________________________________________________________________________
________________________________________________________________________
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 June 26, 1994, or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ended _____________ to _____________
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 June 26, 1994 was 17,223,849.
This document consists of 13 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 -
June 26, 1994 and March 31, 1994 .................... 3
Condensed Consolidated Statement of Operations -
three months ended June 26, 1994 and June 27, 1993 .. 4
Condensed Consolidated Statement of Cash Flows -
three months ended June 26, 1994 and June 27, 1993 .. 5
Notes to Condensed Consolidated Financial
Statements .......................................... 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ....... 8
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K .................... 11
SIGNATURE ....................................................... 12
EXHIBIT 11 Computation of Primary and Fully Diluted
Earnings Per Share .................................. 13
<PAGE> 3
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
June 26, March 31,
1994 1994
(unaudited)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,365 $ 23,854
Temporary cash investments 14,214 17,714
Accounts receivable, net of allowances of $3,334
at June 26 and $3,195 at March 31 56,578 57,432
Inventories 33,184 34,456
Prepaid expenses and other assets 4,082 3,842
-------- --------
Total current assets 132,423 137,298
Property and equipment, net of accumulated depreciation and
amortization of $80,584 at June 26 and $75,990 at March 31 30,047 33,386
Software production costs, net of accumulated amortization of
$18,781 at June 26 and $18,041 at March 31 5,489 5,520
Other assets 10,714 10,811
-------- --------
$178,673 $187,015
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 16,612 $ 20,225
Accrued liabilities 31,917 38,883
Notes payable and current portion of long-term obligations 22 26
-------- --------
Total current liabilities 48,551 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 194 268
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 17,224,000 shares at June 26 and
17,097,000 shares at March 31 172 171
Additional paid-in capital 99,130 98,315
Unrealized gain (loss) on available-for-sale securities (28) -
Accumulated translation adjustment (1,057) (1,157)
Accumulated deficit (37,242) (38,669)
Total stockholders' equity 61,169 58,928
-------- --------
$178,673 $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>
Three Months Ended
June 26, June 27,
1994 1993
--------- ---------
<S> <C> <C>
Revenue:
Product revenue $ 40,630 $ 37,546
Service and other revenue 20,908 17,035
-------- --------
Total revenue 61,538 54,581
-------- --------
Cost of sales:
Cost of product revenue 17,083 15,070
Cost of service and other revenue 14,374 11,982
-------- --------
Total cost of sales 31,457 27,052
-------- --------
Gross margin 30,081 27,529
Operating expenses:
Sales and marketing 16,904 16,020
Research and development 8,105 7,935
General and administrative 2,525 3,420
-------- --------
Total operating expenses 27,534 27,375
-------- --------
Income from operations 2,547 154
Other income (expense):
Interest income 294 359
Interest expense (1,296) (1,309)
Other (118) (213)
-------- --------
Income (loss) before income taxes 1,427 (1,009)
Income tax provision (benefit) - -
-------- --------
Net income (loss) $ 1,427 $ (1,009)
-------- --------
-------- --------
Primary and fully diluted net income (loss) per share $ .08 $ (.06)
-------- --------
-------- --------
Shares used in computation 17,127 16,604
-------- --------
-------- --------
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>
Three Months Ended
June 26, June 27,
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) 1,427 (1,009)
Adjustments to reconcile net income (loss) to cash
used for operations:
Depreciation and amortization 4,756 4,737
Restricted stock compensation - 109
Changes in assets and liabilities:
Accounts receivable 854 (3,904)
Inventories 1,272 892
Prepaid expenses and other assets (240) (995)
Accounts payable (3,613) 609
Accrued liabilities (6,966) (2,992)
-------- --------
Net cash used for operations (2,510) (2,553)
-------- --------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (500) (5,000)
Proceeds from sales of temporary cash investments 3,972 7,096
Additions to property and equipment (677) (2,960)
Additions to software production costs (709) (636)
Other 97 529
-------- --------
Net cash provided by (used for) investing activities 2,183 (971)
-------- --------
Cash Flows from Financing Activities:
Sale of common stock 742 566
Repurchase of common stock - (307)
Repayments of borrowings (4) (279)
Other 100 (109)
-------- --------
Net cash provided by (used for) financing activities 838 (129)
-------- --------
Net increase (decrease) in cash and cash equivalents 511 (3,653)
-------- --------
Cash and Cash Equivalents at End of Period $ 24,365 $ 26,427
-------- --------
-------- --------
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 2,515 $ 2,549
Income taxes $ (179) $ 80
Non-cash investing and financing activities:
Unrealized loss on investments $ 28 $ -
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE> 6
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(June 26, 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 June 26, 1994, and the
results of operations and cash flows for the three months ended
June 26, 1994 and June 27, 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
three months ended June 26, 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 $28,000 as a separate component
of stockholders' equity at April 1, 1994 and June 26, 1994,
respectively.
