<PAGE>
______________________________________________________________________________
______________________________________________________________________________
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 December 26, 1993
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 organization) Identification Number)
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 December 26, 1993 was 16,827,827.
This document consists of 13 pages of which this is page 1.
______________________________________________________________________________
______________________________________________________________________________
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet -
December 26, 1993 and March 31, 1993 ........... 3
Condensed Consolidated Statement of Operations -
quarter and nine months ended December 26, 1993
and December 27, 1992 .......................... 4
Condensed Consolidated Statement of Cash
Flows - nine months ended December 26, 1993
and December 27, 1992 .......................... 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 5. Other Information .............................. 11
Item 6. Exhibits and Reports on Form 8-K ............... 11
SIGNATURE ..................................................... 12
EXHIBIT 11 Computation of Primary and Fully Diluted
Earnings Per Share ................................ 13
2.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
December 26, March 31,
1993 1993
(unaudited)
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,953 $ 30,080
Temporary cash investments 18,550 22,022
Accounts receivable, net of allowances of $3,515 at
December 26 and $3,819 at March 31 57,618 50,530
Inventories 27,770 23,755
Prepaid expenses and other assets 5,380 5,276
-------- --------
Total current assets 134,271 131,663
Property and equipment, net of accumulated depreciation and
amortization of $72,774 at December 26 and $60,959 at March 31 33,985 36,236
Software production costs, net of accumulated amortization of
$17,367 at December 26 and $14,784 at March 31 5,548 6,129
Other assets 10,297 12,568
-------- --------
$184,101 $186,596
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 18,732 $ 15,624
Accrued liabilities 33,595 38,100
Notes payable and current portion of long-term obligations 280 1,048
-------- --------
Total current liabilities 52,607 54,772
Other long-term obligations 7 52
Deferred income taxes 1,824 1,824
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 472 3,529
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 16,828,000 shares at December 26 and
16,042,000 shares at March 31 168 160
Additional paid-in capital 96,043 90,984
Accumulated translation adjustment (1,076) (1,005)
Accumulated deficit (34,569) (32,345)
-------- --------
Total stockholders' equity 61,038 61,323
-------- --------
$184,101 $186,596
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1993 1992 1993 1992
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 43,481 $ 40,078 $119,056 $121,422
Service and other revenue 17,764 16,032 51,781 40,118
-------- -------- -------- --------
Total revenue 61,245 56,110 170,837 161,540
Cost of sales:
Cost of product revenue 18,305 15,483 49,713 46,881
Cost of service and other revenue 12,043 11,274 34,627 27,134
-------- -------- -------- --------
Total cost of sales 30,348 26,757 84,340 74,015
Gross margin 30,897 29,353 86,497 87,525
Operating expenses:
Sales f marketing 17,760 15,697 50,959 45,720
Research f development 8,566 7,945 24,512 24,126
General f administrative 3,336 3,411 10,111 10,346
-------- -------- -------- --------
Total operating expenses 29,662 27,053 85,582 80,192
Income from operations 1,235 2,300 915 7,333
Other income (expense):
Interest income 354 478 1,077 1,621
Interest expense (1,339) (1,288) (3,960) (3,982)
Other 80 (304) (256) (602)
-------- -------- -------- --------
Income (loss) before income taxes 330 1,186 (2,224) 4,370
Income tax provision (benefit) - - - -
-------- -------- -------- --------
Net income (loss) $ 330 $ 1,186 $ (2,224) $ 4,370
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share:
Primary and fully diluted $ .02 $ .08 $ (.13) $ .28
-------- -------- -------- --------
-------- -------- -------- --------
Common and common equivalent shares outstanding:
Primary and fully diluted 16,829 15,808 16,711 15,642
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands - unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 26, Dec. 27,
1993 1992
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $ 30,080 $ 20,132
Net Cash Flows from Operating Activities:
Net income (loss) (2,224) 4,370
