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, 1997
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
(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 April 30, 1997 there were 9,525,805 shares of the registrant's
Common Stock, $.05 par value per share, outstanding.
NETRIX CORPORATION
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FORM 10-Q
---------
MARCH 31, 1997
--------------
INDEX
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Page No.
PART I -- FINANCIAL INFORMATION ---------
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 13
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
---------------------------
1997 1996
Revenues:
Product........................................................ $ 5,937 $ 8,633
Service........................................................ 2,485 2,564
----------- ------------
Total revenues........................................... 8,422 11,197
Cost of revenues:
Product........................................................ 2,700 3,875
Service........................................................ 1,995 1,715
------------ ------------
Total cost of revenues................................... 4,695 5,590
------------ ------------
Gross profit...................................... 3,727 5,607
Operating Expenses:
Sales and marketing............................................ 3,216 3,194
Research and development....................................... 2,772 2,894
General and administrative..................................... 1,097 1,096
Restructuring reserve.......................................... 1,350 900
------------ ------------
Loss from operations................................ (4,708) (2,477)
Interest and other income, net....................................... 109 178
Foreign currency exchange gain (loss)................................ 44 (12)
------------ -------------
Loss before income taxes............................. (4,555) (2,311)
Provision for income taxes............................................ 20 17
------------- -------------
Net loss.............................................................. $ (4,575) $ (2,328)
========== ==========
Loss per share........................................................ $ (0.48) $ (0.25)
========== ==========
Weighted average number of shares outstanding......................... 9,516 9,435
========== ==========
See notes to unaudited condensed consolidated financial statements.
2
NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
March 31, December 31,
1997 1996
--------------- ----------------
(Unaudited)
Current assets:
Cash and cash equivalents............................................... $ 539 $ 687
Short-term investments.................................................. 4,934 5,350
Accounts receivable, net of allowance for doubtful
accounts of $1,473 and $1,380, respectively........................... 9,749 11,649
Inventories............................................................. 9,023 8,403
Other current assets.................................................... 1,950 1,011
------------- ------------
Total current assets..................................... $ 26,195 $ 27,100
Property and equipment, net of accumulated
depreciation of $16,045 and $15,297,
respectively............................................................ 5,601 6,023
Deposits and other assets.......................................................... 238 244
Goodwill, net of accumulated amortization of $1,193
and $1,090, respectively................................................ 1,310 1,412
----------- ----------
$ 33,344 $ 34,779
========= =========
See notes to unaudited condensed consolidated financial statements.
3
NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
March 31, December 31,
1997 1996
------------------ ----------------
(Unaudited)
Current liabilities:
Line of credit.......................................................... $ 754 $ 754
Accounts payable........................................................ 4,881 3,459
Accrued liabilities..................................................... 5,559 4,864
Current portion of long-term debt....................................... 241 241
--------- -----------
Total current liabilities................................ 11,435 9,318
Other liabilities.................................................................. 1,130 --
Long-term debt, net of current portion............................................. 180 240
Deferred rent, net of current portion.............................................. 310 374
--------- ---------
13,055 9,932
--------- ---------
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; 9,525,425 and 9,510,109
shares issued and outstanding, respectively....................... 476 476
Additional paid-in capital.............................................. 55,634 55,603
Unrealized investment holding loss...................................... (17) (7)
Cumulative translation adjustment....................................... (51) (45)
Accumulated deficit..................................................... (35,753) (31,180)
--------- ---------
Total stockholders' equity.............................................. 20,289 24,847
--------- ---------
$ 33,344 $ 34,779
========= =========
See notes to unaudited condensed consolidated financial statements.
