______________________________________________________________________________
______________________________________________________________________________
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 25, 1994, or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended _________________ or ____________________
Commission File Number 0-15323
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2904044
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
800 Saginaw Drive
Redwood City, CA 94063
(415) 366-4400
(Address, including zip code, and telephone number
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock,
$.01 par value, on September 25, 1994 was 17,647,225.
This document consists of 12 pages of which this is page 1.
______________________________________________________________________________
______________________________________________________________________________
<PAGE 2>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
September 25, 1994 and March 31, 1994 ...................... 3
Condensed Consolidated Statement of Operations - quarter and
six months ended September 25, 1994 and September 26, 1993 . 4
Condensed Consolidated Statement of Cash Flows - six
months ended September 25, 1994 and September 26, 1993 ..... 5
Notes to Condensed Consolidated Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition .............. 7
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ........ 10
Item 6. Exhibits and Reports on Form 8-K ........................... 10
SIGNATURE ............................................................ 11
EXHIBIT 11 Computation of Primary and Fully Diluted
Earnings Per Share ......................................... 12
<PAGE 3>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
September 25, March 31,
1994 1994
(unaudited)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 26,118 $ 23,854
Temporary cash investments 26,420 17,714
Accounts receivable, net of allowances of $3,408 at
September 25 and $3,195 at March 31 51,954 57,432
Inventories 30,719 34,456
Prepaid expenses and other assets 4,065 3,842
-------- --------
Total current assets 139,276 137,298
Property and equipment, net of accumulated depreciation and
amortization of $84,293 at September 25 and $75,990 at March 31 28,703 33,386
Software production costs, net of accumulated amortization of
$19,439 at September 25 and $18,041 at March 31 5,493 5,520
Other assets 10,626 10,811
-------- --------
$184,098 $187,015
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 13,968 $ 20,225
Accrued liabilities 33,985 38,883
Notes payable and current portion of long-term obligations 14 26
-------- --------
Total current liabilities 47,967 59,134
Deferred income taxes 328 328
7-1/4% convertible subordinated debentures 68,625 68,625
Stockholders' equity:
Preferred stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none - -
Common stock to be issued 130 268
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 17,647,000 shares at September 25 a
17,097,000 shares at March 31 176 171
Additional paid-in capital 102,262 98,315
Unrealized gain (loss) on available-for-sale securities (44) -
Accumulated translation adjustment (1,023) (1,157)
Accumulated deficit (34,323) (38,669)
-------- --------
Total stockholders' equity 67,178 58,928
-------- --------
$184,098 $187,015
-------- --------
-------- --------
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE 4>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 44,030 $ 38,029 $ 84,660 $ 75,575
Service and other revenue 22,821 16,982 43,729 34,017
-------- -------- -------- --------
Total revenue 66,851 55,011 128,389 109,592
-------- -------- -------- --------
Cost of sales:
Cost of product revenue 18,117 16,338 35,200 31,408
Cost of service and other revenue 16,330 10,602 30,704 22,584
-------- -------- -------- --------
Total cost of sales 34,447 26,940 65,904 53,992
-------- -------- -------- --------
Gross margin 32,404 28,071 62,485 55,600
Operating expenses:
Sales and marketing 17,113 17,179 34,017 33,199
Research and development 8,439 8,011 16,544 15,946
General and administrative 2,821 3,355 5,346 6,775
-------- -------- -------- --------
Total operating expenses 28,373 28,545 55,907 55,920
-------- -------- -------- --------
Income (loss) from operations 4,031 (474) 6,578 (320)
Other income (expense):
Interest income 476 364 770 723
Interest expense (1,306) (1,312) (2,602) (2,621)
Other (282) (123) (400) (336)
-------- -------- -------- --------
Income (loss) before income taxes 2,919 (1,545) 4,346 (2,554)
Income tax provision (benefit) - - - -
-------- -------- -------- --------
Net income (loss) $ 2,919 $ (1,545) $ 4,346 $ (2,554)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share:
Primary $ .16 $ (.09) $ .25 $ (.15)
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted $ .16 $ (.09) $ .23 $ (.15)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computation:
Primary 18,243 16,695 17,988 16,650
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted 18,725 16,695 18,608 16,650
-------- -------- -------- --------
-------- -------- -------- --------
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE 5>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands - unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Sept. 25, Sept. 26,
1994 1993
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $ 23,854 $ 30,080
-------- --------
Net Cash Flows from Operating Activities:
Net income (loss) 4,346 (2,554)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operations:
Depreciation and amortization 9,254 9,686