Adjustments to reconcile net income (loss) to cash
provided by (used for) operations:
Depreciation and amortization 14,223 14,080
Restricted stock compensation 329 391
Changes in assets and liabilities:
Accounts receivable (7,088) (7,125)
Inventories (4,015) (2,545)
Prepaid expenses and other assets (104) 1,102
Accounts payable 3,108 2,344
Accrued liabilities (4,668) 56
-------- --------
Net cash provided by (used for) operations (439) 12,673
Cash Flows from Investing Activities:
Purchases of temporary cash investments (17,700) (25,786)
Proceeds from sales of temporary cash investments 21,172 26,241
Additions to property and equipment (9,356) (12,380)
Additions to software production costs (2,035) (2,576)
Other 2,271 409
-------- --------
Net cash used for investing activities (5,648) (14,092)
Cash Flows from Financing Activities:
Sale of common stock 2,444 3,456
Repurchase of common stock (600) -
Repayments of borrowings (813) (1,395)
Other (71) (796)
-------- --------
Net cash provided by financing activities 960 1,265
-------- --------
Net decrease in cash and cash equivalents (5,127) (154)
-------- --------
Cash and Cash Equivalents at End of Period $ 24,953 $ 19,978
-------- --------
-------- --------
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 5,127 $ 5,226
Income taxes $ 94 $ (1,415)
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(December 26, 1993 - unaudited)
1. 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 December 26, 1993, and the results of operations
and cash flows for the quarter and nine months ended December 26, 1993
and December 27, 1992. These statements should be read in conjunction
with the March 31, 1993 consolidated financial statements and notes
thereto.
The results of operations for the quarter and nine months ended December
26, 1993 are not necessarily indicative of the results to be expected for
the fiscal year ending March 31, 1994.
2. Inventories consist of (in thousands):
[CAPTION]
December 26, March 31,
1993 1993
(unaudited)
-------- --------
[S] [C] [C]
Purchased components $11,476 $ 9,824
Work-in-process 13,456 11,602
Finished goods 2,838 2,329
------- -------
$27,770 $23,755
------- -------
------- -------
3. 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 include, if
dilutive, the incremental shares issuable upon the assumed exercise of
stock warrants and options. For fully diluted earnings per share, common
equivalent shares will 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.
6.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table depicts selected data derived from the consolidated
statement of operations expressed as a percentage of revenue for the third
quarter and first nine months of fiscal years 1994 and 1993:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
Percent of Revenue 1993 1992 1993 1992
- - ------------------ ----- ----- ----- -----
<S> <C> <C> <C> <C>
Product revenue 71.0 71.4 69.7 75.2
Service and other revenue 29.0 28.6 30.3 24.8
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Product revenue gross margin 57.9 61.4 58.2 61.4
Service and other revenue gross margin 32.2 29.7 33.1 32.4
----- ----- ----- -----
Total gross margin 50.4 52.3 50.6 54.2
----- ----- ----- -----
Sales and marketing 29.0 28.0 29.8 28.3
Research and development 14.0 14.2 14.3 14.9
General f administrative 5.4 6.1 5.9 6.4
----- ----- ----- -----
Total operating expenses 48.4 48.2 50.1 49.6
----- ----- ----- -----
Income from operations 2.0 4.1 .5 4.5
----- ----- ----- -----
Net income (loss) .5 2.1 (1.3) 2.7
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
REVENUE
Total revenue for the third quarter and first nine months of fiscal 1994
increased 9.2% and 5.8%, respectively, from the comparable periods in the
prior year. The quarter-over-quarter increase is comprised of a $3.4 million,
or 8.5%, increase in product revenue and a $1.7 million, or 10.8%, increase in
service and other revenue. The quarter-over-quarter increase in product
revenue is attributable to growth in all three of the Company's major
distribution channels--Domestic Commercial, Federal, and International. On a
year-to-date basis, however, product revenue decreased $2.4 million, or 1.9%
from the first nine months of fiscal 1993. This decline is primarily a result
of a 21.2% decrease in product sales to international customers, which reduced
international product revenue as a percent of total product revenue to 25.1%
from 31.2% in the comparable period of the prior year. The current level of
proposal activity in Europe may indicate some potential improvement in
international sales activity for the fourth quarter of fiscal 1994.
