______________________________________________________________________________
______________________________________________________________________________
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 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 December 25, 1994 was 18,113,581.
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 -
December 25, 1994 and March 31, 1994 ....................... 3
Condensed Consolidated Statement of Operations - quarter and
nine months ended December 25, 1994 and December 26, 1993 .. 4
Condensed Consolidated Statement of Cash Flows - nine
months ended December 25, 1994 and December 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 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>
December 25, March 31,
1994 1994
(unaudited)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 29,213 $ 23,854
Temporary cash investments 35,252 17,714
Accounts receivable, net of allowances of $3,744 at
December 25 and $3,195 at March 31 56,803 57,432
Inventories 32,252 34,456
Prepaid expenses and other assets 4,668 3,842
-------- --------
Total current assets 158,188 137,298
Property and equipment, net of accumulated depreciation and
amortization of $87,699 at December 25 and $75,990 at March 31 28,071 33,386
Software production costs, net of accumulated amortization of
$20,161 at December 25 and $18,041 at March 31 5,009 5,520
Other assets 10,436 10,811
-------- --------
$201,704 $187,015
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,054 $ 20,225
Accrued liabilities 42,500 38,883
Notes payable and current portion of long-term obligations 9 26
-------- --------
Total current liabilities 56,563 59,134
Deferred income taxes 458 328
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 86 268
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 18,114,000 shares at December 25 and
17,097,000 shares at March 31 181 171
Additional paid-in capital 105,948 98,315
Unrealized gain (loss) on available-for-sale securities (2) -
Accumulated translation adjustment (1,091) (1,157)
Accumulated deficit (29,064) (38,669)
-------- --------
Total stockholders' equity 76,058 58,928
-------- --------
$201,704 $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 Nine Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 51,227 $ 43,481 $135,887 $119,056
Service and other revenue 22,612 17,764 66,341 51,781
-------- -------- -------- --------
Total revenue 73,839 61,245 202,228 170,837
-------- -------- -------- --------
Cost of sales:
Cost of product revenue 20,825 18,305 56,025 49,713
Cost of service and other revenue 14,839 12,043 45,543 34,627
-------- -------- -------- --------
Total cost of sales 35,664 30,348 101,568 84,340
-------- -------- -------- --------
Gross margin 38,175 30,897 100,660 86,497
Operating expenses:
Sales and marketing 17,707 17,760 51,724 50,959
Research and development 8,556 8,566 25,100 24,512
General and administrative 3,029 3,336 8,375 10,111
-------- -------- -------- --------
Total operating expenses 29,292 29,662 85,199 85,582
-------- -------- -------- --------
Income from operations 8,883 1,235 15,461 915
Other income (expense):
Interest income 625 354 1,395 1,077
Interest expense (1,304) (1,339) (3,906) (3,960)
Other (135) 80 (535) (256)
-------- -------- -------- --------
Income (loss) before income taxes 8,069 330 12,415 (2,224)
Income tax provision 2,810 - 2,810 -
-------- -------- -------- --------
Net income (loss) $ 5,259 $ 330 $ 9,605 $ (2,224)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share:
Primary $ .27 $ .02 $ .52 $ (.13)
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted $ .27 $ .02 $ .49 $ (.13)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computation:
Primary 19,567 16,829 18,312 16,711
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted 19,819 16,829 19,596 16,711
-------- -------- -------- --------
-------- -------- -------- --------
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>
Nine Months Ended
Dec. 25, Dec. 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) 9,605 (2,224)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operations:
Depreciation and amortization 13,382 14,223
Restricted stock compensation - 329
Changes in assets and liabilities:
Accounts receivable 629 (7,088)
Inventories 2,204 (4,015)
Prepaid expenses and other assets (826) (104)
Accounts payable (6,171) 3,108
Accrued liabilities 3,617 (4,668)
-------- --------
Net cash provided by (used for) operations 22,440 (439)
-------- --------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (36,608) (17,700)
Proceeds from sales of temporary cash investments 19,068 21,172
Additions to property and equipment (5,947) (9,356)
Additions to software production costs (1,609) (2,035)
Other 505 2,271
-------- --------
Net cash used for investing activities (24,591) (5,648)
-------- --------
Cash Flows from Financing Activities:
Sale of common stock 7,461 2,444
Repurchase of common stock - (600)
Repayments of borrowings (17) (813)
Other 66 (71)
-------- --------
Net cash provided by financing activities 7,510 960
-------- --------
Net increase (decrease) in cash and cash equivalents 5,359 (5,127)
-------- --------
Cash and Cash Equivalents at End of Period $ 29,213 $ 24,953
-------- --------
-------- --------
Other Cash Flow Information:
Cash paid for:
Interest $ 5,076 $ 5,127
Income taxes $ 1,223 $ 94
Non-cash investing and financing activities:
Unrealized loss on investments $ 2 $ -
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE 6>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(December 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 December 25, 1994, and the results of
operations and cash flows for the quarter and nine months ended December
25, 1994 and December 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 nine months ended
December 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." 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 $2,000
as a separate component of stockholders' equity at April 1, 1994 and
December 25, 1994, respectively.
