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 25, 1995, 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 June 25, 1995 was 19,150,164.
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 -
June 25, 1995 and March 31, 1995............................ 3
Condensed Consolidated Statement of Operations -
three months ended June 25, 1995 and June 26, 1994 ......... 4
Condensed Consolidated Statement of Cash Flows -
three months ended June 25, 1995 and June 26, 1994 ......... 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>
June 25, March 31,
1995 1995
(unaudited)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 34,902 $ 33,886
Temporary cash investments 51,625 52,734
Accounts receivable, net of allowances of $3,170 at June 25
and $2,514 at March 31 69,440 56,983
Inventories 28,528 32,314
Deferred income taxes 9,900 9,900
Prepaid expenses and other assets 5,703 4,625
-------- --------
Total current assets 200,098 190,442
Property and equipment, net of accumulated depreciation and
amortization of $92,804 at June 25 and $90,618 at March 31 25,762 27,149
Software production costs, net of accumulated amortization of
$21,523 at June 25 and $20,838 at March 31 4,298 4,691
Other assets 9,538 9,764
-------- --------
$239,696 $232,046
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 21,056 $ 18,315
Accrued liabilities 39,146 43,444
-------- --------
Total current liabilities 60,202 61,759
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 7 32
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 19,150,000 shares at June 25 and
18,714,000 shares at March 31 192 187
Additional paid-in capital 116,640 113,846
Unrealized gain (loss) on available-for-sale securities 127 (10)
Accumulated translation adjustment (920) (794)
Accumulated deficit (5,177) (11,599)
-------- --------
Total stockholders' equity 110,869 101,662
-------- --------
$239,696 $232,046
-------- --------
-------- --------
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 25, June 26,
1995 1994
-------- --------
<S> <C> <C>
Revenue:
Product revenue $ 49,498 $ 40,630
Service and other revenue 30,111 20,908
-------- --------
Total revenue 79,609 61,538
-------- --------
Cost of sales:
Cost of product revenue 19,861 17,083
Cost of service and other revenue 21,026 14,374
-------- --------
Total cost of sales 40,887 31,457
-------- --------
Gross margin 38,722 30,081
Operating expenses:
Sales and marketing 17,729 16,904
Research and development 8,100 8,105
General and administrative 2,939 2,525
-------- --------
Total operating expenses 28,768 27,534
-------- --------
Income from operations 9,954 2,547
Other income (expense):
Interest income 1,365 294
Interest expense (1,292) (1,296)
Other (147) (118)
-------- --------
Income before income taxes 9,880 1,427
Income tax provision 3,458 -
-------- --------
Net income $ 6,422 $ 1,427
-------- --------
-------- --------
Primary and fully diluted net income per share $ .32 $ .08
-------- --------
-------- --------
Shares used in computation:
Primary 19,983 17,127
-------- --------
-------- --------
Fully diluted 20,038 17,127
-------- --------
-------- --------
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 25, June 26,
1995 1994
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $33,886 $23,854
Net Cash Flows from Operating Activities:
Net income 6,422 1,427
Adjustments to reconcile net income to cash
used for operations:
Depreciation and amortization 3,422 4,664
Restricted stock compensation 71 -
Changes in assets and liabilities:
Accounts receivable (12,767) 1,412
Inventories 3,744 1,325
Prepaid expenses and other assets (1,120) (194)
Accounts payable 2,778 (3,667)
Accrued liabilities (4,225) (7,106)
-------- --------
Net cash used for operations (1,675) (2,139)
-------- --------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (14,832) (500)
Proceeds from maturities of temporary cash investments 16,078 3,972
Additions to property and equipment (1,422) (434)
Additions to software production costs (292) (709)
Other 183 183
-------- --------
Net cash provided by (used for) investing activities (285) 2,512
-------- --------
Cash Flows from Financing Activities:
Sale of common stock 2,703 742
Repayments of borrowings - (4)
-------- --------
Net cash provided by financing activities 2,703 738
-------- --------
Effect of exchange rate changes on cash 273 (600)
-------- --------
Net increase in cash and cash equivalents 1,016 511
-------- --------
Cash and Cash Equivalents at End of Period $34,902 $24,365
-------- --------
-------- --------
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 2,511 $ 2,515
Income taxes $ 1,335 $ (179)
Non-cash investing and financing activities:
Net unrealized (gain) loss on available-for-sale securities $ (137) $ 28
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<Page 6>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
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 25, 1995, and the results of operations and
cash flows for the three months ended June 25, 1995 and June 26, 1994.
