherWorks
Corporation. (filed as Exhibit 10.16 to the January 2001 S-3).
10.3 Amendment to the 1999 Long Term Incentive Plan dated March 7, 2001
(filed as Exhibit 10.31 to the Annual Report on Form 10-K for the
year ended December 31, 2000).
10.4 Termination Agreement dated March 22, 2001 between Nx Networks,
Inc. and Greg McNulty (filed as Exhibit 10.32 to the Annual Report
on Form 10-K for the year ended December 31, 2000).
10.5 Amended and Restated Promissory Note, dated May 7, 2001, issued by
Jonathan Sachs to Nx Networks, Inc.
10.6 Termination Agreement dated May 2001 between Nx Networks, Inc. and
Water Tower II, LLC.
(b) Reports on Form 8-K
None.
29
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NX NETWORKS, INC.
Date: May 21, 2001
By: /s/ John DuBois
______________________________________
John DuBois
Chief Executive Officer
By: /s/ Peter J. Kendrick
______________________________________
Peter J. Kendrick
Vice President Finance and Administration and
Chief Financial Officer (Principal Accounting Officer)
30
Exhibit Index
Exhibit
Number Description
_______ ___________
3.1 Amendment to Certification of Incorporation of Nx Networks, Inc.
dated March 2001 (filed as Exhibit 4.6 to our Annual Report on
Form 10-K for the year ended December 31, 2000).
4.1 Specimen certificate of common stock of Nx Networks, Inc. (filed
as Exhibit 4.1 to our Registration Statement on Form S-3 filed on
January 17, 2001 File No. 333-53852 (the "January 2001 S-3")).
4.2 Certificate of designations for the form of Series C 8%
convertible preferred stock (filed as Exhibit 4.4 to our Annual
Report on Form 10-K for the year ended December 31, 2000).
4.3 Certificate of designations for the form of Series D 8%
convertible preferred stock (filed as Exhibit 4.5 to our Annual
Report on Form 10-K for the year ended December 31, 2000).
4.4 Form of Warrant. (filed as Exhibit 4.3 to the January 2001 S-3).
4.5 Subscription Agreement related to the March 2001 private
placement of common stock (filed as Exhibit 4.4 to our Annual
Report on Form 10-K for the year ended December 31, 2000).
4.6 Certificate of designations for the form of Series E 8%
convertible preferred stock (filed as Exhibit 4.1 to our Current
Report on Form 8-K dated May 16, 2001).
4.7 Form of warrant related to the Series E 8% convertible preferred
stock (filed as Exhibit 10.3 to our Current Report on Form 8-K
dated May 16, 2001).
4.8 Securities Purchase Agreement related to the Series E 8%
convertible preferred stock (filed as Exhibit 10.1 to our Current
Report on Form 8-K dated May 16, 2001).
10.1 1999 Long Term Incentive Plan of Netrix Corporation, as amended
(incorporated by reference to Exhibit 10.9 to our quarterly
report on Form 10-Q filed on November 15, 1999).
10.2 Amended and Restated 1997 Stock Option Plan of AetherWorks
Corporation. (filed as Exhibit 10.16 to the January 2001 S-3).
10.3 Amendment to the 1999 Long Term Incentive Plan dated March 7,
2001 (filed as Exhibit 10.31 to the Annual Report on Form 10-K
for the year ended December 31, 2000).
10.4 Termination Agreement dated March 22, 2001 between Nx Networks,
Inc. and Greg McNulty (filed as Exhibit 10.32 to the Annual
Report on Form 10-K for the year ended December 31, 2000).
31
Exhibit
Number Description
_______ ___________
10.5 Amended and Restated Promissory Note, dated May 7, 2001, issued
by Jonathan Sachs to Nx Networks, Inc.
10.6 Termination Agreement dated May 2001 between Nx Networks, Inc.
and Water Tower II, LLC.
32