3. Inventories
Inventories consist of (in thousands):
December 25, March 31,
1994 1994
-------- --------
(unaudited)
Purchased components $ 12,343 $ 12,608
Work-in-process 16,679 18,618
Finished goods 3,230 3,230
-------- --------
$ 32,252 $ 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 Nine Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
Percent of Revenue 1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Product revenue 69.4 71.0 67.2 69.7
Service and other revenue 30.6 29.0 32.8 30.3
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Product revenue gross margin 59.3 57.9 58.8 58.2
Service and other revenue gross margin 34.4 32.2 31.4 33.1
----- ----- ----- -----
Total gross margin 51.7 50.4 49.8 50.6
----- ----- ----- -----
Sales and marketing 24.0 29.0 25.6 29.8
Research and development 11.6 14.0 12.4 14.4
General and administrative 4.1 5.4 4.2 5.9
----- ----- ----- -----
Total operating expenses 39.7 48.4 42.2 50.1
----- ----- ----- -----
Income from operations 12.0 2.0 7.6 .5
----- ----- ----- -----
Net income (loss) 7.1 .5 4.7 (1.3)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Revenue
Total revenue for the third quarter and first nine months of fiscal 1995
increased 20.6% and 18.4%, respectively, from the comparable periods in the
prior year. Product revenue for the third quarter and first nine months of
fiscal 1995 increased $7.7 million, or 17.8%, and $16.8 million, or 14.1%,
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 44.3% to 27.9% of total
revenue for the quarter and 56.7% to 26.8% of total revenue year-to-date.
Based upon current levels of proposal activity, management expects product
revenue to increase in the fourth quarter and, consistent with historic
trends, to then decrease in the first quarter of fiscal 1996 from the fourth
quarter of fiscal 1995.
The increase in service and other revenue for the third quarter and first nine
months of fiscal 1995 of $4.8 million and $14.6 million, respectively, is
primarily attributable to an increase in systems integration services in
support of product sales to the U.S. government and to increases in service
revenue as a result of increases in the installed base of the Company's
products.
<PAGE 8>
Gross Margin
Total gross margin as a percentage of total revenue increased to 51.7% in the
third quarter and decreased to 49.8% in the first nine months of fiscal 1995
from 50.4% and 50.6% in the comparable periods of fiscal 1994. The quarter-
over-quarter increase was the result of an increase in product gross margin
while the year-to-date decline was the result of a decrease in service and
other gross margin as well as an increase in the mix of service and other
revenue as a percentage of total revenue. Product gross margin increased to
59.3% and 58.8% in the third quarter and first nine months of fiscal 1995 from
57.9% and 58.2%, respectively, in the comparable periods of fiscal 1994.
These increases were 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.
Service and other gross margin for the third quarter and first nine months of
fiscal 1995 was 34.4% and 31.4%, respectively, as compared to 32.2% and 33.1%
in the comparable periods of fiscal 1994. The quarter-over-quarter increase
is a result of an increase in service margin. However, service and other
gross margin was negatively impacted in both periods as a result of a higher
mix of lower gross margin systems integration services provided under a U.S.
government contract.
Operating Expenses
Operating expenses in the third quarter and first nine months of fiscal 1995
decreased from the comparable periods of fiscal 1994, and also decreased as a
percentage of total revenue to 39.7% and 42.2% from 48.4% and 50.1%,
respectively, as a result of higher revenue levels. Management expects the
relationship of operating expenses as a percentage of total revenue for the
fourth quarter of fiscal 1995 to remain comparable to that of the third
quarter.
Sales and marketing expense remained flat quarter-over-quarter and increased
$.8 million for the first nine months of fiscal 1995 from the comparable
periods of fiscal 1994, but decreased as a percentage of total revenue to
24.0% and 25.6% from 29.0% and 29.8%, 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 remained flat quarter-over-quarter and
increased $.6 million for the first nine months of fiscal 1995 from the
comparable periods of fiscal 1994, but decreased as a percentage of total
revenue to 11.6% and 12.4%, respectively, from 14.0% and 14.4% in the
comparable periods of fiscal 1994. The year-over-year 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 third quarter and first
nine months of fiscal 1995, $.2 million and $1.6 million of software costs
were capitalized as compared to $.7 million and $2.0 million in 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, $.3 million and
$1.7 million for the third quarter and first nine months of fiscal 1995 from
the comparable periods of fiscal 1994, and as a percentage of total revenue,
to 4.1% and 4.2% from 5.4% and 5.9%, respectively. The dollar decrease is
primarily a result of lower personnel costs related to streamlining the
Company's operations.
