NETRIX CORPORATION
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FORM 10-Q
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MARCH 31, 1998
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INDEX
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Page No.
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE 12
1
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)
Three Months Ended
March 31,
---------------------
1998 1997
---- ----
Revenues:
Product................................................ $ 4,995 $ 5,937
Service................................................ 2,246 2,485
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Total revenues..................................... 7,241 8,422
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Cost of revenues:
Product................................................ 2,109 2,700
Service................................................ 1,414 1,995
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Total cost of revenues............................. 3,523 4,695
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Gross profit............................................. 3,718 3,727
Operating Expenses:
Sales and marketing.................................... 2,049 3,216
Research and development............................... 1,568 2,772
General and administrative............................. 1,094 1,097
Restructuring reserve.................................. -- 1,350
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Loss from operations..................................... (993) (4,708)
Interest and other income, net........................... (12) 109
Foreign currency exchange gain (loss).................... 53 44
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Loss before income taxes................................. (952) (4,555)
Provision for income taxes............................... -- 20
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Net loss................................................. (952) (4,575)
Other comprehensive income (losses), net of income tax:.. (71) (16)
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Comprehensive loss....................................... $(1,023) $(4,591)
======= =======
Basic and diluted net loss per share..................... $(0.10) $(0.48)
Weighted average number of shares outstanding............ 9,643 9,516
See notes to unaudited condensed consolidated financial statements.
2
NETRIX CORPORATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
March 31, December 31,
ASSETS 1998 1997
------ ----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents..................... $ 1,768 $ 2,758
Accounts receivable, net of allowance for
doubtful accounts of $1,161 and $1,505,
respectively................................. 7,119 6,212
Inventories................................... 8,263 8,035
Other current assets.......................... 351 713
-------- --------
Total current assets................ 17,501 17,718
Property and equipment, net of accumulated
depreciation of $18,550 and $18,016,
respectively.................................. 4,769 4,969
Deposits and other assets.......................... 339 543
Goodwill, net of accumulated amortization of $1,514
and $1,447, respectively...................... 727 794
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$ 23,336 $ 24,024
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit................................ $ 1,733 $ 1,147
Accounts payable.............................. 3,275 3,002
Accrued liabilities........................... 2,771 3,298
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Total current liabilities........... 7,779 7,447
Other liabilities.................................. 24 97
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7,803 7,544
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Stockholders' equity:
Preferred stock, $0.05 par value; 1,000,000
shares authorized; none issued and
outstanding.................................. -- --
Common stock, $0.05 par value; 15,000,000
shares authorized; 9,643,240 and 9,593,253
shares issued and outstanding, respectively 482 480
Additional paid-in capital.................... 55,816 55,774
Accumulated other comprehensive income........ (56) (17)
Accumulated deficit........................... (40,709) (39,757)
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Total stockholders' equity.................... 15,533 16,480
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$ 23,336 $ 24,024
======== ========
See notes to unaudited condensed consolidated financial statements.
3
NETRIX CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31,
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1998 1997
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CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................................... $ (952) $(4,575)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 601 852
Changes in assets and liabilities -
Accounts receivable............................. (907) 1,900
Inventories..................................... (228) (696)
Other current assets............................ 362 (939)
Deposits and other assets....................... 204 6
Other liabilities............................... (73) 1,066
Accounts payable................................ 273 1,422
Accrued liabilities............................. (527) 774
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Net cash used in operating activities........... (1,247) (190)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (334) (326)
Purchases of short-term investments............... -- (1,498)
Sales of short-term investments................... -- 1,902
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Net cash (used in) provided by investing
activities.................................... (334) 78
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit. 586 --
Proceeds from exercise of stock options........... -- 30
Proceeds from employee stock purchase plan........ 45 30
Payments on long-term debt........................ -- (60)
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Net cash provided by (used in) financing
activities.................................... 631 (30)
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Effect of foreign currency exchange rate changes on
cash and cash equivalents......................... (40) (6)
Net decrease in cash and cash equivalents............ (990) (148)
Cash and cash equivalents, beginning of period....... 2,758 687
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Cash and cash equivalents, end of period............. $ 1,768 $ 539
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......... $ 45 $ 16
Cash paid during the period for income taxes...... -- 11
See notes to unaudited condensed consolidated financial statements.
