UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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 27, 1999
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)
6500 Paseo Padre Parkway
Fremont, CA 94555
(510) 713-7300
--------------------------------------------------
(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 August 2, 1999 was 21,297,568.
================================================================================
This document consists of 20 pages of which this is page 1.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
June 27, 1999 and March 31, 1999 ........................... 3
Condensed Consolidated Statements of Income -
three months ended June 27, 1999 and June 28, 1998 ......... 4
Condensed Consolidated Statements of Comprehensive Income -
three months ended June 27, 1999 and June 28, 1998 ......... 5
Condensed Consolidated Statements of Cash Flows -
three months ended June 27, 1999 and June 28, 1998 ......... 6
Notes to Condensed Consolidated Financial Statements ....... 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition .............. 9
PART II. OTHER INFORMATION
Item 5. Other Information .......................................... 19
Item 6. Exhibits and Reports on Form 8-K ........................... 19
SIGNATURES ............................................................ 20
2.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
June 27, March 31,
1999 1999
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,203 $ 13,720
Temporary cash investments 120,725 140,843
Accounts receivable, net of allowances of $4,142 at June 27
and $3,375 at March 31 59,253 46,381
Inventories 17,933 19,193
Deferred income taxes 9,009 5,510
Prepaid expenses and other assets 7,050 6,834
--------- ---------
Total current assets 230,173 232,481
Property and equipment, net 51,864 55,877
Software production costs, net 6,176 6,129
Deferred income taxes 9,053 9,053
Other assets 9,397 9,572
--------- ---------
$ 306,663 $ 313,112
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,423 $ 11,755
Accrued liabilities 40,193 43,638
--------- ---------
Total current liabilities 54,616 55,393
7-1/4% convertible subordinated debentures 24,706 24,706
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: 21,295,000 shares at June 27 and
21,509,000 shares at March 31 213 215
Additional paid-in capital 180,383 180,596
Treasury stock (6,630) (4,853)
Cumulative comprehensive income (1,234) 5,921
Retained earnings 54,609 51,134
--------- ---------
Total stockholders' equity 227,341 233,013
--------- ---------
$ 306,663 $ 313,112
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 27, June 28,
1999 1998
---- ----
<S> <C> <C>
Revenue:
Product revenue $ 33,024 $ 45,662
Service and other revenue 29,531 25,764
-------- --------
Total revenue 62,555 71,426
-------- --------
Cost of sales:
Cost of product revenue 13,600 18,633
Cost of service and other revenue 19,321 14,846
-------- --------
Total cost of sales 32,921 33,479
-------- --------
Gross margin 29,634 37,947
Operating expenses:
Sales and marketing 19,038 21,608
Research and development 11,440 10,283
General and administrative 3,076 2,888
-------- --------
Total operating expenses 33,554 34,779
-------- --------
Income (loss) from operations (3,920) 3,168
Other income (expense):
Interest income 1,468 1,660
Interest expense (492) (508)
Other 7,577 (126)
-------- --------
Income before income taxes 4,633 4,194
Income tax provision 1,158 1,246
-------- --------
Net income $ 3,475 $ 2,948
======== ========
Earnings per share:
Basic $ .16 $ .14
======== ========
Diluted $ .16 $ .13
======== ========
Shares used in per share computation:
Basic 21,388 21,570
======== ========
Diluted 21,480 22,433
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
June 27, June 28,
1999 1998
---- ----
<S> <C> <C>
Net income $ 3,475 $ 2,948
Other comprehensive income, net of taxes:
Cumulative translation adjustment (150) (716)
Net unrealized gain (loss) on securities, net of
taxes of $3,771 at June 27, 1999 and
$2,229 at June 28,1998 (7,005) 1,748
Less: reclassification adjustment for gains included
in net income 7,520 3
------- -------
Comprehensive income $ 3,840 $ 3,977
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5.
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 27, June 28,
1999 1998
---- ----
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $ 13,720 $ 59,512
-------- --------
Cash Flows from Operating Activities:
Net income 3,475 2,948
Adjustments to reconcile net income to net cash
used for operations:
Depreciation and amortization 6,647 4,706
Restricted stock compensation 3 82
Deferred income taxes (3,499) --
Changes in assets and liabilities:
Accounts receivable (13,032) (3,678)
Inventories 1,254 267
Prepaid expenses and other assets (241) 351
Accounts payable 2,890 (2,856)
Accrued liabilities (3,240) (5,717)
-------- --------
Net cash provided by (used for) operations (5,743) (3,897)
-------- --------
Cash Flows from Investing Activities:
Purchases of temporary cash investments (15,908) (14,461)
Proceeds from maturities of temporary cash investments 29,021 13,732
Purchases of property and equipment (1,932) (12,035)
Additions to software production costs (794) (946)
Other 156 664
-------- --------
Net cash provided by (used for) investing activities 10,543 (13,046)
-------- --------
Cash Flows from Financing Activities:
Sale of Common Stock 1,010 2,010
Repurchase of Common Stock (3,005) --
-------- --------
Net cash provided by (used for) financing activities (1,995) 2,010
-------- --------
Effect of exchange rate changes on cash (322) (666)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,483 (15,599)
-------- --------
Cash and Cash Equivalents at End of Period $ 16,203 $ 43,913
======== ========
Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 924 $ 966
Income taxes $ 146 $ (471)
Non-cash investing and financing activities:
Net unrealized gain (loss) on available-for-sale securities $ (7,005) $ 1,748
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6.