<PAGE 9>
Income Taxes
The third quarter of fiscal 1995 includes a provision for income tax expense
of $2.8 million. Based on the improved earnings in the quarter, the Company
now expects to pay tax (primarily U.S. Alternative Minimum tax) in the range
of 22% of pretax earnings for the year and, accordingly, has provided in the
quarter for this year-to-date impact.
The Company has reported net losses in its past three fiscal years and,
accordingly, has not recognized the benefit of tax loss and other tax credit
carryforwards. With improved results in the current fiscal year, management
will, in the fourth quarter, assess when it would be appropriate to recognize
such tax benefits. At such time that these benefits are recognized, they will
result in a one-time credit to earnings.
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 December 25, 1994, the Company had cash, cash equivalents and temporary
cash investments of $64.5 million, as compared to $41.6 million as of March
31, 1994. Cash provided by operations was $22.6 million during the first nine
months of fiscal 1995, a $23.0 million increase over the comparable period of
the prior year. This increase was principally due to net income versus a net
loss in the prior year and to decreases in accounts receivable and inventory.
Despite the significant increase in revenue, accounts receivable and inventory
decreased $.6 million and $2.2 million, respectively, during the first nine
months of fiscal 1995 as compared to increases of $7.1 million and $4.0
million in the comparable period of the prior year.
Net cash used for investing activities of $24.7 million for the first nine
months of fiscal 1995 consisted of $17.5 million in net purchases of temporary
cash investments, $5.9 million in purchases of property and equipment and
additions to software production costs.
Net cash provided by financing activities of $7.5 million for the first nine
months of fiscal 1995 is composed primarily of the sale of Common Stock.
As of December 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 December 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 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 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) February 7, 1995
<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. 25, Dec. 26, Dec. 25, Dec. 26,
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary
Earnings:
Net income (loss) $ 5,259 $ 330 $ 9,605 $ (2,224)
-------- -------- -------- --------
-------- -------- -------- --------
Shares:
Weighted average number of common shares outstanding 17,906 16,829 17,482 16,711
Number of common equivalent shares assuming
exercise of dilutive stock options 1,661 - 830 -
-------- -------- -------- --------
19,567 16,829 18,312 16,711
-------- -------- -------- --------
-------- -------- -------- --------
Primary earnings (loss) per share $ .27 $ .02 $ .52 $ (.13)
-------- -------- -------- --------
-------- -------- -------- --------
Fully Diluted
Earnings:
Net income (loss) $ 5,259 $ 330 $ 9,605 $ (2,224)
-------- -------- -------- --------
-------- -------- -------- --------
Shares:
Weighted average number of common shares outstanding 17,906 16,829 17,482 16,711
Number of common equivalent shares assuming
exercise of dilutive stock options 1,913 - 2,114 -
Number of common equivalent shares assuming
conversion of convertible securities (1) - - - -
-------- -------- -------- --------
19,819 16,829 19,596 16,711
-------- -------- -------- --------
-------- -------- -------- --------
Fully diluted earnings (loss) per share $ .27 $ .02 $ .49 $ (.13)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
_____________
(1) 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> DEC-25-1994
<CASH> 29,213
<SECURITIES> 35,252
<RECEIVABLES> 56,803
<ALLOWANCES> 3,744
<INVENTORY> 32,252
<CURRENT-ASSETS> 158,188
<PP&E> 28,071
<DEPRECIATION> 87,699
<TOTAL-ASSETS> 201,704
<CURRENT-LIABILITIES> 56,563
<BONDS> 68,625
<COMMON> 181
0
0
<OTHER-SE> 75,877
<TOTAL-LIABILITY-AND-EQUITY> 201,704
<SALES> 135,887
<TOTAL-REVENUES> 202,228
<CGS> 56,025
<TOTAL-COSTS> 101,568
<OTHER-EXPENSES> 85,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,906
<INCOME-PRETAX> 12,415
<INCOME-TAX> 2,810
<INCOME-CONTINUING> 9,605
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,605
<EPS-PRIMARY> .52
<EPS-DILUTED> .49
</TABLE>
