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 30, 1996, 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 30, 1996 was 20,962,283.
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 Sheets -
June 30, 1996 and March 31, 1996 ............................ 3
Condensed Consolidated Statements of Income -
three months ended June 30, 1996 and June 25, 1995 ........... 4
Condensed Consolidated Statements of Cash Flows -
three months ended June 30, 1996 and June 25, 1995 ........... 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 ...................... 11
SIGNATURE ........................................................ 12
EXHIBIT 11.1 Computation of Primary and Fully Diluted
Earnings Per Share .................................... 13
<Page 3>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
(unaudited)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 53,118 $ 52,319
Temporary cash investments 62,891 59,892
Accounts receivable, net of allowances of $4,643 at
June 30 and $4,533 at March 31 71,626 76,966
Inventories 29,055 31,705
Deferred income taxes 11,830 11,830
Prepaid expenses and other assets 6,304 5,714
-------- --------
Total current assets 234,824 238,426
Property and equipment, net 31,059 31,040
Software production costs, net 4,479 4,146
Other assets 8,686 8,345
-------- --------
$279,048 $281,957
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 19,249 $ 21,559
Accrued liabilities 34,030 42,442
-------- --------
Total current liabilities 53,279 64,001
7-1/4% convertible subordinated debentures 33,526 33,526
Stockholders' equity:
Preferred stock, $.01 par value
Authorized: 5,000,000 shares,
Outstanding: none - -
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 20,962,000 shares at June 30 and
20,839,000 shares at March 31 210 208
Additional paid-in capital 168,765 165,414
Net unrealized loss on available-for-sale securities (49) (12)
Accumulated translation adjustment (912) (931)
Retained Earnings 24,229 19,751
-------- --------
Total stockholders' equity 192,243 184,430
-------- --------
$279,048 $281,957
-------- --------
-------- --------
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<Page 4>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 25,
1996 1995
-------- --------
<S> <C> <C>
Revenue:
Product revenue $ 50,723 $ 49,498
Service and other revenue 25,746 30,111
-------- --------
Total revenue 76,469 79,609
-------- --------
Cost of sales:
Cost of product revenue 20,775 19,861
Cost of service and other revenue 16,321 21,026
-------- --------
Total cost of sales 37,096 40,887
-------- --------
Gross margin 39,373 38,722
Operating expenses:
Sales and marketing 19,300 17,729
Research and development 10,447 8,100
General and administrative 3,073 2,939
-------- --------
Total operating expenses 32,820 28,768
-------- --------
Income from operations 6,553 9,954
Other income (expense):
Interest income 1,439 1,365
Interest expense (633) (1,292)
Other (137) (147)
-------- --------
Income before income taxes 7,222 9,880
Income tax provision 2,744 3,458
-------- --------
Net income $ 4,478 $ 6,422
-------- --------
-------- --------
Primary and fully diluted net income per share $ .21 $ .32
-------- --------
-------- --------
Shares used in per share computation:
Primary 21,607 19,983
-------- --------
-------- --------
Fully diluted 21,607 20,038
-------- --------
-------- --------
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<Page 5>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 25,
1996 1995
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $52,319 $33,886
------- -------
Net Cash Flows from Operating Activities:
Net income 4,478 6,422
Adjustments to reconcile net income to cash
provided by (used for) operations:
Depreciation and amortization 4,122 3,422
Restricted stock compensation 99 71
Changes in assets and liabilities:
Accounts receivable 5,316 (12,767)
Inventories 2,676 3,744
Prepaid expenses and other assets (586) (1,120)
Accounts payable (2,316) 2,778
Accrued liabilities (6,788) (4,225)
-------- -------
Net cash provided by (used for) operations 7,001 (1,675)
-------- -------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (33,881) (14,832)
Proceeds from maturities of temporary cash investments 30,845 16,078
Purchases of property and equipment (3,550) (1,422)
Additions to software production costs (895) (292)
Other (321) 183
-------- -------
Net cash used for investing activities (7,802) (285)
-------- -------
Cash Flows from Financing Activities:
Sale of Common stock 1,620 2,703
-------- -------
Net cash provided by financing activities 1,620 2,703
-------- -------
Effect of exchange rate changes on cash (20) 273
-------- -------
Net increase in cash and cash equivalents 799 1,016
-------- -------
Cash and Cash Equivalents at End of Period $53,118 $34,902
-------- -------
-------- -------
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 1,229 $ 2,511
Income taxes $ (497) $ 1,335
Non-cash investing and financing activities:
Income tax benefit arising from employee stock option plans $ 1,634 $ 5,820
Net unrealized (gain) loss on available-for-sale securities $ 37 $ (137)
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) considered necessary to present
fairly the financial position as of June 30, 1996, and the results of
operations and cash flows for the three months ended June 30, 1996 and
June 25, 1995. These financial statements should be read in conjunction
with the March 31, 1996 audited consolidated financial statements and
notes thereto. The results of operations for the three months ended June
30, 1996 are not necessarily indicative of the results to be expected for
the fiscal year ending March 31, 1997.
2. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
(unaudited)
-------- --------
<S> <C> <C>
Purchased components $ 13,110 $ 14,381
Work-in-process 13,984 15,533
Finished goods 1,961 1,791
-------- --------
$ 29,055 $ 31,705
-------- --------
-------- --------
</TABLE>
3. Earnings Per Share
Net income per share has been computed based upon the weighted average
number of common and common equivalent shares outstanding during the
periods. 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.
4. Recently Issued Accounting Standard
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). This standard defines a fair
value method of accounting for stock-based employee compensation plans.
Under this method, compensation cost is measured based on the fair value
of the stock award when granted and is recognized as an expense over the
service period. This standard became effective for the Company on April
1, 1996 and will require measurement of awards made beginning April 1,
1995. The Company has adopted the disclosure-only alternative, and,
accordingly, SFAS 123 had no impact on the Company's results of
operations or financial position.
<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 1996 Annual Report to Shareholders
and Part I of the Company's Form 10-K for the fiscal year ended March 31,
1996.
RESULTS OF OPERATIONS
The following table depicts selected data derived from the Company's
Consolidated Statements of Income expressed as a percentage of revenue for the
periods presented:
<TABLE>
<CAPTION>
Three Months Ended
----------------------
June 30, June 25,
Percent of Revenue 1996 1995
- ------------------ ----- -----
<S> <C> <C>
Product revenue 66.3 62.2
Service and other revenue 33.7 37.8
----- -----
Total revenue 100.0 100.0
----- -----
Product revenue gross margin 59.0 59.9
Service and other revenue gross margin 36.6 30.2
----- -----
Total gross margin 51.5 48.6
----- -----
Sales and marketing 25.2 22.2
Research and development 13.7 10.2
General and administrative 4.0 3.7
----- -----
Total operating expenses 42.9 36.1
----- -----
Income from operations 8.6 12.5
----- -----
Net income 5.9 8.1
----- -----
----- -----
</TABLE>
Revenue
Total revenue for the first quarter of fiscal 1997 decreased 3.9% to $76.5
million from $79.6 million for the first quarter of fiscal 1996. Product
revenue increased $1.2 million and service and other revenue decreased $4.4
million quarter-over-quarter. The 2.5% increase in product revenue is
primarily attributable to an increase in international product sales, which
increased 22.3% to 38.4% of product revenue. This increase resulted from
growth in product sales in the Asia Pacific/Latin American region, which grew
66.2% quarter-over-quarter. Decreases in other sales channels of primarily
IDNX_ equipment were partially offset by an increase in sales of OEM
equipment. The 14.5% decrease in service and other revenue is primarily
attributable to a decrease in systems integration services in support of
product sales to the U.S. government. Overall, international and U.S. federal
channel sales represented 29.2% and 32.2% of the Company's total revenue,
respectively, for the first quarter of fiscal 1997. As a result of a
slowdown in both product and systems integration services revenue in the U.S.,
management believes there exists a higher level of uncertainty in projecting
revenue levels for fiscal 1997.
<Page 8>
Gross Margin
Total gross margin as a percentage of total revenue increased to 51.5% in the
first quarter of fiscal 1997 from 48.6% in the comparable period of fiscal
1996. This increase was primarily the result of a decrease in the mix of
service and other revenue as a percentage of total revenue. Product gross
margin decreased to 59.0% in the first quarter of fiscal 1997 from 59.9% in
the first quarter of fiscal 1996, primarily as a result of both a less
favorable channel and product mix.