4
NETRIX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
Netrix Corporation ("Netrix" or the "Company") is a worldwide provider of
voice and data networking products. Netrix develops, manufactures, markets, and
supports networking equipment for voice, data, and image networks. Netrix
products are designed to transport voice over data networks to enable its
customers to realize significant cost savings. Netrix was incorporated in 1985.
The Company maintains operations in the United Kingdom through its wholly-owned
subsidiary, Netrix International Corporation (a Delaware corporation), and in
Germany and Italy through its wholly-owned subsidiaries Netrix GmbH and Netrix
S.r.l., respectively. These condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. 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.
Risks and Other Important Factors
For the quarter ended March 31, 1998, the Company experienced declining
revenues and a net loss of $1.0 million due to declining sales of the Company's
mature products. The success of the Company is dependent on its ability to
generate adequate cash for operations and capital needs. Its ability to
generate adequate cash for such needs is in part dependent on its success in
increasing sales of its products. The Company has developed a plan to increase
revenues through sales of its Network Exchange product line; however, due to
market conditions and other factors beyond its control, there can be no
assurance the Company will be able to adequately increase product sales.
Therefore, the Company may have to generate additional cash through the sales of
assets including technologies or the sale of debt or equity securities.
Although the Company believes it has the ability to generate additional 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 to the Company. If the Company is unable to generate adequate
cash, there could be a material and adverse effect on the business and financial
condition of the Company. Therefore, the Company has also developed a plan to
implement certain cost control measures to mitigate its liquidity risk.
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 and introduction
of competitive products may require a significant investment of financial
resources. Additionally, the Company relies on reseller channels which are not
under its control for a significant portion of its revenues, particularly in its
international regions. Also, while the Company has generally been able to
obtain adequate supplies of components to date, the interruption or termination
of the Company's current manufacturing relationships could have an adverse
effect on the Company's operating results.
5
2. New Accounting Pronouncements:
------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of a statement of financial position. The Company
implemented SFAS No. 130 in the first quarter of 1998, and it did not have a
material impact on the financial statements. SFAS No. 131 requires the Company
to report financial and descriptive information about its reportable operating
segments. The Company will adopt SFAS No. 131 at its year-end December 31, 1998.
The Company is currently evaluating the impact of SFAS No. 131 on its financial
statements.
3. Cash Equivalents:
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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.
4. Inventories:
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Inventories consisted of the following (in thousands):
March 31, 1998 December 31, 1997
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Raw materials...... $ 450 $ 462
Work in process.... 812 772
Finished goods..... 7,001 6,801
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Total inventories.. $8,263 $8,035
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5. Commitments and Contingencies:
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Line of Credit
In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital. This
agreement provides for interest at a per annum rate equal to the lender's prime
rate plus 2%. The line of credit agreement includes a covenant that requires
the Company to maintain tangible net worth of at least $13.5 million. At March
31, 1998, tangible net worth was approximately $14.8 million. The facility,
which matures on November 30, 1999, is collateralized by the Company's assets.
Borrowings under the line are based on qualified accounts receivable. At March
31, 1998, the Company had approximately $2.0 million available under the line of
credit. At March 31, 1998 and December 31, 1997, the Company had $1.7 million
and $1.1 million, respectively, outstanding under the line of credit.
6
6. Product Revenues:
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The Company's product revenues were generated in the following geographic
regions:
Three Months Ended March 31,
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1998 1997
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Domestic........................ $1,765 $2,419
Europe, Middle East and Africa.. 2,510 2,057
Pacific Rim, Latin America and
South America................. 720 1,461
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Total........................... $4,995 $5,937
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Sales are primarily denominated in US dollars.