<PAGE>
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 27, 1999, and the results of operations
and cash flows for the three months ended June 27, 1999 and June 28, 1998.
These financial statements should be read in conjunction with the March
31, 1999 audited consolidated financial statements and notes thereto. The
results of operations for the three months ended June 27, 1999 are not
necessarily indicative of the results to be expected for the fiscal year
ending March 31, 2000.
2. Inventories
Inventories consist of (in thousands):
June 27, March 31,
1999 1999
---- ----
(unaudited)
Purchased components $ 3,831 $ 3,728
Work-in-process 12,649 13,168
Finished goods 1,453 2,297
-------- --------
$ 17,933 $ 19,193
======== ========
3. Earnings Per Share
Basic earnings per share has been computed based upon the weighted average
number of common shares outstanding for the periods presented. For diluted
earnings per share, shares used in the per share computation include
weighted average common and potentially dilutive shares outstanding.
Potentially dilutive shares consist of shares issuable upon the assumed
exercise of dilutive stock options and totaled 92,000 and 862,000 for the
three months ended June 27, 1999 and June 28, 1998, respectively.
Additionally, there were 784,000 shares of Common Stock issuable upon
conversion of debentures. These shares, and the related effect of the
accrued interest on the debentures, were not included in the calculation
of diluted earnings per share for the period ended June 27,1999, as their
inclusion would have been antidilutive.
4. Comprehensive Income
Statements of comprehensive income for the three months ended June 27,
1999 and June 28, 1998, have been included within the Consolidated
Statements of Income. Cumulative comprehensive income at June 27, 1999 and
March 31, 1999 is comprised of cumulative foreign translation adjustments
of ($958,000) and ($808,000), respectively, and cumulative net unrealized
gains (losses) on available-for-sale securities of ($276,000) and
$6,729,000, respectively.
5. Restructure Costs
In the fourth quarter of fiscal 1999, the Company announced plans to
restructure along global lines of business to address specific market
segments. These actions resulted mainly in a reduction in the number of
employees.
The Consolidated Statements of Operations for fiscal 1999 included a
charge of $4.7 million, consisting of $4.6 million for employee severance
and other related costs and $0.1 million for office closures. A
7.
<PAGE>
restructuring provision of $2.0 million remains as of June 27, 1999. The
Company will pay $1.0 million during the remainder of fiscal 2000 and $1.0
million in fiscal 2001.
Restructure Remaining
Liability at Expense Liability at
March 31, 1999 in Q1 00 June 27, 1999
-------------- -------- -------------
Compensation $ 3,540 $ 1,893 $ 1,647
Outplacement 499 178 321
Office closures 119 38 81
--------- --------- ---------
Totals $ 4,158 $ 2,109 $ 2,049
--------- --------- ---------
6. Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments.
Additionally, in June 1999, the Financial Accounting Standards Board
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the effective date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133," which defers the effective date of
FASB No. 133 for one year. Adoption of this statement will not impact the
Company's consolidated financial position, results of operations or cash
flows. This statement is effective for the Company beginning April 1,
2001.
7. Subsequent Event
In July 1999, the Company announced a reorganization to streamline its
organizational structure and to bring expenses in line with projected
revenue. The streamlining involved reducing the structure of the Company
to five internal organizations: Marketing, Sales and Service, Product
Development, Manufacturing, and Finance. The Vice Presidents of each of
these areas will report directly to the CEO and President. In addition,
the General Counsel of the Company will also report directly to the CEO
and President.
Implementation of the reorganization included reductions at all levels
of the Company. In particular, the Company reduced its work force by
approximately 7% worldwide. Also at this time, the following members
of senior management resigned: Roger A. Barney, Senior Vice President
of Corporate Services and Assistant Corporate Secretary, G. Michael
Schumacher, Senior Vice President of Product Operations, and David P.
Owen, Vice President of Strategy and Technology.
Expenses related to the reorganization will be recognized in the second
quarter of the current fiscal year. While the Company does not project any
further expenses related to the restructuring after the second quarter, it
cannot be certain that additional expenditures will not be required in the
future, nor can the Company assure that the restructuring will have a
positive effect long term.
8.
<PAGE>
Item 2.
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 1999 Annual Report to Stockholders and
Part I of the Company's Form 10-K for the fiscal year ended March 31, 1999.