Restricted stock compensation - 220
Changes in assets and liabilities:
Accounts receivable 5,478 (5,832)
Inventories 3,737 (164)
Prepaid expenses and other assets (223) (846)
Accounts payable (6,257) 74
Accrued liabilities (4,898) (6,872)
-------- --------
Net cash provided by (used for) operations 11,437 (6,288)
-------- --------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (18,352) (13,000)
Proceeds from sales of temporary cash investments 9,602 17,071
Additions to property and equipment (3,173) (6,225)
Additions to software production costs (1,371) (1,374)
Other 185 1,503
-------- --------
Net cash used for investing activities (13,109) (2,025)
-------- --------
Cash Flows from Financing Activities:
Sale of common stock 3,814 1,682
Repurchase of common stock - (600)
Repayments of borrowings (12) (568)
Other 134 (7)
-------- --------
Net cash provided by financing activities 3,936 507
-------- --------
Net increase (decrease) in cash and cash equivalents 2,264 (7,806)
-------- --------
Cash and Cash Equivalents at End of Period $ 26,118 $ 22,274
-------- --------
-------- --------
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 2,552 $ 2,572
Income taxes $ 421 $ (4)
Non-cash investing and financing activities:
Unrealized loss on investments $ 44 $ -
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE 6>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(September 25, 1994 - unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
financial position as of September 25, 1994, and the results of
operations and cash flows for the quarter and six months ended September
25, 1994 and September 26, 1993. These statements should be read in
conjunction with the March 31, 1994 consolidated financial statements and
notes thereto. The results of operations for the six months ended
September 25, 1994 are not necessarily indicative of the results to be
expected for the fiscal year ending March 31, 1995.
2. Temporary Cash Investments
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities," which was issued in May 1993.
Adoption of SFAS 115 resulted in adjusting investments to fair value at
April 1, 1994 and recording an unrealized gain of $99,000 and an
unrealized loss of $44,000 as a separate component of stockholders'
equity at April 1, 1994 and September 25, 1994, respectively.
3. Inventories
Inventories consist of (in thousands):
September 25, March 31,
1994 1994
-------- --------
(unaudited)
Purchased components $ 10,223 $ 12,608
Work-in-process 15,534 18,618
Finished goods 4,962 3,230
-------- --------
$ 30,719 $ 34,456
-------- --------
-------- --------
4. Earnings Per Share
Net income (loss) per share has been computed based upon the weighted
average number of common and common equivalent shares outstanding. For
primary earnings per share, common equivalent shares consist of the
incremental shares issuable upon the assumed exercise of dilutive stock
options. For fully diluted earnings per share, common equivalent shares
also include, if dilutive, the effect of incremental shares issuable upon
the conversion of the 7-1/4% convertible subordinated debentures, and net
income is adjusted for the interest expense (net of income taxes)
related to the debentures.
<PAGE 7>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This discussion and analysis should be read in conjunction with Management's
Discussion and Analysis in the Company's 1994 Annual Report to Shareholders
and Part I of the Company's Form 10-K for the fiscal year ended March 31,
1994.
RESULTS OF OPERATIONS
The following table depicts selected data derived from the consolidated
statement of operations expressed as a percentage of revenue for the periods
presented:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
Percent of Revenue 1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Product revenue 65.9 69.1 65.9 69.0
Service and other revenue 34.1 30.9 34.1 31.0
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Product revenue gross margin 58.9 57.0 58.4 58.4
Service and other revenue gross margin 28.4 37.6 29.8 33.6
----- ----- ----- -----
Total gross margin 48.5 51.0 48.7 50.7
----- ----- ----- -----
Sales and marketing 25.6 31.2 26.5 30.3
Research and development 12.7 14.6 12.9 14.5
General and administrative 4.2 6.1 4.2 6.2
----- ----- ----- -----
Total operating expenses 42.5 51.9 43.6 51.0
----- ----- ----- -----
Income from operations 6.0 (.9) 5.1 (.3)
----- ----- ----- -----
Net income (loss) 4.4 (2.8) 3.4 (2.3)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Revenue
Total revenue for the second quarter and first six months of fiscal 1995
increased 21.5% and 17.2%, respectively, from the comparable periods in the
prior year. Product revenue for the second quarter and first six months of
fiscal 1995 increased $6.0 million, or 15.8%, and $9.1 million, or 12.0%,
respectively, from the comparable periods of the prior year. Both the
quarter and year-to-date increases in product revenue are primarily
attributable to an increase in international sales which increased 86.5% to
28.6% of total revenue for the quarter and 65.4% to 26.1% of total revenue
year-to-date. Based upon current levels of proposal activity, management
expects product revenue to continue to increase over the remainder of the
fiscal year.
The increase in service and other revenue for the second quarter and first six
months of fiscal 1995 of $5.8 million and $9.7 million, respectively, is
primarily attributable to an increase in systems integration services in
support of product sales to the U.S. government.