4
NETRIX CORPORATION
------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
--------------------------------------
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (4,575) $ (2,328)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................................... 852 1,009
Noncash compensation expense............................................ -- 43
Decrease in deferred rent credit........................................ (57) (50)
Changes in assets and liabilities -
Accounts receivable................................................ 1,900 1,412
Inventories........................................................ (761) (10)
Other current assets............................................... (939) 51
Deposits and other assets.......................................... 6 11
Other liabilities.................................................. 1,130 --
Accounts payable................................................... 1,422 (1,460)
Accrued liabilities................................................ 691 230
---------- ----------
Net cash used in operating activities.............................. (331) (1,092)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments..................................... (185) (3,075)
Sales of short-term investments......................................... 1,902 3,844
Purchases of property and equipment..................................... (1,498) (311)
Cash acquired from IDS acquisition...................................... -- --
---------- ----------
Net cash provided by investing activities.......................... 219 458
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit............................................ -- 4
Proceeds from exercise of stock options................................. 30 --
Payments on long-term debt.............................................. (60) --
---------- ----------
Net cash (used in) provided by financing activities................. (30) 4
---------- ----------
Effect of foreign currency exchange rate changes on
cash and cash equivalents............................................... (6) (15)
Net decrease in cash and cash equivalents.......................................... (148) (645)
Cash and cash equivalents, beginning of period..................................... 687 4,370
---------- ----------
Cash and cash equivalents, end of period........................................... $ 539 $ 3,725
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................................ $ 16 35
Cash paid during the period for income taxes............................ 11 1
Capitalization of inventories into manufacturing and
test equipment........................................................ $ 141 $ 71
See notes to unaudited condensed consolidated financial statements.
5
NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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) which
maintains operations in the United Kingdom. The Company also maintains
operations in Germany and Italy through its wholly-owned subsidiaries Netrix
GmbH and Netrix S.r.l., respectively. These consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated.
The Company's operations are subject to certain risks and
uncertainties including, among others, rapidly changing technology and markets,
current and potential competitors with greater financial, technological,
production and marketing resources, reliance on certain sole source suppliers
and a single contract manufacturer, and dependence on key management personnel.
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. Cash Equivalents:
-----------------
Cash equivalents are primarily bank deposits, commercial paper, and
government agency securities with original maturities of three months or less.
These investments are carried at cost which approximates market value.
3. 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.
Under Statement of Financial Accounting Standards 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 March 31, 1997 and December 31, 1996, the unrealized
net holding gain/loss on short-term investments was a loss of approximately
$17,000 and $7,000, respectively, and is reported as a separate component of
stockholders' equity.
6
4. Inventories:
------------
Inventories consisted of the following (in thousands):
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials................................................. $ 433 $ 326
Work in process............................................... 796 869
Finished goods................................................ 7,794 7,208
--------- ---------
Total inventories............................................. $ 9,023 $ 8,403
======== =========
5. Commitments and Contingencies:
------------------------------
Line of Credit
The Company's existing line of credit expires in May 1997 and the
Company is in the process of renegotiating it with the lender. The existing line
provides 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% (9.25% at March 31,
1997). The existing line of credit agreement includes covenants that require the
Company to maintain certain levels of liquidity and tangible net worth and
matures with unpaid principal amounts due and payable on January 3, 1998. At
March 31, 1997 and December 31, 1996, the Company had approximately $754,000
outstanding under the working capital line of credit. There can be no assurance
that the Company can successfully renegotiate its credit line.
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, bears interest at a rate per annum equal to the lender's prime
rate plus 3/4% (9.25% at March 31, 1997), and is secured by certain machinery
and equipment. At March 31, 1997 and December 31, 1996, the Company had
approximately $421,000 and $481,000, respectively, outstanding under the
equipment note payable.
6. Product Revenues:
-----------------
The Company's product revenues were generated in the following
geographic regions:
Three Months Ended March 31,
----------------------------
1997 1996
------- -------
Domestic...................................................... $ 2,419 $ 2,864
Europe, Middle East, Africa................................... 2,057 3,332
Pacific Rim and other......................................... 1,461 2,437
--------- ----------
Total......................................................... $ 5,937 $ 8,633
========= ==========
All of the Company's products are manufactured and shipped
out of its facilities in Charlotte, North Carolina. Sales are primarily
denominated in US dollars.
7
7. Restructuring Charge:
---------------------
In March 1997, the Company recorded a restructuring charge of
approximately $1,350,000 before income taxes. The charge included anticipated
costs associated with an overall reduction in work force, the discontinuance of
its micro.pop product, and the discontinuance of its direct operation in
Germany.
