UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-50464
NETRIX CORPORATION
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(Exact name of registrant as specified in charter)
Delaware 54-1345159
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(State of Incorporation) (I.R.S. Employer Identification No.)
13595 Dulles Technology Drive, Herndon, Virginia 22071
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(Address of principal executive offices) (Zip Code)
(703) 742-6000
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(Registrant's telephone number, including area code)
Indicate by check number whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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At October 31, 1996 there were 9,497,282 shares of the registrant's
Common Stock, $.05 par value per share, outstanding.
NETRIX CORPORATION
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FORM 10-Q
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SEPTEMBER 30, 1996
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INDEX
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Page No.
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the nine
months and three months ended September 30, 1996 and
September 30, 1995 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 13
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE 14
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
NETRIX CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Product......................................... $23,966 $31,259 $ 7,604 $ 8,189
Service......................................... 8,283 7,598 2,910 2,697
------- ------- -------- -------
Total revenues............................ 32,249 38,857 10,514 10,886
Cost of revenues:
Product......................................... 10,644 12,916 3,751 3,659
Service......................................... 5,245 5,406 1,789 1,956
------- ------- -------- -------
Total cost of revenues.................... 15,889 18,322 5,540 5,615
------- ------- -------- -------
Gross profit....................... 16,360 20,535 4,974 5,271
Operating expenses:
Sales and marketing............................. 8,763 10,825 2,719 3,518
Research and development........................ 8,294 8,132 2,706 2,735
General and administrative..................... 3,165 3,666 1,005 1,159
Restructuring reserve .......................... 900 -- -- --
------- ------- -------- -------
Loss from operations................. (4,762) (2,088) (1,456) (2,141)
Interest income, net................................. 350 551 87 207
Foreign exchange gain (loss)........................ (56) 133 (10) (55)
------- ------- -------- -------
Loss before income taxes............. (4,468) (1,404) (1,379) (1,989)
Provision for income taxes........................... 69 72 33 18
------- -------- -------- -------
Net loss............................................. $(4,537) $(1,476) $(1,412) $(2,007)
======= ======= ======== =======
Loss per share....................................... $ (0.48) $ (0.16) $ (0.15) $ (0.21)
======= ======= ======== =======
Weighted average number of shares outstanding........ 9,458 9,357 9,491 9,411
======= ======= ======== =======
See notes to unaudited condensed consolidated financial statements.
3
NETRIX CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents..................................... $ 1,254 $ 4,370
Short-term investments........................................ 7,257 7,357
Accounts receivable, net of allowance for doubtful
accounts of $1,468 at September 30, 1996 and
$1,530 at December 31, 1995................................. 10,297 11,052
Inventories, net.............................................. 8,492 9,016
Other current assets.......................................... 865 962
---------- ----------
Total current assets........................... 28,165 32,757
Property and equipment, net of accumulated
depreciation of $14,806 at September 30, 1996
and $12,131 at December 31, 1995............................ 5,781 7,130
Goodwill, net.......................................................... 1,511 1,816
Deposits and other assets.............................................. 251 282
---------- ----------
$ 35,708 $ 41,985
========== ==========
See notes to unaudited condensed consolidated financial statements.
4
NETRIX CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
September 30, December 31,
1996 1995
---------------- ------------
(Unaudited)
Current liabilities:
Line of credit................................................ $ 754 $ 750
Accrued liabilities........................................... 4,510 4,712
Accounts payable.............................................. 3,276 4,944
Current portion of long-term debt............................. 241 241
------- --------
Total current liabilities...................... 8,781 10,647
Long-term debt, net of current portion................................. 300 320
Deferred rent, net of current portion.................................. 438 622
---------- ----------
9,519 11,589
--------- --------
Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000 shares
authorized; none issued and outstanding.................. -- --
Common stock, $0.05 par value; 15,000,000
shares authorized; 9,493,448 and 9,435,268
shares issued and outstanding at September 30,
1996 and December 31, 1995, respectively................ 475 472
Additional paid-in capital.................................... 55,510 55,105
Unrealized holding gain (loss)................................ (10) 42
Cumulative translation adjustment............................. (38) (11)
Accumulated deficit........................................... (29,748) (25,212)
---------- ----------
Total stockholders' equity.................................... 26,189 30,396
---------- ----------
$ 35,708 $ 41,985
========= =========
See notes to unaudited condensed consolidated financial statements.
