<Page 1>
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 29, 1997, 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 29, 1997 was 21,140,504.
=============================================================================
This document consists of 14 pages of which this is page 1.
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NETWORK EQUIPMENT TECHNOLOGIES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
June 29, 1997 and March 31, 1997 ...................... 3
Condensed Consolidated Statements of Income -
three months ended June 29, 1997 and June 30, 1996 .... 4
Condensed Consolidated Statements of Cash Flows -
three months ended June 29, 1997 and June 30, 1996 .... 5
Notes to Condensed Consolidated Financial Statements .. 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ......... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ...................... 12
SIGNATURE ....................................................... 13
EXHIBIT 11.1 Computation of Primary and Fully Diluted
Earnings Per Share .................................... 14
<Page 3>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
June 29, March 31,
1997 1997
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,977 $ 39,141
Temporary cash investments 97,799 99,581
Accounts receivable, net of allowances of $4,175 at June 29
and $3,910 at March 31 86,682 82,986
Inventories 21,083 22,662
Deferred income taxes 7,418 7,418
Prepaid expenses and other assets 7,602 6,679
-------- --------
Total current assets 260,561 258,467
Property and equipment, net 31,424 30,009
Software production costs, net 5,356 4,616
Other assets 8,844 8,561
-------- --------
$306,185 $301,653
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 20,926 $ 23,758
Accrued liabilities 39,350 39,174
-------- --------
Total current liabilities 60,276 62,932
7-1/4% convertible subordinated debentures 25,821 25,821
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: 21,141,000 shares at June 29 and
21,049,000 shares at March 31 211 210
Additional paid-in capital 172,936 172,038
Treasury Stock (2,171) (2,545)
Net unrealized gain (loss) on available-for-sale securities 67 (56)
Accumulated translation adjustment (353) (490)
Retained earnings 49,398 43,743
-------- --------
Total stockholders' equity 220,088 212,900
-------- --------
$306,185 $301,653
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<Page 4>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Product revenue $ 53,517 $ 50,723
Service and other revenue 26,456 25,746
-------- --------
Total revenue 79,973 76,469
-------- --------
Cost of sales:
Cost of product revenue 20,428 20,775
Cost of service and other revenue 17,070 16,321
-------- --------
Total cost of sales 37,498 37,096
-------- --------
Gross margin 42,475 39,373
Operating expenses:
Sales and marketing 22,206 19,300
Research and development 10,151 10,447
General and administrative 2,784 3,073
-------- --------
Total operating expenses 35,141 32,820
-------- --------
Income from operations 7,334 6,553
Other income (expense):
Interest income 1,623 1,439
Interest expense (476) (633)
Other (165) (137)
-------- --------
Income before income taxes 8,316 7,222
Income tax provision 2,661 2,744
-------- --------
Net income $ 5,655 $ 4,478
======== ========
Primary and fully diluted earnings per share $ .26 $ .21
======== ========
Shares used in per share computation:
Primary 21,753 21,607
======== ========
Fully diluted 22,079 21,607
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<Page 5>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $ 39,141 $ 52,319
Net Cash Flows from Operating Activities:
Net income 5,655 4,478
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization 4,617 4,122
Restricted stock compensation 90 99
Changes in assets and liabilities:
Accounts receivable (3,841) 5,316
Inventories 1,598 2,676
Prepaid expenses and other assets (922) (586)
Accounts payable (2,834) (2,316)
Accrued liabilities 162 (6,788)
-------- --------
Net cash provided by operations 4,525 7,001
-------- --------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (23,311) (33,881)
Proceeds from maturities of temporary cash investments 25,216 30,845
Purchases of property and equipment (5,454) (3,550)
Additions to software production costs (1,293) (895)
Other (260) (321)
-------- --------
Net cash used for investing activities (5,102) (7,802)
-------- --------
Cash Flows from Financing Activities:
Sale of Common Stock 1,183 1,620
-------- --------
Net cash provided by financing activities 1,183 1,620
-------- --------
Effect of exchange rate changes on cash 230 (20)
-------- --------
Net increase in cash and cash equivalents 836 799
-------- --------
Cash and Cash Equivalents at End of Period $ 39,977 $ 53,118
======== ========
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 934 $ 1,229
Income taxes $ 10,809 $ (497)
Non-cash investing and financing activities:
Income tax benefit arising from employee stock option plans $ - $ 1,634
Net unrealized (gain) loss on available-for-sale securities $ (123) $ 37
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<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 29, 1997, and the results of
operations and cash flows for the three months ended June 29, 1997 and
June 30, 1996. These financial statements should be read in conjunction
with the March 31, 1997 audited consolidated financial statements and
notes thereto. The results of operations for the three months ended June
29, 1997 are not necessarily indicative of the results to be expected for
the fiscal year ending March 31, 1998.
2. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
June 29, March 31,
1997 1997
(unaudited)
-------- --------
<S> <C> <C>
Purchased components $ 5,325 $ 6,710
Work-in-process 13,120 13,675
Finished goods 2,638 2,277
-------- --------
$ 21,083 $ 22,662
======== ========
</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 Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). This standard replaces current earnings per share (EPS)
reporting requirements and requires a dual presentation of basic and
diluted EPS. As basic EPS excludes dilution by dividing net income by
only the weighted average of common shares outstanding for the period, it
will result in a higher value than the historically reported primary EPS.
Diluted EPS under SFAS 128 is not expected to be significantly different
than fully diluted EPS reported historically. This standard will be
effective for the Company beginning in the third quarter of fiscal 1998
and will require restatement of prior periods.
<Page 7>
In June 1997, the FASB adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report, by major components
and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes annual and
interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas, and
major customers. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash
flows. Both statements are effective for the Company beginning April 1,
1998, with earlier application permitted.
<Page 8>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This discussion and analysis should be read in conjunction with Management's
Discussion and Analysis in the Company's 1997 Annual Report to Shareholders
and Part I of the Company's Form 10-K for the fiscal year ended March 31,
1997.
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 29, June 30,
Percent of Revenue 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Product revenue 66.9 66.3
Service and other revenue 33.1 33.7
----- -----
Total revenue 100.0 100.0
----- -----
Product gross margin 61.8 59.0
Service and other revenue gross margin 35.5 36.6
----- -----
Total gross margin 53.1 51.5
----- -----
Sales and marketing 27.8 25.2
Research and development 12.6 13.7
General and administrative 3.5 4.0
----- -----
Total operating expenses 43.9 42.9
----- -----
Income from operations 9.2 8.6
----- -----
Net income 7.1 5.9
===== =====
</TABLE>
Revenue
Total revenue for the first quarter of fiscal 1998 increased 4.6% to $80.0
million from $76.5 million for the first quarter of fiscal 1997. Product
revenue increased $2.8 million and service and other revenue increased $.7
million quarter-over-quarter. The 5.5% increase in product revenue was
attributable to an increase in international product sales, which grew 45.1%
from the first quarter of fiscal 1997 to 52.8% of product revenue. This more
than offset a 33.4% quarter-over-quarter decrease in sales through the North
American channel. The slight increase in service and other revenue was
attributable to an increase in systems integration services in support of
product sales to the U.S. government. Overall, international and U.S. federal
channel sales represented 40.9% and 31.9% of the Company's total revenue,
respectively, for the first quarter of fiscal 1998.
Gross Margin
Total gross margin as a percentage of total revenue increased to 53.1% in the
first quarter of fiscal 1998 from 51.5% in the comparable period of fiscal
1997. This increase was composed of a 2.8% increase in product gross margin
partially offset by a 1.1% decrease in service and other gross margin.
Product margins increased to 61.8% in the first quarter of fiscal 1998 from
59.0% in the first quarter of fiscal 1997 primarily as a result of a favorable
product mix and reduced sales discounts.