7. Restructuring Charge:
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In March 1997, the Company recorded a restructuring charge of approximately
$1,350,000 before income taxes, which was reduced in May 1997 to a net
restructuring charge of 875,000. The net charge included anticipated costs
associated with an overall reduction in work force and the discontinuance of the
Company's micro.pop product.
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,
1998 and 1997 is approximately $53,000 and $44,000 in translation gains,
respectively.
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, 1998 and 1997, the effect of common stock
equivalents has not been considered as they would have been antidilutive.
10. Subsequent Event:
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In April 1998, the Company completed a private placement by issuing and
selling 1,750,000 shares of common stock at a price of $1.25 per share and by
issuing warrants to purchase an additional 140,000 shares of common stock at an
exercise price of $1.75 per share. In connection with the private placement,
the Company received net proceeds of approximately $2.1 million.
7
NETRIX CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
Recent Developments. In January 1998, the Company announced its Vodex
Voice Gateway software for its Network Exchange 2210, a voice/data/fax-over-IP
gateway switch. Vodex is one of the industry's first voice gateways to
simultaneously deliver high quality voice over IP and voice over Frame Relay
with the ability to gateway between the two.
Background. The results for first quarter of 1998 reflect an overall
decrease in the revenues and expenses of the Company from the comparable period
in 1997. During the first quarter of 1998, Netrix continued to experience a
decline in revenues in the product line it acquired from Republic Telcom and an
increase in its new products, the 2210, which combines the Republic technology
with Netrix switching capability, and the 2550, Netrix' enhanced switching
platform. In April 1997, the Company implemented a restructuring of operations
to reduce and economize its work force. The restructuring resulted in the
overall reduction of compensation and travel expenses and other operating costs
of the Company, which it has been able to maintain through the first quarter of
1998.
Revenues. Total revenues decreased by $1.2 million, or 14%, from the three
months ended March 31, 1997 to the three months ended March 31, 1998. The
decrease in revenues was due primarily to a decrease in product volume, as the
mix of products sold continued to transition from the older Republic products to
the 2210 and 2550. Product revenues decreased by $0.9 million, or 16%, from the
first quarter of 1997 to the first quarter of 1998. Service revenues decreased
by approximately $0.2 million, or 10%, over the same period. Service revenue is
primarily the result of the renewal of existing maintenance contracts as well as
the negotiation of new equipment contracts. As such, it has remained fairly
consistent due to the elimination of older product servicing offset by new
product and customer arrangements.
Gross Profit. Gross profit remained flat from the first quarter of 1997 to
the comparable period of 1998, and increased as a percentage of total revenues
from 44% to 51%. Product gross profit increased from 55% in the first quarter
of 1997 to 58% in the first quarter of 1998. This increase primarily resulted
from the combination of a higher proportion of products sold through channels
with lower discounts along with a higher 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 increased from 20% in the first quarter of 1997 to 37% in the
first quarter of 1998. The higher service margin is a result of generally
consistent levels of service revenue combined with lower service costs due to
the restructuring discussed above.
Sales and Marketing. Sales and marketing expenses decreased by $1.2
million, or 36%, from the first quarter of 1997 to the first quarter of 1998.
The decreases are mainly attributed to the restructuring of operations as
discussed above.
Research and Development. Research and development expenses decreased by
$1.2 million, or 43%, from the first quarter of 1997 to the comparable period of
1998. As a percentage of revenues, R&D expenses decreased from 33% of revenues
in the first quarter of 1997 to 22% of revenues in the first quarter of 1998.
The decrease in R&D expenses is due mainly to the restructuring plan discussed
above. 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 1997 to the first quarter of 1998.
8
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.