Statements made in this Management's Discussion and Analysis or elsewhere in
this quarterly report or other communications (including press releases and
analyst calls) that are not statements of historical fact are forward-looking
statements, including without limitation, those related to the Company's future
revenues, gross margins, and other financial and economic targets, trends or
goals. Forward-looking statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from
statements made, including those discussed in the Company's Annual Report to
Stockholders for the fiscal year ended March 31, 1999. The Company does not
undertake an obligation to update its forward-looking statements or risk factors
to reflect future events or circumstances.
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:
- --------------------------------------------------------------------------------
Three Months Ended
------------------
Percent of Revenue June 27, 1999 June 28, 1998
- -----------------------------------------------------------------------------
Product revenue 52.8% 63.9%
Service and other revenue 47.2 36.1
----- -----
Total revenue 100.0 100.0
----- -----
Product gross margin 58.8 59.2
Service and other revenue gross margin 34.6 42.4
----- -----
Total gross margin 47.4 53.1
----- -----
Sales and marketing 30.4 30.3
Research and development 18.3 14.4
General and administrative 4.9 4.0
----- -----
Total operating expenses 53.6 48.7
----- -----
Income/(loss) from operations (6.3) 4.4
----- -----
Net income 5.6% 4.1%
===== =====
- --------------------------------------------------------------------------------
Revenue
Total revenue for the first quarter of fiscal 2000 decreased 12.4% to $62.6
million from $71.4 million for the first quarter of fiscal 1999. Product revenue
decreased $12.6 million and service and other revenue increased $3.8 million
quarter-over-quarter. The 27.7% decrease in product revenue was principally due
to a 57.7% decline in sales in the North America channel and a 56.1% decline in
the Europe/Middle East channel. The decrease in product sales in the North
America channel was the result of lower sales to service providers, especially
the Emerging Service Providers market, which has been slow to develop for the
Company. The decrease in product sales in the Europe/Middle East channel
resulted from lower sales to distributors and enterprise customers in the
European market. The Federal sales channel increased 12.7% and the Asia
Pacific/Latin America sales channel increased 14.3% from the first quarter of
fiscal 1999 to the first quarter of fiscal 2000.
9.
<PAGE>
The increase in service and other revenue was due to an increase in systems
integration services in support of product sales to the U.S. government.
Gross Margin
Total gross margin as a percentage of total revenue was 47.4% for the first
quarter of fiscal 2000, a 5.7% decrease from the first quarter of fiscal 1999.
The decrease is primarily a result of lower product revenue as a percent of
total revenue for the first quarter of fiscal 2000. Product gross margin
decreased to 58.8% in the first quarter of fiscal 2000 from 59.2% in the first
quarter of fiscal 1999. The decrease results from unfavorable manufacturing
variances resulting from the lower product volumes.
Service and other revenue gross margin decreased to 34.6% in the first quarter
of fiscal 2000 from 42.4% in the first quarter of fiscal 1999. The decrease in
service gross margin is primarily the result of increased systems integration
services in support of product sales to the U.S. government. Systems integration
services to the U.S. government are lower margin service offerings. The
percentage for systems integration services as a percent of total service
revenue for the first quarter of fiscal 2000 increased from the first quarter of
fiscal 1999.
Management expects product and service and other revenue gross margins in fiscal
2000 to remain fairly comparable to gross margins experienced in the second
quarter and third quarter of fiscal 1999.
Operating Expenses
Operating expense decreased 3.5% to $33.6 million in the first quarter of fiscal
2000 from the first quarter of fiscal 1999. In the fourth quarter of fiscal
1999, the Company completed a restructuring that resulted in a restructuring
charge of $4.7 million in the quarter. The restructuring included a reduction in
work force that contributed to operating expense reductions in the first quarter
of fiscal 2000. The operating expenses increased as a percent of total revenue
to 53.6% in the first quarter of fiscal 2000 from 48.7% in the first quarter of
fiscal 1999 as a result of lower revenue. Management initiated an additional
restructuring in the second quarter of fiscal 2000. See Note 7., Subsequent
Event, of Notes to Condensed Consolidated Financial Statements on page 8 of this
Form 10-Q. This restructuring is expected to result in a $3.0 million to $4.0
million charge in the second quarter and to reduce current operating expenses by
approximately $10.0 million over the next four quarters. Management therefore
expects operating expenses in fiscal 2000 to be lower in quarter-over-quarter
comparisons to fiscal 1999.
Sales and marketing expense decreased 11.9% to $19.0 million in the first
quarter of fiscal 2000 from the first quarter of fiscal 1999 but remained flat
as a percentage of total revenue. The decrease in the first quarter of fiscal
2000 was due to lower headcount and fewer sales commission payments resulting
from lower product revenue and lower marketing expenses for advertising,
promotions and trade shows. Management expects sales and marketing expense to
increase during fiscal 2000 as more resources are focused in these areas.
Research and development expense increased 11.2% to $11.4 million for the first
quarter of fiscal 2000 as compared to the first quarter of fiscal 1999, and
increased as a percentage of total revenue to 18.3% from 14.4%, respectively.