<PAGE 8>
Gross Margin
Total gross margin as a percentage of total revenue decreased to 48.5% and
48.7%, respectively, in the second quarter and first six months of fiscal 1995
from 51.0% and 50.7% in the comparable periods of fiscal 1994. These declines
were the result of a decrease in service and other gross margin to 28.4% and
29.8% for the second quarter and first six months of fiscal 1995 from 37.6%
and 33.6%, respectively, for the comparable periods of fiscal 1994. Product
gross margin increased quarter-over-quarter to 58.9% from 57.0% and remained
flat at 58.4% for the first six months of fiscal 1995 over the comparable
period of fiscal 1994 primarily due to favorable manufacturing variances from
higher production volumes. This was partially offset by a higher volume of
lower margin sales to new customers in the Asia Pacific/Latin American sales
channel as well as an increase in sales discount and upgrade programs. The
favorable margin impact as a result of expected sales volume increases during
the remainder of the fiscal year may be partially offset by sales through
lower margin distribution channels.
Service and other gross margin decreased both for the quarter and year-to-date
periods from the prior fiscal year primarily as a result of a significantly
higher mix of lower gross margin systems integration services provided under
a U.S. government contract. Gross margin on these services, which decreased
to 10.5% and increased to 10.8% for the second quarter and first six months of
fiscal 1995, respectively, from 16.1% and 10.4% for the comparable periods of
fiscal 1994, can vary widely based upon the nature, timing, and extent of OEM
products and services provided.
Operating Expenses
Operating expenses in the second quarter and first six months of fiscal 1995
remained relatively flat from the comparable periods of fiscal 1994, but
decreased as a percentage of total revenue to 42.5% and 43.6% from 51.9% and
51.0%, respectively, as a result of higher revenue levels. Management expects
the relationship of operating expenses as a percentage of total revenue to
decrease during the remainder of fiscal 1995 due to expected higher levels of
revenue.
Sales and marketing expense remained flat quarter-over-quarter and increased
$.8 million for the first six months of fiscal 1995 from the comparable
periods of fiscal 1994, but decreased as a percentage of total revenue to
25.6% and 26.5% from 31.2% and 30.3%, respectively. The year-over-year dollar
increase is primarily the result of increased sales commissions due to higher
sales volume and the addition of personnel. On a quarter-over-quarter basis,
these increases were offset by other cost reductions.
Research and development expense increased $.4 million and $.6 million in the
second quarter and first six months of fiscal 1995 from the comparable periods
of fiscal 1994, but decreased as a percentage of total revenue to 12.7% and
12.9%, respectively, from 14.6% and 14.5% in the comparable periods of fiscal
1994. The dollar increase is comprised of an increase in direct R&D project
funding, including salary-related expenses, offset slightly by a reduction in
other costs as a result of streamlining the Company's operations. During the
second quarter and first six months of fiscal 1995, $.7 million and $1.4
million of software costs were capitalized, flat with the comparable periods
of fiscal 1994. Management plans to continue funding research and development
expenses at levels relatively comparable with fiscal 1994.
General and administrative expense decreased both in dollars, $.5 million and
$1.4 million for the second quarter and first six months of fiscal 1995 from
the comparable periods of fiscal 1994, and as a percentage of total revenue,
to 4.2% from 6.1% and 6.2%, respectively. The dollar decrease is primarily a
result of lower personnel costs related to streamlining the Company's
operations.
<PAGE 9>
Income Taxes
No tax expense was recorded by the Company for the net income of $2.9 million
and $4.3 million, respectively, in the second quarter and first six months of
fiscal 1995 due to the utilization of net operating loss carryforwards.
BUSINESS ENVIRONMENT AND RISK FACTORS
The Company's products include components, assemblies and subassemblies that
are currently available from single sources. Testing and manufacturing is
performed at the Company's Redwood City, California facility. Availability
limitations, price increases or business interruptions could adversely impact
revenue, margins and earnings.
LIQUIDITY AND CAPITAL RESOURCES
As of September 25, 1994, the Company had cash, cash equivalents and
temporary cash investments of $52.5 million, as compared to $41.6 million as
of March 31, 1994. Cash provided by operations was $11.4 million during the
first six months of fiscal 1995, a $17.7 million increase over the comparable
period of the prior year. This increase was principally due to decreases in
accounts receivable and inventory and net income versus a net loss in the
prior year. Accounts receivable decreased $5.5 million during the first six
months of fiscal 1995 as compared to an increase of $5.8 million in the
comparable period of the prior year despite the significant increase in
revenue over that same period.