5
NETRIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
------------------------------------------------
1996 1995
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (4,537) $ (1,476)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................................. 2,979 2,650
Non-cash compensation expense................................. 129 --
Decrease in deferred rent..................................... (161) (140)
Changes in assets and liabilities -
Accounts receivable...................................... 756 4,498
Inventories.............................................. 20 (550)
Other current assets..................................... 97 293
Deposits and other assets................................ 31 216
Accounts payable......................................... (1,668) (1,202)
Accrued liabilities...................................... (226) (1,086)
---------- ----------
Net cash (used in) provided by operating activities...... (2,580) 3,203
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................... (5,330) (14,363)
Sales of short-term investments............................... 5,378 12,319
Purchases of property and equipment........................... (822) (1,642)
Cash acquired from IDS acquisition............................ -- 35
---------- ----------
Net cash provided by (used in) investing activities...... (774) (3,651)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options....................... 205 200
Proceeds from employee stock purchase plan.................... 75 137
Proceeds from line of credit.................................. 4 480
Repayments of long-term debt.................................. (20) --
Payments under capital lease obligations...................... -- (25)
---------- ----------
Net cash provided by financing activities................. 264 792
---------- ----------
Effect of foreign currency exchange rate changes on cash and
cash equivalents.................................................. (26) (9)
---------- ----------
Net (decrease) increase in cash and cash equivalents................... (3,116) 335
Cash and cash equivalents, beginning of period......................... 4,370 6,000
---------- ----------
Cash and cash equivalents, end of period............................... $ 1,254 $ 6,335
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... 108 37
Cash paid during the period for income taxes.................. -- --
Capitalization of inventories into manufacturing and
test equipment........................................... 504 223
See notes to unaudited condensed financial statements.
6
NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. Basis of Presentation:
Netrix Corporation (the "Company") was formed in 1985 to develop,
manufacture, market and support a family of high performance, integrated network
switching and network management products for use in enterprise-wide
communications networks. During 1989, the Company formed a wholly-owned
subsidiary, Netrix International Corporation (a Delaware corporation). On
January 1, 1995, the Company's wholly-owned subsidiary, Netrix Telcom Systems
Corporation, was merged with and into the Company. Also on January 1, 1995, the
Company acquired the equipment, inventory, and contract rights of InterData
Systems GmbH ("IDS"), relating to its corporate network business. All
significant intercompany transactions have been eliminated.
The unaudited condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include, in the opinion of
management, all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of interim period results. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. The results for such interim periods are not necessarily indicative
of results to be expected for the full year.
Certain reclassifications have been made to the prior year financial
statements to conform with current year presentation.
2. Acquisitions:
------------
IDS
On January 1, 1995, the Company acquired the equipment, inventory, and
contract rights of IDS, relating to its corporate network business. Prior to
this acquisition, IDS was a distributor of the Company and provided sales and
service of the Company's products in Germany. The purchase price for the assets
acquired in this transaction was $545,000. All of the assets acquired were
transferred to Netrix GmbH, a wholly-owned subsidiary of the Company, which was
established coincidentally with the acquisition of the assets of IDS.
3. Cash Equivalents:
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Cash equivalents are primarily bank deposits, commercial paper, and US
government agency securities, with original maturities of three months or less.
These investments are carried at cost, which approximates market value.
4. Short-Term Investments:
-----------------------
Short-term investments consist primarily of commercial paper with
maturities of more than three months and less than twelve months and longer-term
investments which are primarily US government obligations with maturities
between twelve and eighteen months. Longer-term investments are bought and held
principally for the purpose of selling them in the near term. Short-term
investments are reported at fair value.
7
Under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," debt securities that are classified as available-for-sale
are reported at fair value, with unrealized gains and losses reported as a
separate component of stockholders' equity. At September 30, 1996 and December
31, 1995, the unrealized holding gain/loss on short-term investments was a loss
of approximately $10,000 and gain of approximately $42,000, respectively, and is
reported as a separate component of stockholders' equity.