Compensation expense was lower in the first quarter of fiscal 2000 compared to
the first quarter of fiscal 1999 as a result of the headcount reduction in the
fourth quarter of fiscal 1999. The lower compensation expense was offset by an
increase in direct materials, consulting expense and depreciation on capital
expenditures. Management expects research and development spending to be lower
in quarter-over-quarter comparisons to fiscal 1999 as a result of the
restructuring completed in the second quarter of fiscal 2000.
General and administrative expense increased 6.5% to $3.1 million for the first
quarter of fiscal 2000 as compared to the first quarter of fiscal 1999.
Consulting expense and legal expense increased, which offset the reduction in
compensation expense from the restructuring. Management expects general and
administrative expense to be lower in future quarters in quarter-over-quarter
comparisons to fiscal 1999 as a result of the restructuring completed in the
second quarter of fiscal 2000.
10.
<PAGE>
Non-Operating Items
During the first quarter of fiscal 2000, the Company sold all of the equity
securities held in a publicly traded company for a gain of $7.5 million.
Interest income decreased 11.6% to $1.5 million from $1.7 million in the first
quarter of fiscal 2000 from the first quarter of fiscal 1999. The reduction in
cash, cash equivalents and temporary cash investments was due to lower accounts
receivable at the beginning of the first quarter of fiscal 2000 compared to the
beginning of the first quarter fiscal of 1999. Interest expense remained flat
for the first quarter of fiscal 2000 compared to the first quarter of fiscal
1999.
For the first quarter of fiscal 2000, the Company recorded income tax expense of
$1.2 million as compared to $1.2 million for the first quarter of fiscal 1999,
at an effective rate of 25% and 30% for fiscal 2000 and fiscal 1999,
respectively.
BUSINESS ENVIRONMENT AND RISK FACTORS
All statements in this Form 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.
Sales
Historically, the majority of the Company's revenue in each quarter has resulted
from orders received and shipped in that quarter. In addition, the Company's
backlog at the beginning of a quarter is generally insufficient to achieve
expected net sales for the quarter. Because of ordering patterns and potential
delivery schedule changes, the Company does not believe that backlog is
indicative of future revenue levels. Since 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.
Sales of networking products fluctuate based upon a number of factors such as
capital spending levels and general economic and market conditions. Future
declines in networking product sales as a result of general economic and
marketing conditions or for other reasons could have a materially adverse affect
on the Company's business, financial position or results of operations. In
particular, international sales will continue to account for a significant
portion of the Company's sales in future periods. International sales tend to
have risks that are difficult to foresee and plan for including political and
economic stability, regulatory changes, currency exchange rates, tax rates and
structures, and collection of accounts receivable. In the recent past, events
outside North America, especially in Asia and Latin America, have adversely
impacted the Company's results of operations. Although there has been some
improvement in sales from Asia, future unforeseen events in various areas of the
globe may continue to have an adverse impact on the Company. 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 has been focusing some of its selling efforts on the emerging global
carrier market including third party leasing programs targeted at this market.
Enterprises in this market typically do not have either long operating histories
or significant capitalization. The Company's programs targeted to these markets
have the potential to significantly impact both revenue and expense for the
Company.
Further, a significant portion of the Company's revenue comes from contracts
with the U.S. government, most of which do not include purchase commitments.
Orders from the U.S. government or from other customers may not continue at
historical levels, and it is possible that the Company will not be able to
obtain orders from new customers.
11.
<PAGE>
Competition
All markets for the Company's products are very competitive and dynamic. The
Company competes directly both internationally and domestically with a number of
different companies. Many of these companies have greater financial, marketing
and technical resources and offer a wider range of networking products than the
Company. In addition, the Company has distribution, product and technology
relationships with a number of significant customers, resellers and other
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.
Products
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. The markets for the Company's products are characterized by
rapid technological changes, evolving industry standards, frequent new product
introductions and enhancements and significant price competition. The
interaction of these factors could negatively impact the market for the
Company's existing products as well as for products under development and
thereby adversely affect the Company's business, financial position or results
of operations. The Company may not be able to respond effectively to
technological changes or new product announcements by competitors. Further, the
Company may not be able to successfully develop and market new products or
product enhancements, and the Company cannot say for certain 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 majority of the Company's product sales involve a discount from the
Company's standard list price. Discounting is standard in the sale of networking
products. In fiscal year 2000, the Company has begun a program to price its
products to reflect more accurately the prices charged in the market. It is not
the intent of the program to reduce prices. The program is designed to be
revenue neutral so that while prices are adjusted downward, discounts will be
adjusted downward as well. Although it is the intent of the program not to
impact margins, there can be no guarantee that competition or other factors
would not require continued discounting, thereby adversely affecting the
Company's business, financial position or results of operations.
Technology
The Company is currently in the process of filing patent applications in the
U.S. to protect its proprietary technology in its new products. The Company does
not know whether the patents will be granted and until patents are issued, third
parties could assert infringement claims against the Company and could be
successful in those assertions. In addition, the Company does a material amount
of business outside the U.S. Laws outside the U.S. may not protect the Company's
proprietary rights to the same degree as do U.S. laws.