7.
<PAGE>
The increase in service and other revenue for the third quarter and first nine
months of fiscal 1994 of $1.7 million and $11.7 million, respectively, is
attributable to both continued increases in the installed base of the
Company's products and to system integration activities in support of product
sales to the U.S. government.
GROSS MARGIN
Total gross margin as a percentage of total revenue decreased to 50.4% and
50.6%, respectively, in the third quarter and first nine months of fiscal 1994
from 52.3% and 54.2% in the comparable periods of fiscal 1993. This decline
in gross margins was a result of the decrease in product gross margins to
57.9% and 58.2%, respectively, for the third quarter and first nine months of
fiscal 1994 from 61.4% for the comparable periods of the prior year. The
quarter-over-quarter decline resulted primarily from a decrease in standard
margins as a result of discount programs, which encouraged new customer
purchases and upgrades of the Company's equipment by existing customers. The
year-to-date decline in product gross margin as compared to the first nine
months of fiscal 1993 resulted primarily from unfavorable manufacturing
variances resulting from lower production volumes. Year-to-date, the decline
in margin due to increased discounts was more than offset by a favorable sales
channel mix.
Service and other gross margin increased to 32.2% and 33.1% for the third
quarter and first nine months of fiscal 1994 from 29.7% and 32.4%,
respectively, for the comparable periods of the prior year. The increase is
largely attributable to increases in service revenue outpacing increases in
service costs.
Historically, product shipments have been concentrated close to the end of
each quarter. Delays in product shipments or in closing significant sales
near the end of a quarter could cause quarterly revenue, and, to a greater
degree, gross margin, to vary. As a result, product revenue and gross margin
may be negatively affected by such production flows and volumes.
Additionally, product mix within channels can have an impact on product gross
margins. On an overall basis, total gross margin is also affected by changes
in the revenue mix between product revenue (higher margin) and service and
other revenue (lower margin).
OPERATING EXPENSES
Operating expenses in the third quarter and first nine months of fiscal 1994
increased $2.6 million and $5.4 million, respectively, from the comparable
periods of fiscal 1993. Operating expenses for the first nine months of
fiscal 1994 as compared to the comparable period of fiscal 1993 have increased
slightly as a percentage of revenue to 50.1% from 49.6%.
8.
<PAGE>
Sales and marketing expense increased by $2.1 million and $5.2 million,
respectively, in the third quarter and first nine months of fiscal 1994. This
expense has also increased as a percentage of total revenue, to 29.0% and
29.8% for the third quarter and first nine months of fiscal 1994, from 28.0%
and 28.3%, respectively, in the comparable periods of fiscal 1993. These
increases are primarily the result of the addition of personnel to support
expansion of the sales infrastructure and increased sales commissions.
Research and development expense increased by $.6 million and $.4 million,
respectively, in the third quarter and first nine months of fiscal 1994 from
the comparable periods in fiscal 1993. As a percentage of total revenue,
research and development expense decreased slightly to 14.3% on a year-to-date
basis from 14.9% in the comparable period of fiscal 1993. The increase in
spending is primarily attributable to development of ATM products in our
ADAPTIVE Division, which was partially offset by development funds received as
a result of the Company's ATM development agreement with Ericsson Business
Networks AB. During the third quarter and first nine months of fiscal 1994,
$.7 million and $2.0 million, respectively, of software costs were capitalized
as compared to $.9 million and $2.6 million, respectively, in the comparable
periods of fiscal 1993. Management plans to continue funding research and
development efforts at levels necessary to advance product programs.
General and administrative expense remained relatively flat in absolute
dollars and consequently decreased slightly as a percentage of total revenue
in the third quarter and first nine months of fiscal 1994 from the comparable
periods of fiscal 1993.