The fair value and the amortized cost of available-for-sale
securities at April 1, 1994 are presented in the table which
follows. Fair values are based on quoted market prices obtained
from an independent broker. For each category of investment
securities, the table presents gross unrealized holding gains and
losses.
<TABLE>
<CAPTION>
Unrealized Unrealized
Amortized Market Holding Holding
Cost Value Gains Losses
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Medium term/corporate notes $ 13,750 $ 13,844 $ 101 $ 7
Commercial paper 1,964 1,969 5 -
Floating rate notes 1,000 1,000 - -
State agency bonds 1,000 1,000 - -
-------- -------- -------- --------
$ 17,714 $ 17,813 $ 106 $ 7
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
As of April 1, 1994, all available-for-sale securities mature
within one year.
<PAGE> 7
3. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
June 26, March 31,
1994 1994
(unaudited)
--------- ---------
<S> <C> <C>
Purchased components $ 11,865 $ 12,608
Work-in-process 17,623 18,618
Finished goods 3,696 3,230
--------- ---------
$ 33,184 $ 34,456
--------- ---------
--------- ---------
</TABLE>
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 will be
adjusted for the interest expense (net of income taxes) related to
the debentures.
<PAGE> 8
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 first
quarter of fiscal years 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
Percent of Revenue June 26, 1994 June 27, 1993
--------- ---------
<S> <C> <C>
Product revenue 66.0 68.8
Service and other revenue 34.0 31.2
----- -----
Total revenue 100.0 100.0
----- -----
Product revenue gross margin 58.0 59.9
Service and other revenue gross margin 31.3 29.7
----- -----
Total gross margin 48.9 50.4
----- -----
Sales and marketing 27.5 29.4
Research and development 13.2 14.5
General and administrative 4.1 6.3
----- -----
Total operating expenses 44.7 50.2
----- -----
Income from operations 4.1 0.3
----- -----
Net income (loss) 2.3 (1.8)
----- -----
----- -----
</TABLE>
REVENUE
Total revenue for the first quarter of fiscal 1995 increased 12.7% to $61.5
million from $54.6 million for the first quarter of fiscal 1994. Product
revenue and service and other revenue increased $3.1 million and $3.9 million,
respectively, quarter-over-quarter. The 8.2% increase in product revenue is
primarily attributable to an increase in international and U.S. government
sales, which increased 41.8% and 20.0%, respectively. Overall, international
and U.S. government sales represented 22.9% and 34.9% of the Company's total
revenue, respectively, for the first quarter of fiscal 1995. Based upon
current levels of proposal activity, management expects product revenue to
increase over the remainder of the fiscal year.
The 22.7% increase in service and other revenue is attributable to systems
integration activities in support of product sales to the U.S. government and
to continued increases in the installed base of the Company's products.
<PAGE> 9
GROSS MARGIN
Total gross margin as a percentage of total revenue decreased to 48.9% in the
first quarter of fiscal 1995 from 50.4% in the comparable period of fiscal
1994. This decline was the result of a decrease in product gross margin to
58.0% in the first quarter of fiscal 1995 from 59.9% in the first quarter of
fiscal 1994. The quarter-over-quarter decline resulted primarily from a
slightly unfavorable IDNX product mix and an increase in sales discounts
related to new client pricing programs. This decrease was partially offset by
quarter-over-quarter favorable manufacturing variances from higher production
volumes.
Service and other gross margin increased to 31.3% in the first quarter of
fiscal 1995 from 29.7% in the comparable period of fiscal 1994. This increase
is primarily attributable to improved margins on a slightly higher mix of
systems integration activities provided under a U.S. government contract.
This component of service and other gross margin, which increased to 11.3% for
the first quarter of fiscal 1995 from 6.4% for the comparable period of fiscal
1994, can vary based upon the nature, timing, and extent of OEM products and
services provided.
OPERATING EXPENSES
Operating expenses in the first quarter of fiscal 1995 remained relatively
flat from the first quarter of fiscal 1994, but decreased as a percentage of
total revenue to 44.7% from 50.2%, respectively, as a result of higher revenue
levels. Management expects the relationship of operating expenses as a
percentage of total revenue to be relatively comparable with its current
levels during the remainder of fiscal 1995.