These statements should be read in conjunction with the March 31, 1995
consolidated financial statements and notes thereto. The results of
operations for the three months ended June 25, 1995 are not necessarily
indicative of the results to be expected for the fiscal year ending March
31, 1996.
2. Reclassification
Certain fiscal 1995 amounts have been reclassfied to conform with fiscal
1996 presentation.
3. Inventories
Inventories consist of (in thousands):
June 25, March 31,
1995 1995
(unaudited)
-------- --------
Purchased components $ 11,955 $ 11,498
Work-in-process 13,895 17,175
Finished goods 2,678 3,641
-------- --------
$ 28,528 $ 32,314
-------- --------
-------- --------
4. Earnings Per Share
Net income 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 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 1995 Annual Report to Shareholders
and Part I of the Company's Form 10-K for the fiscal year ended March 31,
1995.
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>
Three Months Ended
June 25, June 26,
Percent of Revenue 1995 1994
------- -------
<S> <C> <C>
Product revenue 62.2 66.0
Service and other revenue 37.8 34.0
----- -----
Total revenue 100.0 100.0
----- -----
Product revenue gross margin 59.9 58.0
Service and other revenue gross margin 30.2 31.3
----- -----
Total gross margin 48.6 48.9
----- -----
Sales and marketing 22.2 27.5
Research and development 10.2 13.2
General and administrative 3.7 4.1
----- -----
Total operating expenses 36.1 44.8
----- -----
Income from operations 12.5 4.1
----- -----
Net income 8.1 2.3
----- -----
----- -----
</TABLE>
Revenue
Total revenue for the first quarter of fiscal 1996 increased 29.4% to $79.6
million from $61.5 million for the first quarter of fiscal 1995. Product
revenue and service and other revenue increased $8.9 million and $9.2 million,
respectively, quarter-over-quarter. The 21.8% increase in product revenue is
primarily attributable to an increase in international sales and sales to
network service providers. International product sales increased 30.8% to
32.2% of product revenue. Most of this increase resulted from growth in
international product sales in the Asia Pacific/Latin American region, which
grew 111.0%. Sales to network service providers has more than doubled as
compared to the same period in the prior year. Overall, international and
U.S. federal channel sales represented 24.2% and 39.6% of the Company's total
revenue, respectively, for the first quarter of fiscal 1996.
The 44.0% increase in service and other revenue is primarily attributable to
systems integration services in support of product sales to the U.S.
government. Quarter-over-quarter, system integration revenue increased by
$7.2 million.
<Page 8>
Gross Margin
Total gross margin as a percentage of total revenue decreased to 48.6% in the
first quarter of fiscal 1996 from 48.9% in the comparable period of fiscal
1995. This decline was the result of an increase in the mix of service and
other revenue as a percentage of total revenue. Product gross margin
increased to 59.9% in the first quarter of fiscal 1996 from 58.0% in the first
quarter of fiscal 1995. This quarter-over-quarter increase resulted primarily
from a favorable product mix and a higher revenue base over which to spread
manufacturing costs.
Service and other gross margin decreased to 30.2% in the first quarter of
fiscal 1996 from 31.3% in the comparable period of fiscal 1995. This decrease
is attributable to a significantly higher mix of lower margin systems
integration services provided under a U.S. government contract. The gross
margin on these system integration services increased to 11.9% for the first
quarter of fiscal 1996 from 11.3% for the comparable period of fiscal 1995 due
to the mix of OEM products and services provided. Management expects service
and other gross margin will to continue to fluctuate as a result of the
changes in mix between systems integration services and other service revenue.
Operating Expenses
Operating expenses in the first quarter of fiscal 1996 increased $1.2 million
from the first quarter of fiscal 1995, but decreased as a percentage of total
revenue to 36.1% from 44.8%, respectively, as a result of higher revenue
levels. Management expects the relationship of operating expenses as a
percentage of total revenue to continue to trend downward during the remainder
of fiscal 1996 as planned revenue growth exceeds that of operating expenses.
Sales and marketing expense in the first quarter of fiscal 1996 increased $.8
million, or 4.9%, from the first quarter of fiscal 1995, but decreased as a
percentage of total revenue to 22.2% from 27.5%, respectively. The increase
in spending is primarily the result of the addition of personnel to support
expansion of the sales infrastructure. Management expects sales and marketing
expenses to increase during the remainder of fiscal 1996 while decreasing as a
percentage of planned revenue.
Research and development expense remained flat in the first quarter of fiscal
1996 but decreased as a percentage of total revenue to 10.2% from 13.2% in the
comparable period of fiscal 1995. Management plans to continue funding
research and development efforts at levels necessary to advance product
programs. While it is management's intention to continue to focus these
development efforts, research and development spending is expected to increase
during the remainder of fiscal 1996 while decreasing as a percentage of
planned revenue.