5. Inventories:
-----------
Inventories consisted of the following (in thousands):
September 30, 1996 December 31, 1995
------------------ -----------------
Raw materials........................................ $ 390 $ 335
Work in process...................................... 1,207 798
Finished goods....................................... 6,895 7,883
---------- ---------
Total inventories.................................... $ 8,492 $ 9,016
========== =========
6. Debt:
Line of Credit
In January 1996, the Company renegotiated its existing line
of credit agreement with a lending institution to provide for a $2.0 million
line of credit for working capital at an interest rate per annum equal to the
lender's prime rate plus 3/4% (9.0% at September 30, 1996), which includes
covenants that require the Company to maintain certain levels of liquidity and
tangible net worth. The working capital line of credit matures with unpaid
principal amounts due and payable on January 3, 1997. At September 30, 1996 and
December 31, 1995, the Company had approximately $754,000 and $750,000,
respectively, outstanding under the working capital line of credit.
Long-term Debt
The Company utilized approximately $561,000 of available draws
under an equipment line of credit with a lending institution, which was capped
at this amount in January 1996 and began to amortize as a term loan over a
28-month period in accordance with the credit agreement. The term loan is
payable in monthly installments of approximately $20,000 from September 3, 1996
through January 3, 1999. The equipment note payable bears interest at a rate per
annum equal to the lender's prime rate plus 3/4% (9.0% at September 30, 1996)
and is secured by certain machinery and equipment. At September 30, 1996 and
December 31, 1995, the Company had approximately $541,000 and $561,000,
respectively, outstanding under the equipment note payable.
8
7. Product Revenues:
The Company's product revenues for the nine months and three
months ended September 30, 1996 and 1995 were generated in the following
geographic regions:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
Domestic....................... $ 8,642 $17,207 $ 2,765 $ 4,431
Europe......................... 7,262 7,394 1,524 2,364
Pacific Rim and other.......... 8,062 6,658 3,315 1,394
--------- --------- --------- ---------
Total.......................... $23,966 $31,259 $ 7,604 $8,189
======= ======= ======== ======
All of the Company's products are manufactured and shipped out
of its facilities in Herndon, Virginia and Charlotte, North Carolina. Sales are
primarily denominated in U.S. dollars.
8. Restructuring Charge:
In March 1996, the Company recorded a restructuring charge of $900,000
before income taxes. The charge includes anticipated costs associated with the
consolidation and relocation of facilities and the reduction of personnel levels
as part of management's restructuring plan for the Company. Of this amount,
approximately $487,000 remained unused at September 30, 1996.
9. Foreign Exchange Gain (Loss):
Generally, assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at current exchange rates. Operating results are
translated into U.S. dollars using the average rates of exchange prevailing
during the period. Gains or losses resulting from translation of assets and
liabilities are included in the cumulative translation adjustment account in
stockholders' equity, except for the translation effect of intercompany balances
that are anticipated to be settled in the foreseeable future. Included in
foreign exchange income for the nine and three months ended September 30, 1996,
is approximately $56,000 and $10,000 in translation losses, respectively, and
for the nine and three months ended September 30, 1995, is approximately
$133,000 in translation gains, and $55,000 in translation losses, respectively.
10. Loss Per Share:
Loss per share amounts have been computed using the weighted average
number of common shares and common equivalent shares having a dilutive effect
during the periods. The Company had a loss per share for the nine months and
three months ended September 30, 1996, of $0.48 and $0.15, respectively,
compared to a loss per share of $0.16 and $0.21, respectively, for the nine and
three months ended September 30, 1995.
9
NETRIX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Background. The results for the nine and three months ended September
30, 1996, reflect a decrease in revenues over the comparable periods in 1995.
The decline is primarily a result of decreased domestic and European sales
offset by an increase in revenue from its Pacific Rim markets.
In March 1996, the Company implemented a restructuring plan, reducing
its workforce by approximately 15% and consolidating its manufacturing
facilities from Herndon, Virginia, and Longmont, Colorado, to one location in
Charlotte, North Carolina.