<Page 9>
Service and other gross margin decreased slightly to 35.5% in the first
quarter of fiscal 1998 from 36.6% in the comparable period of fiscal 1997.
The gross margin on systems integration services in support of product sales
to the U.S. government increased to 19.8% for the first quarter of fiscal 1998
from 18.0% for the comparable period of fiscal 1997 due to the mix of products
and services provided.
Due to an expected shift in the favorable product mix seen in the first
quarter, management expects total gross margin as a percentage of total
revenue to decrease during the remainder of fiscal 1998.
Operating Expenses
Operating expenses in the first quarter of fiscal 1998 increased $2.3 million
from the first quarter of fiscal 1997, and increased as a percentage of total
revenue to 43.9% from 42.9%. Management expects operating expenses to
increase slightly during the remainder of fiscal 1998.
Sales and marketing expense in the first quarter of fiscal 1998 increased $2.9
million, or 15.1%, from the first quarter of fiscal 1997, and increased as a
percentage of total revenue to 27.8% from 25.2%. The increase
in spending was primarily the result of increased trade show, advertising,
travel and compensation expenses in conjunction with new product launches.
Management expects sales and marketing spending to increase during the
remainder of fiscal 1998, while decreasing as a percentage of revenue.
Research and development expense in the first quarter of fiscal 1998 remained
fairly flat with the first quarter of fiscal 1997, and decreased as a
percentage of total revenue to 12.6% from 13.7%. 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 1998, while decreasing as a percentage
of revenue.
General and administrative expense decreased $.3 million in the first quarter
of fiscal 1998 as compared to the first quarter of fiscal 1997, and decreased
as a percentage of total revenue to 3.5% from 4.0%, respectively. Management
expects general and administrative expense to increase slightly for the
remainder of fiscal 1998, remaining fairly flat as a percentage of revenue.
Non-Operating Items
Net interest income for the first quarter of fiscal 1998 increased by $.3
million from the comparable period of fiscal 1997.
The first quarter of fiscal 1998 includes a provision for income tax expense
of $2.7 million at an effective rate of 32% as compared to $2.7 million at an
effective rate of 38% in the first quarter of fiscal 1997. The lower
effective tax rate in fiscal 1998 is primarily due to the utilization of
foreign net operating loss carryforwards as well as expected U.S. tax benefits
on increased export revenue.
BUSINESS ENVIRONMENT AND RISK FACTORS
All statements in this 10-Q that are not historical are forward-looking
statements that involve risks and uncertainties including, but not limited to,
the risks and uncertainties detailed in the Company's filings with the
Securities and Exchange Commission. Actual results may differ materially from
those projected.
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. In addition, because a
large portion of the Company's orders historically have been received and
filled in the last month of the quarter, forecasting sales during a quarter is
difficult, and there is a significant risk of excessive or inadequate
inventory if orders do not match forecast. Furthermore, if large orders do
not close when forecasted or if near-term demand weakens for the products the
Company has available to ship, the Company's operating results for that or
subsequent quarters would be adversely affected.
<Page 10>
Expense levels are relatively fixed and are set based on expectations
regarding future revenue and margin levels. These expectations derive from
making judgments on issues such as planned revenue, 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 regulations and political
conditions. The Company has limited visibility into factors that could
influence its revenue, mix of product orders 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, including products announced by the
Company in July, after the end of the quarterly period reflected in this
Report. 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 development and
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 of products designed by N.E.T. are
performed at the Company's Redwood City, California, facility. Pursuant to
several types of agreements, the Company also resells products designed or
manufactured by third parties for order fulfillment, quality control and
support of their products. Such products are generally available to end users
from sources other than the Company, and are generally sold or licensed by the
Company at gross margins that are lower than products designed and
manufactured by the Company. There can be no assurance that these third-party
manufacturers will be able to meet the Company's future requirements for these
products, that the quality control and support provided by these manufacturers
will be adequate, or that the Company's gross margins on these products will
not be lowered further. Product 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 issues or 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 11>
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 1997, the Company had cash, cash equivalents and temporary cash
investments of $137.8 million, as compared to $138.7 million as of March 31,
1997. Cash provided by operations was $4.5 million during the first quarter
of fiscal 1998, which was a $2.5 million decrease from the cash provided by
operations from the comparable period of the prior year. This decrease was
principally due to an increase in accounts receivable during the first quarter
of fiscal 1998 as compared to a decrease during the first quarter of fiscal
1997. The increase in accounts receivable, which was primarily attributable
to a few, very large carrier and international customer accounts, led to an
increase in days sales outstanding to 97 days from 83 days,
quarter-over-quarter.