In March 1996, the Company recorded a restructuring charge of
approximately $900,000 before income taxes. The charge included anticipated
costs associated with the consolidation and relocation of facilities and the
reduction of personnel levels as part of management's restructuring plan for the
Company. As part of this plan, the Company vacated leased office space in
Herndon, Virginia, and Longmont, Colorado. Approximately $403,000 was charged
against this reserve during 1996 related to severance and other costs associated
with an approximate 15% reduction of the Company's work force. Approximately,
$158,000 of this provision remained accrued at March 31, 1997 to cover
anticipated losses from the Herndon and Longmont lease commitments.
The accompanying financial statements include management's best
estimate of the amounts expected to be realized from the subleasing of its
Herndon facility. The estimates are based upon an analysis of the facility, the
local real estate markets and the advice of real estate professionals. The
amounts the Company will ultimately realize could differ materially in the near
term from the amounts assumed in the calculation of the accrual. The future
minimum rental payments under this lease are approximately $674,000. The lease
also calls for payments for the Company's proportionate share of certain
operating expenses.
8. Foreign Currency Exchange Gain:
-------------------------------
Generally, assets and liabilities denominated in foreign currencies
are translated into US dollars at current exchange rates. Operating results are
translated into US dollars using the average rates of exchange prevailing during
the period. Gains or losses resulting from translation of assets and liabilities
are included in the cumulative translation adjustment account in stockholders'
equity, except for the translation effect of intercompany balances that are
anticipated to be settled in the foreseeable future. Included in the condensed
consolidated statements of operations for the quarter ended March 31, 1997 and
1996 is approximately $44,000 in translation gains and $12,000 in translation
losses, respectively.
9. Earnings (Loss) Per Share:
--------------------------
Earnings (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. For the three months ended March 31, 1997
and 1996, the effect of options has not been considered as they would have been
antidilutive.
8
NETRIX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Background. The results for first quarter of 1997 reflect a decrease
in revenues over the comparable period in 1996, along with a major restructuring
charge. The decline in revenues is primarily a result of decreased sales of
current products in all of the Company's sales territories not being offset by
the increased revenue generated by the newer products - the 2210 and the 2550.
Revenues. Total revenues decreased by $2.8 million, or 24.8%, from
the three months ended March 31, 1996 to the three months ended March 31, 1997.
The decrease in revenues was due primarily to a decrease in product volume and,
to a lesser extent, an increase in average customer discounts. Product revenues
decreased by $2.7 million, or 31.2%, from the first quarter of 1996 to the first
quarter of 1997. Service revenues decreased by approximately $0.1 million, or
3.1%, over the same period. The lower service revenues are due mainly to
discontinuation of maintenance on older products.
Gross Profit. Gross profit decreased by $1.9 million, or 33.5%, from
the first quarter of 1996 to the comparable period of 1997, and decreased as a
percentage of total revenues from 50.1% to 44.3%. Product gross profit decreased
from 55.1% in the first quarter of 1996 to 54.5% in the first quarter of 1997.
This decrease primarily resulted from the combination of a higher proportion of
products sold through channels with higher discounts along with a lower margin
product mix of shipments. 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. The gross profit for service revenues decreased from 33.1% in the first
quarter of 1996 to 19.7% in the first quarter of 1997. The lower gross margin is
a result of lower service revenue combined with higher service costs mainly in
the areas of salaries and data communication expense.
Sales and Marketing. Sales and marketing expenses increased less than
1%, from the first quarter of 1996 to the first quarter of 1997.
Research and Development. Research and development expenses decreased
by $0.1 million, or 4.2%, from the first quarter of 1996 to the comparable
period of 1997. The decrease was due principally to lower salary and outside
services expenses. Currently, all of the Company's research and development
costs are charged to operations as incurred.
General and Administrative. General and administrative expenses were
unchanged from the first quarter of 1996 to the first quarter of 1997.