In January 1995, the Company acquired the equipment, inventory, and
contract rights of IDS, relating to its corporate network business. Prior to
this acquisition, IDS was a distributor of the Company and provided sales and
service of the Company's products in Germany. The purchase price for the assets
acquired in this transaction was $545,000. See Notes 1 and 2 to the Unaudited
Condensed Consolidated Financial Statements for further discussion. The reported
results include the operations of IDS since the acquisition date of January 1,
1995.
Revenues. Total revenues decreased by $6.6 million or 17.0%, in the
nine months ended September 30, 1996 compared to the nine months ended September
30, 1995. Total revenues also decreased $0.4 million, or 3.4%, in the third
quarter of 1996 compared to the third quarter of 1995. The decrease in revenues
was due to decreased product sales offset in part by increased service revenue.
Product revenues decreased $7.3 million, or 23.3% for the first nine months of
1996 compared to 1995. Product revenue to domestic customers decreased by 49.8%,
sales to Europe remained flat, while sales to the Pacific Rim increased by 21.1%
during this time period. Although revenue by territory can vary from quarter to
quarter, the decline in domestic product revenue is partially due to the
transition of the more established products to new products the company released
for shipment in Q3 1996, combined with the decrease in the domestic sales force,
resulting from the restructuring in March 1996. Service revenues increased by
approximately $0.7 million, or 9.0%, for the nine months ended September 30,
1996 compared to nine months ended September 30, 1995. For the third quarter of
1996, there was an increase in service revenue of 7.9% from third quarter of
1995. The increase in service revenue is reflective of additions to the
installed base during 1995 and early 1996.
Gross Profit. Gross profit decreased by $4.2 million, or 20.3%, for the
first nine months of 1996 compared to the first nine months of 1995, and
decreased as a percentage of total revenues from 52.8% to 50.7%. For the third
quarter of 1996 compared to the third quarter of 1995, gross profit decreased
$0.3 million or 5.6%, and decreased as a percent of total revenues from 48.4% to
47.3%. Product gross margin decreased from 58.7% in the first nine months of
1995 to 55.6% in the first nine months of 1996. This decrease primarily resulted
from a high volume of sales of the Company's lower margin products to
distributors with higher discounts. As the product mix and channel mix change
from quarter to quarter, product gross margins can vary within a wide range. Due
to this mix, margins earned in the nine months ended September 30, 1996 are not
necessarily indicative of margins that will be earned in the future. The gross
margin for service revenue increased from 28.8% in the first nine months of 1995
to 36.7% in the first nine months of 1996. The higher gross margin is a result
of increased service revenues as discussed above and lower service costs mainly
in the areas of compensation and warranty expenses.
Sales and Marketing. Sales and marketing expenses decreased by $2.1
million or 19.0% from the first nine months of 1995 to the first nine months of
1996. For the third quarter of 1996 as compared to the third quarter of 1995,
the decrease was $0.8 million, or 22.7%. The decrease in expenses was
principally due to a decrease in personnel and travel costs, and marketing
programs which include trade shows and public relations.
10
Research and Development. Research and development expenses increased
by $0.2 million or 2.0% from the first nine months of 1995 to the comparable
period of 1996. Third quarter expenses did not change significantly from 1996 to
1995. The increase was due principally to increased expenses related to
equipment parts and outside services. Currently, all of the Company's research
and development costs are charged to operations as incurred.
General and Administrative. General and administrative expenses
decreased by $0.5 million or 13.6%, from the first nine months of 1995 as
compared to the same period in 1996. For the third quarter of 1996 compared to
the third quarter of 1995 there was a decrease of $0.2 million, or 13.3%. The
decrease in these expenses was due principally to a reduction in personnel
costs, outside services expenses which include consulting costs, and legal and
accounting fees.
Restructuring Charge. In March 1996, the Company recorded a
restructuring charge of $900,000 before income taxes. The charge includes
anticipated costs associated with the consolidation and relocation of facilities
and the reduction of personnel levels as part of management's restructuring plan
for the Company. Of this amount, approximately $497,000 remained unused at
September 30, 1996. Approximately $265,000 of this reserve relates to future
lease obligations.