Net cash used for investing activities of $5.1 million in the first quarter of
fiscal 1998 consisted primarily of purchases of property and equipment of $5.5
million and an increase in software production costs of $1.3 million, offset
partially by net proceeds of temporary cash investments of $1.9 million.
Net cash provided by financing activities of $1.2 million in the first quarter
of fiscal 1998 pertains to the issuance of Common Stock relating to the
employee stock benefit plans.
As of June 29, 1997, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed facility are available through May
1998 and would bear interest at the bank's base rate (which approximates
prime). At June 29, 1997, there were no outstanding borrowings under this
facility.
In April 1997, the Company entered into a 12-year operating lease agreement
pursuant to which a new corporate headquarters facility will be built in
Fremont, California. In conjunction with the project management and design
and construction of the new facility, the Company expects to incur
expenditures during the remainder of fiscal 1998, the significant portion of
which it plans to capitalize. Management expects to fund the leasehold
improvements with available cash and investments. The Company plans to move
to its new headquarters when the buildings are completed, which is expected to
occur during the first half of fiscal 1999. The Company's current
headquarters' lease expires in October 1998.
The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, including costs associated with the new headquarters' facility,
purchases of capital equipment and research and development programs currently
planned at least through the next twelve months.
<Page 12>
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 29, 1997.
<Page 13>
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, Chief Financial
Officer and Corporate Secretary
(Principal Financial and Accounting
Officer)
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 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Primary
Earnings:
Net income $ 5,655 $ 4,478
======== ========
Shares:
Weighted average number of common shares outstanding 21,064 20,880
Number of common equivalent shares assuming exercise
of stock options 689 727
-------- --------
21,753 21,607
======== ========
Primary earnings per share $ .26 $ .21
======== ========
Fully Diluted
Earnings:
Net income $ 5,655 $ 4,478
======== ========
Shares:
Weighted average number of common shares outstanding 21,064 20,880
Number of common equivalent shares assuming exercise
of stock options 1,015 727
Number of common equivalent shares assuming conversion
of convertible securities (1) - -
-------- --------
22,079 21,607
======== ========
Fully diluted earnings per share $ .26 $ .21
======== ========
</TABLE>
_______________________
(1) The assumed conversion of these common stock equivalents was excluded as
it was anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-29-1997
<CASH> 39,977
<SECURITIES> 97,799
<RECEIVABLES> 86,682
<ALLOWANCES> 4,175
<INVENTORY> 21,083
<CURRENT-ASSETS> 260,561
<PP&E> 31,424
<DEPRECIATION> 88,029
<TOTAL-ASSETS> 306,185
<CURRENT-LIABILITIES> 60,276
<BONDS> 25,821
<COMMON> 211
0
0
<OTHER-SE> 219,877
<TOTAL-LIABILITY-AND-EQUITY> 306,185
<SALES> 53,517
<TOTAL-REVENUES> 79,973
<CGS> 20,428
<TOTAL-COSTS> 37,498
<OTHER-EXPENSES> 35,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 476
<INCOME-PRETAX> 8,316
<INCOME-TAX> 2,661
<INCOME-CONTINUING> 5,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,655
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