Personnel
The Company's success depends in part on its ability to attract and retain
executive officers, senior managers and other employees necessary to support
planned revenue goals. The Company has hired a new President and Chief Executive
Officer who started with the Company on June 1, 1999. The President and Chief
Executive Officer is responsible for filling all open executive positions within
the Company and has appointed internal candidates to permanently fill two open
positions: Vice President of Marketing and General Counsel. While a decision has
not yet been made about who will fill the open Chief Financial Officer position,
the Company has been actively searching for a Vice President of Product
Development. The failure of the Company to attract, hire and retain executive
officers, senior managers and other key personnel or the failure of new
management, if hired, to execute Company strategy could have a material adverse
affect on the Company's business, financial position or results of operations.
12.
<PAGE>
Third Party Suppliers
The Company's products include components, assemblies and subassemblies that are
currently available from single sources and, in some cases, are in short supply.
The unavailability of certain components from current suppliers could result in
delayed availability of certain products, thereby adversely affecting the
Company's business. Testing and manufacturing of products designed by N.E.T.
have generally been outsourced to third parties. Final test and assembly is
generally performed at the Company's Fremont, California, facility. Pursuant to
several types of agreements, the Company also resells products designed or
manufactured by third parties, and the Company relies to a significant degree on
such third parties for order fulfillment, quality control and support of their
products. Such products are generally sold or licensed by the Company at gross
margins that are lower than products designed and manufactured by the Company.
Limited availability of products designed or manufactured by third parties,
price increases for such products or business interruptions in their manufacture
could adversely impact revenue, gross margin or earnings from such third party
products.
YEAR 2000
THIS STATEMENT IS INTENDED AS A YEAR 2000 READINESS DISCLOSURE.
Introduction
The Year 2000 computer issue creates risks for all companies, particularly those
heavily dependent on or producing information technology ("IT") products such as
the Company. Management believes that the risk for the Company exists in four
principal areas: potential warranty or other claims from the Company's customers
related to its products or services, the potential failure of systems used by
the Company to run its business, the potential failure of systems used by the
Company's suppliers and reduced spending by other companies on networking
solutions as a result of significant information systems spending on Year 2000
remediation.
In recognition of this risk, in early 1997, the Company established a Year 2000
compliance team to identify and attempt to minimize the effect of Year 2000
issues on the Company. The compliance team is continuing the process of
assessing the potential impact of the advent of the Year 2000 on the Company's
products, customers, suppliers and internal systems, both IT and non-IT. The
Company expects to complete such evaluation no later than September 30, 1999.
The Company cannot predict the ultimate outcome of its Year 2000 compliance
program. If the Company is not successful in identifying and remediating Year
2000 problems relating to its internal systems, or if suppliers or customers
material to the Company experience Year 2000 failures, the Company's business,
financial position or results of operations may be materially adversely
affected.
Products and Services
The Company has completed an evaluation of all its current product offerings to
determine Year 2000 compliance. The majority of the products sold currently by
the Company are Year 2000 compliant. A few products were sold during fiscal year
1999 that were not compliant; however, these products were not a major source of
Company revenue, and no such products are currently being sold by the Company.
Non-compliant products are identified in the N.E.T. Products Year 2000
Compliance Program posted on the Company's web site (www.net.com). There are
certain non-Year 2000 compliant products installed in customer networks that the
Company no longer sells. While the Company has a migration path for many of
these products that allows customers to become Year 2000 compliant, customers
may choose not to take advantage of the available migration path.
In addition to its own manufactured product lines, the Company has also resold a
number of products manufactured by third parties. Some of those products have
carried the Company's label and have been sold as the Company's product and
warranted by the Company's standard product warranty. The Company is relying
primarily on the written assurances of the private label manufacturers as to the
Year 2000 compliance of these products, as the Company cannot independently
assess this compliance for these products. For products resold by the Company
but which carry the original equipment manufacturer's label ("OEM products"),
the Company has passed on to the customer the manufacturer's warranty rather
than the Company's warranty. Although many OEM products have no Year 2000
13.
<PAGE>
problems as they lack a clocking device which would be affected by the advent of
the Year 2000, other OEM products contain components vulnerable to the Year
2000. The Company has substantially completed its assessment of the Year 2000
compliance of these OEM products and is in the process of seeking further
protection, if deemed necessary, from OEM vendors. Notwithstanding the Company's
efforts to seek appropriate protection, there can be no guarantee that the
Company will be able to obtain any added protection. In addition, since the
Company is not able to control the Year 2000 compliance of any OEM products, the
Company may face Year 2000 claims should these products fail.
In addition to the sale of products, the Company also sells post-sale
maintenance services to end users buying products directly from the Company and
to its resellers of product (collectively "customers"). The Company generally
does not provide post-sale maintenance services to customers who purchase
products through resellers ("reseller end users"). The standard written
maintenance agreements in effect since 1992 require the Company to make
reasonable efforts to resolve software errors; however, such standard written
maintenance contracts do not otherwise provide that the Company is to provide
the software or hardware necessary to make the customer's system Year 2000
compliant. Certain older maintenance agreements, however, primarily those
entered into prior to 1992, have broader product support provisions. The Company
is currently evaluating its potential duties under these older maintenance
contracts.