Service and other gross margin increased to 36.6% in the first quarter of
fiscal 1997 from 30.2% in the comparable period of fiscal 1996. This quarter-
over-quarter increase is attributable to a 47.4% decrease in lower margin
systems integration services provided under a U.S. government contract. The
gross margin on these systems integration services increased to 18.0% for the
first quarter of fiscal 1997 from 11.9% for the comparable period of fiscal
1996 due to the mix of products and services provided.
Management expects product gross margin to continue to be affected by sales
channel and product mix changes as well as manufacturing volume variances, and
expects service and other revenue gross margin 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 1997 increased $4.1 million
from the first quarter of fiscal 1996, and increased as a percentage of total
revenue to 42.9% from 36.1%. Management expects operating expenses to
continue to increase during the remainder of fiscal 1997.
Sales and marketing expense in the first quarter of fiscal 1997 increased $1.6
million, or 8.9%, from the first quarter of fiscal 1996, and increased as a
percentage of total revenue to 25.2% from 22.2%, respectively. The increase
in spending is primarily the result of the addition of personnel to support
expansion of the sales infrastructure and increases in trade show and
advertising expenses. Management expects sales and marketing expenses to
increase during the remainder of fiscal 1997.
Research and development expense in the first quarter of fiscal 1997 increased
$2.3 million, or 29.0%, from the first quarter of fiscal 1996, and increased
as a percentage of total revenue to 13.7% from 10.2%, respectively. This
increase was primarily due to an increase in direct project funding, primarily
salary-related expenses and purchases of direct materials to support product
development. Management plans to continue funding research and development
efforts at levels necessary to advance product programs and expects research
and development spending to increase during the remainder of fiscal 1997.
General and administrative expense increased $.1 million in the first quarter
of fiscal 1997 as compared to the first quarter of fiscal 1996, and increased
as a percentage of total revenue, to 4.0% from 3.7%, respectively. Management
expects general and administrative expense to remain fairly flat for the
remainder of fiscal 1997.
Income from Operations
Income from operations for the first quarter of fiscal 1997 decreased to $6.6
million from $10.0 million for the first quarter of fiscal 1996 as a result of
an increase in operating expenses. The Company expects income from operations
in the second quarter of fiscal 1997 to be below operating income during the
same period in fiscal 1996.
Non-Operating Items
Interest income for the first quarter of fiscal 1997 increased slightly from
the comparable period of fiscal 1996. Interest expense decreased by $.7
million quarter-over-quarter as a result of the partial call of the Company's
convertible debentures in the third quarter of fiscal 1996.
The first quarter of fiscal 1997 includes a provision for income tax expense
of $2.7 million at an effective rate of 38% as compared to $3.5 million at an
effective rate of 35% in the first quarter of fiscal 1996.
<Page 9>
BUSINESS ENVIRONMENT AND RISK FACTORS
This Form 10-Q contains forward-looking statements. These forward-looking
statements are subject to risks and uncertainties. Actual results may differ
materially from such forward-looking statements as a result of risks and
uncertainties, including those described below and others as set forth in the
Company's fiscal 1996 Form 10-K and other reports filed with the Securities
and Exchange Commission.
Historically, the majority of the Company's revenue 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, in part, based on
expectations regarding future revenue and margin levels. These expectations
derive from making judgments on issues such as future technology trends,
competitive products and services, pricing 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 and many are susceptible to changing economic conditions, regulations
and political conditions. The Company has limited visibility into factors
that could influence its revenue, mix of product and other revenue sources and
margins, particularly in international markets that are served primarily by
non-exclusive resellers.
The Company's products incorporate intellectual property and technology owned
by the Company or licensed from third parties. The Company's ability to
maintain and enhance the value of its intellectual property and technology and
third party licenses will affect future product and service offerings.
Moreover, the Company believes that operating results will depend on
successful development and introduction of new products and enhancements to
existing products and service offerings. There can be no assurance that the
Company will succeed in such efforts or that customers will accept new,
enhanced and existing products and services in quantities and at prices and
margins that are consistent with the Company's expectations. The Company's
success also depends on its ability to attract and retain employees necessary
to support planned growth.