Interest and Other Income, Net. The Company generated net interest and
other income of approximately ($12,000) in the first quarter of 1998 compared to
approximately $109,000 in the same period in 1997. The decrease in net interest
income is due primarily to debt levels maintained under the line of credit.
Foreign Exchange Gain. Included in foreign exchange income for the first
quarter of 1998 is approximately $53,000 of translation gains as compared to
$44,000 of translation gains in the first quarter of 1997.
Net Loss. For the first quarter of 1998 the Company had a net loss of
approximately $1.0 million, an improvement from a net loss of approximately $4.6
million in the same period of 1997, due primarily to the restructuring plan and
the other factors discussed above.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998, the Company had approximately $1.8 million of cash and
cash equivalents on hand and net working capital of $9.7 million.
For the three months ended March 31, 1998 and 1997, the Company used
approximately $1.2 million and $0.2 million of cash from operating activities,
respectively. In the first quarter of 1998, the cash used by operations was
primarily due to the negative cash flow from operations and the increase in
accounts receivable and the decrease in accrued liabilities over the December
31, 1997 balances. 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.
Capital acquisitions during the first quarter of 1998 were $334,000
compared to $326,000 in the first quarter of 1997. These acquisitions were
primarily equipment used for research and development purposes along with some
computer and test equipment.
In November 1997, the Company negotiated a $3 million line of credit
agreement with a lending institution to be used for working capital. This
agreement provides for interest at a per annum rate equal to the lender's prime
rate plus 2%. The line of credit agreement includes a covenant that requires
the Company to maintain tangible net worth of at least $13.5 million. At March
31, 1998, tangible net worth was approximately $14.8 million. The facility,
which matures on November 30, 1999, is collateralized by the Company's assets.
Borrowings under the line are based on qualified accounts receivable. At March
31, 1998, the Company had $2.0 million available under the line of credit, of
which $1.7 million was outstanding, and was in compliance with the tangible net
worth covenant.
In April 1998, the Company completed a private placement by issuing and
selling 1,750,000 shares of common stock at a price of $1.25 per share and by
issuing warrants to purchase an additional 140,000 shares of common stock at an
exercise price of $1.75 per share. In connection with the private placement,
the Company received net proceeds of approximately $2.1 million that will be
used for working capital and other general corporate purposes and agreed to file
a Registration Statement on Form S-3 with the Securities Exchange Commission
within 45 days to cover the resale of such securities.
9
The success of the Company is dependent on its ability to generate adequate
cash for operations and capital needs. Its ability to generate adequate cash
for such needs is in part dependent on its success in increasing sales of its
products. The Company has developed a plan to increase revenues through sales
of its Network Exchange product line; however, due to market conditions and
other factors beyond its control, there can be no assurance the Company will be
able to adequately increase product sales. Therefore, the Company may have to
generate additional cash through the sales of assets including technologies or
the sale of debt or equity securities. Although the Company believes it has the
ability to generate additional 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 to the Company. If the
Company is unable to generate adequate cash, there could be a material and
adverse effect on the business and financial condition of the Company.
Therefore, the Company has also developed a plan to implement certain cost
control measures to mitigate its liquidity risk.
10
PART II -- OTHER INFORMATION
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Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports of Form 8-K
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(a) Exhibits
Exhibit No. Description
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10.18 Common Stock Purchase Agreement dated April 21, 1998
10.19 Common Stock Purchase Agreement dated April 24, 1998
10.20 Common Stock Warrant dated April 24, 1998
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended March 31, 1998.
11
SIGNATURE
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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, 1998 By: /s/ Lynn C. Chapman
---------------------------------------
Lynn C. Chapman
President and Chief Executive Officer
12
EXHIBIT INDEX
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Exhibit
No. Description
- -------- -----------
10.18 Common Stock Purchase Agreement dated April 21, 1998
10.19 Common Stock Purchase Agreement dated April 24, 1998
10.20 Common Stock Warrant dated April 24, 1998
13