Net cash used for investing activities of $13.1 million for the first six
months of fiscal 1995 consisted of $8.8 million in net purchases of temporary
cash investments, $3.2 million in purchases of property and equipment and
additions to software production costs.
Net cash provided by financing activities of $3.9 million for the first six
months of fiscal 1995 is composed primarily of the sale of Common Stock.
As of September 25, 1994 the Company had available an unsecured $10.0 million
line of credit. Borrowings under this committed facility are available
through May 1995 and bear interest at the bank's base rate (which approximates
prime) and base rate plus 0.5% on usage above $5.0 million. At September 25,
1994, there were no outstanding borrowings under this facility.
The Company believes that current cash balances and cash flows from
operations, together with available sources of financing, will be sufficient
to fund operations, purchases of capital equipment and research and
development programs currently planned at least through the next twelve
months.
<PAGE 10>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On August 9, 1994, the Company held its Annual Meeting of
Stockholders. At this meeting, the stockholders voted to (1)
elect Joseph J. Francesconi and Walter J. Gill as directors.
Joseph J. Francesconi received 15,781,801 votes in favor and
142,629 votes withheld and Walter J. Gill received 15,778,383
votes in favor and 146,047 votes withheld. Continuing as
directors are John B. Arnold, Robert H. B. Baldwin, Dixon R. Doll,
DuWayne J. Peterson, Jr., Frank S. Vigilante and Hans A. Wolf; and
(2) approve amendments to the Company's 1993 Stock Option Plan
concerning the Non-Employee Director Automatic Stock Option Grant
Program as follows: 13,178,262 votes in favor, 2,664,366 votes
against, and 81,802 votes abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Statement re: Computation of Primary and Fully
Diluted Earnings Per Share.
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Company during its
fiscal quarter ended September 25, 1994.
<PAGE 11>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) NETWORK EQUIPMENT TECHNOLOGIES, INC.
BY (SIGNATURE) /s/ Craig M. Gentner
(NAME AND TITLE) Craig M. Gentner
Senior Vice President and Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
(DATE) November 7, 1994
<PAGE>
EXHIBIT 11
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Computation of Primary and Fully Diluted Earnings Per Share
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
Sept. 25, Sept. 26 Sept. 25, Sept. 26,
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary
Earnings:
Net income (loss) $ 2,919 $ (1,545) $ 4,346 $ (2,554)
Interest expense during the period on convertible
subordinated debentures, net of tax (1) - - 84 -
-------- -------- -------- --------
$ 2,919 $ (1,545) $ 4,430 $ (2,554)
-------- -------- -------- --------
-------- -------- -------- --------
Shares:
Weighted average number of common shares outstanding 17,398 16,695 17,265 16,650
Number of common equivalent shares assuming
exercise of dilutive stock options and warrants 845 - 723 -
-------- -------- -------- --------
18,243 16,695 17,988 16,650
-------- -------- -------- --------
-------- -------- -------- --------
Primary earnings (loss) per share $ .16 $ (.09) $ .25 $ (.15)
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted
Earnings:
Net income (loss) $ 2,919 $ (1,545) $ 4,346 $ (2,554)
-------- -------- -------- --------
-------- -------- -------- --------
Shares:
Weighted average number of common shares outstanding 17,398 16,695 17,265 16,650
Number of common equivalent shares assuming
exercise of dilutive stock options and warrants 1,327 - 1,343 -
Number of common equivalent shares assuming
conversion of convertible securities (2) - - - -
-------- -------- -------- --------
18,725 16,695 18,608 16,650
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted earnings (loss) per share $ .16 $ (.09) $ .23 $ (.15)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
_____________
(1) This amount represents interest on repurchased debentures resulting from
the 20% limitation of common stock repurchases under the modified
treasury stock method.
(2) The assumed exercise of these common stock equivalents were excluded as
they were anti-dilutive.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1994
<PERIOD-END> SEP-25-1994
<CASH> 26,118
<SECURITIES> 26,420
<RECEIVABLES> 51,954
<ALLOWANCES> (3,408)
<INVENTORY> 30,719
<CURRENT-ASSETS> 139,276
<PP&E> 112,996
<DEPRECIATION> (84,293)
<TOTAL-ASSETS> 184,098
<CURRENT-LIABILITIES> 47,967
<BONDS> 68,625
<COMMON> 102,568
0
0
<OTHER-SE> (35,390)
<TOTAL-LIABILITY-AND-EQUITY> 184,098
<SALES> 84,660
<TOTAL-REVENUES> 128,389
<CGS> 35,200
<TOTAL-COSTS> 65,904
<OTHER-EXPENSES> 55,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,602
<INCOME-PRETAX> 4,346
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,346
<EPS-PRIMARY> .25
<EPS-DILUTED> .23
</TABLE>