Sales and marketing expense in the first quarter of fiscal 1995 increased $.9
million, or 5.5%, from the first quarter of fiscal 1994, but decreased as a
percentage of total revenue to 27.5% from 29.4%, respectively. The dollar
increase is primarily the result of the addition of personnel to support
expansion of the sales infrastructure and increased sales commissions due to
higher sales volume.
Research and development expense increased $.2 million, or 2.1%, in the first
quarter of fiscal 1995 but decreased as a percentage of total revenue to 13.2%
from 14.5% in the comparable period 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 first quarter of fiscal
1995, $.7 million of software costs were capitalized as compared to $.6
million in the comparable period of fiscal 1994. Management plans to continue
funding research and development efforts at levels necessary to advance
product programs. At the same time, it is management's intention to increase
the focus of these development efforts and therefore keep research and
development expense at levels relatively comparable with fiscal 1994.
General and administrative expense decreased both in dollars, from $3.4
million to $2.5 million, and as a percentage of total revenue, from 6.3% to
4.1%, in the first quarter of fiscal 1995 as compared to the first quarter of
fiscal 1994, respectively. The dollar decrease is primarily a result of lower
personnel costs related to streamlining the Company's operations.
INCOME TAXES
No tax expense was recorded by the Company for the net income of $1.4 million
in the first quarter of fiscal 1995 due to the utilization of net operating
loss carryforwards.
<PAGE> 10
BUSINESS ENVIRONMENT AND RISK FACTORS
Historically, the majority of the Company's revenues in each quarter results
from orders received and shipped in that quarter, and a significant proportion
of such revenues result from orders received and shipped in the last month of
the quarter. Because of these ordering patterns and potential delivery
schedule changes, the Company does not believe that backlog is indicative of
future revenue levels. Furthermore, if near term demand for the Company's
products weakens in a particular quarter, the Company's operating results for
that quarter would be adversely affected. Expense levels are relatively fixed
and are set based on expectations regarding future revenue levels. These
expectations involve making judgments on issues such as future competitive
conditions and customer requirements, a process that involves evaluation of
information that often is unclear and in conflict.
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.
Because of the factors described above, as well as others that may affect the
Company's operating results, past financial results may not be an accurate
indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
As of June 26, 1994, the Company had cash, cash equivalents and temporary cash
investments of $38.6 million, as compared to $41.6 million as of March 31,
1994. Cash used for operations was $2.5 million during the first quarter of
fiscal 1995, consistent with the comparable period of the prior year. This
usage was principally due to payment of fiscal 1994 incentive compensation,
payment of interest on the convertible subordinated debentures, and a
reduction in restructuring and reorganization reserve liabilities, offset
somewhat by net income, depreciation and decreases in inventory and accounts
receivable.
Net cash provided by investing activities of $2.2 million in the first quarter
of fiscal 1995 consisted of $3.5 million in net proceeds from sale of
temporary cash investments, partially offset by additions to software
production costs and purchases of property and equipment.
Net cash provided by financing activities of $.8 million in the first quarter
of fiscal 1995 is composed primarily of the sale of Common Stock.
As of June 26, 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 June 26, 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> 11
PART II
OTHER INFORMATION
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 June 26, 1994.
<PAGE> 12
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) August 9, 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>
Three Months Ended
June 26, June 27,
1994 1993
-------- --------
<S> <C> <C>
PRIMARY
Earnings:
Net income (loss) $ 1,427 $ (1,009)
-------- --------
-------- --------
Shares:
Weighted average number of common
shares outstanding 17,127 16,604
Number of common equivalent shares assuming
exercise of stock options and warrants (1) - -
-------- --------
17,127 16,604
-------- --------
-------- --------
Primary earnings (loss) per share $ .08 $ (.06)
-------- --------
-------- --------
FULLY DILUTED
Earnings:
Net income (loss) $ 1,427 $ (1,009)
-------- --------
-------- --------
Shares:
Weighted average number of common
shares outstanding 17,127 16,604
Number of common equivalent shares assuming
exercise of stock options and warrants (1) - -
Number of common equivalent shares assuming
conversion of convertible securities (1) - -
-------- --------
17,127 16,604
-------- --------
-------- --------
Fully diluted earnings (loss) per share $ .08 $ (.06)
-------- --------
-------- --------
</TABLE>
_____________
(1) The assumed exercise of these common stock equivalents were excluded as
they were anti-dilutive.
<PAGE>
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