Customers
The Company has posted on its web site the N.E.T. Products Year 2000 Compliance
Program, which provides its customers and resellers with information on the Year
2000 compliance status of N.E.T. products and identifies solutions for achieving
network system and application compliance prior to the Year 2000. In addition,
in late 1997, the Company mailed the then current Compliance Program Information
to the majority of its customers. The Company is currently in the process of
determining which direct sale end users and which reseller end users have not
yet made their equipment Year 2000 compliant and will shortly be notifying those
end users or other resellers accordingly. Substantial portions of the Company's
sales are to end users outside of the U.S. These sales are through resellers of
the Company's products. Not all direct sale or reseller end users, especially
those in locations outside the U.S., have undertaken Year 2000 compliance
programs. Regions outside of the U.S. have not been as focused on the system
problems associated with the advent of the Year 2000, and customers in these
regions have been slower to take the remedial action necessary to become Year
2000 compliant. The inability of the Company's products to handle the transition
to the Year 2000 could result in increased customer satisfaction issues,
servicing costs, potential lawsuits and other material costs and liabilities.
In addition, while the Company has been working with its resellers to ensure
that the reseller's end user base is informed of Year 2000 issues, the Company
cannot guarantee that its resellers have communicated sufficiently or accurately
with all their end users, that reseller end users have understood the
seriousness of the Year 2000 problem, or that those end users will take the
necessary actions to fix any Year 2000 problem associated with their installed
products.
Year 2000-related litigation to date indicates that direct sale and reseller end
users who have not upgraded their installed products to become Year 2000
compliant may assert warranty, contract, tort, and/or statutory claims against
the Company as a way to recover any damages suffered as a result of the
customer's failure to become Year 2000 compliant. Resellers may assert similar
claims, as well as claims for indemnity, against the Company if the reseller has
such claims made against it by the reseller's end users. Since early 1998, the
Company's product warranty has limited the warranty provided for Year
2000-related problems. As the Company's product warranty runs for one year, the
Company does not at this time foresee significant exposure in the U.S. from
product warranty claims involving Year 2000 compliance. The Company cannot,
however, predict with any accuracy how legislative action or judicial decisions
may impact the warranty requirements placed upon the Company
14.
<PAGE>
or a customer's ability to successfully prosecute a Year 2000 claim against the
Company should one be asserted. In particular, the Company is in the process of
analyzing the impact of the recently passed federal legislation, the Y2K Act, on
potential customer claims. If claims were to be asserted in countries outside
the U.S., it would be difficult to predict actions or rulings outside the U.S.
where legal responsibilities and judicial proceedings are not as well defined
and, were unfavorable rulings to occur, there could be a material adverse affect
on the Company's business, financial position or results of operations.
15.
<PAGE>
The Company's revenue may be adversely impacted if current and prospective
customers devote a substantial portion of their information systems spending to
evaluation and remediation of Year 2000 issues that could divert money away from
spending on networking solutions. This diversion could have a material adverse
impact on the Company's future sales volume.
Internal Systems
The Year 2000 compliance team has been and is evaluating Year 2000 issues
related to the Company's internal systems, both IT systems and non-IT systems,
upon which the Company relies in conducting its business, including financial
systems, manufacturing applications, customer service and support, desktop
applications and infrastructure such as networks, telecommunications products,
banking and financial services, service providers and security systems. The Year
2000 compliance team expects to finish its Year 2000 evaluation by September 30,
1999. As the Company's Year 2000 compliance team continues its work, it may
discover new or additional Year 2000 problems, may not be able to develop and
implement remediation or contingency plans, or may find that the costs of these
activities exceed current expectations and become material.
Mission-Critical Systems
The Company is identifying and testing its mission-critical systems to identify
Year 2000 problems, if any, and is in the process of developing plans to
remediate any identified Year 2000 problems. Mission-critical systems have been
categorized according to the level of impact a failure would have upon the
Company, i.e., "catastrophic" (causing a shutdown of all or a part of the
business) or "business interrupting" (interrupting system functioning but not
causing an actual shutdown). Testing of all mission-critical systems is expected
to be completed by September 30, 1999. The Company intends to have contingency
plans in place to deal with any impact of the Year 2000 on all Company
mission-critical systems. All such contingency plans were finalized by June 30,
1999 and are scheduled to be implemented by September 30, 1999. Despite the
implementation of any contingency plan, the inability to remedy a Year 2000
problem and the consequent failure of any internal systems could cause a
material disruption in the Company's operation.
The Company estimates that by June 30, 1999, 90% of its mission-critical systems
in all categories were compliant with requirements to continue functioning after
the advent of the Year 2000. The Company expects that to the extent possible,
all systems, both mission-critical and non-mission-critical, will be Year 2000
compliant by September 30, 1999.