Restructuring Charge. In March 1997, the Company recorded a
restructuring charge of approximately $1,350,000 before income taxes. The charge
included anticipated costs associated with an overall reduction in work force,
the discontinuance of its micro.pop product, and the discontinuance of its
direct operation in Germany.
In March 1996, the Company recorded a restructuring charge of
approximately $900,000 before income taxes. The charge included anticipated
costs associated with the consolidation and relocation of facilities and the
reduction of personnel levels as part of management's restructuring plan for the
Company. As part of this plan, the Company vacated leased office space in
Herndon, Virginia, and Longmont, Colorado. Approximately $403,000 was charged
against this reserve during 1996 related to severance and other costs associated
with an approximate 15% reduction of the Company's work force. Approximately,
$158,000 of this provision remained accrued at March 31, 1997 to cover
anticipated losses from the Herndon and Longmont lease commitments.
9
Interest and Other Income, Net. The Company generated net interest
and other income of approximately $109,000 in the first quarter of 1997 compared
to approximately $178,000 in the same period in 1996. The decrease in net
interest income is due primarily to lower investment levels maintained in
short-term investments.
Foreign Exchange Gain. Included in foreign exchange income for the
first quarter of 1997 is approximately $44,000 of translation gains as compared
to $12,000 of translation losses in the first quarter of 1996.
Net Loss. For the first quarter of 1997 the Company had a net loss of
approximately $4.6 million, a decrease from a net loss of approximately $2.3
million in the same period of 1996, due primarily to the restructuring charge, a
decrease in revenues and the other factors discussed above.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1997, the Company had approximately $0.5 million of cash
and cash equivalents on hand, short-term investments of $4.9 million, and net
working capital of $14.7 million.
For the three months ended March 31, 1997 and 1996, the Company used
approximately $0.3 million and approximately $1.1 million of cash from operating
activities, respectively. In the first quarter of 1997, the cash used by
operations was primarily due to the negative cash flow from operations and the
increase in inventory levels over the December 31, 1996 balances. In the first
quarter of 1996, the cash used by operations was primarily due to the negative
cash flow from operations and the reduction in accounts payable levels over the
December 31, 1995 balances.
For the quarter ended March 31, 1997, the Company generated $0.2
million from investing activities, as sales of investments outpaced purchases of
investments and capital equipment. For the quarter ended March 31,1996 the
Company generated approximately $0.5 million from investing activities as the
result of a $0.8 million net decrease in short-term investments offset by
capital expenditures during the period. Capital expenditures in both periods
were financed with cash on hand and funds generated from operations. The
expenditures were primarily for additional research and development and test
equipment required to support the expanded product base at the Company.
The Company's existing line of credit expires in May 1997 and the
Company is in the process of renegotiating it with the lender. The existing line
provides 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% (9.25% at March 31,
1997). The existing line of credit agreement includes covenants that require the
Company to maintain certain levels of liquidity and tangible net worth and
matures with unpaid principal amounts due and payable on January 3, 1998. At
March 31, 1997 and December 31, 1996, the Company had approximately $754,000
outstanding under the working capital line of credit. There can be no assurance
that the Company can successfully renegotiate its credit line.
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, bears interest at a rate per annum equal to the lender's prime
rate plus 3/4% (9.25% at March 31, 1997), and is secured by certain machinery
and equipment. At March 31, 1997 and December 31, 1996, the Company had
approximately $421,000 and $481,000, respectively, outstanding under the
equipment note payable.
Cash used by financing activities was approximately $30,000 for the
first quarter of 1997, compared to $4,000 of cash generated by financing
activities for the first quarter of 1996.
The Company believes that existing cash resources, together with
internally generated funds, will be sufficient to meet its cash requirements
through fiscal 1997.
10
PART II -- OTHER INFORMATION
----------------------------
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.
10.12 President and CEO Severance Agreement
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Registrant during the quarter ended
March 31, 1997.
11
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: May 14, 1997. By: /s/ Robert W. Carroll
---------------------------------
Robert W. Carroll
Vice President - Finance and Administration
(Principal Financial Officer)
12
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ----------- -----------
11 Computation of Earnings Per Share
10.12 President and CEO Severance Agreement
13