Interest and Other Income, Net. The Company generated net interest and
other income of approximately $350,000 and $87,000, respectively, in the nine
and three months ended September 30, 1996, compared to approximately $551,000
and $207,000, respectively, in the same periods in 1995. The decrease in net
interest income is due primarily to lower investment levels maintained in
short-term investments, combined with increased interest expense on the
Company's borrowings under an equipment line of credit.
Foreign Exchange Gain. Included in foreign exchange income for the nine
and three months ended September 30, 1996, is approximately $56,000 and $10,000
in translation losses, respectively, and for the nine and three months ended
September 30, 1995, is approximately $133,000 in translation gains and $55,000
in translation losses, respectively.
Net Loss. For the first nine months of 1996, the Company generated a
net loss of approximately $4.5 million compared to net loss of $1.5 million in
the comparable period of 1995. The net loss for the third quarter of 1996 was
approximately $1.4 million compared to net loss of $2.0 million in the third
quarter of 1995. The decline in earnings for the year to date and the increase
in earnings in the third quarter were due to the factors discussed above.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the Company had approximately $1.3 million of
cash and cash equivalents on hand, short-term investments of $7.3 million, and
net working capital of $19.4 million, a decrease of $3.1 million, $0.1 million,
and $2.7 million, respectively, for the nine month period.
For the nine months ended September 30, 1996, the Company used
approximately $2.6 million in cash from operating activities. The cash used in
operating activities was primarily due to the negative cash flow from operating
results and a reduction in accounts payable during the nine months. For the same
period in 1995, the cash provided by operating activities totaled $3.2 million
and was attributable mainly to accounts receivable collections during the
period.
For the nine months ended September 30,1996, the Company used
approximately $0.8 million in investing activities. This was the result of
purchases of capital expenditures during the period of $0.8 million. For the
period, purchases and sales of short-term investments generally offset each
other with $5.3 million in purchases and $5.4 million in sales. For the same
period in 1995, the Company used approximately $3.7 million in investing
activities, which consisted primarily of net purchases of short-
11
term investments totaling $2.0 million and capital expenditures of $1.6 million.
Capital expenditures in both periods were financed with cash on hand and funds
generated from operations, and were primarily for additional research and
development and test equipment required to support the expanded product base at
the Company.
Cash provided by financing activities in the first nine months of 1996
was approximately $0.3 million and consisted primarily of proceeds from the
employee stock option and employee stock purchase plans. For the same period in
1995, cash provided by financing activities of approximately $0.8 million
consisted primarily of proceeds from the equipment line of credit of $0.5
million. In January 1996, the Company renegotiated its existing line of credit
with a lending institution to provide working capital. The agreement provides
for a $2.0 million line of credit for working capital and includes covenants
that require the Company to maintain certain levels of liquidity and tangible
net worth. In addition, the Company utilized approximately $561,000 of available
draws under an equipment line of credit with the same lending institution. This
amount is payable in monthly installments of approximately $20,000 from
September 3, 1996 through January 3, 1999. The working line of credit matures
with unpaid principal amounts due and payable on January 3, 1997. Both
instruments bear interest at a rate per annum equal to the lender's prime rate
plus 3/4% (9.0% at September 30, 1996). At September 30, 1996 and December 31,
1995, the Company had approximately $754,000 and $750,000, respectively,
outstanding under the working capital line of credit, and approximately $541,000
and $561,000, respectively outstanding under the equipment line of credit.
The Company believes that existing cash resources, together with
internally generated funds, will be sufficient to meet its cash requirements
through fiscal 1996.
12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
11 Computation of Earnings Per Share.
99 Agreement on Change in Control
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Registrant during the quarter
ended September 30, 1996.
13
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.
NETRIX CORPORATION
Date: November 11, 1996 By:
--------------------- --------------------------------
Robert W. Carroll
Vice President, Finance
(Principal Financial Officer)
14
EXHIBIT INDEX
Exhibit
No. Description Page
- --------- ----------- ----
11 Computation of Earnings Per Share 16
99 Change in Control Agreement 17
15