Third Party Suppliers for Internal Systems
The Company has historically worked with its suppliers to ensure their ability
to meet Company demands. The Company is in the process of reviewing its
mission-critical third party suppliers to determine the suppliers' Year 2000
compliance as it impacts the services and products supplied to the Company. The
Company has surveyed the Year 2000 readiness of the majority of its
mission-critical suppliers. The third party supplier reviews to date have not
uncovered any material Year 2000 problems although most suppliers are currently
still in the process of evaluating their internal systems for Year 2000
compliance. The Company has also evaluated the Year 2000 compliance of products
supplied for mission-critical systems and has upgraded such products to be Year
2000 compliant in line with the recommendations made by the supplier. For all
mission-critical suppliers, the Company has developed contingency plans to
ensure that any potential business interruption caused by Year 2000 problems are
mitigated. The costs of implementing these contingency plans are still being
evaluated, and these costs may have an adverse affect on the Company's business,
financial position or results of operations. Third party supplier Year 2000
failures remain a possibility and could have an adverse impact on the Company's
business, financial position or results of operations.
Worst-Case Scenario and Contingency Plans
The Company believes that the most reasonably likely worst-case scenario would
involve problems with services and systems supplied by third parties such as
electricity, water, telecommunications, transportation channels and
mission-critical suppliers, rather than from the failure of the Company's
16.
<PAGE>
internal systems. The Company has a limited ability to assess and control the
failure of third parties, especially those third parties supplying
infrastructure services to a large geographic area such as electric and
telecommunications companies. The Company has developed contingency plans to
deal with the failure of the infrastructure suppliers to the extent possible.
Any contingency plan, however, will be limited by the Company's ability to
provide infrastructure services normally provided on a large geographic basis.
Outside the Company's headquarters facility, Company offices support sales and
service functions. A worst-case scenario involving system-wide failures of
telecommunications services to locations outside the U.S. would impact the
Company's ability to engage in sales activities and to provide post-sale support
services to customers outside the U.S. The Company has developed contingency
plans to deal with the worldwide full or partial loss of telecommunications
services. Should the Company lose telecommunications services worldwide for any
extended period of time, or should alternate communications systems not be
available, the Company may be unable to communicate with worldwide locations.
This could result in an inability to process customer orders and/or manufacture
and ship products, which could materially impact the Company's results of
operations. In addition, the Company's ability to provide maintenance support to
customers with Year 2000 network problems could be seriously limited as
post-sale support relies on telephone calls or e-mail messages to and from the
Company's Technical Assistance Centers.
The Company is planning for increased calls to its Technical Assistance Centers
due to anxiety on the part of its customer base as the Year 2000 approaches. The
Company will be adding staff at both its Virginia and Crawley, England centers
to handle any increase in call traffic. In addition, staffing will be maximized
for the period running from the end of December 1999 through the beginning of
January 2000.
In addition to infrastructure suppliers, the Company could face a worst-case
scenario involving third party suppliers of mission-critical services or systems
who are forced to shut down either partially or completely due to Year
2000-related systems failure. While the Company has surveyed its
mission-critical third party suppliers to ensure that they are addressing Year
2000 issues and have put into place contingency plans which it believes will
help to alleviate supplier problems, the activities of third parties are outside
the control of the Company so there can be no guarantee that third parties will
take the actions necessary to alleviate Year 2000 issues or that factors not
currently foreseeable will not have a negative impact on the Company's ability
to carry out its contingency plans. In particular, the contingency plans
developed by the Company's manufacturing department require that third party
suppliers provide additional inventory to the Company by December 27, 1999. This
higher level of inventory may involve increased costs to the Company and the
risk of write-downs in the value of the inventory if held for a prolonged period
of time.
Finally, the Company may not be able to provide or obtain alternate materials or
services in all instances. In its contingency plans, the Company has attempted
to identify substitute and second source suppliers. For certain areas of the
Company, substitute or second source suppliers may not be readily available or,
if available, may not be able to quickly supply products or services required.
Risks
If certain internal systems, Company products and third party products are not
Year 2000 compliant, the Company could experience a material negative impact on
its business, financial position or results of operations and relating to
factors that include, among others: diversion of resources by the Company to
address and/or remediate Year 2000 issues; disruption of qualification to sell
products in certain foreign jurisdictions; litigation expense; service delays to
the Company's customers arising from the failure of vendors, manufacturers and
service providers to adequately address Year 2000 issues; and increased warranty
and other claims by the Company's customers and/or increased product and system
repair, replacement, service and maintenance obligations under its existing and
future sales, service and maintenance agreements.
17.
<PAGE>
The Company currently cannot accurately assess or estimate the possible impact
of the foregoing risks and liabilities because: the legal standards for Year
2000 liability presently are uncertain, particularly in foreign jurisdictions;
the Company's Year 2000 obligations will depend on, among other things, the
varying contractual terms contained in its sales, service and maintenance
agreements with respect to the particular customer and the nature of such
customer's Year 2000 issue; and there can be no assurance that indemnification
or pass-through arrangements relating to the Company's sales, service and
maintenance agreements will cover all of the Company's liabilities and costs
incurred in potential Year 2000-related claims.