General and administrative expense increased $.4 million in the first quarter
of fiscal 1996 as compared to the first quarter of fiscal 1995, but decreased
as a percentage of total revenue, to 4.1% from 3.7%, respectively. Management
expects general and administrative expense to be comparable to fiscal 1995 for
the remainder of fiscal 1996.
Other income (expense)
Interest income for the first quarter of fiscal 1996 increased $1.1 million
from the comparable period of fiscal 1995 due to higher cash balances and
higher interest rates. Interest expense, primarily related to the 7-1/4%
convertible subordinated debentures, remained flat at $1.3 million.
Income Taxes
The first quarter of fiscal 1996 includes a provision for income tax expense
of $3.5 million at an effective rate of 35%. No tax expense was recorded in
the first quarter of fiscal 1995 due to the utilization of net operating loss
carryforwards.
<Page 9>
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. 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 large
orders do not close when forecasted or if near term demand for the Company's
products weakens, the Company's operating results for that or subsequent
quarters would be adversely affected.
Expense levels are relatively fixed and are set based on expectations
regarding future revenue and margin levels. These expectations involve making
judgments on issues such as future competitive conditions and customer
requirements, a process that involves evaluation of information that is often
unclear and in conflict. All markets for the Company's products are very
competitive and dynamic. The Company has limited visibility into factors that
could influence its revenue and margins, particularly in international markets
that are served primarily by non-exclusive resellers. Moreover, the Company
believes that future operating results will depend on successful development
or introduction of new products and enhancements to existing products and
service offerings, and there can be no guarantee that the Company will succeed
in such efforts.
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. In addition, price competition could adversely
impact 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 25, 1995, the Company had cash, cash equivalents and temporary cash
investments of $86.5 million, as compared to $86.6 million as of March 31,
1995. Cash used for operations was $1.7 million during the first quarter of
fiscal 1996, which was a $.5 million decrease in cash used for operations from
the comparable period of the prior year.
Net cash used for investing activities of $.3 million in the first quarter of
fiscal 1996 consisted of purchases of property and equipment of $1.4 million
and an increase in software production costs of $.3 million, partially offset
by $1.2 million in net proceeds from maturities of temporary cash investments.
Net cash provided by financing activities of $2.7 million in the first quarter
of fiscal 1996 pertains to the issuance of Common Stock relating to the
employee stock benefit plans.
As of June 25, 1995 the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed facility are available through May
1996 and would bear interest at the bank's base rate (which approximates
prime). At June 25, 1995, there were no outstanding borrowings under this
facility.
The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations 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 June 25, 1995.
<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) August 8, 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>
Three Months Ended
June 25, June 26,
1995 1994
-------- --------
<S> <C> <C>
Primary
Earnings:
Net income $ 6,422 $ 1,427
-------- --------
-------- --------
Shares:
Weighted average number of common shares outstanding 18,872 17,127
Number of common equivalent shares assuming exercise
of stock options 1,111 -
-------- --------
19,983 17,127
-------- --------
-------- --------
Primary earnings per share $ .32 $ .08
-------- --------
-------- --------
Fully Diluted
Earnings:
Net income $ 6,422 $ 1,427
-------- --------
-------- --------
Shares:
Weighted average number of common shares outstanding 18,872 17,127
Number of common equivalent shares assuming exercise
of stock options 1,166 -
Number of common equivalent shares assuming conversion
of convertible securities (1) - -
-------- --------
20,038 17,127
-------- --------
-------- --------
Fully diluted earnings per share $ .32 $ .08
-------- --------
-------- --------
</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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-25-1995
<CASH> 34,902
<SECURITIES> 51,625
<RECEIVABLES> 69,440
<ALLOWANCES> 3,170
<INVENTORY> 28,528
<CURRENT-ASSETS> 200,098
<PP&E> 25,762
<DEPRECIATION> 92,804
<TOTAL-ASSETS> 239,696
<CURRENT-LIABILITIES> 60,202
<BONDS> 68,625
<COMMON> 192
0
0
<OTHER-SE> 110,670
<TOTAL-LIABILITY-AND-EQUITY> 239,696
<SALES> 49,498
<TOTAL-REVENUES> 79,609
<CGS> 19,861
<TOTAL-COSTS> 40,887
<OTHER-EXPENSES> 28,768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,292
<INCOME-PRETAX> 9,880
<INCOME-TAX> 3,458
<INCOME-CONTINUING> 6,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,422
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