Net non-operating expense in the third quarter and first nine months of fiscal
1994 has remained fairly flat as compared to the respective periods of fiscal
1993.
Income Taxes
No tax expense was recorded by the Company for the net income of $330 thousand
reported in the third quarter. No tax benefit was recognized by the Company
for the net loss of $2.2 million for the first nine months of fiscal 1994 due
to the uncertainty surrounding the timing of realizing this benefit in future
profitable periods.
LIQUIDITY AND CAPITAL RESOURCES
As of December 26, 1993, the Company had cash, cash equivalents and temporary
cash investments of $43.5 million, as compared to $52.1 million as of March
31, 1993. Net cash used for operations of $.4 million for the first nine
months of fiscal 1994 resulted primarily from expenditures related to the
restructuring and other non-recurring charge recorded in the fourth quarter of
fiscal 1993, the increase in accounts receivable due to increased sales and
payment of interest on the convertible subordinated debentures.
9.
<PAGE>
Net cash used for investing activities of $5.6 million for the first nine
months of fiscal 1994 consists primarily of purchases of property and
equipment, offset partially by net sales of temporary cash investments.
Net cash provided by financing activities of $1.0 million for the first nine
months of fiscal 1994 is composed primarily of the sale of common stock,
offset partially by repayments of borrowings and the repurchase of 80,000
shares of common stock.
The Company has been authorized to repurchase up to one million shares of
common stock. These purchases may be made on the open market from time to
time at price levels the Company deems appropriate.
As of December 26, 1993 the Company had available an unsecured $10.0 million
line of credit. Borrowings under this facility have been extended through
March 2, 1994 and bear interest at the bank's base rate (which approximates
prime). The Company is currently discussing the renewal of the line of credit
agreement with the bank. At December 26, 1993, there were no outstanding
borrowings under the line of credit agreement. In addition, if the remaining
holders of N.E.T. warrants exercise their right to purchase common stock
through March 1994, the Company would receive additional proceeds of up to
$15.1 million. Management believes that current cash balances and cash flows
from operations, together with available sources of financing, will be
sufficient to fund domestic and international operations, purchases of capital
equipment and research and development programs currently planned at least
through the next fiscal year.
10.
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information
In late January the Company announced that it has signed a
strategic cooperation agreement with Mitsui f Co. Ltd. for
distribution and development of our ATM products in Japan.
This agreement includes multi-million dollar funding to
address current and future product capabilities.
Also in January, John B. Arnold, a member of the Board of
Directors of the Company since 1983, became Acting CEO and
President.
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 December 26, 1993.
11.
<PAGE>
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) February 7, 1994
12.
<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 Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1993 1992 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary
Earnings:
Net income (loss) $ 330 $ 1,186 $ (2,224) $ 4,370
-------- -------- -------- --------
-------- -------- -------- --------
Shares:
Weighted average number of common
shares outstanding 16,829 15,808 16,711 15,642
Number of common equivalent shares assuming
exercise of stock options and warrants (1) - - - -
-------- -------- -------- --------
16,829 15,808 16,711 15,642
-------- -------- -------- --------
-------- -------- -------- --------
Primary earnings (loss) per share $ .02 $ .08 $ (.13) $ .28
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted
Earnings:
Net income (loss) $ 330 $ 1,186 $ (2,224) $ 4,370
-------- -------- -------- --------
-------- -------- -------- --------
Shares:
Weighted average number of common
shares outstanding 16,829 15,808 16,711 15,642
Number of common equivalent shares assuming
exercise of stock options and warrants (1) - - - -
Number of common equivalent shares assuming
conversion of convertible securities (1) - - - -
-------- -------- -------- --------
16,829 15,808 16,711 15,642
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted earnings (loss) per share $ .02 $ .08 $ (.13) $ .28
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) The assumed exercise of these common stock equivalents were excluded as
they were anti-dilutive or would not have had a material effect on the
earnings per share calculation.
13.