Notwithstanding, the Company believes that the aggregate cost of resolving the
foregoing issues, defending any claims that may be asserted and satisfying
adverse judgments, if any, could potentially materially and adversely affect the
Company's business, financial position or results of operations.
Costs
The Company's efforts to make its internal systems and products Year 2000
compliant have been undertaken largely by using its existing work force. In a
few instances, consultants have been engaged. It is expected that the costs for
all consultants should not exceed $300,000 in total. The Company has spent
approximately $1.3 million to date for Year 2000-related costs and currently
expects that the total cost of all Year 2000 efforts will not exceed $2.0
million. These cost estimates do not include the fixed costs involved with
employee time spent on Year 2000 matters, nor does it include costs incurred to
test products and make those products Year 2000 compliant as those costs were
incurred in 1997 and at that time, were not separated out from other product
development costs. Finally, the cost estimates provided do not include any
potential costs related to customer or other claims or potential amounts related
to executing contingency plans, such as costs incurred as a result of an
infrastructure or supplier failure. The Company has adequate general funds with
which to pay for all expected Year 2000 costs. The Company expects that
expenditures for the Year 2000 compliance of internal systems will decline after
September 1999.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans, third party assurances of Year 2000 compliance and other
factors. There can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to: the
availability and cost of personnel trained in this area; the ability to locate
and correct all relevant computer codes; the nature and amount of programming
required to upgrade or replace each of the affected programs; the rate and
magnitude of related labor and consulting costs; and the success of the
Company's end users and suppliers in addressing the Year 2000 issue. The
Company's evaluation is ongoing and it expects that new and different
information will become available as the evaluation continues. Consequently,
there is no guarantee that all material elements will be Year 2000 ready in
time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
There has been no material change from the information as reported in the Form
10-K and Annual Report for the fiscal year ended March 31, 1999. Refer to the
Quantitative and Qualitative Disclosures section in the Form 10-K and Annual
Report for the fiscal year ended March 31, 1999 for information on the financial
instruments.
LIQUIDITY AND CAPITAL RESOURCES
As of June 27, 1999, the Company had cash, cash equivalents and temporary cash
investments of $136.9 million as compared to $154.6 million at the end of fiscal
1999.
18.
<PAGE>
Cash used for operations was $5.7 million in the first quarter of fiscal 2000 as
compared to $3.9 million of cash used for operations in the comparable period of
the prior year. The year-over-year net $1.8 million decrease in cash flow was
principally due to a large increase in accounts receivable for the first quarter
of fiscal 2000 compared to a small increase in accounts receivable in the first
quarter of fiscal 1999.
Net cash provided by investing activities in the first quarter of fiscal 2000
consisted primarily of proceeds from the net sale of temporary cash investments
in the amount of $13.1 million. Net cash used for investing activities in fiscal
2000 consisted of additions to property and equipment of $1.9 million and
additions to software production costs of $.8 million.
19.
<PAGE>
Net cash used by financing activities in fiscal 2000 was composed principally of
$3.0 million from the repurchase of Common Stock.
As of June 27, 1999, the Company had available on a secured basis a $10.0
million line of credit. Borrowings under this committed borrowing facility are
available through May 2000 and bear interest at the bank's base rate (which
approximates prime). At June 27, 1999, 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 fiscal 2000.
20.
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information
(a) In addition to the changes in Corporate Officers discussed in Note
7., Subsequent Event, of Notes to Condensed Consolidated Financial
Statements on page 8 of this Form 10-Q, the following Officer
resignations and appointments occurred during the quarter:
(1) Effective July 1, 1999, Robert T. Warstler resigned as Senior
Vice President, North America.
(2) Effective July 19, 1999, Mary Ann Moran was appointed General
Counsel and Corporate Secretary.
(b) On July 12, 1999, the Board of Directors of N.E.T. approved an
extension to the current Stockholder Rights Plan so that the Plan
will now expire on August 24, 2009. In addition, the Board approved
certain amendments to the Plan including a repricing of the purchase
price of a Right to $80 per Right and the inclusion of a Three Year
Independent Director Evaluation provision ("TIDE" provision). The
TIDE provision will require that at least every three years, a
committee of independent Directors will evaluate whether maintenance
of the Rights Plan continues to be in the interest of the
stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
No report on Form 8-K was filed by the Company during its fiscal
quarter ended June 27, 1999.
21.
<PAGE>
SIGNATURES
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.
NETWORK EQUIPMENT
TECHNOLOGIES, INC.
Dated: August 11, 1999 /s/ Hubert A.J. Whyte
----------------------------------------
Hubert A.J. Whyte
President and Chief Executive Officer
/s/ Robert P. Bowe
----------------------------------------
Robert P. Bowe
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
22.
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