The Company's products include components, assemblies and subassemblies that
are currently available from single sources and, in some cases, are in short
supply. 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.
The Company has distribution, product and technology relationships with a
number of significant customers and entities that are considered by the
Company to be strategic. Most of the Company's competitors have similar
relationships with their respective customers and other parties. Changes in
the Company's relationships or changes in similar relationships among
competitors could have a material impact on competitive and other factors
described above, including the Company's operating results. Also, litigation
or other claims based on securities, intellectual property, patent, product,
regulatory or other factors could materially adversely affect the Company's
business, operating results and finances.
A significant portion of the Company's revenue comes from contracts with the
U.S. government, most of which do not include purchase commitments. There can
be no assurance that orders from the U.S. government, or from other customers,
will continue at historical levels, or that the Company will be able to obtain
orders from new customers.
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.
<Page 10>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash, cash equivalents and temporary cash
investments of $116.0 million, as compared to $112.2 million as of March 31,
1996. Cash provided by operations was $7.0 million during the first quarter
of fiscal 1997, which was an $8.7 million increase from the cash used for
operations from the comparable period of the prior year. This increase was
principally due to a decrease in accounts receivable during the first quarter
of fiscal 1997 as compared to a significant increase during the comparable
period of the prior year.
Net cash used for investing activities of $7.8 million in the first quarter of
fiscal 1997 consisted primarily of purchases of property and equipment of $3.6
million, net purchases of temporary cash investments of $3.0 million and an
increase in software production costs of $.9 million.
Net cash provided by financing activities of $1.6 million in the first quarter
of fiscal 1997 pertains to the issuance of Common Stock relating to the
employee stock benefit plans.
The Board of Directors has authorized the Company to repurchase up to 10% of
the outstanding shares of its Common Stock and to repurchase its outstanding
7-1/4% convertible subordinated debentures. These purchases may be made on
the open market from time to time at the discretion of the Company's
management and at price levels the Company deems appropriate. The Company may
discountinue its purchases at any time it determines additional purchases are
not warranted. As of the close of business on August 14, 1996, the Company
had repurchased 204,600 of its shares of Common Stock at a weighted average
price of $13.27 and repurchased debentures with a face value of $2,705,000 at
a weighted average cost of 81.9% of the face value.
As of June 30, 1996 the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed facility are available through May
1997 and would bear interest at the bank's base rate (which approximates
prime). At June 30, 1996, 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 11>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1: 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 30, 1996.
<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 14, 1996
<PAGE>
EXHIBIT 11.1
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 30, June 25,
1996 1995
-------- --------
<S> <C> <C>
Primary
Earnings:
Net income $ 4,478 $ 6,422
-------- --------
-------- --------
Shares:
Weighted average number of common shares outstanding 20,880 18,872
Number of common equivalent shares assuming exercise
of stock options 727 1,111
-------- --------
21,607 19,983
-------- --------
-------- --------
Primary earnings per share $ .21 $ .32
-------- --------
-------- --------
Fully Diluted
Earnings:
Net income $ 4,478 $ 6,422
-------- --------
-------- --------
Shares:
Weighted average number of common shares outstanding 20,880 18,872
Number of common equivalent shares assuming exercise
of stock options 727 1,166
Number of common equivalent shares assuming conversion
of convertible securities (1) - -
-------- --------
21,607 20,038
-------- --------
-------- --------
Fully diluted earnings per share $ .21 $ .32
-------- --------
-------- --------
</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-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 53,118
<SECURITIES> 62,891
<RECEIVABLES> 71,626
<ALLOWANCES> 4,643
<INVENTORY> 29,055
<CURRENT-ASSETS> 234,824
<PP&E> 31,058
<DEPRECIATION> 80,526
<TOTAL-ASSETS> 279,048
<CURRENT-LIABILITIES> 53,279
<BONDS> 33,526
<COMMON> 210
0
0
<OTHER-SE> 192,033
<TOTAL-LIABILITY-AND-EQUITY> 279,048
<SALES> 50,723
<TOTAL-REVENUES> 76,469
<CGS> 20,775
<TOTAL-COSTS> 37,096
<OTHER-EXPENSES> 32,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633
<INCOME-PRETAX> 7,222
<INCOME-TAX> 2,744
<INCOME-CONTINUING> 4,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,478
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
